As merger and acquisition activity throughout digital health remains slow, companies are increasingly turning to partnerships and joint ventures.
The shifting market dynamics are a stark departure from 2021, which saw record M&A activity. Market research firm Pitchbook logged 90 M&A deals among U.S.-based digital health companies in 2021 compared with just 58 in 2023.
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“In some ways partnerships are the new M&A right now,” said Aaron DeGagne, a senior analyst covering healthcare at Pitchbook. “There's been certainly, I would say, kind of a flurry of partnership announcements.”
Digital health companies are partnering, rather than acquiring, for a variety of reasons, DeGagne said. Companies that might have been looking to acquire in the past are faced with a lack of capital or investor support, he said. For companies being acquired, it could be difficult to let go of past market valuations.
David Sanders, partner at law firm Foley and Lardner who specializes in M&A transactions with a concentration on health services and digital health, expects the number of partnerships among digital health companies to climb. He said many emerging technology companies, which tend to be more focused on singular problems, are looking to pair their products with others for a more comprehensive offering. He said capital constraints among startups often lead younger companies to turn to joint ventures or partnerships more frequently because they are more economical than M&A.
“There’s a pendulum and there’s always room for both,” Sanders said. “The pendulum has shifted towards joint ventures and strategic alliances in the past few years.”
Transcarent shares M&A, partnership strategy
Glen Tullman, CEO at digital health and benefits management startup Transcarent, is a company that has done both in the last year. In January, Transcarent inked partnerships with weight management-focused 9amHealth and health technology company Soda Health. The deals allow Transcarent's users to sign onto the other companies' services without leaving Transcarent's application.
In March 2023, Transcarent acquired 98point6’s virtual care platform and clinical customer base of 3.5 million people through portions of cash, equity and performance incentives. The sale price could reach $100 million if 98point's customer-related targets are met.
Tullman said many companies are prioritizing partnerships because they lack the capital to pull off an acquisition. These companies still want to partner since digital health buyers are not interested in “point solutions,” an industry term for software products that only focus on one area of medical care. Tullman said he prefers acquisitions when the asset is directly involved with a customer or end user's experience.
"Consumers and employers have become inundated with point solutions that while often effective, in many cases, are adding to the confusion and not delivering coordinated care, better outcomes, or reduced costs," Tullman said.
Talkspace prioritizes partnerships
Digital mental health provider Talkspace has prioritized partnerships over M&A. The company announced a partnership with virtual primary care company Wheel Health on February 24. In the past year, its also teamed with consumer health company ŌURA, virtual care company Bicycle Health and women's health-focused Evernow.
Talkspace's CEO Dr. Jon Cohen, said partnering allows the company to expand its user base and offer better overall care to patients. He said during a recent earnings call the company, which aims to be profitable by the end of this year's first quarter, does not need to make a transaction to continue its growth but would consider acquisitions within mental health.
“The purpose is to increase the inflow of patients coming onto the platform, who we know are probably going to be covered by the insurance,” Cohen said. “We don't need to purchase [companies operating] other diseases entities that's for sure. We just need to make people aware and make physicians aware.”
Cohen said Talkspace does not pay for referrals or receive money from its partners.
Other companies that are taking the partnerships over acquisitions route include TBD Health, a sexual health and wellness startup that offers hybrid and telehealth care. TBD said in a news release it would offer access to at-home testing kits and other services to patients at FOLX Health, a digital healthcare service provider primarily servicing LGBTQIA+ patients, and Wisp, a virtual sexual health and reproductive care provider. In October 2023, virtual mental health company Headspace announced a partnership with ŌURA.
DeGagne said if the market was more favorable, at least some of the sector's partnerships would have turned into acquisitions. A January analysis from investment bank and financial services company Morgan Stanley blamed sticky inflation, high interest rates and challenged equity markets for stalling M&A activity across sectors last year.
“Probably in 2021, you would have seen an acquisition,” DeGagne said. “Instead, it’s partnership[s]. So, I think, that's been a material shift.”
