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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?
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:
A decade ago, the digital health industry was in its infancy. Participants in the space consisted mostly of start-ups and small, emerging companies with limited financial backing. Companies sought venture capital funding, as well as multiple partnership arrangements with erstwhile competitors, in an attempt to expand their product and service capabilities. The companies that survived have proven themselves and are taking the next developmental step toward mature operations. These companies are seeking larger investments and the opportunity to grow. Private equity firms and other investors are just now beginning to respond by dipping their toes in the industry to fund these companies. It is still early, and most private equity firms interested in telemedicine and digital health are interested in the technology as a value-add to their existing portfolio companies. While there are some notable pure telemedicine private equity deals, those have been few compared to the numerous venture funding deals. However, this will change over the next few years, and the market will see more private equity come to the table. As investors continue to explore the new opportunities offered by digital health, certain industry characteristics have emerged, signaling the time is right for investment opportunities. These characteristics include, but are not limited to:
Recent changes in the regulatory and reimbursement landscape also support the rise in investment in the telemedicine and digital health industry. Some of these changes include:
The Food and Drug Administration’s (FDA) Center for Devices and Radiological Health (CDRH) adopted the Digital Health Innovation Action Plan, which outlines the FDA’s approach for assuring that all Americans, including patients, consumers, and other health care customers have timely access to high-quality, safe, and effective digital health products. This plan lays out the CDRH’s vision for fostering digital health innovation while continuing to protect and promote the public health.
Health care is one of the most highly-regulated industries in the United States and constitutes 18% of the nation’s gross domestic product. While telemedicine and digital health offer the promise of transformative care delivery and bending the cost curve, health technology has its own unique risks to investors and is subject to significant regulations, making due diligence critical for potential investments. Digital health is not geographically limited in the same ways as traditional medical practices, and a telemedicine provider can be subject to the laws of each state where its patients are located. Because of this complexity and multi-state legal issues, additional consideration and sophistication are mandatory in a digital health transaction in order for the buyer to meaningfully determine whether or not the target company is in compliance with state and federal laws. Some of the key due diligence considerations for digital health transactions include:
The telemedicine and digital health industry meets many criteria making it ripe for private equity investment. The industry has grown extensively in the past several years, and outside investment in digital companies has likewise increased in recent years. Consequently, there has been a notable increase in venture capital, private equity firms, and other investors entering the digital health investment space.
Companies with reasonable histories of financial performance, scalability, and sustainability may present the most attractive opportunities for investors. With the reimbursement and legal/regulatory scheme changing at the federal and state levels to support the growth of the digital health industry, investors should seriously consider opportunities in this growing market.
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.
To find this article in Lexis Practice Advisor, follow this research path:
RESEARCH PATH: Corporate and M&A > M&A by Industry > Healthcare M&A > Practice Notes
For a discussion of the legal considerations applicable to physician practice acquisitions, see
> PHYSICIAN PRACTICE ACQUISITIONS: AVOIDING LEGAL PITFALLS
For an overview of factors applicable to participants in Medicare and Medicaid during a health care M&A transaction, see
> MEDICARE AND MEDICAID CHANGE OF OWNERSHIP CONSIDERATIONS IN HEALTHCARE INDUSTRY M&A
For answers to questions about regulatory issues and negotiating tactics, see
> EXPERT INSIGHTS: REGULATORY AND NEGOTIATING ISSUES IN U.S. HEALTHCARE INDUSTRY M&A TRANSACTIONS