Dealmaking in the behavioral health space is slow these days — there’s no arguing that. But there are still plenty of lessons to be learned from the deals that have been completed thus far in 2024.
With less to look at, there’s more to see. With fewer deals, we can spend more time taking in what’s going on and learn from what the market is telling us.
The latest data shows that dealmaking is down to early pandemic levels in the second quarter. The industry generated 30 deals in the quarter, according to data from the M&A firm Mertz Taggart.
Specific slices of behavioral health dealmaking are more vibrant than others. If annualized, dealmaking totals in autism therapy and mental health should match levels in 2023, according to data from PitchBook. The same data show nine addiction treatment deals in 2024 so far. That segment saw a total of eight deals in 2023. Should this year’s pace hold out, 2024 will see more than double the number of addiction treatment deals.
The deal slowdown is multifaceted. Inflation and high interest rates have cooled investors’ eagerness to deploy capital. On top of that, high deal volume and a lack of savvy about financing the behavioral health industry have inflated multiples, inspiring a wait for prices to come down. The market is reflecting that to some degree. A report by PwC shows that the cumulative value of deals done so far in 2024 is down 18% compared to the same period last year.
Deals are still getting done at a time when it’s harder to do so. What can we learn from these deals? I picked six examples that caught my eye. Some demonstrate the power and the limits of the forces shaping the behavioral health industry. Others are interesting because they appear to be harbingers for what’s to come.
In this BHB+ Update, I dissect six of the most interesting deals from 2024 so far.
Uwill continues to blitz toward scale
Boston-based digital, student-focused mental health provider Uwill Inc. is on fire. It is among the fastest-growing of all private companies in the U.S.
The latest Inc. 5000 list ranks Uwill at No. 27 overall, with three-year revenue growth increasing 8,722% in 2023. It was the second-fastest-growing behavioral health-related business on the list this year.
Uwill has tapped a rich vein. Schools at all levels (K-12 and post-secondary) are looking to the private sector for help with students’ mental health needs. In 2024, the company pulled M&A out of its toolbox. The company has announced two acquisitions this year.
If Uwill keeps this up, it could launch an acquisition blitz and become the dominant player in the digital student mental health space. Entrepreneurs and venture capitalists alike rushed into this space after the onset of the pandemic, when the mental health challenges of American youth were revealed and worsened. And Uwill appears to be in a position to do so.
Uwill was founded in 2020. But it has only raised $35 million, according to Crunchbase, a relatively small amount of funding. A company with a track record of organic and inorganic growth could win over investors with a roll-up pitch. Late-state companies in similarly crowded spaces, like Spring Health in the digital B2B mental health space (more on them in a sec), are still able to haul in $100 million at a time.
This could be more likely if the national financing environment improves and the Federal Reserve lowers interest rates. Lowering rates and reinvigorating dealmaking could lead to the long-predicted wave of closures and consolidations in digital health.
What are the lessons learned from the CARE Counseling acquisition?
A meme exists in the uber-specific health care entrepreneur internet communities: If Optum doesn’t own one of your competitors, is there really a market? The acquisitions of Jacksonville Beach, Florida-based Refresh Mental Health in 2022 and St. Louis Park, Minnesota-based CARE Counseling in 2024 show that there is a substantial market for outpatient mental health providers.
The CARE Counseling deal gives us a lot to think about, in part because it is not particularly well explained.
The deal shows that it’s possible to skip being sold straight to a terminal acquirer. That’s out of step with the typical tradition of private equity firms trading companies and eventually setting them up for an IPO. Why Optum chose to go after CARE Counseling is not clear, other than some general comments about the role of mental health services within OptumCare, the entity’s payer-agnostic health care provider division. Neither Optum nor CARE Counseling have answered BHB’s questions about the deal.
It may demonstrate the idea that scale is most meaningful when it is concentrated. CARE Counseling operates 10 locations in the Twin Cities metro area, according to its website. Still, 10 locations in the nation’s 16th largest metro doesn’t give an obvious explanation for one of the nation’s health care titans to give CARE Counseling the time of day, let alone a buyout.
There may be something to say about the durable growth that CARE Counseling has demonstrated via the Inc. 5000. This year, it ranked the company at No. 1,123 with 456% of three-year revenue growth. Those figures were No. 1,323 at 440% growth in 2023 and No. 1,610 at 394% in 2022.
Spring Health shows digital health companies can still win over investors without profits
New York City-based digital mental health provider Spring Health hauled in a $100 million Series E round, announced at the end of July.
The deal demonstrated something BHB had identified earlier in the year: There is continued interest in behavioral health on the part of venture capital investors, but that interest has evolved. Firms are flocking to more mature and proven startups. In doing so, investors are also demonstrating that venture capital’s involvement in behavioral health is maturing.
But that thinking has a limit. Founded in 2016, Spring Health is not yet profitable. A much-appreciated disclosure puts the company’s vigorous fundraising efforts into perspective. It raised $71 million in 2023 and $190 million in 2021. Company leadership says it is ahead of schedule with its financial goals, and its priority has been to build a “long-lasting, generational company that’s going to be producing long-term financial gains.”
What makes this deal even more impressive is that there are many, many digital health companies that offer mental health services to employers. Examples include Pelago (which also had a big funding round this year), Modern Health, Talkspace and Lyra Health.
Nonprofit mergers demonstrate the universal challenges of behavioral health
Here is a truth that I want all BHB readers to know: Nonprofits aren’t any better or worse than their for-profit peers. A parallel thought to that: nonprofits aren’t exempt from the forces that for-profit operators face.
One of the only genuine differences is the absence of shareholders and equity. There is an exception here too. Large health care nonprofits take on significant amounts of debt through equitized bonds. Bondholders expect returns on their investments.
The LITALICO-Developmental Disability Centers of Nebraska (DDCN) tie-up demonstrates the similarities between the different tax statuses.
In June, we reported that LITALICO, Japan’s largest intellectual and developmental disability provider, would pay $50 million to take over DDCN, which operates 17 group homes for those with IDDs.
The concept of multi-million-dollar deals? Mergers? That’s the language of the private, for-profit world. Yet using this kind of language and thinking will allow DDCN to expand in Nebraska and allow LITALICO to bring its IDD services to the U.S.
The nonprofit sector generally tends to have an impoverished mindset. This is wrong. Nonprofits can and should seek financial success; otherwise, they jeopardize their missions. An example: The nonprofit addiction provider Hazelden Betty Ford Foundation, one of the largest of its type, doesn’t take Medicare or Medicaid and focuses on working with commercial health plans.
Behavioral Innovations’ trade stands apart in 2024
Autism therapy has been one of the segments that has seen deal volume come down. So, seeing a large, mature platform company trade in 2024 was noteworthy.
Tenex Capital Management reportedly acquired the Addison, Texas-based autism therapy provider for about $300 million. The Chicago-based private equity firm Shore Capital Partners previously backed the company.
Behavioral Innovations was likely the first of the next round of autism therapy platforms to trade hands. In the few years before the peak in 2021, a lot of investment went into autism therapy platform companies like Behavioral Innovations. Each has grown through some combination of M&A and de novo growth. Behavioral Innovations leaned into de novo growth.
This means that Behavioral Innovations isn’t grappling with the same M&A-related headaches that other platforms have struggled with. With a new investor and a very small state footprint, a classic roll-up or a strategic acquisition of a larger competitor could come into play. The company only operates in three states: Texas, Oklahoma and Colorado. Sixty-six of its 83 locations are in Texas. This could position the company well to avoid scrutiny from regulators, who are increasingly skeptical of private investment in health care, especially when it comes to consolidation.
Neuronetics-Greenbrook tie-up is a bellwether for TMS services
Transcranial magnetic stimulation (TMS) frequently comes up in BHB’s conversations with behavioral health leaders when we ask about the future of the industry. Many point to the promising outcomes for patients with treatment-resistant depression. One study finds that patients show between 70% and 80% reductions in symptoms in clinician-administered assessments and remission rates of 50% to 60%.
The big question is how this gets paid for. Payers, while increasingly willing to cover the service, often put up the barriers of step therapy, sometimes called fail-first protocols, and prior authorizations before they are willing to pay up. Bureaucratic hurdles like this are killers for the low-margin outpatient mental health space.
The merger of Neuronetics Inc. (Nasdaq: STIM) and Greenbrook TMS highlights just how steep the business challenges facing TMS are. Greenbrook, which offered TMS in its own clinics, has never been profitable. It was delisted from the Nasdaq in February. At its peak, it operated 183 clinics and had a workforce of about 850. In 2023, it tried to recoup its losses with a restructuring plan that cut down its footprint and head count and added services to supplement the TMS business. But it was too little, too late. Neuronetics is set to acquire the company in an all-stock transaction in which each Greenbrook share is expected to be exchanged for 0.01149 shares of Neuronetics common stock.
Neuronetrics, which focuses on supplying TMS equipment and charging providers for each use, didn’t operate its own clinics before the deal. Now, it will have the Greenbrook clinics on its books. Before the deal, Greenbrook was rolling out esketamine, medication management and talk therapy across its footprint. If continued, Neuronetrics will become a supplier and competitor to its behavioral health clients.
Neuronetrics hopes that the deal will accelerate its path to profitability. In the first half of 2024, revenues increased by 2% to $22.9 million, while its net loss deepened by 15% to $17.7 million. The company pinned losses on cash flow and prior authorization challenges related to the Change Healthcare hack.
Looking at this deal, we can see how challenging it will be for all but the most financially sound or philosophically committed to bring TMS into a more prominent position in the mainstream. Even if mental health providers and their TMS partners can work out operational kinks in their respective systems to make TMS a part of the greater whole of treatment, payers’ lack of interest in paying for TMS will limit its viability as a service and therefore limit the good it could do for those with mental health challenges.
If any of these challenges improve or worsen, we will see it in the bottom lines of TMS suppliers like Neuronetics.
Companies featured in this article:
Behavioral Innovations, CARE Counseling, Developmental Disability Centers of Nebraska, Greenbrook TMS, LITALICO, Neuronetics, Optum, Spring Health, Tenex Capital Management, Uwill
