This past Wednesday, June 21st, Gilmartin’s Managing Director, Ryan Halsted, hosted a webinar with BTIG’s David Larsen (Senior Research Analyst, Digital Healthcare/HCIT) and Marie Thibault (Senior Research Analyst, Digital Healthcare/HCIT) and Needham’s Ryan MacDonald (Senior Research Analyst, Digital Healthcare/HCIT/Vertical SaaS). The panel explored market perspectives of the digital health and healthcare technology sectors and discussed views on technological innovation across the sector. Below are key takeaways from this conversation.
Moderator: Ryan Halsted, Managing Director, Gilmartin Group
- David Larsen, Senior Research Analyst, BTIG
- Marie Thibault, Senior Research Analyst, BTIG
- Ryan MacDonald, Senior Research Analyst, Needham
The Street defines Digital Health as companies with solutions powered by technology to address the Triple Aim of healthcare
Digital health solutions aim to optimize the quality of care, reduce costs and improve patient health to deliver better medical outcomes and results. Serving end markets across the healthcare ecosystem, they cover a broad spectrum of solutions from wearables and remote patient monitoring devices to technologies that provide telehealth services, streamline healthcare operations and optimize drug development.
State of the market for digital health reflects macro headwinds with companies offering strongest ROI proposition outperforming rest of the group
While the industry accelerated during the pandemic, the current macroeconomic environment has adversely impacted the sector consistent with the broader market. End market budgetary constraints and a focus on cost management have led to some decreased adoption for these solutions, however, budgets have proved more resilient than investors feared. Offerings that deliver direct ROI in cost savings or incremental revenue, along with a comprehensive suite of solutions rather than point solutions, have performed well despite these headwinds. With the spotlight on generative AI as key drivers of future growth, investors have been keen on understanding how this technology can be used within healthcare, but we are still in the early innings with limited use cases in the industry.
Inflection points, as we look ahead, include loosening budgetary constraints and regulatory changes
In addition to the stabilization of the market, the panelists are looking out for the shortening of elongated sales cycles, the impact of pressures with Medicare Advantage rates, RADV audit implications and legislative changes as it relates to digital devices and therapeutics.
Data and Analytics is leading innovation across the space in addition to novel patient and provider engagement solutions
Companies are leveraging the advancements of health data to pave the way with innovative technology platforms and devices to drive forward better patient care, engagement and outcomes. The panelists expressed excitement over healthcare navigator companies, precision medicine solutions, platforms that accelerate clinical trial enrollment and activities, offerings that can reduce costly hospital admissions, including health technologies at home, such as remote patient monitoring, testing and therapies.
Companies that are viewed by the Street as Health IT, versus pure technology, address the healthcare end market and have recurring revenue and a durable customer/utilization profile
Digital health companies that are at the cross-section of tech and healthcare are often faced asking where they fit within the framework of pure tech versus health IT. The panelists noted one way in which to think about this distinction is whether at its core, the company is operating as a tech-enabled healthcare business or as a software-as-a-service (SaaS) business. To determine categorically whether a company may be operating as a pure SaaS business, some of the characteristics investors may ask are (1) whether the company has a recurring revenue model, (2) how sticky the customer base is and whether utilization lasts greater than 12 months and (3) whether the gross margin profile is above 70%. As it relates to valuation, tech and Health IT companies are generally valued at an EV to Sales multiple whereas over time health IT companies tend to trade on an EBITDA basis. Moreover, SaaS investors often will turn to the Rule of 40 to measure a company’s value and understand its balance between growth and profitability.
Companies that are viewed by the Street as digital health, versus pure medtech, often apply technology within a care delivery model and therefore may have a higher degree of exposure to reimbursement than pure medtech companies
Given the difference between digital health versus pure medtech, another consideration for companies that are sitting at this cross-section is which investors would understand their story best. For these companies, health IT investors may not fully appreciate the nuances of medtech as it relates to risks associated with the business. As an example, if regulation around reimbursement is a hurdle, a tech investor may not closely understand the related implications to the business. Tech investors may care more about commercial and marketing activities while healthcare investors may be more focused on clinical data and roadmaps.
Common KPIs in digital health
Common KPIs in digital health highlighted by the panelists include the number of patient lives and contracts, average or total contract value, annual recurring revenue and net retention rate. They also suggested that management teams consider these metrics in the context of the quality and size of the total addressable market and the ability to capture that TAM.
Companies contemplating an IPO need to emphasize preparedness
The panel stressed the importance of public company readiness. As part of this preparation, management teams need to understand the dynamics of operating as a public company and set forth clear expectations to deliver against and to demonstrate execution. This includes key inflection points investors can follow. Establishing and maintaining credibility with the street is essential around messaging and communications. Finally, aim to beat and raise.
Gilmartin Group has extensive experience working with both private and public companies across digital health and health IT and the broader healthcare space. To find out more about how we strategically partner with our clients, please contact our team today.
Authored by: Ji-Yon Yi, Vice President, Gilmartin Group