Right after reporting that the month of August had an unusual four acquisitions, we had nearly as many in just the first week of September. It seems, going purely on volume, like M&A in digital health is picking up. This week we saw iHealth Labs acquire eDevice for $100 million, HMS Holdings buying Essette for $20 million, and HCA buying Mobile Heartbeat for an undisclosed amount. For a round-up of 2016 digital health acquisitions to date, broken down by acquirer, click here.
Investors MobiHealthNews spoke to seem to agree that we're still in the early stages of digital health acquisition, characterized by larger startups buying smaller startups while big companies just dip their toes in with small deals and acqui-hires.
"It seems to me we’re at a point where a lot of interesting ideas remain interesting, but they were never meant to be companies," Lisa Suennen, a managing member of Cardeation Capital Management who writes the popular 'Venture Valkyrie' blog told MobiHealthNews. "They were meant to be products, or parts of products, or parts of companies. And as valuations are coming down, which they are, and as access to capital is becoming a little more challenging and there’s more need for evidence and proof that what you have is a legitimate solution big enough to be a company, you’re going to see more and more of this type of M&A. Of small good ideas that were never meant to be standalone, rolled up into bigger projects, into bigger companies."
Suennen says valuations are dropping as the market shakes out and corrects itself after overly optimistic valuations in the early days of the space.
"It’s shaking out," she said. "You can only tell somebody you’re going to change the world with your prescription monitoring thing du jour so many times before someone realizes the world’s not changed. That makes people’s appetites a little less."
Skip Fleshman, a partner at Asset Management Ventures, thinks most of the big players, who have a lot of money to spend on serious acquisitions, are still watching and waiting. He agrees with Suennen that the small deals we're seeing are preliminary consolidation in a market that's overfunded and has a lot of small companies with big ideas.
"Unfortunately in digital health a lot of these solutions are a little nichey now and there’s a lot of noise and a lot of people in the same sector," he said. "That means you end up with a lot of acquihires and $10 million acquisitions."
How will we get to the bigger acquisitions? Well, first, Fleshman said, we need to see the bigger players get interested. He thinks the likely candidates are insurance companies, which could potentially buy successful chronic disease management platforms like Omada, pharma companies, which could buy digital therapeutics like Proteus or WellDoc, or big tech companies like Apple, Samsung, or Microsoft, that might be interested in buying their way deeper into the health space. But, as Suennen points out, just because large companies have money doesn't mean they're casual about spending it.
"Big companies are generally pretty smart about their M&A — not always, but often — in that they don’t want to overspend," she said. "You know, M&A is just an investment in another form. If they overpay for an asset, they lost money."
Fleshman thinks that two major pieces are still missing to convince the big players to jump in: efficacy data and revenues. Digital health companies need to convince acquirers that their products work, and the bar for that is getting higher.
"They want to see clinical evidence," he said. "Is it moving the needle? And/or they want to see revenue generated. No one’s really proved that you can make a lot of money in this sector. Companies have maybe $20 million in revenue, but they’re just not ramping and scaling. Which is just heatlhcare. You’re not Facebook or Google, you can’t suddenly make billions in revenue."
This explains why some of the biggest M&A we've seen so far has been on the fitness side of the space, with Under Armour and Asics, a more traditional business where clinical efficacy and healthcare cost reduction aren't an issue. Showing value in the healthcare market is a more complicated and time-intensive proposition.
"It’s slow and I think that was a little bit of a surprise for anyone who came in from outside who wasn’t from a core healthcare realm -- that you couldn’t just take technology and revolutionize healthcare overnight like you can in some other industries," Suennen said. "Healthcare’s slow. But it’s working. We’re starting to see fundamental digital implementations in all sorts of aspects of healthcare. But again, it takes time and it’s not done in a vacuum and I think there’s a very appropriate renewed emphasis that what people are selling is good, that it has real value, both clinically and financially depending on which realm you’re in. The days of blindly and wildly funding digital health ideas without proof of value are over."