Babylon/telehealth: strong medicine needed to recover from Spac setback

Telehealth start-up Babylon wrote itself a duff prescription. The British company last year opted to join the New York Stock Exchange by merging with a special acquisition company. It ended up raising $275mn, less than half as much as hoped. Founder Ali Parsa has called it an “unmitigated disaster”.

The harsh response from investors is, in part, a sign of a wider reappraisal of the once-hot digital health market amid a tech rout. This year’s digital health venture capital funding could be less than half of last year’s $29.1bn, says fund Rock Health.

There are questions over telemedicine’s staying power. It boomed in the pandemic, but a McKinsey survey of US physicians found that three in five would recommend in-person over virtual care to patients.

The economics can disappoint as well. Though accused of skimming off younger, healthier patients, Babylon says those motivated to switch tend to have more complex needs. Unable to make money from its NHS contracts, Babylon now firmly focuses on the US. The group made more than half its revenues from the UK in 2020.

Having fallen by more than 90 per cent since its October debut, Babylon shares trade on 0.3 times forward revenues, less than a fifth of the multiple commanded by rival Teladoc. Babylon recently raised about $80mn of new funds and announced plans to sell a California-based business, which Berenberg says could fetch $300mn. All this should provide enough cash until its hoped-for move into the black in 2025.

Investors might hope to benefit from consolidation in the sector. In August, Babylon had to deny speculation about takeover talks. M&A activity is starting to pick up in the US, with 144 digital health deals in the first nine months of this year, including Amazon’s $3.9bn bid for One Medical.

Mergers would help digital health companies cut costs and boost their services. Even so, these deals will struggle to deliver on ambitious promises. The US healthcare system remains notoriously immune to disruption.

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