Why 2022 Will be the Year of M&A for Digital Mental Health

Following a blockbuster year for digital mental health care investment in 2021, the pressure is on to go big and bold.

There have already been a few game-changing acquisitions in the space — the earliest and most defining is the merger of Ginger and Headspace, which created a $3 billion company called Headspace Health during the middle of 2021.

Industry investors and analysts expect more of these types of transactions in 2022 as companies flush with new funding are forced to grow quickly and compete with major players like the newly established Headspace Health.

It didn’t take long for it to start happening in 2022.

Lyra Health announced a new $235M funding round and that it would acquire London-based ICAS International Holdings Ltd. which has a footprint all over the world. The move gives Lyra Health, which was founded in 2015, the ability to provide services at a massive scale — adding services in more than 155 countries and 66 languages that serves over 1,500 companies and 6.3 million members to be precise.

Experts tell Behavioral Health Businesses that the Lyra Health deal is something of a harbinger for what could come in 2022.

Market to shift from point solutions to platforms

The startups in the behavioral health space often follow the adage of building companies whose focus is an inch wide and a mile deep, meaning they specialize and focus on a point solution.

For example, Equip Health which recently raised $58M, provides digital eating disorder treatment while Cerebral Health offers remote therapy and medication management. In addiction treatment, Ophelia Health offers virtual medication-assisted treatment for opioid use disorder.

The industry currently lacks a clear platform focused on multiple behavioral health conditions. However, Headspace Health, which offers wide-ranging services, is the closest thing up to this point. The challenge is that it focuses on low-intensity wellness and mindfulness content up to on-demand remote mental health services, but has yet to move into more acute conditions

In digital health generally, Sari Kaganoff, general manager of consulting at Rock Health, a San Francisco-based consulting firm and seed fund, said that telehealth giant Teladoc’s acquisition of Livongo, a health management company, was the “starting pistol for the platform wars” in digital health.

“I really believe it’s true that there will be a consolidation of the different services and offerings,” Kaganoff said in an interview with Behavioral Health Business. “However, that consolidation can take different forms.”

Those forms can include companies acquiring a range of therapeutic offerings or companies rolling up various applications for the same specialty, Kaganoff said.

Tim Epple, managing director of advisory services for Washington D.C.-based health care consulting firm Avalere Health, said during an interview with Behavioral Health Business, that it’s likely that many new companies were able to make the most of pandemic-driven demand for behavioral health and related services.

As the companies have grown during the pandemic, Epple said many will see the writing on the wall with more competitors jumping into the fray. And consolidation via mergers and acquisitions is a way to gain scale.

“So you could see an eventual commoditization of some of these services or service types. … As you think about transitioning from an early stage novel, tech-enabled service to a long-term commoditized player, the best thing that you can do for yourself is to scale and differentiate,” Epple said.

Scaling and differentiating a company will make companies better partners for corporate human resources departments and employee assistance programs (EAPs), which many of the digital mental health unicorns currently focus on

Many companies are looking for services to help employees and their families cope with behavioral health issues, especially those that are exacerbated by the pandemic — a market trend many existing companies and startups are eager to capitalize on.

“I do think the notion of being a one-stop-shop is going to be more important because, now that EAPs are getting more attention now, human resource [departments] are going out and probably demoing a lot of these programs,” Epple said.

He added that coupling services such as telehealth, care navigation, mental health services, or wellness programs help companies stand out from the crowd.

Even if companies and consumers aren’t looking at such heady factors as differentiation, many will likely gravitate towards the convenience and ease of one-stop-shop offerings.

“Nobody really wants a lot of point solutions,” Kaganoff said. “It’s not good for consumers. We don’t want a thousand apps, each one doing some separate slice of our life; Not providers because then they have to deal with a million different interfaces; Not employers and payers because then they have to contract with a bunch of different entities and have data split across systems.”

Gaining scale also helps companies flip the script in the marketplace where an increasing number of companies are fighting for the same pool of corporate clients, Epple said.

“Instead of competing with nine platforms, as say a Ginger, we’re going to consolidate and be a bigger part of the market and make the rest of them all compete with us,” Epple added.

Record levels of funding bring a lot of expectation

The digital health space saw about $57.2 billion of funding, a 79% year-over-year increase in 2021 according to CB Insights.

Rock Health shows that digital mental health startups raised about $5.1 billion last year. That leaves companies with a lot of cash on hand to grow. The question becomes, for many companies, what the best way to use the money will be, Kaganoff said.

The venture capital and private equity firms that invested so much money will want to see value added to the company and a return on their investment sooner rather than later, pushing companies toward mergers and acquisitions-fueled growth.

“I think these companies are probably never going to be more valuable than they have been throughout the pandemic,” Epple said.

To get to scale quickly, companies may want to buy similar companies to give them the reach that they need rather than grinding through the capital to grow organically.

“They also have expectations on hand to succeed quickly, to grow, to deliver results,” Kaganoff said. “There is definitely more of a shortcut way to do that by acquiring some of those capabilities versus building from scratch.”

This is especially true for portions of the digital behavioral health sector that are not as well developed as the mental health space such as eating disorders or autism treatment and support. It also allows for greater adoption of hybrid care options that mix in-person and virtual care models.

Telehealth has exploded in popularity over the course of the pandemic. Pre-pandemic, behavioral health providers tended to gravitate to telehealth more than other specialists. But during the pandemic, behavioral health visits make up the bulk of telehealth claims over the last several consecutive months, according to FAIR Health.

But as the acute pressure of the pandemic has started to abate, more people are gravitating to in-person activities across several facets of life.

“What people are recognizing now is [that] hybrid is often the way to go,” Kaganoff said. “And we’re starting to see an emergence of everything from primary care to … substance use disorder where you may also need a clinic in person, but you probably could also benefit from a digital tool that can help you stay on track.”

Time for digital mental health companies to make a move

Experts who Behavioral Health Business spoke with were shy to point out who they think could be the next tie-ups but several sources on background said they could see a company like Cerebral getting into more acute conditions by picking off other point solutions. Cerebral, which offers therapy and medication prescription and management via telehealth, would have the infrastructure to move into other care specialties, some said.

“I’m anticipating we will see significant consolidation this year as larger players look to swipe-up point solutions,” Swiftarc Ventures Founder and Managing Partner Sid Jawahar said in an email. “It’s undeniable that telemedicine solutions are creating a positive change for patients and medical experts, but the market is full of players who have hefty challenges ahead of them in regards to technological innovation and widespread adoption.”

Many of the heavily funded digital mental health companies are hiring for corporate development roles which outline that they are looking for someone to lead strategic mergers and acquisitions.

In the last few months, Spring Health, Lyra Health and Cerebral announced they were looking for such roles and others have as well — potential signals that these companies are putting the key people in place to lead merger and acquisition efforts.

Geode Health, a new KKR-backed company tasked with establishing a wholly new hybrid outpatient mental health provider, is looking for a director of corporate development to assess and manage merger and acquisition opportunities as well.

While 2022 plays out, the newly hired execs tasked with overseeing mergers and acquisitions will have to deal with powerful forces driving them to consolidate the digital behavioral health space.