As global markets cool, there are signs that a new round of consolidation may be starting in the digital health sector, according to Richard Zall, chair of law firm King & Spalding’s healthcare transactional and regulatory practice.

Zall says that the digital health sector — which includes mobile health apps, wearable devices, telehealth technologies, and electronic health records — has slumped this year after a robust period during the height of the COVID-19 pandemic. That slump, he says, is spurring a trend of smaller digital health companies seeking M&A opportunities with larger players.

“During the height of the pandemic, there was a lot of investment in biotech and digital health technologies, which were viewed as being very important when people couldn’t go to a doctor’s office or hospital due to COVID,” says Zall. “That led to a wave of innovation — the use of telehealth, for example, dramatically increased. Many digital health companies were raising money easily, growing quickly, and spending their money quickly.”

But in 2022, he says, those valuations have come back down to earth, and “a lot of companies and investors are pleased to see it because some of the valuations weren’t realistic. While there is still a lot of activity and interest in digital health technology, the capital investment environment has been impacted, so that the sources of capital — the public markets or private equity or venture capital — have definitely slowed, both in the number of deals and the amount of investments.”

Zall says that smaller digital companies are saying, “let’s cut our burn rate or we may not get the capital we need to continue or expand. Or rather than expand to 10 markets, let’s go out to three markets, or let’s perfect 2.0 of this product and not go so fast to 3.0 because we don’t have the money to go to market and hire people, and the like.” The cooling market hasn’t led to these companies going out of business, but it has led to there being a slower growth and more M&A, says Zall. The companies that are well funded are being approached by the smaller companies that might have a product or two but only raised $5 million or $10 million and are running out of money and may not have a runway to be cash-flow positive and commercialize their product. They are starting to look to join forces as they’re not sure they’ll make it through 2022. That is spurring some smaller digital health companies, as they burn through cash, to seek alliances with larger players in the field.

Despite this, Zall says interest in this sector remains. “There are many start-ups and growth companies sprouting up offering new digital technologies. And there’s still a fundamental belief that digitizing is a welcome development in healthcare. It is viewed as a way to reduce costs, make healthcare more accessible, and give consumers more information and more sway in deciding what works for them,” he says.

Sherrie Trigg

Editor and Director of Medical Content