Telemedicine and Digital Health: Strategic Opportunities and Legal Considerations for Private Equity Investment

By: Christopher Donovan, Heidi Jeffery, Nathaniel Lacktman, and Melesa Freerks, Foley & Lardner LLP

THIS ARTICLE ASSESSES THE CHARACTERISTICS OF THE digital health industry and examines whether the market is ripe for notable private equity investment. The broad scope of digital health includes categories such as mobile health, health information technology, wearable devices, telehealth and telemedicine, and personalized medicine. After several years of exponential growth, the telemedicine and digital health industry has reached an inflection point—moving from infancy to adolescence—as consumer-oriented digital health care solutions gain popularity and traditional health care providers turn to virtual care. Naturally, investment in digital health companies has seen a corresponding increase, primarily led by venture capital. But with the increasing size of venture investments deployed into fewer emerging companies, telemedicine is just now starting to gain the interest of private equity. Moreover, a handful of notable mergers could signal more industry consolidation, another sign of market maturation in this still nascent industry. Clearly, many health care institutions are investing in telemedicine and digital health (including via their own venture funds), if only to remain competitive. What is it that has venture capital, private equity, and other players so interested in digital health? And what are the key legal considerations an investor should note when evaluating a telemedicine or digital health investment?

Recent Private Equity Activity in the Digital Health Space

Companies that have proven themselves early successes in digital health are maturing out of their initial stages of development. These companies seek capital investment not to fund the development of their idea, but instead to fuel marketing and business development to expand their service into new geographies. As a result, digital health is no longer exclusive to venture capital, as private equity firms and larger companies have begun to enter the field, targeting digital health companies that have demonstrated that they are more than just cash flow positive and are in fact profitable, heating up deal activity. In 2017, roughly 224 companies made funding announcements constituting just over $5 billion in investments. This was roughly twice the amount announced in 2016. Several notable deals include:

• Modernizing Medicine, which makes a mobile-based electronic health record for specialists, raised $231 million from global private equity firm Warburg Pincus.
• GTCR, a leading private equity firm, acquired GreatCall, Inc., the largest provider of connected health and personal emergency response services for senior citizens, serving more than 800,000 subscribers across the United States.
• Verily, the Alphabet subsidiary formerly known as Google Life Sciences, raised $800 million in funding from Temasek, a Singapore-based investment company.
• Bright Health, the Minnesota-based health insurance startup that boasts “a smarter, more connected” experience, raised a new round of $160 million.
• American Well, the Boston-based telemedicine software company, acquired Avizia for an undisclosed amount, strategically expanding American Well’s footprint with health systems and institutional providers.

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Christopher J. Donovan is a partner and health care lawyer with Foley & Lardner LLP. He focuses his practice on advising companies and their investors and lenders in mergers and acquisitions, recapitalizations, buyouts and restructurings as well as advising on a broad range of commercial arrangements. Mr. Donovan has particular experience in the health service, particularly post-acute, and life sciences sectors. He has a unique blend of deep regulatory as well as corporate and finance experience to bring to a transaction as a result of his consummating dozens of health and life science deals, both domestic and international. Heidi H. Jeffery is a partner and business lawyer with Foley & Lardner LLP. Ms. Jeffery has experience in general municipal, private activity bond, housing, student loan, health care, and senior living finance. In such transactions, she has served as bond counsel and counsel to developers, underwriters, credit enhancers, issuers, and borrowers. Ms. Jeffery is a member and former vice chair of the firm’s Senior Living Team. She is also a member of the firm’s Finance & Financial Institutions, Health Care Finance, and Public Finance Practices and the Health Care Industry Team. Nathaniel (Nate) Lacktman is a partner and health care lawyer with Foley & Lardner LLP. He is the chair of the firm’s Telemedicine Industry Team and co-chair of the firm’s Digital Health Work Group. He advises health care providers and technology companies on business arrangements, compliance, and corporate matters, with particular attention to telehealth, digital health, and health innovation. Melesa A. Freerks is an associate and health care business lawyer with Foley & Lardner LLP. She is experienced with advising clients regarding corporate transactions, compliance programs, fraud and abuse issues, reimbursement arrangements, regulatory compliance, privacy issues, tax-exempt status, and general counsel matters. Ms. Freerks provides transactional counsel to health care organizations where her practice focuses on mergers, acquisitions, corporate restructurings, joint ventures, general corporate matters, and health care regulation. The authors would like to acknowledge Paige Papandrea, summer associate, for her assistance with this article.

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