Why PE could soon dial into the hype around telemedicine

  • Telehealth gains traction at hospitals, staffing providers
  • Reimbursement tailwinds look increasingly favorable
  • PE investment in sector: Warburg, Summit, Abry, Frontier

While venture capital has already begun to swoon over telemedicine, the market has remained largely untouched by the private equity community.

But at least some industry sources suspect the tide may soon be shifting as different ends of the market begin to appreciate the value of virtual diagnosis and treatment.

Simply put, it’s another tool for providers to drive productivity and cut costs.

In the wake of the American Telemedicine Association’s annual conference in Chicago this week, the buzz around field only accelerated.

American Well, whose backers include Allianz Group‘s digital investment unit, said it was buying Avizia, extending its telehealth capabilities within acute-care services. InTouch Health the same day said it planned to buy Reach Health in its second deal of the year.

There’s also Doctor on Demand, the startup co-founded by talk-show psychologist Dr. Phil. The telemedicine provider last week raised $74 million in a round led by Goldman Sachs, bringing its total funding to $160 million.

This week’s telehealth news wasn’t all about dealmaking. Ron Gutman, founder and CEO of VC-backed HealthTap, was ousted in light of allegations that he harassed and verbally abused employees of his telemedicine startup, Recode reported.

Despite all the hype around telemedicine, the sector has fielded minimal PE investment to date. So what gives?

The market aligns with some big themes in healthcare that sponsors have already gotten behind: keeping patients outside the hospital, the highest-cost setting of care, and of course, the consumerism of healthcare.

Problem is, most of these companies, even those of scale, are still in growth phase and are burning through cash — and the buyout shops see that, sources have said.

It’s not unproven, but most of these companies haven’t reached profitability and haven’t gotten the acceptance level yet from PE, as one source put it.

Take Teladoc, the telemedicine company much loved by investors. Teladoc has seen its shares soar over the past couple of years, and on Wednesday it reported Q1 revenue had more than doubled year-over-year.

Still, the company remains unprofitable. It, too, is in growth mode. While historically more of a direct-to-consumer provider, Teladoc is making a push to cross-sell with payers.

While the characteristics of those in the space have historically made telehealth a more obvious fit for VC, hospitals eager for cost savings are beginning to increase their appetite for such services, and the PE universe is starting to take notice, one PE source said.

In other words, as hospitals’ margins are squeezed, telemedicine is one way to leverage specialists from a staffing perspective and reach patients in remote settings.

Even the big physician staffing companies — Envision, Mednax and Blackstone’s Teamhealth — are beginning to think about telehealth, this source added. If they can better leverage their physician force, it only makes them more profitable, the source explained.

Policy changes may further stimulate activity, sources have said. The Bipartisan Budget Act of 2018 signed into law in February has a number of implications for the sector. Starting in 2020, Medicare Advantage plans will be able to reimburse for telehealth services as part of their basic benefit package, for instance.

Exceptions

To be fair, there are a few exceptions in which PE has played — though in most cases investments have been made through firms’ growth-oriented strategies as opposed to pure-play buyout transactions.

One is Warburg Pincus, which has made more than one bet on telemedicine via its “growth stage” strategy.

The firm in 2014 invested in Specialists on Call, which focuses on telemedicine for acute-care hospitals, and primarily within the neurology and psychology segments. SOC added teleneurology services last year when it bought NeuroCall.

Warburg also owns Modernizing Medicine, having injected $231 million in the specialty-specific electronic-health-record company last year. One of its various offerings is telehealth for dermatology. Even Warburg’s walk-in urgent care network, CityMD, has some telemedicine services.

Other investors in the sector include Boston’s Summit Partners. The growth-focused firm owns Advance Medical, a Barcelona telemedicine company, and also backs Modernizing Medicine alongside Warburg.

In other related activity, Abry Partners invested in a startup called MobileHelp in 2017. The company’s technology offers real-time medical-alert monitoring services as well as health-management services the likes of activity tracking and medication reminders.

Teladoc has also bought from growth-oriented PE. The company in 2016 acquired Healthiest You from Frontier Capital for $125 million.

And while a company representative declined to comment on plans for American Well, sources have speculated that American Well could join Teladoc in the public market.

The company, founded by brothers and licensed physicians Roy and Ido Schoenberg, who also founded CareKey and iMDSoft, has raised about $210 million in total funding to date, according to Crunchbase.

Other players include MDLive, whose backers include Bedford Funding and Kayne Partners, among a slew of other startups the likes of mobile-therapy provider Talkspace.

Action Item: Read more about American Well’s deal for Avizia

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