M&A Trends: Digital Health, Due Diligence, and the Future of Healthcare in 2022

Like an iceberg, the healthcare industry has always been slow-moving, vast, and mostly unseen; grinding through heavy regulations and the complexities of innovative science below the surface of public sight. In fact, the sector's true size takes many by surprise. Healthcare spending amounted to 10% of all global GDP in 2017, according to a 2019 World Health Organization (WHO) report.

As warrants such a behemoth, the healthcare ecosystem encompasses a multitude of subsectors. Some of these include:

• Medical device, diagnostics and equipment makers
• Pharmaceuticals and related areas
• Life sciences and biotechnology
• Hospitals
• Point-of-care, physician and dental groups, and urgent care centers
• Animal hospitals and veterinarian offices
• Mental and behavioral health providers
• Medical insurance, services, and managed care providers

However, no area within healthcare has grown as rapidly as one subsector, or a subcategory within each of the above: healthtech. Healthtech, synonymous with digital health, has exploded in the past few years, driven by new technologies, consumer preferences, and plain necessity from the global pandemic.

What is digital health in M&A?

The promise of digital health has never been more alluring to investors. But what does it mean?

According to the Food and Drug Administration (FDA), digital health uses technology such as computing platforms, connectivity, software, and sensors to 'improve medical outcomes and enhance efficiency'. This broad definition encompasses everything from artificial intelligence (AI)-powered drug discovery to the latest mental health apps on your phone.

AI, big data, blockchain, cloud data, machine learning, predictive analytics, remote monitoring, smart wearables, and virtual telemedicine are some of the most well-known tools in the digital health tool kit. No longer are these merely buzzwords to entice investors. Each of these technologies is uprooting the healthcare status quo and pushing the modern medicine machine forward.

However, the biggest evolutionary leaps are driven hardest by external forces. This one is no exception. To understand the acceleration of investment in the healthcare sector today, one need only look back to when COVID-19 arose and tested the limitations of the global healthcare system.

COVID-19 acceleration of digital health trends

In the wake of COVID-19, public and private healthcare systems captured the attention of the world. On the downside, it was painfully clear how underfunded and inadequate our current health infrastructure was for a pandemic. But at the same time, it highlighted the potential of digital health to save us all.

Suddenly digital health was no longer a mere convenience, but a necessity. The pandemic has driven an industry-wide wave of innovation via digitization, AI, tools to accelerate drug discovery, and additive manufacturing, according to Jennifer Buell, President and COO of Agenus, a drug developer, in an interview with Datasite last year. 

What are these venture capitalists funding? Rock Health says that the top value propositions, as defined within their own database, during YTD Q3 2021 are of companies ‘using software to accelerate research and development, deliver on-demand healthcare services, and support treatment of disease.’ Here are a few noteworthy examples from Q3 2021 – including three of the largest digital health fundraisings of the year so far, at $400 million each.

• Cityblock Health, which provides holistic primary care to lower-income communities, raised $400 million in its latest funding round this past September 2021 for a $5.7 billion valuation. The company plans to use the cash to fund growth.
• Hinge Health closed on a $400 million Series E fundraising round to give the company a $6.2 billion valuation. Touting itself as the premier digital musculoskeletal clinic, Hinge Health partners with providers and plans to treat musculoskeletal conditions such as back pain.
• XtalPi raised $400 million in a series D Round, receiving a valuation of $2 billion. The company uses AI models that employ machine learning, deep learning, and natural language processing to discover molecular compounds that can address a specific aspect of a targeted condition or disease. The company then combines the most promising of these into potential drug compounds for its pharmaceutical partners to develop.
• InBrace raised $102 million in a Series D round for an undisclosed valuation. Using AI, the company personalizes teeth straightening with its Smartwire™ technology. Smartwire’s main selling point is fast, healthy tooth movement while being completely hidden behind the teeth. The funding is earmarked for ‘expanding its sales force, launching new marketing initiatives, and driving further support and integration with new and existing orthodontic providers across the country.’
• Maven brought in $110 million in a Series D round, valuing the company at over $1 billion. The virtual care offering focuses upon offering women and families critical support across fertility, pregnancy, adoption, parenting, and pediatrics. The company plans to use the capital to expand into new demographics and further product development.

These are just a few key examples of how digital health startups touch on every aspect of the healthcare ecosystem. Whether it is digital therapeutics, billing, provider directories, digital imaging or any number of other avenues, healthtech startups are disrupting the status quo and there is no end in sight to the waves of fundraising. 

Digital health M&A consolidation

Of course, with every wave of new startups comes the inevitable round of consolidation. Large strategics with big pocketbooks, serial acquirers with focused rollup strategies, and the sheer number of businesses struggling to survive and thrive in a suddenly crowded marketplace have created the perfect breeding ground for M&A – and lots of it.

The digital health landscape is highly fragmented today. According to Rock Health, this is causing customers to feel overwhelmed by the breadth of healthtech options. To combat this, startups and corporations alike are seeking to unify their offerings through M&A strategies of vertical integration, horizontal integration, or competitive acquisitions.

Serial acquirers are employing all three strategies in choosing their targets. Symplr, a digital healthcare operations platform and provider, acquired HealthcareSource, SpinFusion, and Halo Health all in Q3 2021. Meanwhile, health software company Commure completed three acquisitions in 2021, including Patient Keeper, Merlin, and Karuna.

Invitae, a public genetic testing company, is perhaps the most prolific example of an active acquirer in the digital health space, with a total of 14 acquisitions since 2016. Of those 14 acquisitions, three were completed in 2021, and all expand Inviate’s digital health footprint. Inviate acquired One Codex in February 2021 for an undisclosed amount, to bring a new user interface and analytical features to Inviate’s platform. In April 2021, Inviate acquired Genosity for $200 million to horizontally expand its offering into oncology. Finally, it acquired Ciitizen, a patient health portal provider, in September 2021 for $300 million.

Apart from serial acquirers, there are companies flush with cash from recent financings eager to buy growth where they can find it. For example, Unite Us raised a $150 million Series C round in March 2021 and, less than five months later, acquired both Carrot Health and NowPow.

Continuing the trend, Olive raised $400 million in an unlettered July 2021 series round for a valuation of $4 billion. Right before the fundraising, Olive acquired Empiric Health to expand into surgical data analytics. Genome Medical raised a $60 million Series C round in August 2021 and then subsequently acquired GeneMatters in the same month to support growth into virtual genetic counseling.

Buyers aren't the only ones on the prowl for the perfect match. The road ahead isn’t always smooth for startups, and many struggle to achieve scale and profitability in a crowded space. According to Damo Consulting, digital health startups are finding extended sales cycles a big obstacle to making new client acquisitions. Cash flow and liquidity issues are pronounced, and heightened fundraising is needed to see operations through.

As a result, many startups will be tempted to exit in the current environment of ample funds and attractive valuations. In a joint panel earlier this year hosted by Datasite and Mergermarket, Mark Francis, Managing Director and Head of Healthcare at Houlihan Lokey, noted that ‘valuations are at a pretty high-water mark, particularly for larger, higher-growth companies’.

Large companies too – if they hope to gain a foothold in the digital health realm – have found M&A necessary to unify their offerings. Here are some recent examples.

In January 2021, medical device behemoth Boston Scientific announced the acquisition of Preventice Solutions for $925 million to gain a larger footprint in the mobile cardiac space. Preventice Solutions provides ambulatory cardiac monitors, cardiac event monitors, and mobile cardiac telemetry.

In April 2021, Microsoft acquired Nuance Communications for $19.7 billion in order to ‘combine solutions and expertise to deliver new cloud and AI capabilities across healthcare’. Microsoft has been pursuing a strategy to provide more industry-specific cloud offerings, and the boom in healthcare helped to make Nuance Communications an attractive target.

But with 2021 wrapped up, what’s on dealmakers' minds for 2022?

M&A trends: 2022 outlook

Healthcare professionals expect a busy 2022. In November 2021, Datasite surveyed 600 US, UK and EU-based dealmakers, director level and above, involved in corporate development, banking, consulting, accounting, private equity, and legal. Of those 600, over 10% focused on healthcare. One word can sum up their expectations for 2022: growth.

A majority of our healthcare respondents at 44% expect global deal volume to increase in the next 12 months, with 20% predicting more megadeals. Business strategy will take center stage on Boards’ agendas, with a focus on the competitive landscape and compliance management as the next two issues in line.

But growth and strategy do not always equate to simple M&A, particularly in the healthcare sector. As a result of lengthy R&D cycles, the healthcare industry has traditionally relied on a greater mix of joint ventures and partnerships, funding rounds, and IPOs than other sectors.

Next year is no different. Healthcare professionals expect to see more restructurings, refinancings, fundraising, and partnerships. 

Healthcare dealmakers are also fine-tuning their strategies in response to high market valuations. According to our survey, 33% are focusing more on post-merger integration and return on investments, and 21% are seeking out more partnerships and joint ventures, with another 21% reducing their M&A volumes.

Healthcare professionals are also taking an optimistic view on due diligence execution times. Despite 54% reporting that due diligence times stayed the same in 2021 and 34% saying they increased, a majority of 46% of respondents nevertheless believed due diligence times would drop in 2022. Many attributed the increases (and decreases) in due diligence to COVID-19 factors.

However, COVID-19 will not be the greatest blocker of deal execution next year. At 23%, Dealmakers predicted that environmental, social and governance (ESG) risks would sink the most deals next year. Interestingly, healthcare professionals rated ESG risks more highly than dealmakers in other sectors with greater ESG vulnerabilities like industrials. After ESG risks, dealmakers placed labor shortages and macroeconomic concerns as the top two issues likely to bring dealmaking to a halt next year.

With a robust M&A year ahead, getting deals done efficiently has never been more important.

M&A trends: due diligence in a virtual-first world

Now that COVID-19 has thrust the healthcare sector emphatically into the spotlight, staying on top of due diligence best practice has never been more important. Most due diligence fundamentals have remained the same, including our advice on how to best leverage a data room. 

Post COVID-19, however, there is one important addition to our due diligence best practice list: the heightened importance of technology when conducting diligence in a virtual environment. Whether engaging with new investors in virtual meetings or onboarding employees without meeting them face-to-face after an acquisition, conducting deals virtually poses a plethora of challenges – and opportunities – for dealmakers across every industry. 

The hardest part of due diligence for many dealmakers during these times, particularly those engaged in the fundraising process, is relationship building. Last year, we spoke to three executives at innovative healthcare organizations, to hear how they were navigating these waters. Here is their advice. 

Of course, like every other industry, the Tech, Media, Telecom (TMT) sector has created opportunities not just within the healthtech market, but in the tools dealmakers use to execute deals. Given the premium we all place on time, learning how new technologies can save dealmakers time and strain is well worth the effort.

M&A trends: healthcare due diligence fundamentals

COVID-19 may have accelerated technology use for due diligence, but other fundamentals remain the same.  Here are three main healthcare due diligence best practices that remain true today, based on extensive surveys pre-pandemic.

1. Specialization wins. Understanding the industry is especially important in healthcare and life sciences, where valuation is often based on speculative R&D or complex financial ecosystems. Almost 75% of M&A professionals cite sector expertise as the most crucial factor in choosing an advisor. The key to effective due diligence is monitoring current market conditions, as well as shifting regulations, compliance, and privacy concerns, and even geopolitical issues such as trade tensions.
2. Move to continued preparedness. Both buy and sell side are shifting from seeing due diligence as a short term, transaction-based process to viewing it as an embedded part of the entire M&A landscape. In the healthcare arena, where products in the pipeline may take years to develop, continued preparedness and forward planning are even more essential. Some 23% of global deal professionals, including 25% from North America, cite the shift to continued preparedness as a critical driver behind due diligence change.  For a preparedness check-up, review our complete deal readiness checklist here.
3. Form over function. Program management best practices are starting to wend their way into M&A. This is especially important in healthcare and life sciences, where due diligence processes involve more complex analysis – with more external parties – than any other industry. Check out our Q4 2021 corporate roundtable replay for a more extensive discussion on this topic.

Download the full whitepaper here, updated with healthcare findings and benchmarks from 2021.

Virtual audits in and physical audits out

In such a highly regulated industry, independent audits are an important part of the due diligence process to ensure compliance and goodwill amongst participants. With the pandemic restricting face-to-face, on-site audits, virtual audits have become the norm.

The FDA itself finally started to issue guidance on remote virtual audits in April 2021 to help it clear its massive backlog. Although companies now are no stranger to virtual audits, there are intricacies to appreciate versus traditional in-person visits.

In preparation of the audit, companies need to ensure required documents are all scanned and accessible online. Choosing a strategic repository that will be accessible by all parties is critical. Finally, and perhaps most importantly, companies need to give serious consideration to patient data protection laws and ensure they remain compliant with GDPR, CCPA and other regulatory frameworks.

While conducting the audit, companies should ensure strong video connections are present so that auditors are able to see during walk-arounds and can observe body language. Staying organized is critical, and responding to requests must be timely and efficient. The more efficient the audit, the more focus can shift to dealmaking.

By your side throughout healthcare M&A

Datasite has supported healthcare firms of every size over more than half a century of M&A. We’ve been at their side at every step from fundraising to completion, on both buy side and sell side. And in challenging sectors such as Healthcare, we have given dealmakers the confidence they need to complete transactions with ease.  

The Datasite product suite has been crafted for your industry, based on our decades of experience and input from thousands of leading dealmakers. Your healthcare deal becomes one end-to-end process that never leaves the safety of the data room. Fundraise, acquire and exit with ease, moving seamlessly from marketing and preparation to due diligence and beyond.  

Click below to speak to your client representative and find out more. You can request a personalized demo to learn more about how you can use this and other productivity benefits in your next deal or process.