Healthcare startups are driving a takeover boom. A top digital health analyst explains what’s driving it.

Healthcare startups are driving a takeover boom. A top digital health analyst explains what’s driving it.

For all the praise investors and founders lay on consumer-focused

healthcare trends
, it faces a major barrier that might be driving the current wave of consolidation among healthcare startups.

2021 has already been a banner year for mergers and acquisitions among

healthcare companies
.

Ro, the direct-to-consumer healthcare company known for prescribing erectile dysfunction and hair loss medication, bought fertility planning startup Modern Fertility for more than $225 million on May 19. Less than a month later, primary care company One Medical announced a $2.1 billion takeover of Iora Health, which primarily serves Medicare patients.

Both deals highlight how companies serving highly specific patients, like Ro’s initial offering for younger men, are now hoping to branch out in order to sustain the growth they enjoyed during the pandemic. When conditions are right, that can mean spending a lot of money to make a lot of money in the longer term, according to Rock Health general manager Sari Kaganoff told Insider.

“One piece of it is the funding situation we are in,” Kaganoff said of what might be driving the deal activity in 2021. “There is lots of money going into digital health, and when companies have that much cash on hand they want to acquire other, smaller companies.”

Funding alone doesn’t explain every deal, Kaganoff explained, because some companies like One Medical are public and not raising traditional venture funding. Instead, she said she attributed much of the activity to how quickly digital health companies matured during the pandemic. Instead of waiting years to prove their software or tools worked, many companies were overnight success stories.

“In digital health, you have to prove yourself in a niche market and solve the needs of a specific population to prove that it makes sense, just like in any business,” Kaganoff said. “Once you do that, there’s a move to consolidate.”

Digital health companies are thinking beyond single products

That’s been true of other healthcare industries like biotech, wherein companies form with the intention of developing a singular treatment or drug before folding into a larger conglomerate like Pfizer or Johnson & Johnson. 

The logistics of getting a drug into the market and soaring through the costly clinical trial phase, complicate the deals landscape for biotech startups, but there are enough parallels to offer a glimpse into digital health’s future should it continue on the consolidation path.

Many digital health companies start off trying to solve a specific issue like

diabetes
management or mail-order prescriptions. The companies also create software that allows patients to interact with its services, like an app to place orders or a website that sends data from the patient’s home to a doctor’s office. But because these companies are appealing to individual people, whether that’s patients or doctors, these one-off solutions become harder to maintain over time.

“Digital health is different from biotech because it’s a user market, whether you’re selling to providers or payers or patients,” Kaganoff said. “It’s all about point solutions, and we as humans don’t love that. We want it to all be in one and work seamlessly.”

Lately, there’s been a wave of drug startups popping up containing a number of experimental drugs and high valuations. These “mega-biotech” companies are a result of the funding environment in which large sums are relatively easy to raise. These larger entities, made up of combined smaller biotech companies, are easier to finance than a smaller biotech with a singular focus.

Similar to biotech, digital health companies may join forces to create “mega” digital health companies that offer a wide range of tools and software for a growing section of patients. The Ro-Modern Fertility deal, for instance, helps bring Ro’s services to prospective parents, albeit under the Modern Fertility name.

But consolidation only increases the competitive nature of the industry, Kaganoff said, which can force other smaller competitors to pursue deals of their own. As one company tries to out-grow the last, it becomes even more common for less successful companies to agree to try working together instead of going it alone.

“In a venture-backed world, good is not good enough,” Kaganoff said. “If you are going to compete against Ro, you need as much money, if not more, than them to be able to grow and perform in that market.”

Strategic consolidation

Kaganoff’s concern is that the market will overcorrect and too many companies will buy up other companies that aren’t a great fit.

Ro, for example, created what Kaganoff described as a “best in breed virtual service” that went beyond mailing prescriptions. If that hadn’t been the case, trying to justify buying a fertility startup would be a much harder sell to investors and could ultimately cost the company down the line.

“Right now, you see a lot of big conglomerates with mediocre products,” Kaganoff said of other areas in healthcare and technology that have undergone similar consolidation waves.

The winners will be those that carve out their initial purpose while strategically adding new tools that somehow relate to that purpose, Kaganoff said. There will be a handful of larger companies in the end, with some focused on

telehealth
and others looking at primary care, she predicted. But a massive roll-up of all digital health companies into a singular digital health behemoth is unlikely.

“I’m not sure we’ll ever get to a point where there’s one model of consolidation,” Kaganoff said. “Even today with the big tech firms, the directions they go in are not the same. Yes, they are all beastly, but they all turned into something different from each other.”

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