Drake Star is a technology-focused investment bank that partners with top technology companies. Christophe Morvan is managing partner at Drake Star and Lawrence Giesen is partner. Both specialize in telemedicine.
As 2023 turns into 2024, the two experts have many thoughts on the state of the virtual care market. Healthcare IT news sat down with the guys to discuss the key players in the US telemedicine industry, M&A trends for telemedicine, key funders and investment dynamics, and near- and long-term valuation trends.
Q. Who are the key players in the US telemedicine industry and where do they stand?
Giesen: We've divided the telemedicine industry into three main groups: GAMMA technology giants, large established publicly traded leaders, and smaller specialty providers.
The GAMMAs have been actively involved in the telemedicine sector since 2008 and have accelerated the pace of investment in the sector. Google Health leverages the full potential of Google's data and AI capabilities to improve access to healthcare information for medical professionals.
Alphabet has invested in parallel in telehealth companies such as Hello Heart, specialized in heart monitoring, and Klara, a virtual care platform. Its venture capital arm, GV, has also backed Synapticure, a remote consulting company.
Similarly, Apple has contributed to the telemedicine landscape by developing digital health tools, including wellness trackers on Apple Watch and its own telemedicine app Apple Health.
For large incumbents Amwell and Teladoc Health are the undisputed U.S. leaders in telemedicine services, committed to both individuals and organizations. Amwell offers nationwide coverage to 90 million users, with Teladoc Health expanding its reach internationally.
Despite pursuing an active external growth strategy, they have halted further acquisitions since 2021. Both are under market pressure to improve profitability, leading to a pause in external growth. The current oversupply of telemedicine services (after the correction of the COVID-19 demand bubble) further contributes to a natural cull of small, unprofitable players.
And with specialized providers, certain specialized/vertical players manage to grow quickly in their niche. For example, Capsule, the American operator of online pharmacies, has raised more than $600 million in private capital in seven years.
Similarly, Ro, the telehealth platform specializing in prescription drug treatments, has secured an impressive $1 billion in funding since its founding in 2017. The companies will use the funds to strengthen their position in direct-to-patient care and strengthen their technology. The mental health sector has been particularly busy and has been consolidating recently, with multiple horizontal acquisitions.
Q. What are the M&A trends for telemedicine in 2024?
Morvan: The current trend reflects a slowdown in telemedicine merger and acquisition activity. Only 22 deals were completed globally in the first half of 2023, a 35% year-over-year decline compared to 2022. During the first half of 2023, 60% of global M&A deals involved a US target company, consistent with the 2015-2022 trend in which more than 70% of deals involved a US target company.
A major transaction took place in the first half of 2023 when Humana acquired remote consultation provider Heal for $100 million.
Recent M&A deals follow two different scenarios: 1) For international transactions, large telemedicine companies aim to scale geographically and gain market share by acquiring telemedicine incumbents from other countries, and 2) domestically, consolidators consider technological additions to their offerings of telemedicine. offer, through the acquisition of smaller target groups with specific technical added value (data security, specific distribution channels, etc.).
The United States remains the global hub for telemedicine with more than 800 companies, approximately four times its European counterparts. The oversupply of telemedicine solutions offers opportunities for consolidation at attractive rates.
Historically, two-thirds of telemedicine M&A transactions have occurred in the US, and this ratio should continue into 2024. There are two conflicting trends in current market conditions.
First, the telemedicine market is still in its maturation phase and lower numbers are driving consolidation. On the other hand, transaction financing costs are at historically high levels, and the cost of interest on debt is weighing on the ability of large incumbent players to finance external growth.
Q. Let's talk fundraising: who are the top funders, and what are the dynamics between venture capital and private equity?
Morvan: Fundraising has been challenging in 2023. We recorded 82 US deals in the first half of 2023, representing a decline of approximately 45% year-on-year compared to 2022, when 292 US deals were completed. This drop is even more striking considering that the number of deals completed in 2022 was already 60% less than a very strong year in 2021. You have to go back to 2015 to see such a low level of fundraising activity.
As with M&A, the US dominates telemedicine fundraising activity, with more than $25 billion raised since 2015 through 2,195 deals, accounting for more than 70% of total volume. This trend was confirmed in the first half of 2023, with 65% of global funds raised in the US with a volume of $610 million.
As in 2022, pre-seed and seed investments will remain the most active asset class in the first half of 2023, with half of the total number of financing rounds. VC in the first half of 2023 was less than half compared to 2022 levels, indicating a loss of interest in unprofitable growth companies.
Late-stage VC has been the second most active asset class at 28% of the total. Late-stage investment tickets in specialty telemedicine players dominate the market, with an emphasis on profitable operators. Large PE growth deals have all but disappeared; only four deals were completed in the first half of 2023.
Big macro deals disappeared as the credit environment forced high financing costs. In the current economic environment, it may be safer to opt for investments at a mature stage, given the challenges of accessing liquidity and the critical importance of profitability for investors to realize returns on their initial investments.
Giesen: Notable US backers include major VCs such as General Catalyst, which closed 15 deals in 2021-2022, followed by Alumni Ventures and Optum Ventures with 10 deals each.
The first half of 2023 saw smaller investment tickets with seed funds including US government-led seed fund National Science Foundation and leading US technology incubator Y Combinator, each investing in five telemedicine companies in the first half of 2023.
We register more than 1,800 investors backing US telemedicine companies, which represents four times the European number. The US investor network gives a competitive advantage to telemedicine companies raising money in the US, which benefit from innovation hubs and growth dynamics.
In the short term, the stabilization of interest rates should allow for a potential rebound in fundraising activity in the first half of 2024, especially for large amounts of PE growth/expansion.
Q. What are the short-term and long-term valuation trends in the public market?
Morvan: During the COVID-19 pandemic, global telemedicine valuations skyrocketed to 7.5 times last-12-month revenue. The climb started in the first half of 2020 and lasted a year until the first half of 2021, after which it began to gradually decline and then stabilized at around three times LTM sales in 2022. In the first half of 2023, there was for the first time in the past two years a slightly positive recovery was noted.
Giesen: In the near term, we expect a recovery in the EV/revenue multiple, in line with the ongoing recovery that started in the first half of 2023. During the period, valuation multiples increased by 20% compared to year-end 2022.
The public EV/revenue multiples of our proprietary Drake Star telemedicine index increased from 2.6 times to 3.1 times as of the first half of 2023. We can explain this phenomenon as a result of the decline in financial performance of telemedicine operators and limited consolidation activity with a generally sluggish M&A market.
Morvan: Over the long term, we expect telemedicine valuations to stabilize in the three to four times EV/revenue range and return to a long-term average following the post-COVID investment pattern. Liquidity pressure from high interest rates puts a strong emphasis on profit margins, and while the credit environment should improve over the medium term, we remain conservative on multiples development.
For more details and statistics on the telemedicine industry, see Drake Star's March 2023 Telemedicine Report And September 2023 Telemedicine Report.
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