Cain Brothers Industry Insights

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Recent Behavioral HealthTech Investment Action
June 15, 2022 - Banker Commentary by Benton Au
Over the last few years, behavioral healthtech has seen an explosion of investment activity. According to Rock Health, behavioral health has been the number one funded clinical indication within healthtech every year since 2018. While last year was a banner year for most everyone in healthcare M&A, it’s worth noting that the $4.8 billion of mental health funding was more than two times that of cardiovascular, the number two ranked funded clinical indication.
However, the overall investment picture isn’t quite as rosy, shifting into this year. Public markets have obviously been pummeled across the board, but virtual care and digital health companies have been hit particularly hard, with most companies (Amwell, Babylon, Talkspace, Teledoc, etc.) in that sector being off anywhere from 60% to 80%+ of their 52-week highs. And while mental health remained the funded indication through Q1 2022, the year-over-year comparison to 2021 is down by approximately 30%.
The issues in the public markets are probably obvious. Macroeconomic factors, like inflation and rising interest rates are driving the flight to safety by investors. These trends have been particularly challenging for growth stocks, heavily weighted towards technology broadly, as investors seek refuge in value stocks with a strong earnings base and less dependent on outsized growth forecasts. So far in 2022, the S&P 500 Value Index has outperformed the S&P Growth Index by 17%, the widest margin we’ve seen since 2000.
The potential slow-down in private markets are maybe a bit less obvious. At the “Going Digital Behavioral Health Tech” conference this past week, one venture capital investor described some of the recent momentum across behavioral healthtech as “tourist capital.” Many investors during the pandemic, who traditionally did not invest in healthcare, began to bring their dollars to the wellness and behavioral space, because they (like most everyone) felt some level of increased stress and anxiety and could relate to familiarity. No doubt, the pandemic opened up the opportunity for digital health companies and the aperture of who can receive care, but we may now be seeing the start of a pull-back from that recent influx of capital.
There are a couple themes worth highlighting as we move forward within virtual care, and behavioral healthtech in particular. Investors will renew their focus on capital efficiency. While this has always been one of the many factors in the equation for buyers, as of late, we’ve seen increased scrutiny on spending and a clear path to profitability— a trait that many healthtech companies had a much longer allowance for over the last two to three years. Additionally, there looks to be a shift of investor focus from lower acuity, “wellness-type” solutions to more targeted set of solutions serving individuals with severe mental illness (“SMI”). Investors are less keen on blanket catch-all product for lower acuity individuals and more focused on quality, where outcomes across a higher acuity population can be targeted and measured.
Cost, access, and quality are three underlying issues that will continue to drive investor sentiment going forward, plus factors that highlight the need for care more broadly. A recent Tufts study cited an individual with major depression can spend on average over $10,000 a year or more on out-of-pocket costs than an individual without major depression. With the median U.S. household making roughly $70,000 a year, that presents a huge barrier to receiving necessary care.
Access to care also remains an ongoing issue. According to the Steinberg Institute, a nonprofit organization focused on brain health, two-thirds of primary care providers say they have issues finding mental health specialists. Approximately 55% of counties across the U.S. have no psychiatrists, while 77% report a severe shortage. There remains a huge supply and demand imbalance across the country, and it’s unlikely the traditional, less scalable brick & mortar model will ever be able to fill the gap that has only been increasing. That being said, the emergence of hybrid (virtual/in-person) models is one solution to the capital-intensive problem of scaling outpatient care.
As mentioned earlier, one positive takeaway of the pandemic was that it opened our eyes to the fact virtual care was a feasible solution to help treat mental health. Additionally, thanks to the heavy appetite of venture capital and private equity over the last several years, the universe of healthtech companies has grown exponentially with some estimates of around 10,000+ active companies. As we turn the corner within the space, we’d expect a new wave of consolidation with smaller companies needing fresh capital via the M&A markets. The winners in behavioral healthtech will be those companies that leverage their technology platforms in unique and innovative ways. Increasing access, lowering costs, and improving outcomes is critical to providing higher acuity individuals the level of care needed today.
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