Cross-Industry Acquisitions Heat Up in Digital Health Sector

Internet healthcare startups are attracting numerous cross-industry acquirers. What does this trend mean for companies solely seeking acquisition? VCBeat believes that the following overseas trends may be replicated in China. Let’s take a look at Rock Health’s observations of the U.S. market.

As mergers and acquisitions within the healthcare industry gradually heat up, non-healthcare institutions are inevitably seeking to capitalize on this trend. In the first quarter of 2015, we witnessed sportswear brand Under Armour acquire MyFitnessPal and Endomondo for $475 million and $85 million, respectively. Last year, the acquisition of healthcare payment management company Trizetto by Cognizant, a non-healthcare institution, was the largest known deal of its kind. The outsourcing services company acquired Trizetto for $2.7 billion. Other non-healthcare entities have also been active, successively acquiring several healthcare companies previously invested in by the venture capital firm Rock Health. For instance, MyFitnessPal acquired Sessions, Weight Watchers took over Wello, and Google merged with Lift Labs. The aforementioned acquisitions represent only a small fraction of such transactions.

Why Are Acquisitions Led by Non-Traditional Enterprises on the Rise?

Nowadays, non-traditional healthcare companies are increasingly investing in the internet healthcare sector. This trend indicates that these investors have gradually come to recognize that integrating the healthcare industry into their business models will yield substantial benefits. Furthermore, whether driven by the need for treatment or by health maintenance considerations, consumers’ growing purchases of healthcare-related products have created a suitable market for the “B2C e-commerce model.” Since 2013, Rock Health has been tracking acquisition activities in the internet healthcare space. To date, among all recorded acquisitions, those completed by non-healthcare entities have reached 33 deals, with a total value of up to $5.2 billion, accounting for 20% of all acquisitions (while acquisitions completed by traditional healthcare institutions account for 23%). Non-traditional healthcare enterprises have also made significant investments in the consumer personal health sector, such as investing in personal health tools and personal health monitoring devices.

How do traditional healthcare companies view this issue?

Policy shifts within traditional healthcare enterprises are now inevitable, with companies placing greater emphasis on consumer health. However, for many stakeholders in the conventional healthcare sector—such as pharmaceutical companies, medical device manufacturers, consumers, and healthcare providers—the role played by internet-based healthcare remains ambiguous. The scenario in which patients can access medical consultations simply by tapping a “confirm” button online, potentially reducing certain segments of the healthcare industry to mere intermediaries, is unprecedented in history. Leslie Silverglide, Co-founder of Wello (which was acquired by Weight Watchers as its inaugural acquisition) and current Vice President of Product Management at Weight Watchers, offered her perspective on digital healthcare: “The concept of internet-based healthcare is still in its infancy; the industry has yet to witness even one successful initial public offering (IPO). The general public remains largely unaware of how this sector operates. Therefore, I believe a significant number of people will continue to adopt a wait-and-see attitude toward the prospects of internet-based healthcare.”
According to Jeff Royal, Director of the Acquisitions and Licensing Division at Abbott Vascular, uncertainty surrounding the future of internet healthcare has made many medical device manufacturers, such as Abbott, reluctant to pursue acquisitions. Instead, they are more inclined to seek partnerships, perceiving them as lower-risk alternatives to acquisitions. However, while traditional healthcare companies tend to adopt a conservative approach toward innovation, they possess unique competitive advantages. They typically wield broader influence among customers and can establish strong brand equity. Furthermore, these companies can leverage their extensive practical experience in commercial trade to help foster a favorable regulatory environment for healthcare. These distinctive roles enable traditional healthcare companies to serve as valuable partners for emerging enterprises in addressing complex healthcare challenges.

Steven Rubis, a sell-side equity research analyst at Stifel Investments, holds an optimistic outlook on the prospects of pharmaceutical companies. He believes that these companies can play a significant role in healthcare niche markets by securing the position of digital health technologies within such segments. The responsibilities of the pharmaceutical industry now extend beyond mere diagnosis, treatment, and data statistics. They require internet-based healthcare technologies and aim to leverage these tools to identify more comprehensive approaches to cost reduction, ultimately succeeding in maintaining price stability. In 2014, five digital health companies were acquired by pharmaceutical firms.

So, what factors need to be carefully considered if one seeks an acquisition?

There are five fundamental principles for accurately identifying which acquirers are genuinely interested in making acquisitions; these principles apply to all acquiring companies, whether they are traditional or non-traditional healthcare enterprises.

1. Get closer to companies that share your goals. Nick Crocker, co-founder of the behavioral coaching firm Sessions and current Head of Product at MyFitnessPal, stated, “If the acquirer did not share our business objectives, I would never have endorsed the acquisition. During our initial negotiation meeting, the acquirer made it clear that their interests were perfectly aligned with ours.” Shortly after Sessions was acquired by MyFitnessPal, MyFitnessPal itself was acquired by Under Armour.

2. Investigate the acquisition motivations of potential acquirers. The motives behind each acquirer’s decision vary. Strong partnerships and the presence of co-investors can help establish a relatively balanced dynamic between both parties during the acquisition process, while also providing you with clearer insights into the acquirer’s strategic rationale and objectives.

3. Be ready to act at the right opportunity. Sometimes, a successful acquisition requires a bit of luck; at the very least, you need to have a good understanding of the ever-changing market dynamics. “When we started out, we were fighting alone. But it wasn’t long before we saw emerging healthcare companies springing up like mushrooms after rain,” said Sliverglied. “Many companies went through multiple rounds of significant fundraising. It seemed as though they were competing in a race dictated by market spending, with the goal of winning over more consumers. From this perspective, Wello’s acquisition makes perfect sense.”

4. Create a sense of urgency for the acquirer. If you are negotiating with only one acquiring company, it may deliberately slow down the acquisition process to conduct a thorough valuation of your company or to weaken your bargaining position by dragging out negotiations. In such situations, intentionally showing interest in other potential buyers may prompt the acquirer to accelerate the completion of the deal (a tactic also commonly used in venture capital). However, especially when negotiating with large corporations, the pace of negotiations tends to be much slower than what startups are accustomed to. It is crucial for startups to recognize this reality.

5. It is essential to position this as a pathway with significant potential for success. “Acquiring your company means there is a visible path to investment exit. This possibility includes both helping the acquirer achieve its next stage of success and the potential for being acquired by a larger buyer down the line,” said Crocker.

Original Author: Stephanie Liu | Compiled by: Zhou Changling | Editor: Luo Xiaosou