Mergers & Acquisitions identifies the sectors and predicts the trends that will drive dealmaking in 2021. This four-part series opens with a deep dive into the telehealth sector, where deals are proliferating as virtual healthcare visits rise in the Covid era.

After the extraordinary challenges of 2020 – which included the coronavirus pandemic, the polarizing presidential election and the increased awareness of racial injustice in the U.S. – dealmakers are eagerly embracing 2021 with open arms. It may turn out to be a spectacular year for M&A. The high level of activity experienced at the end of the old year is expected to continue in the new year. At Mergers & Acquisitions, the editorial team has identified four sectors in which we predict activity will be especially high in 2021: Logistics, Cryptocurrency, Telehealth and Education Technology.

Here’s Our Forecast for the Telehealth Sector

Telehealth or telemedicine—using telecommunications technology to deliver healthcare services—was viewed as a promising sector before Covid-19, but it was slow to catch on with patients, providers, insurers and regulators. Then the pandemic shifted telehealth into overdrive.

By April 2020, 46 percent of U.S. healthcare consumers were using telehealth services, up from 11 percent in 2019, according to McKinsey & Co. Total annual revenues for U.S. telehealth companies were $3 billion prior to the pandemic; now that annual figure could rise to $250 billion, the consulting firm predicts.

Telehealth’s potential for profits, and for creating upheaval in the healthcare industry, has piqued the interest of middle-market dealmakers. Look for these trends to drive telehealth M&A in 2021:

Here to Stay
The coronavirus changed the landscape for telemedicine. Under its Covid-19 public health emergency declaration, the U.S. Department of Health and Human Services expanded Medicare and Medicaid payments for telehealth and allowed providers to use widely available video and text communications, like Zoom and Facebook Messenger, without risk of violating healthcare privacy rules. States modified their medical licensing to make it easier for physicians, nurses, psychologists, emergency medical services workers, physical therapists and speech-language therapists to provide telehealth services. The Drug Enforcement Administration made it easier to prescribe drugs via telemedicine.

Telehealth services won’t regress to pre-pandemic levels because they’ve been popular across the board, says Robert Schmidt, a managing director on the healthcare investment team for the Carlyle Group, the New York PE firm.

“Patients loved using telemedicine services; providers started broadly offering them; payers are reimbursing and the government relaxed a lot of the restrictions and licensing,” he says. “It was a huge tailwind.”

“The genie’s out of the bottle,” says Marty Felsenthal, managing partner Health Velocity Capital, a PE firm based in San Francisco and Nashville. In five years, he predicts, telehealth will be synonymous with healthcare, not viewed as a separate service.

Care Quality, Cost Savings
The long-term viability of a specific private equity investment in telehealth will be dictated by whether a company’s business model is improving access to high quality care and whether it is reducing overall costs, Schmidt says. Also, assessing how health insurers and regulators will view telemedicine in the post-Covid world will be “absolutely critical” as PE investors evaluate potential acquisitions, he says.

Over the last four to five years, health insurers have been aggressively steering their members toward high-quality, low-cost healthcare providers, which bodes well for insurer acceptance of telehealth in the post-pandemic world, Felsenthal says. “Telehealth is a great tool in that arsenal.”

National Markets
One of the interesting aspects of telehealth technology for investors is how it can deliver healthcare to national markets for the first time, Schmidt says. Instead of evaluating the market in just one state, for example, the investor can consider building access for a primary care or specialty market throughout the U.S. The technology is breaking down access-to-care barriers and leveling the playing field for competing companies.

“A lot of technology-focused companies are trying to figure out how to harvest the advancements in artificial intelligence and 5G networks to bring solutions to make telehealth more effective; more widely available,” says Landen Williams, partner at WilliamsMarsten, a Boston and New York advisor on M&A and initial public offerings. “I think we’re finally starting to see the disruption to the healthcare system that we’ve all been waiting for, frankly, because it’s just a bloated, inefficient system and it’s been slow to adopt technologies.”

Beyond Urgent Care
Schmidt says the telemedicine market is fragmented with more than 250 companies, most of them small and aiming to expand from virtual urgent care into virtual primary care, virtual behavioral health and other repeat-visit patient services. Telemedicine companies want to build out their services through acquisitions or building services internally, and large healthcare providers and insurers want to add telemedicine services. “That’s why the telemedicine space is so interesting, because everyone recognizes the need to have these capabilities, but it’s still early days for the large providers,” he says.

“For us, it’s really interesting when folks are using telemedicine to drive growth in their business as a way to drive new access to patients or incremental revenue streams,” Schmidt says.

Telehealth is evolving and transforming healthcare, much like Amazon evolved and changed the retail industry, Felsenthal says.

“In the same way that Amazon went from books to DVDs to CDs to diapers to television, I think telehealth’s going from non-critical urgent care to behavioral healthcare to dermatology to chronic care management to post-acute-care management to helping seniors age at home and everything under the sun, except for–this is an overstatement–but except for surgery,” Felsenthal says. “There are a lot of services that are delivered in brick-and-mortar health systems that are both inconvenient and really expensive,” he says. “It’s really important that health systems very nimbly and urgently figure out how they’re not going to become Borders bookstores.”

Packed with Buyers
From venture-capital-funded startups to tech companies to healthcare providers to insurers to blank-check companies, the telehealth space seems to be packed with potential buyers and sellers, in addition to PE firms.

According to San Francisco venture capital firm Rock Health, the first three quarters of 2020 produced more VC funding for U.S. digital health startups–$9.4 billion–than any entire year previously. On-demand healthcare services, including telemedicine, was the top-funded sector within that total, with $2 billion invested in 48 deals through the first three quarters of 2020.

At least 10 digital health companies are potential acquirers of telehealth providers, with another 10 potential buyers that are planning initial public offerings, Felsenthal says. Amazon, Microsoft, Salesforce and Alphabet (formerly Google) are also investing in or considering investing in telehealth, along with large insurers like Cigna, United Health, Aetna, Anthem and Humana, and pharmacy giants Walgreens and CVS.

Middle-market PE firms and VC firms are in fierce competition to invest in the smaller companies in the space, says Lenard Marcus (pictured), general partner at Edison Partners, a Princeton, New Jersey, PE firm. Edison lost three or four potential telehealth deals because of price before leading a $10 million investment in Health Recovery Solutions, a remote patient monitoring company, in 2019, says Marcus, who co-leads health IT investments for the firm.

“It’s a market that is literally white hot,” he says. “What you’ve seen in the last 18 months is just a massive push for telehealth, mainly because of the amount of stress that the hospitals and providers are under. And so we are looking for companies that can really help that hospital-to-home aspect of care and lighten the load on the providers.”

Telemedicine is appealing to both PE and public equities investors from the environmental-social-governance (ESG) investment perspective also, Williams says, because it provides more and better healthcare to disadvantaged people. “People are saying, here’s an area where you can put capital and actually help people at the same time.”

Flurry of Deals
Here are some notable telehealth deals.

● The Carlyle Group (Nasdaq: CG) took public its One Medical (Nasdaq: ONEM) in-person and virtual primary care medical group.
● Amwell (NYSE: AMWL), a telehealth technology provider, went public.
● GigCapital2, a SPAC, agreed to merge UpHealth, an international digital healthcare provider, with Cloudbreak, a telemedicine and video medical interpretation solutions provider, in a $1.35 billion deal, creating UpHealth Inc. (NYSE: UPH).
● SOC Telemed, provider of acute care telemedicine, agreed to merge with Healthcare Merger Corp. (Nasdaq: HCCO) to form a $720 million company traded on the Nasdaq.
● Telemedicine tech company Curavi Health, software and analytics company CarePointe and health manager U.S. Health Systems merged to form Arkos Health.
● Teladoc Health (NYSE: TDOC) has made a dozen acquisitions, including acquiring Livongo, a telehealth provider focused on chronic medical conditions and InTouch Health, provider of telehealth solutions for more than 450 hospitals and health systems.