Jul 14, 2018 | Techcelerate Ventures |
Health IT & Health Information Services Semi-Annual Market Review January 2018 www.hgp.com Copyright 2018 Healthcare Growth Partners Health IT & Health Information Services: Market Review January 2018 Table of Contents Health IT Executive Summary 3 Health IT Market Trends 6 HGP 2017 Corporate M&A Survey 9 HIT M&A (Including Buyout) 16 Health IT Capital Raises (Non-Buyout) 21 Healthcare Capital Markets 22 Macroeconomics 26 Health IT Headlines 28 About Healthcare Growth Partners 35 HGP Transaction Experience 36 Appendix 39 1 2 3 4 5 6 7 8 9 10 11 Health IT Executive Summary Market Disorientation 2017 was a blockbuster year for Health IT. Despite uncertainty surrounding a failed effort to repeal the ACA and the resignation of HHS Secretary Tom Price, the HGP Health IT index gained 25%, Health IT Investment activity shattered prior records, and Health IT M&A activity and valuations hover at all-time highs. Global and U.S. Health IT investment are up 849% and 583% since 2011, respectively. The S&P 500 gained nearly 20%, marking the 9th year of a bull market. The U.S. unemployment rate is at a 17 year low at 4.1%, and interest rates, while trending up, remain near all- time lows, providing easy access to capital. All of this occurred even before lower corporate and individual tax rates kicked in on January 1. The Health IT stats are staggeringly good. But are they scary good? In this HGP HIT Market Review, we uncover the findings from our bi-annual Health IT M&A Survey. Our 13 question survey covers a range of topics, including whether the Health IT market is in a bubble, to which survey respondents reported the following in comparison to the same question in 2015: There is certainly an abundance of growth capital flooding into the Health IT Market we've seen nearly $34 billion globally and $26.2 billion in the U.S. since 2013. Compared to the prior 5-years, this represents a 608% and 387% increase in capital. With such a swing, one can speculate that the market is either correcting for historical underfunding or significantly overfunded. To determine which, we took a look at the numbers. Copyright 2018 Healthcare Growth Partners 3 1 Valuation Annual Revenue ($ mm) U.S. Health IT Investment Pre- Money Post- Money Exit (2x return) Starting Exit Net New 2013 2,849 4,274 6,268 12,536 1,068 3,134 2,066 2014 4,554 6,832 10,020 20,041 1,708 5,010 3,302 2015 6,173 9,260 13,582 27,163 2,315 6,791 4,476 2016 5,564 8,347 12,243 24,485 2,087 6,121 4,034 2017 7,102 10,653 15,625 31,250 2,663 7,812 5,149 5 Year Average 5,249 7,873 11,548 23,095 1,968 5,774 3,805 Post-money value is calculated by assuming investors are acquiring 40% ownership on average and that approximately 70% of all invested capital is primary capital, while 30% is used to cash out existing shareholders (secondary capital). We assume investors are targeting a 2.0x return on their investments, valuing the enterprise using a 4.0x Enterprise Value / Revenue multiple Based on our assumptions, revenue must grow 2.9x for investors to realize a target 2.0x return. Is Health IT in a bubble? Survey Year Yes No Maybe 2017 36% 18% 46% 2015 29% 31% 40% U.S. Health IT investment amounts are drawn from private equity growth investment transactions seen by HGP. These numbers do not include buyout transactions or public offerings which both typically operate under different returns models. Nor does this analysis attempt to solve for any missing data from unreported investments. The analysis is dependent on certain assumptions for which there is no available data. Health IT Executive Summary Market Disorientation, cont'd On average, $5.2 billion was invested in the U.S. Health IT market in each of the last 5 years. We assume that those investors are targeting a 2x return, which is consistent with median private equity returns of about 14% over a typical hold period of 5.5 years. The target 2x return means they need to create about $11.5 billion in incremental value over and above the new capital invested. Assuming a relatively conservative 4x revenue multiple, this amount of investment implies that approximately $3.8 billion of new revenue needs to be generated annually to support the target value creation. That new revenue needs to come from one of two places, either from shifting cost that is captured elsewhere in the system, or directly through additional expense for the end- consumer (i.e., the American population). We optimistically assume this revenue is the result of efficiencies created from new technology investment that will ultimately benefit the healthcare system on the whole. Translated to healthcare costs, the $3.8 billion in new annual revenue represents an increased cost of $11.68 per person every year ($0.97 pmpm) across the U.S. population. The companies that received this investment need to save customers at least this much in order to justify their contribution to the healthcare economy. Over the last decade, electronic medical record (EMR) adoption and its byproducts have significantly expanded the addressable market for Health IT. We estimate the U.S. Health IT market is about a $115 billion annual revenue market. Based on our returns assumptions involving investment over the past 5 years, the market would need to achieve an annual growth of 3.3% to support the 5-year rate of investment and an annual growth rate of 4.5% to support 2017 investment. However, these growth rates do not also account for companies who are financing growth from their balance sheets, public companies, or buyout transactions. Taken together, we estimate that the companies that receive institutional funding in our database represent between 25-50% of the overall Health IT market. This would imply that the overall market needs to grow 2 4x the rate of growth implied by our database analysis. Our analysis concludes that the overall Health IT market would need to grow at an annual rate of 6.6% to 13.2% based on the 5-year average or 9.0% to 18.0% based on 2017 to support the current rate of investment, as outlined in the following table. While the growth rate suggested by the level of investment in 2017 is high, our supply-side analysis is not inconsistent with market studies using a bottoms-up demand analysis. We believe that the Health IT market can ultimately sustain this level of investment as market participants begin to capitalize on the critical mass of EMR adoption that we have finally reached, as well as a number of other favorable market forces, including value-based care, precision medicine, and telehealth. Copyright 2018 Healthcare Growth Partners 4 1 0% 20% 40% 60% 80% 100% 2008 2009 2010 2011 2012 2013 2014 2015 EHR Adoption Physicians (Any EHR) Hospitals (Basic EHR) Implied Expected Growth Rates Investment Period U.S. Investment ($mm) Implied Revenue Growth to Support 2x Return Implied Revenue Growth as % of Health IT Market Investment Share of total Health IT Market Implied Health IT Market Growth to Support Investment 5-yr Average $5,249 $3,805 3.3% 25-50% 6.6% - 13.2% 2017 $7,102 $5,149 4.5% 25-50% 9.0% - 18.0% Health IT Executive Summary Market Disorientation, cont'd While the numbers say one thing, the words tell another story. The Health IT industry is ripe with buzzwords, both from a technology and market perspective. Like it or not, buzzwords are as much reality as perception among the investment community, yet buzzwords have a rapidly depleting value - today's buzzword becomes tomorrow's standard and is no longer a differentiator, and the cycle repeats itself. However, intrinsic and economic value is created by turning that buzzword into a marketable product that generates revenue by delivering a strong customer value proposition. The selling point is not the technology itself, but the value that it delivers to customers. The overuse of buzzwords on its own is not necessarily an indicator of bubble activity, however the buzzwords of the day are indicative of changing attitudes in the market. The market gets disoriented and bubbles form when companies focus too much on messaging to investors to the neglect of customers. There is no better example of this than the dot com era, when companies got carried away by investors' appetite for buzzwords at the expense of creating true value. Examples of recent buzzwords in the Health IT segment, according to an annual vote managed by HIStalk, include Cloud, mHealth, Meaningful Use, Big Data, and Population Health. Over the past year, however, companies have quickly pivoted to two new buzzwords - Blockchain and Artificial Intelligence (AI). One risk of the significant increase in Health IT investment is that it may reorient the market away from customers and toward investors, and history shows that this is indicative of bubble behavior. There is no doubt that blockchain and AI are transformational innovations that will likely be standards of the future, but healthcare is an industry that is less enamored by technology than the value that technology can deliver. Customers don't buy blockchain or AI, they buy products that utilize blockchain or AI, and the use of these technologies only matters to the customer if the product has a better value proposition (increases revenue or reduces cost) than alternatives. We believe long-term value creation is a byproduct of serving customers, while investor-centric buzzwords push companies to operate at the leading edge of innovation. So long as market participants keep this balance in mind, the market should be able to sustain the level of growth implied by recent investment activity. Copyright 2018 Healthcare Growth Partners 5 1 Most Overused Buzzword 2013 2014 2015 2016 2017 Customer- Centric vs. Investor- Centric ACO Pop. Health Management Patient Engagement Pop. Health Value-based Care Interoperability Meaningful Use Patient- Centered Patient Engagement Pop. Health Meaningful Use Big Data Analytics/ Big Data Interoperability Interoperability Big Data Cloud Optimization Big Data Patient Engagement Cloud Cloud Big Data Health IT Market Trends HGP Analysis of HIT Sector Valuations 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, 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 sees the highest median revenue multiples, it also sees a large amount of variability and positive skew. While 25% of the observed telemedicine oriented companies received 9.3x revenue or more in sale transactions, another 25% received less than 2.8x 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 from buyers. The box-and-whisker plot on page 7 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 Population Health or Benefits Management. Copyright 2018 Healthcare Growth Partners 6 2 Reported 2010 2017 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 4 2.8x 4.8x 9.3x 6.0x 4.0x 12.0x Benefits Mgmt 15 4 2.3x 4.0x 6.8x 5.9x 5.9x 15.0x Analytics 22 10 2.6x 3.9x 4.4x 4.3x 3.4x 13.9x Population Health 39 12 3.0x 3.9x 6.9x 6.3x 6.2x 11.5x Content 26 9 2.0x 3.8x 6.0x 4.4x 2.9x 12.2x RCM Tech 35 24 2.2x 3.0x 4.1x 3.6x 2.2x 15.5x Infrastructure Tech 46 27 1.7x 2.7x 3.6x 2.8x 1.6x 10.0x PM/EMR 68 42 1.4x 2.3x 4.1x 2.8x 2.0x 13.0x Utilization Mgmt 9 5 0.8x 1.9x 2.9x 2.4x 2.4x 10.0x Clinical Trial Mgmt 9 5 1.5x 1.9x 2.6x 1.9x 0.7x 10.0x RCM Services 18 13 1.0x 1.7x 2.7x 1.9x 1.1x 10.0x Consulting 18 12 1.2x 1.6x 2.0x 1.8x 1.0x 10.4x Outsourced Services 23 15 1.2x 1.4x 2.2x 1.9x 1.6x 9.0x Health IT Market Trends HGP Analysis of HIT Sector Valuations 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. The table on page 8 provides additional context on the valuation trends within each sector as well as a sample of recent transactions within each. 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. Copyright 2018 Healthcare Growth Partners 7 2 Health IT Market Trends HGP Analysis of HIT Sector Valuations Copyright 2018 Healthcare Growth Partners 8 2 Sector Description Representative Deals Telemed (8 deals) Median: 4.8X Std. Dev.: 4.0X Contains a mix of pure telemedicine services and connected device transactions. Best Doctors (Teladoc), Healthiest You (Teladoc), Cardiocom (Medtronic) Benefits Management (15 deals) Median: 4.0X Std. Dev.: 5.9X Includes benefits management and admin software companies serving payers and employers. HealthX (JMI), Benaissance (WEX), bswift (Aetna), Health Advocate (West), Extend (Towers Watson) Analytics (22 deals) Median: 3.9X Std. Dev.: 3.4X Primarily represents a mix of life sciences and provider analytics, and to a lesser extent, payer analytics. IMS (Quintiles), Truven (IBM), MedeAnalytics (Thoma Bravo), DRG (Piramal), Humedica (Optum) Population Health (39 deals) Median: 3.9X Std. Dev.: 6.2X Comprised of patient engagement, provider connectivity, and care management technologies. Emmi (Wolters Kluwer), Press Ganey (EQT), Wellcentive (Philips), MedHOK (Hearst), Phytel (IBM) Content (26 deals) Median: 3.8X Std. Dev.: 2.9X Transactions are a mix of online consumer content and provider- oriented clinical content. Everyday Health (j2 Global), Milliman (Hearst), Health Language (Wolters Kluwer), Healthgrades (Vestar) RCM Tech (35 deals) Median: 3.0X Std. Dev.: 2.2X Includes tech-oriented RCM vendors serving hospitals and physicians, and to a lesser extent, payers. Zirmed (Navicure), Brightree (ResMed), Passport (Experian), MedAssets (Pamplona), TriZetto (Cognizant) Infrastructure Tech (46 deals) Median: 2.7X Std. Dev.: 1.6X Compliance and resource management software generally serving provider organizations. Morrisey (HealthStream), CenTrak (Halma), VendorMate (GHX), Concerro (API), Lawson (Infor) PM/EMR (68 deals) Median: 2.3X Std. Dev.: 2.0X Includes ambulatory, acute, post- acute, alternate site, and departmental EMR/PM systems. Mediware (TPG), Netsmart (Allscripts/GI), Healthland (CPSI), HealthFusion (QSI), Merge (IBM) Utilization Mgmt (9 deals) Median: 1.9X Std. Dev.: 2.4X Payer-oriented software and services vendors focused on traditional utilization management. HealthHelp (WNS), Alere (Abbott), HSM & CDMI (Magellan) Clinical Trial Mgmt (9 deals) Median: 1.9X Std. Dev.: 0.7X Includes traditional CTMS vendors as well as other vendors that deliver value in the clinical trial process. NOTOCORD (Instem), Phlexglobal (Bridgepoint), BioClinica (JLL), eResearch (Genstar) RCM Services (18 deals) Median: 1.7X Std. Dev.: 1.1X Outsourced revenue cycle management services generally serving hospitals and physicians. Anthelio (Atos), Cardon (MedData), Equian (New Mountain), MedSynergies (Unitedhealth) Consulting (15 deals) Median: 1.6X Std. Dev.: 1.0X Project-based IT consulting and staff augmentation companies generally serving provider organizations. HCI Group (Tech Mahindra), CynergisTek (Auxilio), Encore (Quintiles), Vonlay (Huron) Outsourced Services (23 deals) Median: 1.4X Std. Dev.: 1.6X Includes non-RCM outsourced services primarily serving payers as well as providers. Connextions (TeleTech), Edco (ExamWorks), Patriot National (Ebix), HealthPlan Holdings (Wipro) Copyright 2018 Healthcare Growth Partners 9 HGP 2017 Corporate Survey Results and Commentary Q1: What is your job title? To assess the general sentiment on the status and future of Health IT, we surveyed C-level and business development professionals at 500 companies across the Health IT sector and broke down the findings in this edition of our report. Out of the 500 companies surveyed, we gathered responses from 85 distinct companies across the Health IT landscape. HGP surveyed a mix of C-level executives, M&A professionals, and private equity professionals. It is important to note that our survey most likely has selection bias, which we cannot fully assess given the confidential nature of the survey response data. Anyone likely to respond to a survey about M&A in Health IT is likely to have an interest or pursuit in M&A. Furthermore, we are more likely to generate responses from individuals who are familiar with HGP, and HGP generally interacts with companies interested in Health IT transactions. It is safe to conclude that our survey findings have a bias toward respondents who are more interested in Health IT investments and acquisition than not. However, we believe that the data set is broad enough to be meaningful and deliver insights, particularly in mapping out the priorities and criteria of active buyers. Q2: How large is the company you represent? Respondents represent a mix of large and small companies. The largest share involves companies with over $100mm in revenue, representing 40% of responses. When selecting smaller companies to include in the survey, which includes the 49% of companies surveyed with under $50mm revenue, HGP aimed to include companies with the capital wherewithal to execute M&A transactions, such as private-equity backed platforms. 3 Corp Dev/M&A Professional 40% CFO 9% CEO 26% Private Equity Professional 26% 23% 26% 11% 40% 10X Software Services Health IT M&A (Including Buyout) Health IT M&A Activity The following chart summarizes annual M&A activity since 2008, according to the Healthcare Growth Partners database. After a record 373 transactions in 2016, health IT M&A activity continued at a healthy pace of 366 transactions in 2017. 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. 17 4 Copyright 2018 Healthcare Growth Partners 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
Global and U.S. Health IT investment are up 849% and 583% since 2011,
respectively. The S&P 500 gained nearly 20%, marking the 9th year of a bull market.
Tech Investment and Growth Advisory for Series A in the UK, operating in £150k to £5m investment market, working with #SaaS #FinTech #HealthTech #MarketPlaces and #PropTech companies.