Non-healthcare acquirers heating up digital health M&A activity

Stephanie Liu, Strategy Fellow, Rock Health

What does it mean for companies looking to get acquired?
With M&A heating up in the digital health space, it’s no wonder non-healthcare companies also want to get a piece of the action. In Q1 2015, we saw consumer athletic wear company Under Armour make a $475M acquisition of MyFitnessPal and $85M acquisition of Endomondo. Last year we also saw the largest disclosed acquisition by a non-healthcare acquirer: Outsourcing services company Cognizant bought payer administration company TriZetto for $2.7B.  Several non-healthcare companies have gone on to acquire a number of Rock Health portfolio companies—MyFitnessPal acquired Sessions, Weight Watchers bought Wello, and Google purchased Lift Labs—just to name a few.

Why so much activity from non-traditional players?
The trend of non-traditional players investing in digital health indicates that healthcare is no longer a silo as these players identify value of incorporating healthcare into their business model. The growth of consumers willing to pay out of pocket for healthcare-related expenses, whether that’s medical or wellness-oriented, is creating an attractive market for B2C models. Since Rock Health began tracking M&A deals in digital health in 2013, non-healthcare company acquisitions in digital health account for close to 20% of all M&A deals (compared to 23% by traditional healthcare companies) with a total of 33 deals and $5.2B in disclosed digital health acquisitions. Non-traditional players also invested more heavily in the consumer health space such as personal health tools and tracking.

How do traditional healthcare players see things differently?  
The trend of consumer health seems inevitable; however, in traditional healthcare such as pharma, medical device, payers and providers, the role of digital health is a little less clear. The customer has historically never been the “paying” consumer, with one of the industry players bearing the costs as an intermediary.  “Because digital health is so new and there haven’t been big IPO winners that have defined the space so far, I think that a lot of people are still hesitant about the role of digital health,” said Leslie Silverglide co-founder of Wello and now VP of Product Management at Weight Watchers. Wello was Weight Watchers’ first acquisition in the company’s history.

This uncertainty means traditional players like medical device company Abbott are often less amenable to acquisitions and view partnerships as a less risky, preferred alternative, according to Jeff Royal, Director of Licensing & Acquisitions at Abbott Vascular.

While traditional healthcare companies tend to be more conservative in their approach to innovation, they do have a competitive advantage of a broader reach and stronger brand with healthcare customers and substantial experience and knowledge navigating the healthcare regulatory environment. These facets make traditional stakeholders important partners for startups tackling disruptive healthcare solutions.

Steven Rubis, a sell-side equity research analyst at investment banking firm Stifel, is optimistic that pharma will play a large role in the consolidation of digital innovation in niche markets. “[Pharma] is moving beyond identifying a disease, running a trial, and running statistical significance,” said Rubis. “They are looking at [mobile health] to drive a more complete solution and protect pricing at the end of the day.” Pharma made five acquisitions of digital health companies in 2014.

So, what should digital health companies think about if they want to be acquired?

Key tenets for identifying the right digital health acquirer are the same for potential non-traditional and traditional healthcare acquirers:

1. Align with a company with similar mission/vision: “I wouldn’t have done the deal if there wasn’t an aligned vision. From the first meeting, it was clear they cared about exactly the same things we did,” said Nick Crocker, co-founder of behavioral coaching company Sessions and now Product Lead at MyFitnessPal. Sessions was acquired by MyFitnessPal before the Under Armour acquisition.
2. Understand strategic motivations of potential acquirer: Each organization has different reasons for acquiring.  Existing partnerships or mutual investors can foster the right relationships for a future acquisition and also provide insight into an acquirer’s strategy and vision for the future.
3. Know when the time is right: Sometimes the right acquisition requires a bit of luck or at least an understanding of the changing market landscape. “When we started, we were on a highway by ourselves.  It wasn’t until later however that we saw this proliferation of fitness start-ups,” said Silverglide. “Many companies were raising huge rounds of financing and it looked like it was going to be a fight defined by marketing spend to acquire customers.” At that point, an acquisition by a larger brand to leverage scale made sense for Wello.
4. Create a sense of urgency:  If you are only courting one buyer, that can often slow the process as the acquirer conducts a long evaluation or chooses to weaken the target’s position by dragging out the conversation. Soliciting multiple buyers can help accelerate timelines for a potential acquirer to act (just as in raising a venture round). It is important to note, however, especially with larger companies, that the pace is slower than what most startups are used to.
5. Exude the qualities of a successful standalone company: Building on existing partnerships now opens up relationships with potential acquirers down the road.  “The path to getting acquired and the path to building a successful company are the same,” said Crocker.