by Baker McKenzie

Healthcare meets tech: fit for purpose

Increasing pressure on healthcare systems, massive tech growth and consumer-led demand are the perfect recipe for strong M&A activity in the emerging healthtech sector.

With healthcare making up eight out of the top ten largest M&A deals last year, activity in this sector is buoyant.  However, the need to cut costs, increase efficiency and improve systems has led healthcare companies to collaborate with tech companies who can offer in-depth digital expertise. Whilst tech companies have the platforms to help, and the potential revenues are vast, they don’t necessarily have the market share or, crucially, the consumer trust. This point of convergence is therefore mutually beneficial and driving the market forward with significant recent growth in healthtech M&A activity.

The demands, which are being underpinned by an ageing population, increased desire by consumers to manage their own health and the push for efficient delivery mean that legacy healthcare companies are developing their digital offering. “On the healthcare side we’re seeing much more M&A but largely acquisitions of small start-ups which have got the tech or data analytics expertise” according to Baker McKenzie’s Global Transactional Healthcare Group head Jane Hobson. “To survive, companies have to enhance their technology and in order to do that it’s not just buying it in but actually acquiring the expertise to go with it.”

The opportunities to achieve tremendous growth through M&A while sidestepping the lengthy development process involved in organically developing the tech are evident. However, when a traditional and risk adverse industry such as healthcare meets a fast-paced consumer-driven industry such as tech, there are inevitable challenges too.

Start-ups with cutting-edge ideas are an attractive target for legacy healthcare companies. “These are promising but not necessarily proven technologies; they sometimes work, they sometimes don’t,” points out Alan Zoccolillo, head of Baker McKenzie’s North American Healthcare Group and New York co-managing partner. “So there is a fair amount of risk in paying for what could be the next great technology which turns out not to be.”

The other hurdle faced by healthtech adopters is consumer trust in digital health. Safe data storage and GDPR is currently top of the agenda; couple this with the sensitivity that inevitably characterises the healthcare industry and the challenges are clear. “Data breaches are like large environmental catastrophes in this sector. They impact the company in a variety of ways, from a regulatory standpoint to civil liability with patients and the costs associated,” says Zoccolillo.

Whilst regulators are taking a proactive stance, and healthcare companies are navigating using new tech in a regulatory compliant way, this is still new ground. “Healthcare has long been founded on very traditional methodologies based on science, and has therefore been appropriately slow moving,” says Tim Sheppard, IQVIA’s SVP & General Manager for Northern Europe, a clinical research and health information technology company that harnesses the power of human data science for better health outcomes.

“There has been a change as the power of the patient is increasing, but I’m somewhat sceptical about how successful the tech giants will be in the healthcare industry, which is very personal. Trust is a big thing with patients, I don’t think it’s easily commoditised or made more useful by those who thrive on mass delivery.”

M&A activity in healthcare is set to reach $400bn this year. While it is not without its challenges, from securing consumer trust to safe data storage, cost cutting in care systems and consumer demand for digital healthcare devices means that the potential for rapid growth in healthtech is there. “There has been a realisation from healthcare providers that they need to be much more efficient,” adds Sheppard. “The penny has dropped, and tech is now the focus.”

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FT Due Diligence is a video channel analysing the fast-moving world of M&A, illuminating the trends behind the complex global transactions and how to unlock value from acquisition deals. The channel alternates between independent reporting from FT journalists and insight on global dealmaking from law firm Baker McKenzie.