Drake Star is a tech-focused investment bank that works with top tech companies. Christophe Morvan is managing partner at Drake Star, and Lawrence Giesen is a partner. Both specialize in telemedicine.

As 2023 turns to 2024, the two experts have a lot of thoughts on the state of the market for virtual care. Healthcare IT News sat down with the men to discuss main players in the U.S. telemedicine sector, merger and acquisition trends for telemedicine, main financial backers and investment dynamics, and short-term and long-term valuation trends.

Q. Who are the main players in the U.S. telemedicine sector and where do they stand?

Giesen: We have divided the telemedicine industry into three main groups: GAMMA tech giants, large incumbent listed leaders and smaller specialist providers.

The GAMMAs have actively been involved in the telemedicine sector as far back as 2008 and have accelerated the pace of investment in the sector. Google Health benefits from the full potential of Google's data and AI capabilities to enhance access to healthcare information for medical professionals.

Alphabet has in parallel invested in telehealth companies like Hello Heart, specializing in heart monitoring, and Klara, a virtual care platform. Its venture capital arm, GV, also has backed Synapticure, a remote consultation business.

Likewise, Apple has contributed to the telemedicine landscape by developing digital health tools, including wellness trackers on Apple Watch and the proprietary telemedicine app, Apple Health.

For large incumbents, Amwell and Teladoc Health are the undisputed U.S. leaders of telemedicine services, dedicated to both individuals and organizations. Amwell provides nationwide coverage to 90 million users, with Teladoc Health extending its reach internationally.

Despite pursuing an active external growth strategy, they have paused further acquisitions since 2021. Both are under market pressure to improve profitability, leading to a pause in external growth. The current excess offer of telemedicine services (following the correction of the COVID-19 bubble of demand) contributes further to a natural culling of small, unprofitable players.

And with specialist providers, certain specialized/verticalized players manage to grow swiftly in their niche. For instance, Capsule, the U.S. online pharmacy operator, has raised more than $600 million in private capital in seven years.

Similarly, Ro, the telehealth platform specialized in prescription drug treatments, has secured an impressive $1 billion in funding since its creation in 2017. The companies will use the funds to solidify their position in direct-to-patient care and strengthen their technology. The mental health sector is particularly crowded and has been consolidating recently, with multiple horizontal acquisitions.

Q. What are the M&A trends for telemedicine going into 2024?

Morvan: The current trend reflects a slowdown in telemedicine M&A activity. There were only 22 deals completed in H1 2023 globally, down 35% on an annualized basis compared with 2022. During the first half of 2023, 60% of global M&A deals featured a U.S. target company, consistent with the 2015-2022 trend where more than 70% of deals involved an American target company.

In H1 2023, a significant transaction unfolded as Humana acquired the remote consultation provider Heal for $100 million.

Recent M&A deals follow two distinct scenarios: 1) For international transactions, large telemedicine companies aim to scale geographically and gain market shares by acquiring other countries' incumbent telemedicine operators, and 2) at domestic levels, consolidators consider technological add-ons to their suite of offerings, through the acquisition of smaller targets with specific tech-value add (data security, specific distribution channels, etc.).

The United States remains the global hub for telemedicine with more than 800 companies, about four times the number of European counterparts. The excess of supply in telemedicine solutions provides opportunities for consolidation at attractive multiples.

Historically, two-thirds of telemedicine M&A transactions occurred in the U.S., and this ratio should persist in 2024. The current market conditions experience two contradictory trends.

First, the telemedicine market is still in its maturation phase and lower multiples drive consolidation. However, on the other hand, the financing cost of transactions is at historically high levels, and the cost of debt interest weighs on the capacity of large incumbents to finance external growth.

Q. Let's talk fundraising: Who are the main financial backers, and what are the dynamics between venture capital and private equity?

Morvan: Fundraising activity has been challenging in 2023. We recorded 82 U.S. deals in the first half of 2023, representing around a 45% annualized decrease compared with 2022 where 292 U.S. 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 need to go back as far as 2015 to see such a low level of fundraising activity.

As with M&A, the U.S. has dominated fundraising activity in telemedicine, with more than $25 billion raised since 2015 over 2,195 deals, accounting for more than 70% of the total volume. This trend was confirmed in H1 2023, with 65% of global funds raised in the U.S. with $610 million in volume.

As in 2022, pre-seed and seed investments remain the most active investment class in H1 2023, with half of total funding rounds. Early-stage VC in H1 2023 was less than half compared with the 2022 level, highlighting a loss of interest in unprofitable growth businesses.

Late-stage VC has been the second most active investment class with 28% of the total. Late-stage investment tickets in specialized telemedicine players dominate the market, putting a focus on profitable operators. Large PE growth deals have almost disappeared, with only four deals completed over H1 2023.

Large macro deals vanished as the credit environment forced a steep financing cost. In the current economic climate, opting for investments at a mature stage might be safer, given the challenges in liquidity access and the paramount importance of profitability for investors to realize returns on their initial investments.

Giesen: Notable U.S. financial backers include major venture capital funds such as General Catalyst, which completed 15 deals over 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 the U.S. government-led seed fund National Science Foundation, and the U.S. leading tech incubator Y Combinator, which each invested in five telemedicine businesses over the first half of 2023.

We record more than 1,800 investors backing U.S. telemedicine companies, representing four times the European number. The American investors network is giving a competitive edge to telemedicine companies raising funds in the U.S., which benefit from innovation hubs and growth dynamics.

In the short term, the stabilization of interest rates should give room for a potential pickup in fundraising activity in H1 2024, in particular for large tickets on PE growth/expansion.

Q. In the public market, what are the short-term and long-term valuation trends?

Morvan: During the COVID-19 pandemic, global telemedicine valuations skyrocketed to 7.5 times last-12-months revenues. The climb started in H1 2020 and lasted a year until H1 2021, when it started to decline gradually and then stabilized at around 3 times LTM revenues in 2022. In H1 2023, for the first time in the last two years, a slight positive rebound was noted.

Giesen: In the short term, we expect to see a recovery of the EV/revenue multiple in line with the ongoing bounce-back that started in the first half of 2023. Over the period, valuation multiples have increased by 20% compared with the 2022 year-end.

EV/revenue public multiples of our proprietary Drake Star telemedicine index have increased from 2.6 times to 3.1 times as of H1 2023. We can explain this phenomenon following the drop in telemedicine operators' financial performance and restrained consolidation activity with an overall slow M&A market.

Morvan: In the long term, we expect telemedicine valuations to stabilize within the 3-times to 4-times EV/revenue range, reverting to a long-term average according to the post-COVID holding pattern. Liquidity pressure due to high-interest rates is putting a strong emphasis on profit margins, and even though the credit environment should improve in the medium-term, we remain conservative regarding the evolution of the multiples.

For more details and statistics on the telemedicine sector, see Drake Star's March 2023 telemedicine report and September 2023 telemedicine report.

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