Why ESG is a catalyst for digital health

Bernd Jung and Dr. Thomas Solbach
December 1, 2021

Over the past years, environmental, social, and governance (ESG) issues have increasingly become important priorities for leaders across industries. Ensuring healthy lives and promoting well-being is essential to sustainable development and therefore explicitly embodied in the UN sustainable development goals1. The COVID-19 pandemic illuminated the central role of health for today's societies, with OECD2 reporting a significant deterioration of physical and mental health in the population during the pandemic. Now, more than ever, the health sector needs to assume its responsibility in helping to solve today’s biggest ESG challenges.

In the recent Strategy& ‘where to play’ ESG impact assessment, we examined the entire health sector, including 18 subsectors, to understand which will continue to be most affected by ESG issues. For example, sustainability concerns may have a negative effect on livestock farming, but other factors such as increasing awareness for physical health and safety are expected to have a positive influence on the growth of digital health.

Overview health ESG impact assessment

Digital health to become an ESG front runner

Based on Strategy&’s recent ESG impact assessment, 18 subsectors of the health industry have been identified and quantified with an ESG impact score. This score indicates how positively or negatively a subsector is impacted by ESG and its underlying trends. Naturally, these trends materialize differently for the different subsectors. The value of the score is the sum of all trends, each of which have different impact values. The value of -2 indicates a negative tipping point of a trend while +2 shows a positive one. Subsequently, the values are weighted with the trend probability: 20% indicates an unlikely occurrence and 100% a certain occurrence.

Following this methodology, the ESG impact score for digital health amounts to 3.8. The ESG sub-trend physical health and safety materializes strongly on the health industry which positions the subsector digital health best to benefit from the increasing attention on ESG, due to three key drivers accelerating growth in this market:

  1. Shifting customer requirements and preferences: Patients increasingly demand innovative care solutions that improve their wellbeing. The COVID-19 pandemic accelerated this trend by driving demand for digital mental health services.
  2. Regulatory requirements: Newly established regulations, especially in Germany (e.g., cancellation of “Fernbehandlungsverbot" and DIGA3), enable greater access to remote care and the reimbursement off digital health applications.
  3. New and changing business ecosystem (partnerships): As digital health treatments are increasing, so is the reimbursement of those treatments by payers. For example, telemedicine across Europe is increasingly reimbursed by public and private payers.

These drivers have led to an accelerated growth of the digital health market, amounting to $25 billion for Europe in 2020. The overall digital health market is composed of four key segments: Healthcare Professionals (“HCP”), Medical Apps, Telehealth, and Others. With $11.7 billion in 2020 HCP is the strongest segment with a total market share of 47% followed by “medical apps” (43% in 2020). Within medical apps, “digital therapeutics” stands out due to its market growth rate of ~24% in 2020, making “digital therapeutics” an attractive subsector to invest in.

Overview of European digital health market size and segments

Digital therapeutics is a growing market

Today, the German digital therapeutics market already exhibits a share of 25%, making it the largest market within Europe. As the German market is growing at a faster pace this share is expected to reach almost a third of the European digital therapeutics by 2030 (expected size $6.3 billion). The growth of the German market is broadly driven by:

  • Increasing awareness of mental health and wellbeing topics accelerated by COVID-19 driving to demand e.g., for mental health service
  • The need for cost controlling measures in the German healthcare sector
  • Rising incidence of chronic diseases; and
  • Increasing adoption of mobile devices (e.g., smartphones and tablets), coupled with healthcare applications

In addition to these global growth drivers, Germany exhibits country-specific aspects, which translate into additional market momentum and attractiveness:

  • Lifestyle factors, such as the rise in obesity, consumption of unhealthy dietary habits, lack of physical activity, and an increasing smoking rate; and
  • A fast-aging population, with 57% of Germans above 40 years4 and less children being born.

Strategic investors have identified the importance of this market. The Swiss-based pharmaceutical company Roche for example, acknowledged the strategic importance of digital therapeutics when it acquired all shares of mySugr in June 2017.5 The acquisition is aligned with Roche’s new patient-centered digital health services approach in diabetes care and highlights the momentum of the sector from the strategic investors angel which also contributes to increasing valuation multiples over time.

Market outlook and how to capitalize on the digital health momentum as a General Partner

Digital health remains a highly regulated and complex market with a high number of stakeholders. As such, there will most likely not be a single digital health platform or ecosystem that serves as a one-stop-shop for patients. Instead, as outlined in our “Future of Health”6 study, we expect to see several smaller platforms and ecosystems emerge, all striving to deliver differentiated value by indication area, geography, technology, patient journey, and other dimensions.

Global and European funding

Yet, growth outlooks and the accelerating attention to health related ESG topics are creating an interesting opportunity for investors which already translates into increasing funding. The global funding volume that flows into digital health has more than tripled over the past five years (from $6.1 billion in 2015 to $21.6 billion USD in 20207). As the digital health industry is maturing, more assets are available in the market and General Partners will have to decide on a suitable investment strategy. For General Partners active in the health sector an “add-on strategy” is often preferred to a “buy-and-build” strategy, as it complements their existing assets and adds digital competency (e.g., Ai add-on for I-Med Radiology). In addition, a market entry based on a “buy-and-build” strategy is considered more complex because it is more time consuming and the number of sizeable targets for General Partners is limited. In addition, high regulatory requirements in the healthcare sector also represent a barrier to enter the market as an investor. Nevertheless, it is crucial to screen digital health market segments in their pre-liberalization state for promising targets to cash-in when the liberalization hits in. Hence, incorporating digital health into the screening radar has become paramount for active General Partners.

Conclusion

In conclusion, the global digital health industry, and the German digital health industry, is forecasted to grow significantly in the next decades. Increasing attention to ESG issues will continue to serve as catalyst for growth, highlighting societal health issues like mental health and the role that digital health applications can play to improve patients’ lives. For investors, it will become paramount to include digital health into their screening radar and to decide on their investment strategy regarding digital health.

Interested in learning more about how ESG issues will drive growth in digital health? We’d love to hear from you. Please share your own perspective in the comments section, or feel free to contact our deals or pharma & life sciences community directly.

Marius Lorenz and Antonia Kalusche co-authored this article.


Sources

1) https://www.un.org/sustainabledevelopment/health/
2) https://www.oecd.org/coronavirus/policy-responses/tackling-the-mental-health-impact-of-the-covid-19-crisis-an-integrated-whole-of-society-response-0ccafa0b/
3) DiGa: Digitale Gesundheitsanwendungen: https://www.bfarm.de/EN/Medical-devices/Tasks/Digital-Health-Applications/_node.html
4) https://www.statista.com/statistics/454349/population-by-age-group-germany/
5) https://www.roche.com/media/releases/med-cor-2017-06-30.htm
6) https://www.strategyand.pwc.com/de/en/industries/health/digital-healthcare.html
7) RockHealth, Technavio (Global Digital Health Market) Statista

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Bernd Jung

Bernd Jung

Partner, Strategy& Germany

Dr. Thomas Solbach

Dr. Thomas Solbach

Partner, Strategy& Germany

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