First half digital health investment — a true rebound or a ‘dead cat bounce’? A Gimlety look at Rock Health’s H1 report.

July 30, 2024 | by

Gimlet EyeFirst, your Editor assures our Readers that no felines were harmed or poorly thought of. It’s just words expressing concepts!

In ever-dapper Mr. Market’s picturesque and blunt language of finance, a ‘dead cat bounce’ is a temporary improvement, a short-term recovery that does not reverse the reality of the long-term downward trend, which resumes shortly thereafter the pick-me-up. It’s applied to assets, stock prices, market sectors, and even political polling. 

So…let’s debate the point. Is digital health investment in the US recovering, or taking a few lungfuls of air at the surface before sinking again?

Rock Health’s first half (H1) report. It is, like most of theirs, heavy on the optimistic ‘glass half full’ view. Its headline ‘Resilience Leads to Brilliance’ is certainly a catchy rhyme or meme, but in this Editor’s Gimlety View, an overstatement. It does look like the logjam in funding and M&A has broken, but where’s the brilliance?

Let’s take a cold look at the Rock Health findings for the first half (H1) of 2024. Rock Health only looks at US digital health fundings above $2 million and includes some companies those of us in the professional field do not consider ‘digital health’. FTR:

  • US digital health startups raised $5.7B across 266 deals. Average deal size: $21.4 million.
  • The action was in Series A and B raises, which were roughly comparable to prior years. Series C and D were anemic, with Series C especially lagging even anemic 2023.
  • 40% of H1 2024’s fundraises (107 deals) were unlabeled; by quarter, Q1 47% and Q2 33%. This is only slightly down from the 44% for full year (FY) 2023.
  • The top ‘value propositions’ for fundraising companies were disease treatment (including food as medicine), non-clinical workflow, R&D, clinical workflow, on demand healthcare and precision medicine. The first two are no change from FY 2023. The biggest shifts up from FY2023? Clinical workflow, on-demand healthcare, and precision medicine. These categories are not defined by Rock Health.
  • The top ‘clinical indications’ are mental health, cardiovascular, oncology, weight management, reproductive/maternal health, and neurology. Again, the first three are basically little changed from FY 2023. The big upward shift was funding for reproductive health.
  • “AI momentum underpinned deals in categories next on the list, including nonclinical workflow ($896M), R&D for pharma and medical devices ($737M), and clinical workflow ($639M).”
  • Until Q2 2024, there had not been any into the public markets for 21 months. Starting in May and June, there were three: fetal monitoring Nuvo (public exit via SPAC (!!) in May) and two in June: revenue cycle management company Waystar and precision diagnostics Tempus AI.
  • There were only 66 acquisition deals made in H1, about half between digital health companies. Private equity acquired 10 companies and 12 in “other”. 

In nearly every metric above, H1’s trends are comparable to 2023 extrapolated to a full year, as well as in line in numbers to pre-inflationary 2019–the investments in absolute terms are worth less. 

But overall, it is as if the boom of 2020-2022 never happened except in the wreckage of overfunded/foolish funded companies. And 2023 was marked by four tech bank lender bankruptcies and many high profile bankruptcies such as Babylon Health, Quil Health, and Pear Therapeutics. 2024 should look better than 2023, by that logic.

But let’s factor in the following for 2024 H2:

  • The raises are there and they’re fairly steady–but with only a few exceptions, usually AI related, they are far less than in the past, again using 2019-2020 as a baseline.
  • At the same time, layoffs are also prevalent and substantial at all levels, indicative of retrenching. And there is little real hiring versus resume collection.
  • This is an election year like no other in the US, UK, and France, as well as political and terror turmoil worldwide. 
  • Two active wars in Ukraine and Israel, possibly a third on the horizon with major impact (Taiwan)
  • Drying up of now unwanted Chinese capital that fed into Sand Road VCs
  • The very underdiscussed FTC/DOJ pre-merger notification and Merger Guidelines–and a hostile FTC

Socially and physically, there’s little respite, from the fool’s spectacle of the opening Olympic ceremony to increased volcanic activity worldwide seen from Yellowstone to Italy. Natural disasters add to nervousness. 

As usual, there are two metrics missing from Rock Health’s analysis: companies in deep trouble or bankrupt. Capital destruction matters. Granted, Rock’s report is about digital health investment, but considering what and why it fails is part of the investment picture. What comes after all those rounds and exits? 

  • Bankruptcies: Cue Health, Cano Health, Invitae, SmileDirectClub (late Dec 2023)
  • On the way: 23andme, NeueHealth (probably 2025), Amwell (which avoided delisting by a reverse stock split)

There is also the shutdown of Walmart Health’s telehealth / remote health unit, formerly MeMD, acquired by Fabric. There is also the Veradigm mystery–delisted and as of May, up for sale, despite having positive revenue. Added context: the failure of melding retail health with clinic operations–Walgreens’ VillageMD, CVS scaling back Oak Street, Amazon folding Clinic into One Medical.

AI is also proving to be ‘not all that’. Health systems are using them to automate procedures and some interfaces with patients. But the investment/payout equation is still tilted heavily to the former.

Conclusion: this Editor is leaning towards ‘dead cat bounce’ through this year unless something drastically changes, as in improves.

Agree? Disagree? Comment below!

Referenced: Rock Health FY 2023 report, Rock Health Q1 2024 ‘flat spin’ report, Mobihealthnews

What the DOJ and FTC Merger Guidelines mean for healthcare M&A–review of the Epstein Becker Green podcast

April 23, 2024 | by

Are you in the (mostly) lucky group of companies seeking to buy or be bought? This podcast is a ‘must hear’ as likely you’ll be affected. Healthcare law firm Epstein Becker Green’s roundtable podcast in the ‘Diagnosing Health Care’ series is their half-hour condensed view on the new Federal Merger Guidelines that the Department of Justice (DOJ) and the Federal Trade Commission (FTC) finalized last 18 December. Their view on how it will affect healthcare organizations is not too different from your Editor’s lengthy review of the DOJ/FTC document published on 20 December. The DOJ/FTC end-of-year drop perhaps (ahem) was timed to bury the bad news, drowning it in a punch bowl of good cheer or in holiday busy-ness.

This Editor (note: not a lawyer nor do I play one on TV or YouTube) took the view that it was that it was a whole scuttle of coal for healthcare holiday stockings (right) and that it would discourage much of 2024’s healthcare M&A until companies figured what mergers would likely past muster, among other predictions. The EBG folks mostly agree. They also point out that the final Guidelines’ language is “more aggressive” than the draft that many healthcare organizations took issue with–what the article referred to as “substantially more restrictive language and interpretation”. There are some wins from the draft, but much of the language, especially on vertical mergers, simply moved into one or another of the 11 Guidelines. 

The EBG team on the podcast (available for play on the web page and download) are Trish Wagner, John Steren, and Jeremy Morris, moderated by Dan Fahey. Below are some key points made by the team on the podcast. Your Editor recommends that you pull up our 20 December article as a reference to the specific Guideline references they make.

  • Background: Horizontal merger Guidelines were last updated in 2010. Vertical merger Guidelines were issued in 2020 but later rescinded. These new Guidelines apply to both horizontal and vertical mergers and acquisitions. US antitrust is based on three acts passed by Congress: The Sherman Antitrust Act (1890), the Clayton Act (1914), and the Federal Trade Commission Act of 1914, now in US Code Title 15. The Guidelines since then are based on them as well as case law.  (From the wrapup) Courts tend to be very deferential to the Guidelines.
  • The wording of Guideline #8, When a Merger is Part of a Series of Multiple Acquisitions, the Agencies May Examine the Whole Series, is both interesting and aggressive in that it will be considered and opens up a pattern of acquisitions. This can be by private equity (PE) or other owners.
  • Guidelines #1, Mergers Raise a Presumption of Illegality When They Significantly Increase Concentration in a Highly Concentrated Market, and 2, Mergers Can Violate the Law When They Eliminate Substantial Competition Between Firms, impact hospital mergers. Prior merger guidelines focused on highly concentrated markets using a point system (HHI, the Herfindahl-Hirschman Index, is a common measure of market concentration). This measure sets a lower bar.
    • To trigger #1, a market share above 30% and an HHI over 100 can trigger it even in unconcentrated markets.
    • On #2, elimination of direct competition is maybe in and of itself harmful
  • Guideline #6, Mergers Can Violate the Law When They Entrench or Extend a Dominant Position: for horizontal mergers, ‘entrench’ is in practice the operative term, whereas ‘extend’ applies mainly to vertical mergers. Companies will have to demonstrate that the beneficial competitive effects outweigh the anticompetitive, especially when involving consumers. And they will have to demonstrate why the merger is necessary. 
  • Wrapping up:
    • Ms. Wagner: the Guidelines don’t have the force of law, but they do have impact because they are about the process on how mergers are evaluated. Courts have been very deferential to the Guidelines.
    • Mr. Morris: hospital leaders will have to contemplate this “huge change in a moment” which he questioned. He emphasized that organizations involve their antitrust counsel now even earlier than previously.
    • Mr. Steren: “healthcare has a bullseye on its back”. It is immediately more restrictive. It fits right in with what current enforcers do in trying to bring “persuasive authority” to bring new, novel, cases into court. He seconded Mr. Morris’ last remark.

This Editor, as the Canary in the Coal Mine, will assume that UnitedHealth Group and others have already anticipated that they will have difficulty now making new acquisitions, obtaining approvals for ones that haven’t been finalized, or making quick sales of units they no longer want (Walgreens). Hospitals will find that divestiture and regional mergers will be discouraged. Acquirers who’ve been concentrating on filling out their platforms with vertical acquisitions may find that these Guidelines are also written to trip them up–and once tripped, each Guideline knocks on another. (For other predicted consequences, see the 20 December article.)

DOJ and FTC finalize Merger Guidelines, deliver coal for holiday stockings and the New Year (updated)

December 20, 2023 | by

DOJ and FTC deliver a scuttle of coal for healthcare holiday stockings. The Department of Justice (DOJ) and the Federal Trade Commission (FTC) finalized the Merger Guidelines that were drafted back in July [TTA 20 July]. They update prior guidelines first issued in 1968 that have been revised six times since then. They are not legally binding but demonstrate how each agency will examine any merger or acquisition going forward–and are advance notice on how they can and will stop either. US antitrust law is based on three acts passed by Congress: The Sherman Antitrust Act (1890), the Clayton Act (1914), and the Federal Trade Commission Act of 1914, now in US Code Title 15.

After 30,000 public comments in the 60-day period, the published Guidelines are now down to 11, but in context based on this Editor’s read (caveat, not a lawyer nor play one on TV) are not materially different than the July draft of 13, perhaps considered unlucky. The language in each Guideline restates the draft language in substantially more restrictive language and interpretation. The agencies’ stated purpose is that when two companies propose a merger that “raises concerns” on one or more of these Guidelines, the agencies “closely examine” whether the effect of the merger may be to substantially lessen competition or to tend to create a monopoly (sometimes referred to as a “prima facie case”). Two “C” words are repeated throughout–concentration and consolidation. 

The guidelines are verbatim from the 51-page DOJ/FTC document (PDF link) issued 18 December and are grouped on how the agencies use these guidelines. They are effective immediately.

Distinct frameworks the agencies use to identify that a merger raises prima facie concerns (1-6)

Guideline 1: Mergers Raise a Presumption of Illegality When They Significantly Increase Concentration in a Highly Concentrated Market.
Guideline 2: Mergers Can Violate the Law When They Eliminate Substantial Competition Between Firms.
Guideline 3: Mergers Can Violate the Law When They Increase the Risk of Coordination
Guideline 4: Mergers Can Violate the Law When They Eliminate a Potential Entrant in a Concentrated Market
Guideline 5: Mergers Can Violate the Law When They Create a Firm That May Limit Access to Products or Services That Its Rivals Use to Compete
Guideline 6: Mergers Can Violate the Law When They Entrench or Extend a Dominant Position

How to apply those frameworks in several specific settings (7-11)

Guideline 7: When an Industry Undergoes a Trend Toward Consolidation, the Agencies Consider Whether It Increases the Risk a Merger May Substantially Lessen Competition or Tend to Create a Monopoly
Guideline 8: When a Merger is Part of a Series of Multiple Acquisitions, the Agencies May Examine the Whole Series
Guideline 9: When a Merger Involves a Multi-Sided Platform, the Agencies Examine Competition Between Platforms, on a Platform, or to Displace a Platform
Guideline 10: When a Merger Involves Competing Buyers, the Agencies Examine Whether It May Substantially Lessen Competition for Workers, Creators, Suppliers, or Other Providers
Guideline 11: When an Acquisition Involves Partial Ownership or Minority Interests, the Agencies Examine Its Impact on Competition

The Guidelines are summarized in the Overview. Section 2 explains them more completely with how the agencies apply the Guidelines. Section 3 identifies rebuttal evidence that companies could typically present, and Section 4 presents a non-exhaustive discussion of analytical, economic, and evidentiary tools the Agencies use for evaluation. 

More coal, Ebenezer Scrooge. As this Editor described the draft guidelines in July, it it is hard to see that any merger or acquisition of like companies or even complimentary organizations building out capabilities or platforms could pass. Each one of these Guidelines is a tripwire and once tripped, can trip others. Each one of these can be used by FTC and DOJ to present to a Federal district court, where decisions are now more influential than the body of US Supreme Court decisions. Healthcare Dive notes the Illumina decision in the Fifth Circuit appeals court, liberally cited in the Guidelines document. This is forcing Illumina’s divestiture of cancer test developer Grail, earlier purchased for $7.1 billion. 

So now the coal’s been delivered…what will 2024 and out look like?

  • This will freeze M&A for months as companies try to figure this out. It’s not hard to guess that the imminent publication of the Guidelines nudged the termination of the Cigna-Humana deal. Hospital and health system mergers will continue to find nothing but discouragement.
  • Watch for an acceleration of existing company failures in 2024 and disruption in the current funding structure. Smaller healthcare companies, fattened on the investment binge of 2020-21, but now betting on a buyout from a near competitor, are either going to stick it out on their own or run out of runway. VC and PE companies investing not strategically, but for the purpose of a 18-24 month exit or quick payday, will largely be out of luck. Public companies may languish unless they move quickly to profitability. This may stimulate a new look at investing–strategic investors that look at the very long term–or not. (JP Morgan in January will be verrrrry interesting.)
  • Companies that have grown organically or benefited from previous acquisitions but need to acquire capabilities for a platform to continue to be competitive will also be affected. These could trip Guideline 9 and if found to be anti-competitive, may trip Guideline 8: “If an individual transaction is part of a firm’s pattern or strategy of multiple acquisitions, the Agencies consider the cumulative effect of the pattern or strategy.”
  • The behemoths like UnitedHealth Group, Walgreens Boots Alliance, and CVS Health will have no rivals for many years. The flip side: they will have trouble making additional acquisitions without forcing divestitures, or find buyers when they wish to divest money-losing units.
  • Partnerships may accelerate–with all their risks of purloined IP and monetary disputes. But smaller companies may use it to band together without antitrust risk.
  • The SPAC (special purpose acquisition company) may make a comeback. They will not have any antitrust conflicts but risk a chancy public market, at least in the US. 
  • The conglomerate–unrelated businesses under a holding or investment company–may rise again, as it did in a tight antitrust environment in the 1960s. Remember Gulf + Western and LTV (Ling Temco Vought)–both gone? Berkshire Hathaway is a prime example of a current conglomerate. Foreign investment groups may also find US healthcare an attractive proposition.
  • Offshore reincorporation. Much as Medtronic moved its corporate headquarters from Minneapolis to Dublin, Ireland, companies may move offshore to friendlier climes like Ireland, Estonia, Hungary or the Visegrad nations, and the Channel Islands, effecting their M&A there and making their US branches operational only. 

But…there’s more. Both DOJ and FTC will be reviewing the 2010 Horizontal Merger Guidelines and the 2020 Vertical Merger Guidelines. Fasten your seatbelts, it’s going to be a bumpy year. 

FTC press release (which makes clear what agency is leading!), Crowell (law firm) short analysis, PrivateFundsCFO

Additional sources added 2 January: National Law Review (article by Foley & Lardner), Healthcare Finance News