Immediately, a story of two markets are seen in healthcare mergers and acquisition (M&A): the current (as mirrored within the data about declining dealmaking) and the longer term (mirrored within the more and more optimistic outlook by dealmakers).

Whereas deal knowledge can range in line with how it’s outlined and who’s reporting, it has declined considerably throughout the board because the high-water mark in late 2021 and early 2022, with a significant fall-off within the second quarter of 2023 and once more within the third quarter of 2023.

M&A exercise in digital well being skilled a 44% decline within the third quarter of 2023, hitting a three-year low. The steep decline started within the second quarter of 2022 and within the first quarter of 2023, with solely 56 exits seen in digital well being within the first, then 36 within the second quarter, and solely 20 within the third quarter. Nonetheless, a promising outlook is rising that subsequent yr will convey a significant upswing.

For the reason that HLTH convention in Las Vegas in October, whispers of optimism are being heard and inexperienced shoots are sprouting, which could be attributed to a number of components:

• Shrinking Valuations: Healthcare firms are experiencing reducing valuations, which might make them extra engaging targets for acquisition. This is likely to be as a consequence of varied components, equivalent to slower development, adjustments in market multiples, regulatory adjustments, or shifts in investor sentiment. Decrease valuations is usually a magnet for consumers beforehand deterred by the sky-high costs prevalent in particular healthcare segments. This shift in valuation can open alternatives for strategic acquisitions and expansions. It is a reminder of the cyclical nature of M&A exercise, with alternatives rising as market situations evolve.

• Divestitures of Non-Core Belongings: Corporations within the healthcare sector might look to divest non-core property. Strategic strikes might make them leaner and extra targeted on their major companies, doubtlessly making them extra interesting to acquirers.

• Altering Dynamics: As healthcare firms adapt to evolving {industry} dynamics, elevated M&A exercise is anticipated. This might contain firms restructuring, merging, or buying others to higher place themselves within the altering healthcare panorama.

• New Gamers:  If the current previous is a sign, count on extra non-traditional gamers to enter the well being care market, from “bigtech” firms like Amazon to technology-focused enterprise capital companies like General Catalyst, who stated publicly on the final day of the HLTH convention that it intends to buy a health care system, an unprecedented transfer for a VC agency.

A resurgence in healthcare M&A might occur in early 2024. The potential for M&A offers to extend within the first half of 2024 is contingent on the Federal Reserve’s determination to chop rates of interest, adopted by impacts to the worldwide economic system, geopolitical conflicts, and regulatory hurdles. As soon as there’s stability within the outlook, CEOs and company boards ought to really feel safer to reengage in dealmaking. Whether or not it surges or occurs in suits and begins is anybody’s guess. A rise in stock-for-stock transactions is anticipated, permitting consumers to provide upside to sellers.

These predictions replicate the dynamic nature of the healthcare {industry} and the way varied components can affect M&A exercise. Nonetheless, it is necessary to notice that these are forecasts and precise developments within the healthcare M&A panorama might range primarily based on real-world occasions and market situations. Let’s delve into a couple of pivotal components influencing the choices of healthcare M&A consumers within the upcoming yr.

Prioritizing value-based care

The healthcare sector’s ongoing transition towards value-based care is steadily gaining traction. This concentrated effort to offer top-tier, cost-efficient healthcare companies generates enthusiasm for digital well being companies able to enabling this transformation. Consequently, these firms are poised to be extremely sought-after acquisition prospects.

Within the fast-evolving M&A panorama, consumers within the upcoming yr are set to prioritize a strategic shift towards value-based care. With the healthcare {industry} present process important transformations, M&A exercise is not solely about increasing market share or consolidating assets; it is about enhancing the standard of care delivered to sufferers.

The adoption of value-based care fashions ensures that healthcare organizations concentrate on the outcomes and total well being of their affected person populations reasonably than simply the quantity of companies offered. As M&A consumers more and more search to align with these rules, a surge in partnerships that facilitate the sharing of knowledge and applied sciences geared toward enhancing affected person experiences and outcomes could be anticipated. This shift displays a dedication to a extra patient-centric method in healthcare, in the end paving the best way for a brighter, extra built-in future within the {industry}.

An increase in distant affected person monitoring

Within the coming yr, M&A consumers within the healthcare sector are anticipated to point out a eager curiosity within the surging development of distant affected person monitoring (RPM). RPM permits healthcare suppliers to watch sufferers’ well being knowledge remotely utilizing wearable units or different sensors. RPM is gaining recognition because it allows healthcare suppliers to detect and handle potential well being points at an early stage, resulting in enhanced affected person outcomes.

This expertise, harnessed by way of wearable units and sensors, has revolutionized the healthcare panorama by enabling suppliers to constantly monitor sufferers’ well being knowledge remotely. In consequence, it facilitates early downside identification and considerably enhances affected person outcomes, making RPM options more and more engaging to potential traders. In response to healthcare specialists and {industry} reviews, this rising demand for RPM-driven options underscores the rising significance of preventive and proactive healthcare, in the end reshaping the M&A panorama within the healthcare sector.

RPM is a coated service beneath Medicare, Medicare Benefit, most industrial well being plans, and lots of state Medicaid applications. Different distant monitoring companies equivalent to distant therapeutic monitoring, continual care administration, transitional care administration, behavioral well being integration, principal care administration, and continual ache administration are additionally typically coated.

Beginning in January 2024, Medicare will broaden distant monitoring reimbursement to Federally Certified Well being Facilities and Rural Well being Clinics (which beforehand weren’t approved to obtain separate cost for distant monitoring). Digital well being firms that develop and promote RMP options will possible be in excessive demand from consumers within the near-term horizon.  

Psychological well being takes heart stage

The highlight on psychological well being is rising, and digital well being firms with options to deal with this concern are garnering consideration. Teletherapy platforms, psychological well being apps, and instruments for psychological well being administration are more likely to appeal to important curiosity from consumers.

Lately, there has been a shift in the best way society perceives and prioritizes psychological well being. This cultural transformation has positioned psychological well being on the forefront of public discourse. It’s influencing particular person well-being and shaping the panorama of the healthcare {industry} and the digital well being sector. This shift creates a receptive surroundings for digital well being firms to develop revolutionary approaches to deal with psychological well being challenges.

For instance, teletherapy platforms and psychological well being apps have emerged as a pivotal part of psychological well being care. The comfort, accessibility, and affordability of teletherapy platforms have made psychological well being companies more available to individuals. They not solely provide a bridge to care for many who might face geographical or logistical limitations but additionally enchantment to the broader inhabitants searching for handy and discreet psychological well being assist. Many psychological well being apps have entered the market, catering to varied facets of psychological well-being. These apps provide a variety of options, from temper monitoring and self-help assets to meditation and stress administration instruments. They empower individuals to take control of their mental health and supply a customized method to self-care. Many apps incorporate synthetic intelligence and machine studying to tailor their content material and suggestions to particular person person wants.

Reimbursement has additionally continued to broaden for telemental well being companies, significantly following the Public Well being Emergency. Starting in January 2024, marriage and household therapists and psychological well being counselors are eligible to be paid by Medicare for telehealth-based remedy. And new funds transcend simply remedy and counseling into different social components. For instance, Medicare will now pay for digital well being and well-being teaching companies, in addition to threat assessments of evidence-based social determinants of well being.

Because the impression of psychological well being continues to develop, traders and healthcare organizations more and more acknowledge the potential of digital well being firms on this house. Enterprise capital companies are pouring cash into revolutionary psychological well being startups, and established healthcare suppliers are searching for partnerships and acquisitions to combine these applied sciences into their companies. The digital psychological well being sector is attracting important curiosity and funding, reflecting the assumption in its potential to revolutionize how psychological well being care is delivered.

Becoming a member of the AI revolution

Synthetic intelligence is revolutionizing the digital well being panorama and serving to create revolutionary options. These embody AI-powered diagnostics, drug discovery platforms, and digital assistants. Corporations creating AI-driven well being tech are targets for these trying to stay forward in healthcare’s digital transformation.

A rise in M&A exercise throughout the digital well being sector might be coming as firms on the forefront of AI integration turn into coveted targets for strategic consumers aiming to keep up their aggressive edge within the ever-evolving healthcare panorama. Furthermore, in October 2023, the White Home introduced an Government Order for forthcoming laws on AI, already publishing an preliminary structure of what these laws will comprise. The announcement was well-received within the AI neighborhood, not just for its thoughtfulness however as a result of regulation lends legitimacy to new applied sciences. Supplied the regulation shouldn’t be overburdensome, it can guarantee transparency and accountability in new AI digital well being instruments, thereby producing confidence in the long run customers of these instruments (e.g., clinicians, sufferers). Concurrently, it can generate confidence in traders that the AI instruments will probably be sustainable, scalable, and worthwhile.

Quickly, mergers and acquisitions throughout the digital well being sphere will probably be pushed by the escalating significance of AI-powered options. Established healthcare firms, expertise giants, and pharmaceutical companies are more likely to actively take part on this acquisition spree, searching for to enhance their portfolios with revolutionary AI-driven capabilities. This development might prolong to cross-industry acquisitions as firms from varied sectors acknowledge the profound impression AI can have on healthcare. As such, digital well being enterprises harnessing AI’s potential are poised to be extremely sought-after property, with their experience and expertise turning into very important elements of broader healthcare methods.

Entry of non-traditional gamers

Non-traditional gamers, equivalent to tech giants and personal fairness companies, more and more assert their presence within the digital well being {industry}. These non-traditional gamers are making substantial investments within the sector, which is anticipated to catalyze a surge in M&A actions. Their major goal is to accumulate firms boasting cutting-edge expertise and promising excessive development prospects, underlining the dynamic evolution of the digital well being panorama and the various vary of stakeholders now taking part in it.

Tech giants are already important gamers within the well being tech enviornment, and we will probably be carefully watching to see in the event that they additional make investments on this sector as it’s seen as a gateway to broaden their attain into recent markets and unlock new income streams.

Startup-centric offers

One can count on extra offers involving startups within the subsequent yr. Startups are innovation hubs, providing established gamers entry to new applied sciences and markets with excessive potential. Healthcare firms powered by expertise are teaming up with conventional healthcare suppliers for extra environment friendly and efficient care supply. Some examples are collaborations between telehealth companies and hospitals or wearables firms becoming a member of forces with insurers.

Digital care M&A

The recognition of digital care is on the rise, resulting in a rise in M&A exercise. That is pushed by the comfort, cost-effectiveness, and enhanced accessibility it provides. Digital care will probably be pivotal within the well being tech panorama within the coming yr.

For 3 years throughout COVID Public Well being Emergency, the healthcare {industry} operated beneath a slew of particular waivers, permitting telemedicine companies to flourish and scale in previously-disallowed methods. This consists of distant supervision of clinicians, medical exams and prescribing with out an in-person examination, nationwide distributed staffing fashions, virtual-only medical teams, and a proliferation of consumer-focused retail drugs.

Whereas these waivers have been initially short-term, the federal authorities has prolonged a few of them by way of the top of 2024 and different waivers have already been or are anticipated to be made everlasting (e.g., enlargement of Medicare protection for telehealth, DEA particular registration for telemedicine prescribing, flexibilities on geographic location of supervising medical doctors). Most of those flexibilities are anticipated to stay, which can enable digital care firms to proceed their development.

Furthermore, billions of {dollars} have been raised and invested in digital care firms within the final 5 years. That capital has been deployed, however not totally spent by these firms. Throughout these subsequent couple years, these well-funded firms will both flourish with product-market match or will probably be targets for acqui-hire, incorporating their applied sciences and concepts by way of M&A into the surviving cohort of digital care suppliers. Both means, it can lead to alternatives for dealwork, funding, and in the end improved well being expertise and care entry.

The dynamics of M&A exercise within the healthcare sector are certainly intriguing. The current decline in deal numbers is likely to be a brief section, however it’s necessary to notice that such tendencies typically sign an imminent shift. Because the {industry} adapts to altering conditions, it will likely be fascinating to see how these tendencies unfold and impression the healthcare panorama.

The healthcare {industry} stands on the cusp of transformation, the place adaptation to evolving tendencies turns into the important thing to success. Strategic consumers are anticipated to be significantly lively as they search to enhance their present portfolios and broaden their choices on this dynamic and ever-evolving sector. Rising from COVID, the healthcare {industry} has undergone basic change, remodeled by telemedicine and digital well being. There isn’t a going again, and M&A will probably be a important issue within the subsequent steps of this journey.