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  • The trends leading to healthcare technology M&A growth

The trends leading to healthcare technology M&A growth

02 September 2021

By Bart Paalman and William de Lange 

Investments and M&A involving healthcare technology targets remains high. New opportunities for innovation and growth continuously appear, including within healthcare communication and collaboration.

‘Software is eating the world,’ Mark Andreesen wrote in his 2011 opinion piece in the Wall Street Journal. In the healthcare space, its appetite seems to be growing.

Healthcare is a broad, multifaceted space. One uniting factor is companies and organisations’ need to digitise. A need that has become even more pressing because of COVID-19.

The developments create a strong draw for further investment due to the massive, relatively untapped growth potential of healthcare technology, or ‘healthtech.’ As a result, healthtech subindustries, such as telehealth, digital health, and communication solutions, are also seeing increased competition.

In an evolving market, companies and strategic investors are leveraging inorganic growth through M&A to become the foundation of the future of healthcare.

As the space continues to evolve, driven by the dual forces of innovation and consolidation, we expect to see increased deal activity. A closer look at healthtech communication and collaboration solutions provides a microcosm of broader trends – and what may be on the event horizon.

TMT tops M&A

Developments in healthtech mirror the broader technology, media, and telecoms (TMT) sector. BDO’s M&A data for mid-market deals highlights how TMT’s M&A bull run, led in particular by software, shows no signs of slowing.

For the sixth straight quarter, TMT led mid-market M&A in 2021 Q2 M&A. The quarter saw 572 completed deals with a total disclosed deal value of US$63.5 billion. If deal activity continues, 2021 will far surpass 2020, which was itself a strong year.

Data: MergerMarket. Analysis and graph: BDO Global.

While COVID-19 makes it difficult to draw conclusions from quarterly year-on-year comparisons, it is worth noting that mid-market deal activity was higher than at any point in the last 30 quarters.

Private Equity (PE) remains a prime driver for deal activity across industries, including TMT. During Q2 2021, PE were involved in 194 buyout deals worth a combined US$30 billion, representing 33.9% of global TMT deal volume and 47% of deal value. In comparison, PE were involved in 154 buyouts in the first quarter (35.2% of deal volume and 46.6% of deal value in 2021 Q1).

Technology continues domination

Within TMT, technology leads activity, followed by digital media & e-commerce. Both sectors saw +60% growth in deal volume in a YoY comparison between Q2 2020 and Q2 2021. As we have described in previous articles, digital media and ecommerce activity is partially due to the growing investment interest in digital marketing agencies, headless ecommerce software, and e-commerce marketplace aggregators.

Data: MergerMarket. Analysis and graph: BDO Global.

A breakdown of mid-market technology M&A shows that software represents approximately 90% of deal volume.

The strong performance of software is in part driven by digitisation across industries. Digital transformation solutions and initiatives alone represents around 12.5% of the US$ 4 trillion Gartner predicts companies will spend on IT over the course of 2021.

Furthermore, companies are leveraging technology in general, and software in particular, to develop new solutions – or entire business units. Forrester predicts that 30% of Global 2000 companies to have a significant digital product portfolio and 20% to start up digital divisions dedicated to launching disruptive products before the year is up.

Healthtech on the rise

The dynamics described above also apply to the healthcare space – albeit in some ways with inbuilt delays. Healthcare has traditionally been a conservative space where integration of new technologies is concerned. Tight regulations, complex industry structures and varying legislation across regions and countries have been contributing factors. All with good reason, we hasten to add. This has led to a slower integration of new solutions and technologies.

Already some years before COVID-19, this had begun to change. New technologies and new companies emerged capable of meeting the strict entry bar. However, the market entry costs in money and time, for example associated with running extensive tests and gaining approvals tests, remained an issue for many SME companies. Over time, technology has evolved, making it cheaper for companies to innovate and gain market traction. Those trends have accelerated very quickly over the last 18 months, as COVID-19 has created even more impetus for integration of new solutions and technologies across all areas of healthcare.

Data: CB Insights, Graph, BDO Global

Within healthcare, including the healthtech space, the growing interest is spurring unprecedented deal and funding activity. CB Insights’ 2021 Health Tech Report charts how global healthcare investment rose for the seventh consecutive quarter, surpassing U$34.7 Billion in funding across nearly 1.6K deals during 2021 Q1 alone. Digital transformation initiatives were a prime deal driver, and digital health start-ups accounted for 40% of both the deals and funding raised.

Data: MergerMarket. Analysis and graph: BDO Global. 2021 figures include deals from January through to ultimo June.

M&A activity is also up. BDO’s M&A data shows that 2020 set a high watermark for healthtech deal activity. A mark that 2021 looks set to surpass.

Market growth and digitisation as deal drivers

As mentioned above, one of the reasons is that new technologies and solutions are proving increasingly adept at meeting the challenges posed by strict compliance demands and unique legislative frameworks. As a result, they are changing how healthcare companies and organisations function, innovate and interact with their clients – and creating market growth.

Today, the healthtech market is estimated to be worth up to US$ 350 billion. Considering that almost 10% of global GDP is spent on healthcare, and the potential for improving customer experiences, streamlining operations and further digitisation, rapid market growth is expected.

Data: BDO 2020 Healthcare Digital Transformation Survey, Graph: BDO Global

Furthermore, as evident in BDO’s healthcare research, companies in the space are busily trying to adapt to some of the changes in demand that COVID-19 has accelerated. For example, there is an increased focus on improving the customer experience, as well as upgrading operations and digitisations efforts – often in order to increase operations efficiencies.

Decision makers throughout the space are cognisant of the need for new investments and actively pursuing upgrades. As seen in BDO’s 2021 Healthcare CFO Survey, top business strategies for 2021 focus on digital transformation, product or service expansions and geographic expansion.

Communication emerges as early M&A leader

One of the core areas where many healthcare companies and organisations are looking to build out their offerings is within communication. This covers interactions with patients, including some healthcare services, such as online booking and online consultations.

Here, as elsewhere technology’s disruptive potential can be likened to what Amazon has done to the brick-and-mortar retail industry.

Instead of visiting your local GP or going to a hospital, patients can enjoy consultations from the comfort of their own homes. Thanks to robust communication and the emergence of complementary technology, such as wearables, relevant health data can be shared directly with healthcare professionals. In some instances, prescriptions and next treatment steps can also be handled right then and there.

It makes sense then, that CB Insights data shows funding for ‘telehealth’ breaking records for a fourth quarter in a row with a combined US$4.95 billion in 2021 Q2, as healthcare organisations and companies continue to look at how to evolve their online communication abilities. This has also led to a string of M&A deals.

For instance, healthtech unicorns such as Kry, DocPlanner and Babylon Health all focus on delivering communications-related services. All three unicorns have undertaken both large funding rounds and M&A to grow their businesses.

Outside of the industry, Walmart’s acquisition of MeMD in May was one of the biggest news stories.

Collaboration moving through the gears

The level of activity in communication compared to a relatively slower pace in others, such as healthcare collaboration software, may be testament to B2C healthtech currently performing stronger than the B2B segment.

Said differently, creating digital appointment booking and consultation systems may be more straightforward than building out full collaboration platforms, like a Microsoft Teams for healthcare.

The many moving parts and need to coordinate different parts into a single solution is challenging. Then add in the need for said solution to meet wider legislative frameworks and adhere to all applicable rules, potentially across national or regional borders.

However, as we have seen in other software spaces, including the likes of customer relationship management, enterprise resource planning and content management systems, the upsides and potential are huge when it looks at these areas.

Building out such platforms is, however, also contributing to M&A. For example, investors are looking at how online consultancy and booking systems can be coupled with the likes of online prescription services to create a one-stop shop for GPs. This is an area where the likes of private equity-sponsored buy-and-build acquisitions and consolidation are likely to grow in the coming years.

All-in-all, mid-market TMT M&A remains very strong, and with yet another industry on the verge of ‘being eaten’, we see no signs of a slowdown but instead expect further growth.