The “Boom” of Digital Health Integration
Ross Perot may have promoted the term during the defeat of the presidential election in the 1990s to refer to the adverse effects of the North American Free Trade Agreement on U.S. employment, but “Huge sucking sound“This may be an appropriate metaphor for the rapid integration of today’s digital health companies.
Recent reports indicate that venture capital funding for digital health startups has exploded, approximately $15 billion In the first half of 2021, there is no sign of slowing down. The other story is that these same startups are exiting through liquidity events at the same speed.
Anwell announced Acquired two digital health companies This is the latest in a series of mergers and acquisitions since Teladoc and Livongo merged in a $18.5 billion transaction last year.
On the surface, the two companies are in unrelated areas. Silver Cloud is a behavioral health company that has developed a digital care model equivalent to face-to-face contact. Conversa is a chatbot technology company that uses a dialogue interface for digital access to support a wide range of clinical needs-from patient education and preparation before admission to post-acute monitoring and chronic disease care management.
Unusual transaction announcements indicate that two companies with combined revenue of less than US$15 million were acquired, with a total value of more than US$300 million.
The transaction announcement confirms the ongoing integration trend in the digital health sector. We see digital health startups merge or be acquired by large technology companies to achieve this goal.An example of the former is merger Big round and on-demand doctors The total value is 2 billion U.S. dollars.An example of the latter is Microsoft acquires Nuance for $8 billion. In contrast, Amwell’s acquisition is relatively small. However, as we see the acceleration of mergers and acquisitions in the digital health sector, the value of these transactions may become the norm.
The ongoing integration makes sense for startups (and their venture capital supporters). Chatbot-based tools and virtual behavioral health companies have emerged in large numbers. The bottom line of startups is how to achieve scale and profitability in this highly competitive environment. Many people will tend to exit in the current environment with unlimited funds and attractive valuations, rather than long-term honing.
What does this wave of integration mean for its customers (ie healthcare companies)?
Today, the field of digital health solutions is highly fragmented. In this chaotic environment, the health system CIOs and CDOs working with our company are trying to make strategic bets on partnerships. Digital leaders in the health system realize that choosing a promising start-up for a strategic partnership can have a detrimental effect, that is, the start-up may be involved in a possible acquisition simply based on acquiring the name of a major customer.
On the other hand, many more mature digital health solution providers are acquiring small start-up companies with complementary products to expand their “surface area”-a term that is now popular among digital health venture capital firms. This makes the supplier governance and management of health system executives more complicated.
If the health system is on the Teladoc platform and uses the Conversa chatbot, they may soon let Amwell knock on their door to become the new owner of Conversa. In the long run, the number of incompatible supplier relationships will inevitably increase, and it will require CIOs and CDOs to build their solution stacks with loose coupling and write contracts to provide exit options with minimal penalties and separation costs.
Many health systems have joined this ranks, investing in the startups they bring, reducing risk, and taking advantage of opportunities to profit when startups find a profitable exit. One of Conversa’s main investors is Northwell Health of New York. Other health systems, especially Providence Health, have actively invested in start-up companies and have reaped significant benefits from successful exits.
There is no doubt that mergers and acquisitions have become a necessary condition for the growth and expansion of digital health startups and large companies. As large technology companies such as Microsoft and Amazon actively enter the field of telemedicine and virtual medical care, independent companies such as Amwell and Teladoc are using mergers and acquisitions to expand their scale and remain strong competitors in the emerging digital medical field.
Smaller digital health startups have also found that the extended sales cycle and slow decision-making of medical institutions have made the acquisition of new customers increasingly challenging. Their best option to avoid bankruptcy is to connect their trucks with existing suppliers that have a large footprint in the market. It is worth noting that even large companies in the telemedicine field are not profitable today.
For Amwell, Teladoc and others, the acquisition of smaller companies is actually about the strategic positioning of long-term market share growth and profitability. In the short term, they can take advantage of the synergy between the acquired companies (Conversa chatbots can complement Silver Cloud’s behavioral health virtual care model) to increase organic growth opportunities.
In the long run-well, who knows? The party has just begun. Hold fast to the wild ride ahead.
Paddy Padmanabhan is Digital transformation of healthcare-how consumerism, technology and epidemics will accelerate future development. He is the founder and CEO of Dharma Consulting.