1 big thing: Mighty Health seeds $7.6M

2. The BFD: Angle Health raises $58M 

Illustrated collage of a hundred dollar bill with a red cross and various shapes

3. Deals o' the day

4. It's Personnel

👩‍⚕️ Situational awareness: More health providers are charging patients for responses to emailed queries, raising thorny questions about reimbursement, Axios Vitals reports.

🏃🏻 Erin hit the slopes for some afternoon skiing yesterday and snuck in the equivalent of a marathon, at least in miles.

✅ Thanks for reading, and extra thanks to newsletter editor George Moriarty and copy editor Brad Bonhall. Please ask your friends and colleagues to sign up.

Health Tech Deals

Rockley Photonics files for bankruptcy

1. Rockley Photonics files for bankruptcy

Illustration of a health plus with darts all around it, as if they've missed the target. 

2. MyOrthos in market

Illustration of a one dollar bill zoomed in to show George Washington smiling with a mouth full of white teeth.

3. Fertility tech banks investor dollars

Illustration of a quarter surrounded by sperm.

4. From Science 37 to People Science

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5. Angle Health raises $58M

Happy Friday, Health Techies! Here's your digest of this week's news.

But first, a quick bite on Rockley Photonics' bankruptcy filing. 

That's all for this week. Catch you Monday!

🙏 Thanks for reading, and extra thanks to newsletter editor George Moriarty and copy editor Brad Bonhall. Please ask your friends and colleagues to sign up.

1 big thing: Fertility tech banks investor dollars

2. VC funding for fertility tech soars

3. The BFD: Journey Clinical clinches $9M

Animated illustration of a hundred dollar bill in psychedelic colors with Benjamin Franklin wearing swirling glasses. 

4. Deals o' the day

5. It's Personnel

🤝 Situational awareness: Erin on Wednesday is moderating a live webinar and panel discussion covering the findings from SVB’s annual health care investing report. It will feature TPG Life Sciences' Carolyn Ng, Andreessen Horowitz's Julie Yoo and SVB's Jon Norris. Tune in.

🍾 Claire enjoyed a Chicago "speakeasy" experience last weekend at The Roar on Rush, complete with craft cocktails and a gin tub.

❤️ Thanks for reading, and extra thanks to newsletter editor George Moriarty and copy editor Brad Bonhall. Please ask your friends and colleagues to sign up.

1 big thing: Teal Health debuts for women's virtual cancer screenings

Illustration of a phone wearing a doctor's coat and a stethoscope. 

2. The BFD: Paradigm's $203M Series A 

Illustration of a line of people waiting at a red cross-shaped door.

3. Spark Advisors gets $15M Series A

Illustration of knitting needles making a red health plus.

🙌 Situational awareness: Join us in welcoming our new[sletter] co-author Aaron Weitzman, who joins Axios from PE Hub.

🌤️ Erin spent the weekend in sunny Southern California visiting family and enjoyed the temporary dose of mild weather.

1 big thing: From Science 37 to People Science

Walgreens eyes pharmacy divest

2. The BFD: Walgreens eyes pharmacy divest

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3. Corporate dollars and digital health

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🩸 Situational awareness: Palo Alto-based health tech nonprofit Tidepool this week received FDA clearance for the first prescription app to link continuous glucose monitors and insulin pumps and to automate insulin dosing. 

📺 Claire caught the Valeant Pharmaceuticals episode of Netflix's "Dirty Money" last night, a visceral reminder of the era of the Pharma Bro. 

✨ Thanks for reading, and extra thanks to newsletter editor George Moriarty and copy editor Brad Bonhall. Please ask your friends and colleagues to sign up.

This week we're talking behavioral health M&A with Rajat Duggal, a partner at middle-market private equity firm FFL Partners.

Why he matters: FFL sold its stake in substance use disorder business Summit Behavioral Care in 2021 to Patient Square Capital for north of $1 billion, and has been invested in Autism Learning Partners since 2017. 

Duggal's responses were lightly edited for clarity and length.

How are you navigating new investments and your own behavioral health portfolio, given reimbursement pressures and staffing shortages?

At FFL Partners, we are relying on our Sector Exploration and Expertise Development [SEED] process to identify attractive areas for investment within behavioral health that are showing resilience to some of the headwinds facing the industry. We identify subsectors with secular tailwinds supporting growth and less cyclicality, where FFL’s healthcare investment playbook can add value.

Labor supply was a key issue to address in many health care services deals we looked at last year. However, businesses that have established unique cultures and the ability to recruit and retain good talent really stood out.

In our own portfolio, we are working with our companies on better ways to recruit and retain talented professionals. Our operating partners have worked with several companies to understand the labor dynamics more fully within each market segment of the industry and instituted various initiatives through a test-and-learn approach.  

What subsectors within behavioral health are you most excited about? 

We remain focused and active in investing in the substance use disorder space as the growing national opioid crisis continues to require resources and innovative approaches to providing quality care to those affected. 

Another active SEED area for us is outpatient mental health, where we are focused on companies that are leveraging telemedicine and deploying differentiated recruiting and retention models to attract providers. 

Finally, across all the health care subsectors we are pursuing, we are focused on companies that are taking costs out of the system through innovative payor and provider models while improving overall patient health and experience.

The industry has recently been challenged in recruiting quality caregivers, which has impacted many providers. 

This is especially the case for smaller providers that don’t have the resources to invest in addressing these labor shortages that better-capitalized providers do.

While we expect near-term M&A activity to be muted as the industry recovers from staffing challenges, we do expect over the medium term that deal activity will pick up meaningfully. For example, we understand that Action Behavior Centers was recently sold to a sponsor at a full valuation. 

Given the state of debt and equity markets, is there more scrutiny on pro-forma figures when an asset is for sale?

Both buyers and lenders are focusing much more closely on pro-forma adjustments in the current economic environment. Whether it is de novo maturity adjustments, credit for acquisitions with letters of intent [LOIs] signed but not closed, or even run-rate cost adjustments, the terms in M&A transactions have become much more restrictive than 12 months ago. 

Lenders are particularly focused here, as some of the most aggressive pro-forma adjustments from the last couple of years didn’t end up materializing. This resulted in troubled credits where cash flows did not meet projections. 

Expert Voices: Rajat Duggal of FFL Partners

Duggal discusses the labor crisis and financing environment for behavioral health deals.

photo illustration of Rajat Duggal of FFL Partners surrounded by circles and abstract medical graphs

Photo illustration: Tiffany Herring/Axios; Photo: courtesy FFL Partners

Health tech deals

This week we&#x27;re talking behavioral health M&amp;A with Rajat Duggal, a partner at middle-market private equity firm FFL Partners.Why he matters: FFL sold its stake in substance use disorder business Summit Behavioral Care in 2021 to Patient Square Capital for north of $1 billion, and has been invested in Autism Learning Partners since 2017. Duggal&#x27;s responses were lightly edited for clarity and length.How are you navigating new investments and your own behavioral health portfolio, given reimbursement pressures and staffing shortages?<ul><li>At FFL Partners, we are relying on our Sector Exploration and Expertise Development [SEED] process to identify attractive areas for investment within behavioral health that are showing resilience to some of the headwinds facing the industry. We identify subsectors with secular tailwinds supporting growth and less cyclicality, where FFL’s healthcare investment playbook can add value.</li><li>Labor supply was a key issue to address in many health care services deals we looked at last year. However, businesses that have established unique cultures and the ability to recruit and retain good talent really stood out.</li><li>In our own portfolio, we are working with our companies on better ways to recruit and retain talented professionals. Our operating partners have worked with several companies to understand the labor dynamics more fully within each market segment of the industry and instituted various initiatives through a test-and-learn approach. </li></ul>What subsectors within behavioral health are you most excited about? <ul><li>We remain focused and active in investing in the substance use disorder space as the growing national opioid crisis continues to require resources and innovative approaches to providing quality care to those affected. </li><li>Another active SEED area for us is outpatient mental health, where we are focused on companies that are leveraging telemedicine and deploying differentiated recruiting and retention models to attract providers. </li><li>Finally, across all the health care subsectors we are pursuing, we are focused on companies that are taking costs out of the system through innovative payor and provider models while improving overall patient health and experience.</li></ul>What’s your outlook on autism M&amp;A?<ul><li>The industry has recently been challenged in recruiting quality caregivers, which has impacted many providers. </li></ul><ul><li>This is especially the case for smaller providers that don’t have the resources to invest in addressing these labor shortages that better-capitalized providers do.</li><li>While we expect near-term M&amp;A activity to be muted as the industry recovers from staffing challenges, we do expect over the medium term that deal activity will pick up meaningfully. For example, we understand that Action Behavior Centers was recently sold to a sponsor at a full valuation. </li></ul>Given the state of debt and equity markets, is there more scrutiny on pro-forma figures when an asset is for sale?<ul><li>Both buyers and lenders are focusing much more closely on pro-forma adjustments in the current economic environment. Whether it is de novo maturity adjustments, credit for acquisitions with letters of intent [LOIs] signed but not closed, or even run-rate cost adjustments, the terms in M&amp;A transactions have become much more restrictive than 12 months ago. </li><li>Lenders are particularly focused here, as some of the most aggressive pro-forma adjustments from the last couple of years didn’t end up materializing. This resulted in troubled credits where cash flows did not meet projections. </li></ul>

Digital health should expect more strategic investors participating in and leading fundraises, industry experts said during an SVB webinar Wednesday.

Why it matters: The current bear market is unlikely to shift any time soon, and health tech entrepreneurs and their investors will be seeking nimble capital.

The webinar, moderated by Axios' Erin Brodwin, discussed findings of SVB's Healthcare Investments and Exits report.

What they're saying: "Tying equity investments from strategics to commercial commitments — it's a good game to play if you construct it in the right way," said Andreessen Horowitz general partner Julie Yoo.

"It directs a lot of the commercial risk that is typically associated with these growth-stage healthcare companies," she added.

During the funding frenzy of 2021, "it was actually quite difficult for companies to get to actually get to squeeze in a corporate VC" to their cap table, said TPG Life Sciences partner Carolyn Ng. 

That tide has turned as strategic investors are not bound to the same fund cycles as venture capital, and remain "pretty committed to to innovation and scientists," Ng added.

Zoom in: Today's market requires tangible proof of ROI from companies seeking funding, whether that's a path to profitability or specific clinical milestones, panelists said.

"There's going to be a lot more thinking around what this funding is going to take them to, and whether or not that is truly a valid creating milestone," Ng said.

Companies will need to prioritize their core business and pipelines and end speculative projects, Ng and Yoo both said.

Between the lines: Alongside a rush of strategic capital, 2023 will likely usher in unique deal structures among VC investors.

Typical funding rounds in digital health have one lead investor, but Yoo predicted "more frenemies playing nice with each other on rounds where they're sharing equity."

"People will have to make the tough decision about taking structured terms over just doing a down-round on the valuation side and keeping it as clean as possible," she added.

In its report, SVB predicts an increase in larger, outsider-led rounds in the second half of next year, but notes that many will be down rounds.

"Having new investing partners coming in with dry powder and help support your company going forward is probably a lot more important than trying to save valuation," said SVB managing director Jon Norris. 

The bottom line: "It's not that the [digital health] industry crashed," Yoo said. "It's just that the last few years were such outliers that we should just recalibrate our baseline to not overfit for those two years. Or, rather, look at the straight path that that exists relative to 2019." 

Strategics enter the digital health chat

"Tying equity investments from strategics to commercial commitments — it's a good game to play if you construct it in the right way," said Andreessen Horowitz's Julie Yoo.

Digital health should expect more strategic investors participating in and leading fundraises, industry experts said during an SVB webinar Wednesday.Why it matters: The current bear market is unlikely to shift any time soon, and health tech entrepreneurs and their investors will be seeking nimble capital.

After a lackluster 2022, the health care deal market will be defined this year by cash-rich strategics making calculated bets, a Bain & Co. report predicts.

Why it matters: Strategics are already primed to lead more venture capital raises, and their balance sheets suggest they'll be active buyers, too.

The report surveyed about 300 M&A executives globally across industries on their 2023 outlook and priorities.

Zoom in: Payers sat on the deal sidelines in 2022, but the top 25 health insurers have a combined $200 billion on their balance sheets, the report says.

Given the mammoth size of the major players, maintaining competitive advantage and moving the needle on revenue will require a large buy.

A merger of equals would likely not pass regulatory muster, but expect payors to make large buys in adjacent markets (UnitedHealthGroup-owned Optum's playbook is a good one to look at).

Meanwhile, med tech M&A last year was primarily "designed to provide innovative technologies for future growth" rather than add products to portfolios, the report says.

The report cites Stryker's $3 billion acquisition of Vocera Communications as one example.

What they're saying: "There is a lot of convergence between digital health and med tech," Andreessen Horowitz general partner Julie Yoo said at an SVB webinar last week. 

Best Buy paid $400 million for remote patient monitoring technology vendor Current Health last year, and Biofourmis raised $320 million in Series D capital from General Atlantic and Intel at a valuation of nearly $1.3 billion. 

"The hybrid business models actually mitigate a lot of the risk of why people traditionally might not have been leaning into med tech, where you have manufacturing risk and supply chain risk," Yoo says. 

Yes, but: Don't count out private equity competition, the report cautions.

"Strategic buyers hoping for a steal should be prepared for increased competition from financial buyers as the year unfolds," it says, citing continued record amounts of dry powder and a willingness to pay for good-quality assets.

Cash-rich health strategics prepare to make bets

A Bain & Co. report anticipates strategic buyers stepping in.

Illustration of a handshake with shapes and zoomed in photos of dollar bills. 

After a lackluster 2022, the health care deal market will be defined this year by cash-rich strategics making calculated bets, <a class="gtmContentClick" data-vars-link-text="a Bain &amp; Co. report predicts." data-vars-click-url="https://www.bain.com/insights/topics/m-and-a-report/" data-vars-content-id="4624f1c4-7b96-4a74-8120-eca8f4ea4bef" data-vars-headline="Cash-rich health strategics prepare to make bets" data-vars-event-category="story" data-vars-sub-category="story" data-vars-item="in_content_link" href="https://www.bain.com/insights/topics/m-and-a-report/" target="_blank">a Bain &amp; Co. report predicts.</a>Why it matters: Strategics<a class="gtmContentClick" data-vars-link-text=" are already primed " data-vars-click-url="https://www.axios.com/pro/health-tech-deals/2023/01/26/strategics-capital-digital-health" data-vars-content-id="4624f1c4-7b96-4a74-8120-eca8f4ea4bef" data-vars-headline="Cash-rich health strategics prepare to make bets" data-vars-event-category="story" data-vars-sub-category="story" data-vars-item="in_content_link" href="https://www.axios.com/pro/health-tech-deals/2023/01/26/strategics-capital-digital-health" target="_self"> are already primed </a>to lead more venture capital raises, and their balance sheets suggest they&#x27;ll be active buyers, too.

Wearable-sensor maker Rockley Photonics, which touted high-profile strategic partnerships with Apple and Medtronic, filed for Chapter 11 bankruptcy this week.

Why it matters: Having gone public via SPAC in 2021, Rockley is the latest domino to fall in what will likely be a continuing reckoning for the SPAC market.

Details: In the bankruptcy petition filed Monday, Rockley asked to be allowed to proceed as a “debtor in possession,” which would let the company to continue operating without interruption.

Per the filing, Rockley has a reorganization strategy to eliminate debt and restructure its capital makeup, expected to add $35 million in cash to support its ongoing operations.

Rockley’s stock was halted from further trading on the New York Stock Exchange on Monday, and the exchange said it would start to fully delist the stock.

Rockley does not intend to appeal the delisting, according to its 8-K.

Catch up fast: Rockley Photonics raised almost $168 million after a SPAC merger with SC Health.

The deal included significant investment from Senvest Management and Medtronic.

Yes, but: The transaction was expected to deliver up to $323 million of gross proceeds to the company, including $173 million from SC Health.

SC Health in fact provided $17.8 million. 

How it works: The company's “spectrophotometer-on-a-chip” technology is used in wearable devices to continuously track various biomarkers.

Rockley unveiled its "clinic on the wrist" system in 2021, which monitors health data and sends it to a smartphone app powered by Rockley's machine learning algorithms that further analyze the data. 

Zoom in: Commercial versions of that device have yet to appear, all while Rockley racked up debt and its stock price slipped.

The company touted high-profile strategic partnerships with Apple and Medtronic.

Wearable-sensor maker Rockley Photonics, which touted high-profile strategic partnerships with Apple and Medtronic, filed for Chapter 11 bankruptcy this week.Why it matters: Having gone public via SPAC in 2021, Rockley is the latest domino to fall in what will likely be a continuing reckoning for the SPAC market.Details: In the bankruptcy petition filed Monday, Rockley asked to be allowed to proceed as a “debtor in possession,” which would let the company to continue operating without interruption.<ul><li>Per the filing, Rockley has a reorganization strategy to eliminate debt and restructure its capital makeup, expected to add $35 million in cash to support its ongoing operations.</li><li>Rockley’s stock was halted from further trading on the New York Stock Exchange on Monday, and the exchange said it would start to fully delist the stock.</li><li>Rockley does not intend to appeal the delisting, according to its 8-K.</li></ul>Catch up fast: Rockley Photonics raised almost $168 million after a SPAC merger with SC Health.<ul><li>The deal included significant investment from Senvest Management and Medtronic.</li></ul>Yes, but: The transaction was expected to deliver up to $323 million of gross proceeds to the company, including $173 million from SC Health.<ul><li>SC Health in fact provided $17.8 million. </li></ul>How it works: The company&#x27;s “spectrophotometer-on-a-chip” technology is used in wearable devices to continuously track various biomarkers.<ul><li>Rockley unveiled its &quot;clinic on the wrist&quot; system in 2021, which monitors health data and sends it to a smartphone app powered by Rockley&#x27;s machine learning algorithms that further analyze the data. </li></ul>Zoom in: Commercial versions of that device have yet to appear, all while Rockley racked up debt and its stock price slipped.

Retail Deals

LVMH, L’Oréal SA and Shiseido are among the consumer players weighing a bid for a stake in cosmetics company Aesop, Bloomberg reported.

Why it matters : The deal, which could value Aesop in excess of $2 billion, signals ongoing faith in the luxury and beauty sectors — despite the specter of a recession.

Catch up fast: Aesop owner Natura & Co has been working with Bank of America and Morgan Stanley to sell a stake in its Aesop unit since late last year.

CVC Capital and L'Occitane International, along with Shiseido, were looking at the asset, per a Bloomberg report from November 2022.

While Natura had initially wanted to pursue an IPO for Aesop, the company pivoted to a minority stake sale due to unfavorable capital markets.

Natura acquired Aesop back in 2012 for AUD $68 million. 

Context: The beauty and wellness sector is typically considered "recession proof" because consumer demand remains strong even when the economy takes a turn, industry insiders say.

Indeed, consumers are showing no signs of trading down from prestige to mass-market items, per a D.A. Davidson report from last month.

A handful of strategics emerged from COVID with healthy balance sheets and cash to deploy for deals, Goldman Sachs partner Cosmo Roe told Bloomberg this month.

Skin care has a longterm tail, according to Roe, with a sticky and large addressable market. 

L’Oréal declined to comment. LVMH, Shiseido and Natura did not respond to Axios' request for comment. 

Aesop auction draws LVMH, L'Oreal

The deal, which could value Aesop in excess of $2 billion, signals ongoing faith in the luxury and beauty sectors.

Photographer: Katie Falkenberg/Los Angeles Times/Getty Images

Retail

LVMH, L’Oréal SA and Shiseido are among the consumer players weighing a bid for a stake in cosmetics company Aesop, Bloomberg reported.Why it matters : The deal, which could value Aesop in excess of $2 billion, signals ongoing faith in the luxury and beauty sectors — despite the specter of a recession.

Claire Rychlewski

Stories

Expert Voices: Rajat Duggal of FFL Partners

Cash-rich health strategics prepare to make bets

Aesop auction draws LVMH, L'Oreal

Rockley Photonics files for bankruptcy

Strategics enter the digital health chat

Newsletter editions

Health Tech: A $15M Spark

Health Tech: 🗞️ Catch up quick

Health Tech: People Power

Health Tech: Mighty Health seeds $8M

Health Tech: Journey clinches Series A