The New Economics of Digital Health & Consumer Healthtech

Chris Moynihan (00:02):

Welcome to Solomon Connects. I’m Chris Moynihan, a director in Solomon’s M&A group. Today, I’m joined by Eric Bormel, a managing director in the healthcare group who covers digital health and consumer healthtech, which focuses on the software tech-enabled services and connected device sectors. Eric, thank you for joining me.

Eric Bormel (00:21):

It’s great to be here.

Chris Moynihan (00:23):

You spent more than a decade advising companies and investors across the digital health ecosystem, and this is a period of tremendous change for the industry. Between AI, the general backdrop of the market, and also the robust investor interests that you have in your space, I’m sure we’ll have a lot to talk about.

Eric Bormel (00:41):

We definitely will. It’s been a fun journey. It’s been a lot of change in the digital health category, and it’s been quite the experience to be in the center of it all as the category has matured.

Chris Moynihan (00:52):

Eric, like myself, is a lifelong Solomon employee, so I think today will be quite fun.

Eric Bormel (00:56):

We’ve been through a ride.

Chris Moynihan (00:58):

Eric, you’re a member of the Healthcare Group. It’s one of our biggest groups. Can you talk a little bit about the growth of the group, the growth of the coverage areas, and what you guys have been doing lately?

Eric Bormel (01:09):

It’s actually been one of the more rewarding parts of the latter part of my career growing the healthcare group. I was employee number two into healthcare back in 2020 and have had a hand in its growth ever since. We’re now the largest group at the firm. We have several coverage officers across healthcare technology, medical devices and outsource services, life sciences, healthcare services… and growing.

Chris Moynihan (01:37):

My first question is, over the last decade, we’ve seen digital health move from an emerging category to a meaningful one. As you look across the software tech-enabled services and connected devices today, where do you think the most compelling value creation will come from?

Eric Bormel (01:52):

What excites me the most is the direction of travel. Digital health is still a relatively young category, but it’s already emerged into a meaningful part of how a consumer engages with their own health and wellness using technology. At the simplest level, I think about digital health as the technology that gives patients and consumers the ability to control more of their healthcare journey. So, that can be a platform that a physician uses to guide a diabetic patient. It could be a wearable device that a consumer wears to give them access to their data earlier. It could be easier access to a physician through a virtual-care experience. All of these are being expected now at this point by the consumer, and it’s what’s driving the growth of this category. What I’ll tell you, though, is while early, the category is certainly maturing at this point, with many scaled public companies — think the Teladoc Health, the Hims and Hers, the Garmins, the Pelotons of the world. Nearly a hundred private equity-backed companies, a thousand venture-backed companies, as well as Scale Strategics and other categories that are spending time here as well.

Chris Moynihan (02:56):

Consumers are increasingly expecting more convenient solutions, personalization, and better user experience from any part of the healthcare system. So, how has that shift influenced how capital is flowing into your industry?

Eric Bormel (03:11):

You’re hitting the nail on the head. This is why digital health is having a moment. Consumers are demanding better, and investors are following the trend. What we’re seeing is earlier diagnoses, easier interfaces, more provider access, stronger employer programs, lasting wellness routines, and more control over the whole experience. This is why I think the category sits at this unique intersection of healthcare technology and the consumer, and why investors are circling. I would add one thing too. As investors are thinking about where to put capital to work here, we often think about ROI. In healthcare, particularly in digital health, we think about impact a lot. How are these companies improving the lives of their patients? How are they reducing the cost of care? A major issue these days. How are they increasing the equity in society and particularly within their healthcare ecosystem? And how are they improving the clinical experience?

(04:02):

And if you can find the right impact solution and combine that with the right ROI solution, that’s where the real value is being created.

Chris Moynihan (04:09):

I’ve spoken to the other partners in the firm and the central topic that we always hear is AI across every single sector. I’m sure it becomes a dominant conversation for you as it has for the broader healthcare industry. But what’s your take? I know not every company might benefit equally, but as you’re talking to management teams, investors, et cetera, what are the characteristics that distinguish a company that has a really sound AI plan versus the ones that might struggle in this environment?

Eric Bormel (04:36):

I talk about this daily with my clients. With the exception of the true frontier AI labs or frontier AI apps that are attracting enormous attention and investment, I want to see AI as an accelerant of your capabilities. That’s what’s most important for me, not a whole solution. I think about moats a lot these days. What is a company or a sponsor acquiring that cannot be disintermediated by AI? Sometimes the answer is product, but often the answer is distribution; it’s integrations, it’s brand. And so, can you then leverage AI to be a bigger part of your story to strengthen and accelerate your capabilities and accentuate what are your strengths today?

Chris Moynihan (05:21):

I know investors in particular like to gravitate toward particular themes. Are there unique niches that you’re seeing that are increasingly more active and attracting capital as they solve some of these issues that you’re talking about?

Eric Bormel (05:33):

We could spend an entire podcast on each of these verticals.

Chris Moynihan (05:36):

Let’s do it.

Eric Bormel (05:36):

Let’s do it. Let’s start with health and wellness technology. Think brands that sell direct to consumer with some type of software solution that enables some part of the health and wellness journey, usually with some level of specificity. So, you can go as deep as women’s health period tracking, cycling content for endurance athletes, nutrition content often paired with the nutritionist among many other things. Most of this category was created 20 years ago when the app economy came into our ecosystem, and now sitting here 20 years later, these are real brands that are still growing, have strong margins and durable cash flow. The second one that I’d highlight for you right now is specialty virtual care. Think substance-use disorder providers, mental health providers, cardiometabolic, hospital facing or what we call inpatient specialty providers and referrals, and that list goes on and on. There are many different ways to build a specialty virtual care platform, and what we’re excited to follow in the years ahead is that platform development.

(06:41):

It’s interesting. If you look back at history, this wasn’t really a category of any scale pre-COVID. COVID created it, and it created this acceleration of demand that almost confused the investor community in a sense. We are now well past that and the category remains durable and strong, and now we are starting to see strong cashflow generation from these companies as well, which is creating unique opportunities for investors to find moats and to find opportunities to build durable platforms.

Chris Moynihan (07:09):

To start with virtual care and in general, in the entire connected ecosystem of these healthcare apps or solutions, who’s paying for it? Are the payers, private, out-of-pocket? Where is the source of funding coming from?

Eric Bormel (07:26):

That’s what’s perhaps most intriguing about the digital health ecosystem today. You go back 20 years; it was all payer. Today, consumers are increasingly going out-of-pocket to pay for their own health and wellness journeys, getting their own meds with a cash-pay ecosystem, paying for their own apps to help navigate and manage their own wellness journeys. It’s really exciting. I’ll say the other key trend more macro is that the employer has an increasing role in the responsibility of the employee. It’s actually a major problem for the US economy: how much of the burden of healthcare is being managed by one’s employer. And that’s a trend that digital health is trying to course correct, but it is taking a long time. But the employer’s also very focused on delivering value for their employees, getting ROI out of these solutions because they’re ultimately on the hook for a lot of the costs as well.

Chris Moynihan (08:20):

And when consumers are paying for it, is it because they have the awareness and recognize that, “Hey, I need to get mental health treatment and I’m just going to pay out-of-pocket an increasing share of wallet than they did in the past,” or is it just a wealthier consumer? What’s driving that trend of increased spending out-of-pocket for individuals?

Eric Bormel (08:41):

It’s one of the better outcomes from what was a terrible COVID era. The consumer is much more aware of their own health and wellness journey. They’re far more likely to seek mental health solutions. They are far more likely to seek primary care. They’re far more likely to be focused on longevity, a term that is increasingly in vogue, and an area where we are seeing a ton of activity from an investor perspective, from a private equity perspective, and, of course, from a consumer perspective; where it’s largely a cash-pay ecosystem around that. It’s a generational shift that we’re noting in digital.

Chris Moynihan (09:16):

Health. You mentioned the sponsor ecosystem is very excited, because the opportunity of capturing that growth is tremendous. Do you see any of the strategics start to take interest? I know at the beginning you mentioned HIMSS, for example; there’s some public companies that have emerged. Are these natural acquirers of these businesses, or do they have to wait for that next phase of growth until they scale, mature and get to a different size?

Eric Bormel (09:39):

What’s really exciting is there are an enormous number of potential acquirers of digital health companies. Navigating that is complex and challenging, and frankly, where we come in and in the value that we can help provide to our clients, where you do see direct vertical players, such as a HIMSS being very active in acquisitions. They’ve made a billion-dollar acquisition earlier this year, several in the hundreds of millions over the last three years, but not just them. It’s folks like Hinge Health, with the recent acquisition and the nine figures as a public company. We’ve seen large-scale companies, such as Teladoc Health, be active on the M&A front as well. So, plenty of vertical companies in this category are active. What’s unique about digital health is that the acquirer doesn’t necessarily come from within the category. We’re seeing activity across large-cap consumer, large-cap tech, payers, and the broader healthcare ecosystem and pharma that are all looking at solutions and saying, “Maybe I should be the steward of this brand. Maybe I should be the one that champions the consumer directed healthcare or the health and wellness journeys of these individuals.” It’s a real trend that we’re following.

Chris Moynihan (10:46):

Interesting. And downstream for these businesses that are in the early innings of their growth, what are the challenges to scale? Is it finding the consumers? Is it awareness? Is it dynamics with the payers and actually balancing that mix between having a large commercial payer versus doing out-of-pocket? What are the different components?

Eric Bormel (11:07):

We like to say the prohibitor to scale is not product, it is distribution. In healthcare, distribution always wins. Do you get access to the right payers? Obviously, the big three and what they’re representing in this country is a massive opportunity if you can get access to one of them or all. Or on the product side, can you get integrations into the likes of Epic, which is one of the larger software companies in this country that probably most haven’t heard of, but they run 90% of electronic health records. If you can get the right distribution, you can get to success. You got to get paid for it too, so you do need to have access to reimbursement through the payers and through others, but if you can figure that out, it’s a quick way to get to a good outcome.

Chris Moynihan (11:51):

What’s fascinating about healthcare in general is that it’s so uniquely a US phenomenon—or understanding the US market requires understanding US regulation and it just doesn’t port. But I imagine a lot of the businesses that you covered could port cross-border. They have applications globally. Somebody rides a bike in the US might also ride a bike in France. Do you see any activity cross-border or is it still just largely US investors focused on US healthcare?

Eric Bormel (12:19):

It varies vertical by vertical. The deal you’re referencing is the one we just announced where we advise Ruby on its sale to Zwift. Our client was based in Czechia, and the buyer is based in California. So, we certainly do see that cross-border activity, and we are a big player in that field. The deal I worked on before that was our US client, Willa, when they acquired London-based LV. We certainly see that international and cross-border activity. From a healthcare perspective, it’s largely germane to the US, and you see less border crossing, but you still see some hints, and Hers is acquiring into international territories as well, so we’re seeing it.

Chris Moynihan (12:55):

With a space like yours where you have a lot of dynamics, you have amazing growth, a lot of businesses being founded even over the last couple years, and getting to build relationships with those founders, executives, and also the new capital providers that are attracted and interested in investing in the space, you’ve probably come across quite a unique ecosystem. Looking back, what have you learned about earning trust and becoming a long-term advisor in a sector that’s changing as quickly as this one?

Eric Bormel (13:24):

It’s definitely changing. What I would say is the through line of it all is relationships; deep relationships with individuals whom I have grown to appreciate now as lifelong friends. The ultimate driver of our business is these lasting relationships. We individually execute a couple of deals a year, and most are through referrals, so it is absolutely critical to deliver in every engagement.

Chris Moynihan (13:53):

Like you said, some of these businesses that four or five, 10 years ago you had just started covering were small businesses that have grown into pretty sizable businesses today.

Eric Bormel (14:04):

One of the best things is meeting them early. We often meet companies far before they are ready to sell and help them navigate much earlier questions than when to run a sale process.

Chris Moynihan (14:16):

I know I probably can’t get you to name specific companies, but I am curious: Are there any particular companies or solutions that you use day to day or are excited about in your own life?

Eric Bormel (14:27):

I’m definitely an advocate of the category that I’m covering. I ride my Peloton; I take care of my wellness routine. I’ve certainly got into the wearables category as well, and I’m a Whoop wearer myself.

Chris Moynihan (14:38):

I noticed we’re both wearing watches.

Eric Bormel (14:39):

There you go. That’s what makes it so fun. I mean, you get to be part of the community. I go to these events and conferences, and you meet incredibly interesting people building truly life-changing solutions for their populations. There are many people who are using wearables who are diabetic and are managing hypertension or other chronically challenging diseases. So, that’s what excites me about the category, and makes it a lot of fun.

Chris Moynihan (15:04):

Eric, it was great hearing your insights. Really appreciated all the trends and themes in your space.

Eric Bormel (15:10):

Thanks for having me.

Chris Moynihan (15:11):

Looking forward to the next time that we get together, if not in the podcast studio, then maybe biking together somewhere in France. Thank you to everyone listening and thank you to Eric. For more perspectives from Solomon’s industry experts, be sure to check out solomonpartners.com and subscribe to Solomon Connects wherever you get your podcasts.