Podcast - Digital Health Market Assessment

Morgan Ribeiro: Welcome to "Counsel That Cares." This is Morgan Ribeiro, the host of the podcast and a director in the firm's Healthcare Section. We are kicking off a series of conversations on the state of digital healthcare and tech-enabled healthcare services. And on today's episode, I am joined by Jennifer Rangel, a partner in our Healthcare Regulatory and Enforcement Group, and Dudley Baker, a managing director and the head of the Digital Healthcare Group at Canaccord Genuity, an investment banking firm. Jennifer and Dudley, welcome to the show.

Dudley Baker: Thanks for having us.

Morgan Ribeiro: So before we get into our discussion, I want to take a few minutes and allow each of you to tell our listeners more about your practice and the types of clients that you work with on the digital health front. And Jennifer, I'll look at you to go first.

Jennifer Rangel: Thank you. I'm a healthcare regulatory and compliance attorney in Holland & Knight. I've been practicing for about 28 years exclusively in the area of healthcare law. I represent all types of healthcare industry clients in a wide variety of sectors, including providers, payers, health, tech, digital health vendors to the healthcare industry, and I could go on. A particular focus of mine is on digital healthcare, including telehealth, remote patient monitoring and the impact of digital health and tech-enabled healthcare, with the myriad of regulations and laws that intersect with this developing area. And I also have a lot of experience in structuring transactions and arrangements in compliance with the core practice of medicine and looking at a Super PC-type structure and where that is required and how you structure that appropriately in compliance with all these laws and regulations and everything from corporate practice management, kickback and stock and whatnot. Thank you.

Morgan Ribeiro: Yeah and I know we'll talk more about that in a bit. Just in terms of how the regulatory and evolving regulatory landscape is impacting what we're seeing as it relates to digital health and not only the application of these technologies, but also what we're seeing in terms of deals and transactions. Dudley?

Dudley Baker: So I lead digital and tech-enabled health, as you mentioned, for Canaccord Genuity. We're a global investment bank focused on healthcare and technology in the U.S. We primarily work with clients across employer, payer, provider and pharma-facing technologies going through a transformative transaction, and that can be a strategic sale, majority recap of the private equity firm or a large growth financing. We also are a top five global underwriter of equities and have a meaningful capital markets presence as well. I have to mention we partner with a great consumer practice on consumer-facing health and wellness opportunities as well.

Current State of the Digital Healthcare Market

Morgan Ribeiro: Excellent. All right, well, thank you all for those introductions. So to get us started, Dudley I want to look to you first to really just give us some perspective at a macro level on the digital healthcare market as a whole. Deal volume is down in the space, but that is relative to a series of years where things were at a historical high. So would love you just to kick us off and provide some of that perspective.

Dudley Baker: Sure. Morgan. I mean, you have to frame it from global M&A, after years of quarter over quarter, year over year records, is down 40 percent from its peak, digital health funding down 70 percent from its peak in 2021. That's the negative view. But the optimism is, you know, funding is definitely stabilized. You've seen a meaningful pickup in Q1 of this year for M&A exits and really interest level around and activity around the private equity community. And digital health, you know, continues to be there, as is models that were proven during the pandemic, which were existing well before that, but really received lots of adoption in telemedicine, virtual care, chronic care management, next gen, primary care and overall tech-enabled care delivery. Those models have continued to gain that adoption. And even in the midst of a pandemic pullback, you're seeing massive adoption. And so optimism is, I think, still there in an overall deal market despite being down over the peak.

Morgan Ribeiro: Great. Thank you. And so as we look at these deals that are still happening, what are the areas within digital health where you continue to see investors and strategics interested and acquisitions or investments?

Dudley Baker: Sure. We think of the world in the four primary channels across employer, payer, pharma, provider. I'll pick one, and each where you're seeing a large amount of interest across the strategic landscape, which is really dominated by payers recently. You know, if you look at the employer channel care navigation, the consolidation of benefits, benefit technology, chronic care management has been extremely active in the payer world. Provider data management, digital transformation, network management continues to see interest across both strategics and private equity. On the pharma side, anything data-related and then other aspects like patient access and, you know, really expanding the ability for pharma to deliver and then access the patient. And then lastly, on the provider side, anything that helps the health system operate better across human capital management, revenue cycle management, what we call value cycle management, really business optimization software for health systems, has continued to see a large amount of interest by the broader buyer set.

Jennifer Rangel: I would second a lot of that certainly in my practice, seeing a lot of investment in healthcare, tech and digital health, and anything where we're trying to make healthcare more efficient or focused on patient adherence and compliance and wellness-type issues. Also another big developing area is behavioral health. So certainly there's a lot of focus on tech space therapy and other types of ways you would bring behavioral health services to the masses, given the shortage that we're seeing in in-person behavioral health care.

And even in the midst of a pandemic pullback, you're seeing massive adoption. And so optimism is, I think, still there in an overall deal market despite being down over the peak.

Growing Interest in This Space

Morgan Ribeiro: And who are the parties that you're seeing frequently pop up in terms of, you know, acquirers, investors, private equity firms, venture funds that are investing in this space?

Jennifer Rangel: I mean, it really runs the gamut. I have seen a strong — all of my hair clients I work with, they are very interested in adopting technology and investing in developing technology that is going to be helpful in keeping their patient population healthy, keeping them out of the hospital. We're also seeing it a lot in the specialty care space and an investment in where you see the intersection of value-based care and a chronic illness population, such as kidney care space, and looking at patient monitoring and how tech can really help them keep that patient population well. But I've seen investments just from all, all sectors. So I certainly would echo what Dudley's saying.

Morgan Ribeiro: Dudley, any groups in particular that you're seeing that are becoming more and more active in the space?

Dudley Baker: Look, I think it depends on the segment, as Jennifer mentioned, that chronic care management and thinking about these big spends in healthcare, whether it's kidney care, MSC, oncology, the payers have been both payer directly and through some payer VC-backed organizations have been very active in that space. Across behavioral health, you've seen the private equity and venture capital community, you know, really start funding the larger, more successful businesses that are scaling. I think that's true across all aspects of healthcare. But really tackling these big problems, you're seeing private equity as a part of every transaction across all sectors of healthcare as well.

Morgan Ribeiro: Well, and I feel like our friends over at Optum should be mentioned in this discussion, too. It seems like they're active in all segments of healthcare these days. Just as we were recording this episode this week, you know, they did an all-cash offer for Amedisys that was accepted. And so I'm just curious in terms of players like that have really deep pockets and are able to make such strong offers, how that's really what dynamic that's creating and the deal space right now.

Dudley Baker: So it's interesting, whether it's Optum, CVS, Aetna, and really trying to consolidate the care delivery space and create multiple modalities, end-to-end patient management, if you will, in all settings of care outside of the health system. So meeting patients where they are, whether that's Signify, whether that's Oak Street, as you mentioned, the medicines transaction, you know, really the payers trying to be in the non-health system care delivery business is a key focus area and one that likely continues. And then leveraging some of their technology assets around it, you know, at Optum and others too, to really reduce that overall cost of care, whether it's in the Managed Medicare, the Medicare Advantage market or other, seems to be a continuing trend.

We're also seeing it a lot in the specialty care space and an investment in where you see the intersection of value-based care and a chronic illness population, such as kidney care space, and looking at patient monitoring and how tech can really help them keep that patient population well.

Investment in Artificial Intelligence

Morgan Ribeiro: For sure and probably not something I think if we were having this call three or four years ago, that's definitely something that has shifted in the market. And while venture capital investments in digital health are far from their peak, which you highlighted in your intro, investors continue to fund companies operating in certain areas, such as artificial intelligence. That is an area that has gotten a lot of attention. I mean, even just this year, it seems like that has really picked up. So can you speak to that?

Dudley Baker: There's certainly plenty of optimism in artificial intelligence. And look, it's not new to be a theme in healthcare. Now, I think what has changed with GPT, other large language models, the Microsoft investment, is this opportunity for AI to be a copilot and really to help optimize healthcare and existing models, which we see as a theme across the board. You know, Jennifer mentioned it earlier, this theme of optimization and you know, one struggle that healthcare has had is reducing labor as a percentage of the overall revenue and cost band, but also just access to care. If we leverage that labor line and can do so through things like AI and other efficiency tools, we might not solve shortages that are coming on the physician side or the provider side, but definitely have the ability to lessen the problem and therefore the investment dollars are paying attention to that as an opportunity and creating some optimism around those models.

If we leverage that labor line and can do so through things like AI and other efficiency tools, we might not solve shortages that are coming on the physician side or the provider side, but definitely have the ability to lessen the problem and therefore the investment dollars are paying attention to that as an opportunity and creating some optimism around those models.

Types of Companies Involved in Megadeals

Morgan Ribeiro: So I was reading an article recently. It said six megadeals made up 40 percent of digital health funding in Q1 of this year, smaller startups face rougher waters ahead. Can you tell us more about these transactions and the types of companies that were involved in these megadeals?

Dudley Baker: Yeah, again, a theme in the investment community is around scale unit economics. I think we've transitioned from what was a disruption and growth phase in 2018 really to until the end of 2021, driven some by the utilization drive and increase in the pandemic, to that optimization phase and unit economics phase of healthcare. And so you've seen that in established businesses or more established, like a MoneyGram, that are receiving outsized investment dollars relative to some of the more startup in nature businesses. And then some of the other deals around human capital management really driven by those labor shortages and continuing issues of staffing and turnover in all aspects of health care.

Morgan Ribeiro: Right. And Jennifer, anything you'd add to that? I mean, we talked about chronic care management and, you know, kidney care as being an example that obviously the MoneyGram transaction has received a lot of attention in healthcare circles since that occurred. But anything else you'd about those megadeals and sort of what that speaks to for the space?

Jennifer Rangel: Yes, I think there's a focus on consolidating healthcare, but also I think the latest trend I've been seeing is in the primary care space and really how to deliver primary care via telehealth. And we're seeing in some of these megadeals as well as in the smaller deals. And as things continue to grow and develop a focus on primary care in addition to specialty care and kind of figuring out how to bring healthcare to the person, if they can't get to the doctor or they're going to go to the ER instead of going, you know, doing a telehealth visit, and how to develop those kind of ongoing relationships as opposed to just urgent care via telehealth. I think that's kind of the focus that I'm certainly seeing start to develop. And we're seeing a lot of that kind of be thought about with some of these megadeals.

Yes, I think there's a focus on consolidating healthcare, but also I think the latest trend I've been seeing is in the primary care space and really how to deliver primary care via telehealth. And we're seeing in some of these megadeals as well as in the smaller deals.

Deal Multiples and Valuations

Morgan Ribeiro: All right. So we can't have a discussion about deals and trends and digital health transactions without talking about deal multiples and valuations. So Dudley can you give us an update on what you're seeing as it relates to multiples and valuations?

Dudley Baker: No surprise that this is a constant topic of discussion across every conversation we have. The dynamics of the market are more around a binary outcome versus a pullback in multiples. What we're seeing in the market is the businesses out that have strong unit economics, solid go-to market strategies, manageable sales cycles, near profitable or profitable, not just on an adjusted basis, but an on an actual basis. The multiples haven't really pulled back from the peaks, and you could argue that some deals that are focused more on majority recaps and have real scale might be at or above peak levels of M&A activity from 2021. But on the flip side, you know, companies that have not proven out unit economics that have an inability to go raise follow-on growth capital that are looking to sell, those have been more challenging, and we've actually as a firm been very selective on even taking some of those on, even in spaces where we've talked about that have really interesting opportunities and long-term positive trends, because investors and strategics alike have really gone from market building opportunities for smaller companies to more established players across the board.

What we're seeing in the market is the businesses out that have strong unit economics, solid go-to market strategies, manageable sales cycles, near profitable or profitable, not just on an adjusted basis, but an on an actual basis.

Regulatory and Enforcement Shifts and Their Effects on Deals

Morgan Ribeiro: Great. So, Jennifer, I want to switch over to you. Dudley mentioned in his intro, obviously 2021, all healthcare deals across various segments. We're at an all-time high, but in particular in digital health, and a lot of that being as a result of the pandemic. But what has shifted over the last, say, three years or so, from your perspective as you're advising on digital health matters, and whether that's with providers, technology vendors, payers, you know, other actors in the space, just from a regulatory standpoint, how have things shifted over the last few years?

Jennifer Rangel: Well, they certainly have shifted. I mean, I think regulatory compliance has always been one of the biggest challenges because when you are a company that's operating across jurisdictions, and you're considering both federal laws as well as laws in 50 states plus D.C., that they have to consider, analyze and be sure they're complying with. We certainly saw a loosening of many of these regulations. We had waivers under federal law and certain state laws with temporary licensing, or the ability to practice across state lines was made much easier, that telehealth requirements were certainly loosened. With the end of the public health emergency and pandemic, certainly there's been a strong shift to enforcement. We're seeing enforcement for fraud, abuse that occurred during the public health emergency, and then kind of a renewed focus on ongoing compliance. I think some of the areas that my clients are trying to navigate, and it's a really long list. It's kind of highlight, if you will, this practice of medicine, how to practice across state lines, physician and nurse practitioner or PA licensing when you need a collaborative physician for a nurse practitioner in order to prescribe. We've seen those laws change very quickly in many states, where there's been some states are loosening those requirements and some are making it very difficult. There are few states that require in-person meetings between the nurse practitioner and the physician, and that's very difficult, the telehealth market. And then, of course, HIPAA, we did see some loosening of restrictions to enable telehealth during the pandemic. But now that's not an option, that we’re seeing renewed enforcement in the HIPAA area, as well as kind of a focus on the tech component. Facebook pixels and Google Analytics and how is all there as multitude of other types of products and things that do the same things. But what data get shared back with these analytics companies? We’ve seen a recent OCR guidance in December as well as class actions across the country. Information blocking is another focus. Certainly with the recent OIG enforcement role that was just published this week, there’s a lot of focus on information blocking. And then the things we've always had to worry about, like in a kickback stop loss statement, kickback laws, tele prescribing. And as you can see, there's just a ton of regulations out there that, depending on what the product is, they really have to navigate. And it's not just in one jurisdiction or a federal law, it's across, you know, a huge platform. And then you look at things like AI where you really don't have a lot of laws surrounding it. So that's still developing and it's figuring out how all of those, how those laws might apply to it and where that's headed. So a lot to navigate for the digital health clients.

And as you can see, there's just a ton of regulations out there that, depending on what the product is, they really have to navigate.

Morgan Ribeiro: Yeah, I mean, it definitely seems like the regulatory landscape can be a little murky at times, as you mentioned, for newer technologies like AI where it's just not as established. And so, you know, ultimately how that impacts their business. And Dudley I know we'll talk about this in a minute, but how that impacts your world and sort of how they've set up these companies, oftentimes very high-growth companies, kind of newer models, will this make sense? This is how healthcare should work. We're going to revolutionize the way that healthcare is delivered. And so I think that really understanding the nuances of the regulations as we know them to be today and sort of preparing for what's to come. So I do want to ask you, as kind of a follow up question on that, it seems like that in order to be an attractive target, digital health businesses or tech-enabled service providers need to have their house in order and to be able to demonstrate to prospective buyers that they have worked through these regulatory and compliance matters. So, Jennifer, can you speak more to that? I mean, are you seeing that deals are being slowed down or even ultimately dying because of these regulatory issues?

Jennifer Rangel: Sadly, yes. In fact, I had one die just last week specifically over regulatory issues. And it kind of depends on the size and sophistication of the company. But many smaller digital health companies, even if they grow really quickly and during the pandemic, they may not have focused on regulatory compliance in a meaningful way and they may not — and then I guess the other thing I want to point out is that they have a very sharp learning curve now to try to come into compliance and make themselves an attractive target. So navigating all those regulations, the enforcement environment we're in today, state level enforcement is really difficult. It's difficult for smaller clients who may not have the deep pockets to do that despite how fast they may grow. But they also really haven't maybe put that framework and structure in place. So making sure you have strong HIPAA compliance and not just, you know, a certification that is effective or you think is effective, just really understanding what are your risks. Where do you have Facebook pixels or Google Analytics or other types of analytics on your websites? There's just so many things to navigate, and we're finding that a lot of digital health companies that are now interested in taking investments may not have done all that legwork initially because maybe they grew so fast or they're small or they just haven't been able to focus on it in an efficient way. So it makes it really hard. So, yes, I mean, we're going in and diligence these companies and finding, you know, maybe HIPAA compliance is an issue or they really don't have HIPAA policies and procedures. Even though their technology and security might be great, but they don’t have the policies you have to have in place, or they haven't, they haven't done the homework to know their compliance with all the telehealth regulations on a 50-plus state basis, things like that. Or they may have done some, but not all of it. So it's really kind of getting them ready to take an investment or to move to the next level and really meet those regulatory requirements to be able to stand up to diligent scrutiny and give a level of comfort that they are in fact doing everything right.

Morgan Ribeiro: Right. Dudley, what are you seeing on your end as it relates to regulatory?

Dudley Baker: Look, I can't overemphasize the importance of what Jennifer just said. Unfortunately, it doesn't really lead to premium valuation because your house is in order, but it's table stakes buyers and investors and private equity, partly driven because of the efficiency of transactions over the last decade, are just more sophisticated around things like regulatory compliance, bringing in the right advisors. And you really want a smart investor, a smart buyer looking at your business who has the lowest cost of capital from a risk perspective and therefore can pay the highest price. They will not skimp on things like regulatory compliance and put up with not having your house in order. So ultimately it becomes a binary outcome to the negative if it's not there, not necessarily a purchase price adjustment, unfortunately, so critical to have these things in order.

Jennifer Rangel: And one thing I would add on to that, started, sorry to interrupt, is that buyers are so much more sophisticated, as Dudley just said, on bringing in consultants. So there's been so many companies that have been burned over the years with reimbursement issues and audits. So they're really doing their diligence in a way that they weren't maybe 10 or 15 years ago. And that makes it really hard. And there are some things that you can fix post-closing, so if there are a small issue that they think they can deal with and get the right regulatory framework in place either before closing or shortly thereafter, you know, that's sometimes an option. But it really has to be a situation where the target and the investor can come together and agree on what is required and how to get it done. And where the risks lie — is it something that you can fix quickly or easily, or is it something much more complicated that's really just structural, right? And as we kind of continue this conversation around issues that may come up that, you know, ultimately impact deals, maybe the loan environment obviously has not been great economic conditions and Q1 kind of looming recession, all these conversations. Dudley, how is that impacting your world?

Dudley Baker: It's definitely a factor to consider. We started seeing some cracks in the syndicated loan market a little over a year ago and really through the Citrix transaction and in August timeframe of last year. But in true reference and example of creativity of the sponsor community, really have seen some creative financing structures and solving things like that lockup in the syndicated loan market, the issues around SBB where both private lending and even in a couple examples that we've had where private equity firms have actually put in credit financing themselves and then look to refi that post-transaction later once the banking market opens up. But look, it's still a factor. The cost of capital has gone up across the board, both in debt and equity. And so that is another reason for some of the slowing. But you, you've seen a little bit of opening up of that with that the private market coming in and to really stand up for that gap in the syndicated loan market.

So navigating all those regulations, the enforcement environment we're in today, state level enforcement is really difficult. It's difficult for smaller clients who may not have the deep pockets to do that despite how fast they may grow.

Outlook for the Rest of 2023

Morgan Ribeiro: All right. So what's your outlook for the remainder of this year, Dudley?

Dudley Baker: I'm a constant optimist. We're solving big problems. I mean, healthcare has big problems. There's a lot to do. There's been a lot of money thrown at it over the last five years, some of which will not have a return. But there are some successful models out there. And again, if you look across the channels that we track, there's subsectors within each that are continuing to get interest across the board. And the near-term pickup and transaction activity leads me to believe the back end of the year is going to be more active than we have been earlier in the year. And again, with a few trillion dollars of unlevered private equity capital, many of which is focused on healthcare, digital and tech-enabled health. And we're going to continue to have bets being made in the market. And I think the strategic landscape probably looks a little bit better from an activity perspective as both the payers and even some of the general tech firms continue to look at healthcare as an opportunity.

Morgan Ribeiro: Jennifer, anything else you'd add to that?

Jennifer Rangel: No, I would completely agree with that. I mean, I think we will continue to see consolidation, continue to see growth in the digital health market and in deals in those areas. They may certainly be slower. I always seen in the past, but there's so many great companies out there that are doing really innovative things and doing it well and doing it right and compliance from a regulatory perspective. And so I think that is very good for the for the market, and certainly we'll continue to see those sorts of deals. So I'm hopeful that the second half of the year will be even stronger.

They may certainly be slower. I always seen in the past, but there's so many great companies out there that are doing really innovative things and doing it well and doing it right and compliance from a regulatory perspective.

Morgan Ribeiro: Yeah. And I think again, as this evolves and as the regulations become clearer, hopefully that becomes easier to be in compliance when the laws are constantly changing. I think, you know, post-pandemic and during COVID, that was just shifting constantly, and being able to keep up with that was quite challenging. And I agree with Dudley. I think it’s just such an exciting time for the industry. There’s a lot of great innovation that's happening out there. I think there's a lot of fixing that needs to happen in the space, and with that comes a lot of opportunity. We're going to have some follow-up conversations to this one around the SEC's oversight, FTC's involvement, and as we look at cybersecurity and particularly how that impacts companies in the healthcare space, where there's often, you know, HIPAA involved and other kind of aspects to patient privacy. So more to come on this front. Appreciate you all, Dudley and Jennifer, joining us on the show today and look forward to future conversations.

Dudley Baker: Likewise. Great to be with you both.

Jennifer Rangel:Yes. Thank you so much.