CVC Unplugged: M&A wave about to hit digital health, says MSD’s Taranto

“M&A is coming back in fashion,” says Bill Taranto, president of MSD Global Health Innovation Fund, predicting a wave of acquisitions in the digital health market.

“We’re going to see consolidation in the marketplace, not only because cash-strapped companies are seeking exits, but the bigger players like the private equity players who are flushed with money but didn’t invest last year are going to dump that money into the market and the way they do it is by bringing companies together,” he says.

Taranto, who was speaking on the CVC Unplugged podcast said that MSD Global Health Innovation Fund was looking to participate in this wave of consolidation, calling it “ecosystem investing”.

Taranto, who runs the corporate venture capital fund of pharmaceutical company MSD, says digital health technologies are in need of this kind of consolidation. They have tended to be point solutions – designed to address a single, specific problem – as opposed to a range of problems. This has made it historically difficult for them to scale. Consolidating digital health companies can allow for a range of single solutions to be brought together into a platform, which is more scalable.

M&A is also welcome because of the continued dearth of exits for startups in the public markets, something that has always been elusive for digital health technology.

The end of digital health?

The digital health has come under strain over the past few years. Areas such as telehealth had a boom during the Covid-19 pandemic, but since then, the amount of funding startups have been able to raise has dwindled and there are relatively few examples of profitable companies. This has led some to speculate about the future of the entire sector.

Taranto, however, believes digital health will simply evolve.

“It’s a misnomer that digital health will cease to exist. It’s not really going to cease to exist. It’s really going to become a new channel,” says Taranto. “It’s going to become fully integrated into the market. The only way to do that integration is you’re going to have to consolidate assets and build the scale you want.”

He likens it to banking, which today allows you to perform virtually any function over the internet, complete with round-the-clock support. The same will be true of healthcare.

The A and B round death zone

The market will be resized, however, in the wake of unsustainable valuations in the aftermath of the pandemic, Taranto says. It may mean that some of the weaker companies at the series A and B phases will fall by the wayside but ultimately may result in a better investment environment.

Companies raising A and B funding have found it hardest to close rounds recently. It was companies at this stage raised unrealistic valuations during the 2021 and 2022 boom years, and may now need to eat down rounds.

“Not sure what to do about the [series] A and B situation at the moment. It’s still a mess and that’s not going to change in 2024,” says Taranto.

On a more positive note, growth-stage companies – of series C and above – are seeing money come back from the downturn. It’s not huge amounts, and they may tend to be flat rounds, but it’s a positive sign that they’re still raising.

By a similar token, a lot of money is shifting to earlier-stage deals and seed money, where both the risk and capital commitments are lower.

“I think mostly the coming year will be a recalibration for the digital health industry. I think it’s going to be a harsh reality check for a lot of companies, but I would say we needed a reset,” he says. “So I’m actually very positive about 2024, but it’s going to take time.”

He predicts that by the end of the second quarter, or the beginning of the third, this year, we should start to see the market ticking up again in terms of more funding coming in.

Digital health evolution

MSD Global Health Innovation Fund has been focused on digital health from the beginning, having set up a digital health fund a full five years before its therapeutic fund.

A lot has changed since 2010, when that first digital health fund was launched, not least the name of the segment itself, which was then known as Health IT and revolved around the handling of data – its aggregation, security and privacy.

“It was probably the first evolution where technology was starting to impact healthcare, not only from the payer and provider side but also the corporate side,” says Taranto.

Covid was seen by many as a boost to digital healthcare, but Taranto says that beyond telemedicine or remote monitoring the pandemic did not have a particularly lasting impact on digital health – at least to the extent that many may believe.

“I would say it was very narrow in its overall impact on digital health. I think digital health in and of itself was just growing anyway,” says Taranto, pointing to other drivers of digital health that had a bigger impact, like its applications for the pharmaceutical industry.

Fast forward to 2024, the focus of digital health is moving from telehealth to digital health products that support the treatment of disease or manage workflow.