Jul 15, 2019 | Techcelerate Ventures |
Semi-Annual Market Review HEALTH IT & HEALTH INFORMATION SERVICES JULY 2019 www.hgp.com Copyright© 2019 Healthcare Growth Partners 2 TABLE OF CONTENTS Health IT Executive Summary 3 Health IT Market Trends 6 HIT M&A (Including Buyout) 9 Health IT Capital Raises (Non-Buyout) 14 Healthcare Capital Markets 15 Macroeconomics 19 Health IT Headlines 21 About Healthcare Growth Partners 24 HGP Transaction Experience 25 Appendix A – M&A Highlights 28 Appendix B – Buyout Highlights 31 Appendix C – Investment Highlights 34 1 11 10 9 8 7 6 5 4 3 2 12 Copyright© 2019 Healthcare Growth Partners 3 HEALTH IT EXECUTIVE SUMMARY An Accumulating Backlog of Disciplined Sellers 1 Let’s chat about fireside chats. The term first used to describe a series of evening radio addresses given by U.S. President Franklin D. Roosevelt during the Great Depression and World War II is now investment banker speak for “soft launches” of sell-side and capital raise transactions. Every company has a price, and given a market of healthy valuations, more companies are testing the waters to find out whether they can achieve that price. That process now looks a little more informal, or how you might envision a fireside chat. Price (or valuation) discovery for a company can range from a single conversation with an individual buyer to a full-blown auction with hundreds of buyers and everything in between, including a fireside chat. Given the increasing share of informal conversations, the reality is that more companies are for sale than meets the eye. While the healthy valuations publicized and press-released are encouraging more and more companies to price shop, there is a simultaneous statistical phenomenon in perceived valuations that often goes unmentioned: survivorship bias. Survivorship bias is the logical error of concentrating on the information that made it past some selection process and overlooking the information that did not, typically because of a lack of visibility. What this bias does in the M&A market is lead to false conclusions around comparable valuations through a systemic selection bias towards high-profile, high-value deals. Why does survivorship bias matter in how we value companies? Simply put, companies are often valued based on perceptions of comparable transactions that closed and not on those that didn’t. As a result, survivorship bias of M&A valuation can inflate expectations for all sellers by basing value on higher quality companies with closable transactions, not just those who meet such a standard. “Fireside Chats” and Informal Processes Companies that “Go-to-Market” Transactions that Close Published Transaction Values Survivorship Bias The valuations we see are the deals that close, where, generally speaking, a higher quality seller achieves their asking price. We don’t see and determine value from the deals that don’t close, where sellers, potentially of lower quality, do not achieve their asking price. 13 31 30 31 38 52 54 0 10 20 30 40 50 60 2013 2014 2015 2016 2017 2018 2019 HEALTH IT EXECUTIVE SUMMARY Copyright© 2019 Healthcare Growth Partners 4 1 Over the last five years, the number of US-based Health IT M&A (including buyout) transactions has remained relatively steady at 300 deals per year. Of total Health IT M&A, less than 20% involve the sale of a PE-backed company, and based on our 2019 data, this accounts for approximately 60 PE- backed exit transactions per year. Going back to 2010, the accrued number of HIT PE-backed venture and growth investments exceeds 1,200 companies that have yet to reach a liquidity event, implying a significant backlog of companies that have yet to transact. Using a simple extrapolation and assuming all companies exit, an accrual of 1,200 companies with 60 PE-backed companies trading annually implies a 20-year backlog. Based on 2019 data, 18% of US-based Health IT M&A and buyout transactions involved a seller that had previously raised institutional venture capital or growth equity in excess of $2mm, implying that 82% of Health IT transactions involve bootstrapped sellers. PE-backed companies generally have a higher valuation bar to clear because the return requirements are based on the valuations of the prior funding rounds which are generally higher since investment valuations tend to be higher than M&A valuations. Bootstrapped 82% 2019 Bootstrapped vs. PE-Backed Exits PE-Backed Exits Active HIT PE-Backed Investments by Most Recent Funding Year PE-Backed, 18% With our unique lens into the market, HGP is witnessing an increasing volume of companies undergoing some degree of exploration of a potential sale. Regardless of whether these companies pursue informal conversations or hire an investment bank to run an auction, the higher volume of M&A discussions is effectively reducing the close-rate of M&A transactions, thereby increasing the statistical error of survivorship bias. Fireside chats and informal sale processes are making an impact. In a report about the potential disruption of investment banking, CB Insights wrote: “The last few years have seen a significant uptick in the number of private M&As undertaken without the assistance of an investment bank. In 2015, according to Dealogic, 26% of M&A deals worth $1B+ took place without outside financial advisors, a 13% increase from the year before.” * * Data annualized for 2019 0 50 100 150 200 250 300 350 2014 2015 2016 2017 2018 HEALTH IT EXECUTIVE SUMMARY Copyright© 2019 Healthcare Growth Partners 5 1 The informal nature of many M&A discussions creates opportunities and challenges for both buyers and sellers. In terms of opportunity, fireside chats can turn into preemptive transactions which allow buyers and investors to transact outside of an auction, enabling both parties to get the deal done quickly and efficiently. The challenge for buyers is that informal processes require proactive efforts to get in front of transactions, and for sellers, the sheer volume of informal discussions means that there are more companies competing for the attention and capital of buyers than meets the eye. Why do companies pursue fireside chats or informal processes rather than hire an investment banker to run an auction? Our response is that, in many cases, these companies intuitively know that the valuation they’re seeking is a stretch and do not want to invest the resources into a full sale process and the negative perception that may come with one that fails. A fascinating takeaway is that valuations remain high in the face of a rising supply of transactable companies, bucking basic economic theory. Sellers would rather not transact than accept a lower price, and as such, the market remains in equilibrium from a valuation perspective. This balance holds even though seller valuation expectations are often distorted based on the set of highly visible transactions that close and not on those that aren’t publicized or don’t close at all. To absorb the rising supply of Health IT companies, one or a combination of the following must occur: 1. Health IT sellers must perform at a level to meet the valuation expectations that are set based on high performing transactions that close. 2. More buyers must enter the market to meet the rising supply of sellers. 3. Prices must come down. Based on strong Health IT market fundamentals, we’re optimistic that the outcomes will be #1 and #2, but we’re closely monitoring the data for early indicators of #3. Only time will tell. Percent of PE Investments that Have Exited by Most Recent Funding Date 0% 5% 10% 15% 20% 25% 30% 35% 40% 45% 2010 2011 2012 2013 2014 2015 2016 2017 Copyright© 2019 Healthcare Growth Partners 6 HEALTH IT MARKET TRENDS 2 HGP keeps close tabs on M&A valuations to see how the market evolves over time. While we can only draw data from deals we observe with disclosed multiples and therefore must be careful to consider bias in any conclusions we draw from this data, we can still get a good sense for how the market values companies within the different subsectors of Health IT. The following table and accompanying box-and-whisker plot show the distributions of revenue multiples in 13 subsectors of Health IT. The sectors were sorted according to median revenue multiple from largest to smallest. We believe it’s important to keep dispersion in mind when assessing valuation data, which is why we include the 25th percentile, 75th percentile, and standard deviation in our summary statistics. While measures of central tendency like the median and mean are certainly indicative of how buyers are valuing assets, the dispersion shows that with higher multiples, we also see higher risk. This becomes especially apparent when we chart the data using a box-and-whisker plot. While telemedicine, population health, and analytics see the highest median revenue multiples, these sectors also see a large amount of variability and positive skew. For instance, while 25% of the observed population health companies received 6.7x revenue or more in sale transactions during the period, another 25% received less than 2.6x revenue at exit. Companies in these hot spaces cannot forget that they still need to show strong operating metrics in order to recognize premium valuation multiples. Of particular note this year, the median revenue multiples in the Telemedicine and Clinical Trial Management sectors have jumped significantly from 5.6x and 4.5x to 7.8x and 6.6x respectively. We attribute these increases partially to continued thesis-driven interest in these sectors, but also note the relatively sparse data available on transactions in these spaces. With fewer than 10 revenue multiples available in these two subsectors, the medians we are able to report are highly susceptible to potential reporting bias and outlier data. Reported 2014 – 1H 2019 Deals with Disclosed Revenue Multiples Deals with Disclosed EBITDA Multiples Revenue Multiple EBITDA Multiple 25th %-tile Median 75th %-tile Mean Std. Deviation Median Telemed 8 2 4.6x 7.8x 10.6x 7.7x 4.2x 18.1x Clinical Trial Mgmt 6 4 2.6x 6.6x 7.6x 5.6x 2.9x 14.1x Population Health 41 10 2.6x 4.3x 6.7x 6.1x 5.9x 14.2x Analytics 18 8 3.0x 4.2x 5.0x 4.5x 2.4x 16.2x Benefits Mgmt 16 2 2.4x 4.1x 6.0x 5.7x 5.7x 17.5x Content 14 2 2.8x 3.8x 6.9x 5.0x 3.0x 11.2x RCM Tech 20 15 2.8x 3.5x 6.1x 4.2x 2.1x 16.0x PM/EMR 34 18 1.7x 3.5x 5.0x 3.6x 2.0x 14.0x Infrastructure Tech 26 18 2.4x 3.4x 5.0x 3.7x 1.9x 10.8x Utilization Mgmt 7 4 0.7x 2.5x 3.2x 2.7x 2.6x 10.4x RCM Services 11 9 1.6x 2.3x 3.5x 2.4x 1.0x 9.6x Consulting 18 9 1.2x 1.8x 2.4x 2.2x 1.4x 9.8x Outsourced Services 17 10 1.2x 1.6x 2.7x 2.0x 1.2x 9.7x HEALTH IT MARKET TRENDS Copyright© 2019 Healthcare Growth Partners 7 2 The box-and-whisker plot graphically displays the Median, 25th Percentile, 75th Percentile, Minimum, and Maximum; where points beyond 1.75 times the Inter-Quartile Range are shown as outliers. The Inter-Quartile Range (blue columns) is the 75th Percentile minus the 25th Percentile and serves to describe the variation in the range of outcomes. Note that point estimates such as the mean or median can often be misleading on their own, as they do not convey the level of variability which can be very high such as in the Telemedicine, Population Health, or Benefits Management sectors. The sectors were sorted according to decreasing median revenue multiple, and show a trend of decreasing IQR as median revenue multiple decreases. Thus, while companies that fall within sectors further to the right on the graph can expect a lower revenue multiple in a transaction, the transaction is also much more predictable. A company that falls within a sector on the left, however, cannot have as strong a confidence in their expected outcome. These observations follow a common theme in investment theory: that with greater potential upside, there is also greater risk and volatility. While the metrics presented here may be used as a guidepost for expected outcomes, the end result often depends on buyer circumstances as much as on seller or market fundamentals, and buyer circumstances tend to be extremely unpredictable. It is not uncommon for the clearing price of a transaction to be significantly higher than the cover bids. This usually occurs when a buyer has unique circumstances that justify a higher price than the rest of the buyer universe. Identifying those buyers and appropriately positioning in relation to them is part of the art of running a successful transaction process. HEALTH IT MARKET TRENDS Copyright© 2019 Healthcare Growth Partners 8 2 Sector Description Representative Deals Telemed (8 deals) Median: 7.8x Std. Dev.: 4.2x Contains a mix of pure telemedicine services and connected device transactions. PillPack (Amazon), Best Doctors (Teladoc), Advance Medical (Teladoc), Healthiest You (Teladoc) Clinical Trial Mgmt (6 deals) Median: 6.6x Std. Dev.: 2.9x Includes traditional CTMS vendors as well as other vendors that deliver value in the clinical trial process. Medidata (Dassault Systemes), Bracket Global (Genstar Capital), Phlexglobal (Vitruvian Partners) Analytics (18 deals) Median: 4.2x Std. Dev.: 2.4x Primarily represents a mix of life sciences and provider analytics, and to a lesser extent, payer analytics. Explorys (IBM), Truven (IBM), Strata (Roper), IMS (Quintiles), MedeAnalytics (Thoma Bravo) Population Health Mgmt (41 deals) Median: 4.3x Std. Dev.: 6.1x Comprised of patient engagement, provider connectivity, and care management technologies. Propeller Health (ResMed), Emmi (Wolters Kluwer), Press Ganey (EQT), Wellcentive (Philips), Phytel (IBM) Benefits Management (16 deals) Median: 4.1x Std. Dev.: 5.7x Includes benefits management and admin software companies serving payers and employers. Connecture (Francisco Partners), HealthX (JMI), Benaissance (WEX), bswift (Aetna), Matrix (Express Scripts) Content (14 deals) Median: 3.8x Std. Dev.: 3.0x Transactions are a mix of online consumer content and provider- oriented clinical content. WebMD (Internet Brands), Quantum Health (Great Hill Partners), Everyday Health (j2 Global) RCM Tech (20 deals) Median: 3.5x Std. Dev.: 2.1x Includes tech-oriented RCM vendors serving hospitals and physicians, and to a lesser extent, payers. InstaMed (JPMorgan), Cotiviti (Verscend), ABILITY (Inovalon), Zirmed (Navicure), Brightree (ResMed) PM/EMR (34 deals) Median: 3.5x Std. Dev.: 2.0x Includes ambulatory, acute, post- acute, alternate site, and departmental EMR/PM systems. athenahealth (Veritas), Kinnser (Mediware), Mediware (TPG), Netsmart (Allscripts/GI), Merge (IBM) Infrastructure Tech (26 deals) Median: 3.4x Std. Dev.: 1.9x Compliance and resource management software generally serving provider organizations. Symplr (Clearlake), Datix (Rothschild), Morrisey (HealthStream), CenTrak (Halma), VendorMate (GHX) Utilization Mgmt (7 deals) Median: 2.5x Std. Dev.: 2.6x Payer-oriented software and services vendors focused on traditional utilization management. New Century (Evolent), HealthHelp (WNS), Alere (Abbott), HSM & CDMI (Magellan) RCM Services (11 deals) Median: 2.3x Std. Dev.: 1.0x Outsourced revenue cycle management services generally serving hospitals and physicians. MedPartners (AMN), Intermedix (R1), Anthelio (Atos), Cardon (MedData), Equian (New Mountain) Consulting (18 deals) Median: 1.8x Std. Dev.: 1.4x Project-based IT consulting and staff augmentation companies generally serving provider organizations. Kinapse (Syneos), Advisory Board (UnitedHealth), HCI Group (Tech Mahindra), CynergisTek (Auxilio) Outsourced Services (17 deals) Median: 1.6x Std. Dev.: 1.2x Includes non-RCM outsourced services primarily serving payers as well as providers. Sedgwick & MedRisk (Carlyle Group), InVentiv (INC Research) Patriot National (Ebix), HealthPlan Holdings (Wipro) The following table provides additional context on the valuation trends within each sector as well as a sample of recent transactions within each. Copyright© 2019 Healthcare Growth Partners 9 HEALTH IT M&A (INCLUDING BUYOUT) 3 HGP has observed a number of tangible and intangible company and transaction characteristics that typically define where a deal falls on the valuation distribution. Growth, profitability, and recurring revenue are the most commonly identified factors used to justify valuation multiples. Not all health IT companies capture premium valuations just because they operate in health IT. However, those companies that offer a combination of growth, address an unmet need, and fit into the vision of healthcare reform are seeing valuations significantly higher than historical patterns of activity. Premium value is also created when a seller fulfills the specific needs of a buyer at a specific point in time. Timing and serendipity are external factors that play a large and sometimes unpredictable role in the creation of value. HEALTH IT REVENUE MULTIPLES DISTRIBUTION Among the many business and market characteristics that drive superior valuations, the following are core components to healthcare IT businesses that have established themselves as outliers: 1 SaaS Architecture and Delivery • Single database enabling robust analytics • Delivery model that creates scale on the cost side, and recurring revenue on the top line 2 Pricing Alignment with ROI • Pricing methodology that aligns with customer ROI – the vendor wins when the customer wins 3 Scalable Distribution Model • Efficient distribution model (eg, customer acquisition cost is less than total customer value) 4 Data Rights • Contract structures that contain explicit rights to data 5 Reform-Centric Value Proposition • Addresses healthcare structural flaws rather than take advantage of them in an effort to deliver sustainable change in a policy-based environment 6 Pricing Alignment with ROI • Market leadership (or opportunity to lead) creates favorable supply/demand characteristics at exit • Large and growing market opportunity with strong financial characteristics which include recurring revenue and growth, inherent scalability if not profitability, strong management, and size 0% 10% 20% 30% 40% 50% 0-1X 1-2X 2-3X 3-5X 5-7X 7-10X >10X Software Services HEALTH IT M&A (INCLUDING BUYOUT) Copyright© 2019 Healthcare Growth Partners 10 3 The following chart summarizes annual M&A activity since 2014, according to the Healthcare Growth Partners database. While deal valuation has remained healthy, the volume of Health IT M&A activity seems to have leveled off since 2016, and 2019 is on-pace to continue that trend. After 372 transactions in 2017 and 362 transactions in 2018, we have seen a total of 187 transactions so far in 2019 which equates to 374 when annualized. Total transaction value tends to be much more volatile than deal volume since it only takes one or two very large deals to skew the data and the majority of transactions do not disclose value, thus HGP looks toward transaction volume as a better indicator of deal activity. Generally, sub $100 million companies have three valuation inflection points: proof-of-concept, growth scalability, and mature scalability. 0 5 10 15 20 25 30 0 2 4 6 8 10 12 14 16 Stage of Growth Valuation Proof of Concept Growth Scalability Mature Scalability Revenue $20mm Stage of Growth Chart (for Companies
Healthcare Growth Partners is pleased to release our Semi-Annual Health IT Market Review.
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