The future of digital healthcare

Digital technologies have become even more integral to daily life, and innovation in the digital healthcare sphere has progressed at an unprecedented scale. However, in 2022, we saw “growth at all costs” give way to strong unit economics and judicious bottom lines.

This trend of cautionary investments is expected to strengthen in 2023 with FOMO (fear of missing out) investing vanishing.

Significant investments were made in the healthcare sector during the pandemic leading to high valuations, however, one of the key questions remains – how many of those valuations will stand the test of time?

In the current climate of top-line pressure and funding shortages, healthtech firms can no longer solely rely on private equity (PE) support, having to find new ways to continue to grow their businesses. Companies will need to assess whether they have enough money and technology backbone to offer more to their existing customer base, or enough resources to cater to a new audience.

Failing that their options will be to cut costs or look to the M&A (mergers and acquisitions) market. Over the past three years, it seemed like a safe bet to bank on digital acceleration and innovative solutions in healthcare as secular trends drive successful investments. Assets at the intersection of these two trends saw their valuations rise to very high levels.

During the pandemic a significant amount of dry powder was used to fund startups; and only a select few in the biotech and healthtech sector accelerated to the IPO stage. As per Refinitiv data, in the biotech sector, globally there were 152 offerings in 2021 that had raised over $25bn; however, this plummeted to 47 IPOs last year which raised a total of about $4bn.

Globally, IPOs across all sectors nosedived in 2022 after a blockbuster 2021, as aggressive interest rate hikes by central banks to curb inflation put an end to the era of ‘cheap’ money.

In recent months, we have witnessed that major players in the tech industry have suffered a market collapse and some companies have indeed lost value, but most of them have had to face a significant downfall, including healthtech companies.

The market currently is recessionary, and funding from backers is not as easy to come by, especially as the cost of capital is expensive and the availability of debt is going down. Supply chain challenges, inflation, interest rate hikes and investor pullback reversed investment momentum, and the valuations are not what they used to be.

Return to pre-pandemic levels

Due to the Covid-19 pandemic, this particular asset group became very expensive, in turn becoming less attractive to corporates. Now that valuations are returning to pre-pandemic levels, corporate M&A is on the rise again as corporates recognise an opportunity to acquire cheaper assets while still building synergies with the rest of their business.

This will lead to better outcomes for patients, providers, practitioners and ultimately the investors. Healthech firms that need support in terms of cash runway, will look to acquisitions as a path forward if it feels right.

Trends this year

Evidently, the digital health industry is shifting away from point solutions to platform companies. An evolution of consolidation could trigger a ‘vertical rethinking’ and could drive M&A deals and startup innovation. As we go forward, we believe more end-to-end integrated platforms that combine and deliver people-centric care in a unified manner are going to be essential.

Overall, it may fuel social impact and generate better solutions for healthcare payors, providers and regulators thus improving patient experience and igniting value and outcome-based care. There will also be more integration at an industrial scale as more corporates will be acquiring innovative assets.

Market watchers predict a more robust year for biotech and healthtech deals despite buyers losing access to previously cheap financing that had promoted record M&A activity globally.

In this fast-paced and complex merger space within the sector, corporate and PE organisations will need to be armed with more than just due diligence and deal support. Deal execution requires keen insights, deep due diligence, a strategy that aligns with the buyer and an ability to create value along the complete lifecycle of the acquired target.

Jean Laurent Poitou is the head of Digital, EMEA and Ali Ayach is senior director with Alvarez & Marsal