Jul 14, 2018 | Techcelerate Ventures |
Health IT & Health Information Services Semi-Annual Market Review July 2018 www.hgp.com Copyright 2018 Healthcare Growth Partners Health IT & Health Information Services: Market Review July 2018 Table of Contents Health IT Executive Summary 3 Health IT Market Trends 9 HIT M&A (Including Buyout) 12 Health IT Capital Raises (Non-Buyout) 17 Healthcare Capital Markets 18 Macroeconomics 22 Health IT Headlines 24 About Healthcare Growth Partners 27 HGP Transaction Experience 28 Appendix 31 1 2 3 4 5 6 7 8 9 10 Software Infrastructure Expanding Care Continuum Patient Empowerment Personalized Medicine Advanced CDS Genetic Medicine Drug Discovery Remote Monitoring Benefits Mgmt Patient Engagement Marketing Health & Fitness Care Management Population Health Connectivity Telemed Infrastructure Tech Security/Compliance PM/EMR/HIS RCM/ERP Health IT Executive Summary Revisiting the HGP Health IT Market Evolution Four years ago, HGP introduced the HGP Health IT Market Evolution. The Health IT Market Evolution classifies the health IT market across four phases of innovation: Software Infrastructure, Expanding Care Continuum, Patient Empowerment, and Personalized Medicine. Driven by an expanding infrastructure of mobility and data and propelled by value-based payment reform, the evolution is likely to result in a decentralized and personalized care delivery model that will ultimately cater to a discretionary and informed consumer patient. Despite the $28.5B of investment in US Health IT since 2014, health IT's broad-based impact on care delivery, costs, and outcomes is still somewhat muted. We believe the value in health IT for patients is accruing, with policy and regulation being the key determinants for the timing and force with which this value will ultimately be unlocked at scale. US Health IT investment in 1H 2018 alone was $4.8B across 141 transactions, annualizing to a 32% increase over 2017's $7.4B investment. The following exhibit outlines the phases of the market evolution. Each phase lays the groundwork for the next, with care decentralizing as the evolution progresses. Theoretically, care decentralization and patient empowerment are two key elements to reduce cost, while patient and provider communications and personalized medicine improve the quality of care. Timing investment along the Health IT Market Evolution is perhaps the most valuable but most difficult consideration when making investments in health IT, thus the importance of this construct. Copyright 2018 Healthcare Growth Partners 3 1 Volume-to-Value Reimbursement Transition Software-Enabled Data Infrastructure Consumer-Driven Mobile Infrastructure Decentralization ofCare Health IT Executive Summary Revisiting the HGP Health IT Market Evolution The following outlines the conceptual and actual results within the framework of the Health IT Market Evolution, with the bottom table reporting M&A and Investment activity for the period 2017 1H 2018. As expected and is true in all industries, Investment activity occurs further along the innovation path and is a leading indicator of M&A activity. The graphic on Page 5 outlines M&A/Buyout and Investment transaction highlights across the evolution during 1H 2018. Copyright 2018 Healthcare Growth Partners 4 1 Deal VolumeHealth IT Market Evolution M&A Investment Innovation 0 50 100 150 200 250 Software Infrastructure Expanding Care Continuum Patient Empowerment Personalized Medicine Deal Volume (2017 1H 2018)Evolution Phase M&A Investment M&A Trendline Investment Trendline Health IT Executive Summary Revisiting the HGP Health IT Market Evolution Software Infrastructure Expanding Care Continuum Patient Empowerment Personalized Medicine Copyright 2018 Healthcare Growth Partners 5 1 Volume-to-Value Reimbursement Transition Software-Enabled Data Infrastructure Consumer-Driven Mobile Infrastructure Decentralization ofCareDecentralization ofCare1H 2018M&A/Buyout Highlights1H 2018Investment HighlightsEnterprise IS DATAVANT Health IT Executive Summary Revisiting the HGP Health IT Market Evolution Drilling down further, HGP defines the four stages of the Health IT Market Evolution using the same parameters as 2014, which in itself is indicative of how little the market has shifted in the last four years despite record-setting investment. Copyright 2018 Healthcare Growth Partners 6 1 Stage Description Representative Subsectors 1. Software Infrastructure Driven as much by HITECH mandates and regulatory reform as market forces, software infrastructure has now penetrated the majority of the clinical and revenue cycle landscape. As a proxy, physician and hospital EMR adoption is estimated to be over 90 percent. However, next generation and replacement technologies can be strong opportunities for investors to supplant obsolete technology. This infrastructure facilitates the capture and sharing of patient data, setting the stage for the second phase of the Market Evolution. Provider: Infrastructure technology (ERP, compliance, etc), IT-enabled consulting and outsourced services, PM/EMR, RCM Tech and Services, Supply Chain Payer/Employer: Utilization Management, Infrastructure Technology Life Sciences: Clinical Trial Management, IT-enabled consulting, Supply Chain 2. Expanding Care Continuum Motivated in large part by ACA volume-to-value reimbursement programs and the ability to layer data and mobility on the newly formed software infrastructure, the care continuum evolution reflects the beginning of a prolonged cycle of risk sharing and decentralizing care, which includes participation from all major constituents (providers, payers/employers, and life sciences). Provider: Analytics, Care Management, Content, Education, Integration, Pop Health (Chronic), Provider Communications, Telemed Payer/Employer: Analytics, Care Management, Content, Integration, Pop Health (Chronic), Telemed Life Sciences: Analytics 3. Patient Empowerment As risk distributes across stakeholders; providers, payers, and, to some extent, pharmaceutical and device companies must all engage patients to manage value-based incentives. The alignment of interests to engage the patient may result in a transformational shift of power and responsibility to the patient. For now, patients are faced with the conundrum of rising costs, greater choice, and more responsibility but lack the information transparency to make informed decisions. As information democratizes, the empowered consumer patient will dramatically alter the healthcare landscape. Provider: Marketing, Patient Communications, Population Health (Well), Care Communities Payer/Employer: Benefits Management, Patient Communications, Marketing, Population Health (Well), Fitness Life Sciences: Marketing, Patient Communications, Care Communities 4. Personalized Medicine As genetic analytics becomes more dynamic and cost-effective and data-driven clinical decision support capabilities become more integrated with the delivery of care, the end-game is for care to be personalized at both the population and the individualized level. The vision is a holistic and longitudinal perspective of a patient, which includes genetic predispositions, personalized medication response, diet, lifestyle, environment, and health. Provider: Decision Support, Genomics Payer/Employer: Decision Support, Genomics Life Sciences: Decision Support, Genomics, Drug Discovery Health IT Executive Summary Revisiting the HGP Health IT Market Evolution In our January report, we extrapolated investment data to draw the conclusion that the US health IT market must grow at a 9.0% to 18.0% annual rate to support the current level of investment. While the health IT market growth rate suggested by the level of investment in 2017 is high, market research using a bottoms-up, demand analysis produces similar estimates. We currently estimate US health IT to be an approximately $115 billion market. With US healthcare totaling $3.3 trillion, this implies health IT spend is approximately 3.5% of overall healthcare spend. Our 3.5% spend estimate is consistent with that estimated by Deloitte and in-line with the market average for multiple industries. At 3.5% of revenue, IT spend in healthcare is slightly above the average for all industries, but approximately half that of Banking & Securities, the most commonly cited comparative benchmark. Assuming the health IT market is growing at a 15% annual rate and healthcare is growing at a 4% annual rate, it will take approximately 7 years for the health IT market to reach 7.0% of healthcare revenue. Perhaps this will be a time when healthcare and health IT reach equilibrium and revert to a market growth rate, however, we believe IT spend could be an even larger share of total healthcare spend given the significant role health IT can play in health management as outlined in the Health IT Market Evolution. As important as the amount of IT budgets is where the budget is allocated. To date, the largest share of IT budgets at healthcare organizations has been allocated toward Infrastructure Technology. Hospitals and Physicians still spend the majority of their time switching from EHR vendor to EHR vendor searching for the basic infrastructure of electronic medical records, billing and collections, and practice management preventing them from being able to focus on individualizing care. Given this, it makes sense that M&A and Investment continue to have a strong orientation toward Infrastructure Technology. Put another way, the amount of IT spend in healthcare is not inconsistent with other markets, it's the fact that the spend has historically been directed toward lagging technologies that have a lower impact on the cost and quality of care. Copyright 2018 Healthcare Growth Partners 7 1 Source: Source: Deloitte 2016-17 Global CIO Survey, N=747 3.28% Avg for all industries 1.51% 1.95% 2.04% 2.50% 3.49% 3.62% 3.73% 4.39% 5.77% 5.82% 7.16% Construction Manufacturing Consumer Business & Retail Energy & Resources Healthcare Services Insurance Technology & Telecom Travel, Media and Hospitality Education and Non-Profits Business & Professional Services Banking & Securities IT Budget as a % of Revenue Health IT Executive Summary Revisiting the HGP Health IT Market Evolution In time, IT budgets will also track along the market evolution path, which will drive up adoption of technologies that expand the care continuum, empower patients, and personalize care. Of course, this is already happening to some extent, particularly as regulatory incentives such as MACRA and MIPS drive adoption, but we remain in the early innings of leveraging infrastructure technology to create actionable data to engage patients, inform clinicians, improve outcomes, and reduce the cost of care. EMR penetration inflected only in recent years to include the majority of healthcare providers, and it will take time to cleanse, connect, and analyze that data into meaningful and actionable intelligence. Health IT alone is not healthcare, health IT makes healthcare better. Meaningful adoption of health IT will ultimately dictate the pace at which healthcare travels along the evolution path, and, in today's environment, regulatory and policy incentives are as much the driver of adoption as market forces. However, as health information democratizes through the adoption of health IT, regulatory forces will ultimately succumb to market forces once the patient demands a higher standard of care. While the last four years demonstrated progress across the landscape of Health IT investment, that progress has only been realized within certain segments or pockets of healthcare delivery. As innovation advances, investments accrue, and adoption inflects along the innovation path, we can only hope that when we revisit this topic in four years that the returns experienced by investors are equaled or even surpassed by those experienced by patients. Copyright 2018 Healthcare Growth Partners 8 1 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, benefits management, 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 analytics oriented companies received 9.0x revenue or more in sale transactions during the period, another 25% received less than 2.9x 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. Copyright 2018 Healthcare Growth Partners 9 2 Reported 2013 1H 2018 Deals with Disclosed Revenue Multiples Deals with Disclosed EBITDA Multiples Revenue Multiple EBITDA Multiple 25th %-tile Median 75th %-tile Mean Std. Deviation Median Telemed 7 2 4.0x 5.1x 10.0x 6.6x 4.1x 18.1x Benefits Mgmt 33 8 3.3x 4.8x 7.0x 7.0x 6.5x 13.4x Analytics 11 1 2.9x 4.2x 9.0x 6.9x 6.6x 20.0x Population Health 18 8 3.0x 4.2x 5.0x 5.0x 3.7x 16.2x Content 14 3 2.8x 4.2x 8.5x 5.4x 3.1x 14.3x RCM Tech 31 18 1.6x 3.9x 5.1x 3.7x 2.2x 14.0x Infrastructure Tech 18 15 2.7x 3.4x 5.4x 4.1x 2.2x 16.0x PM/EMR 25 18 2.5x 3.2x 5.0x 3.7x 1.9x 10.5x Utilization Mgmt 6 3 0.8x 2.5x 4.5x 3.1x 2.7x 10.0x Clinical Trial Mgmt 13 11 1.6x 2.3x 3.0x 2.3x 1.0x 9.6x RCM Services 5 2 1.5x 1.9x 2.7x 2.0x 0.7x 10.0x Consulting 15 9 1.2x 1.6x 2.1x 1.9x 1.1x 9.8x Outsourced Services 15 9 1.2x 1.4x 2.6x 1.9x 1.2x 9.3x Health IT Market Trends HGP Analysis of HIT Sector Valuations 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 Analytics or Benefits Management. 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 11 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 10 2 Health IT Market Trends HGP Analysis of HIT Sector Valuations Copyright 2018 Healthcare Growth Partners 11 2 Sector Description Representative Deals Telemed (7 deals) Median: 5.1x Std. Dev.: 4.1x Contains a mix of pure telemedicine services and connected device transactions. Best Doctors (Teladoc), Healthiest You (Teladoc), Cardiocom (Medtronic) Benefits Management (33 deals) Median: 4.8x Std. Dev.: 6.5x Includes benefits management and admin software companies serving payers and employers. HealthX (JMI), Benaissance (WEX), bswift (Aetna), Health Advocate (West), Extend (Towers Watson) Analytics (11 deals) Median: 4.2x Std. Dev.: 6.6x 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 Mgmt (18 deals) Median: 4.2x Std. Dev.: 3.7x Comprised of patient engagement, provider connectivity, and care management technologies. Emmi (Wolters Kluwer), Press Ganey (EQT), Wellcentive (Philips), MedHOK (Hearst), Phytel (IBM) Content (14 deals) Median: 4.2x Std. Dev.: 3.1x 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 (31 deals) Median: 3.9x Std. Dev.: 2.2x Includes tech-oriented RCM vendors serving hospitals and physicians, and to a lesser extent, payers. ABILITY (Inovalon), Zirmed (Navicure), Brightree (ResMed), Passport (Experian), MedAssets (Pamplona), TriZetto (Cognizant) Infrastructure Tech (18 deals) Median: 3.4x Std. Dev.: 2.2x Compliance and resource management software generally serving provider organizations. Morrisey (HealthStream), CenTrak (Halma), VendorMate (GHX), Concerro (API), Lawson (Infor) PM/EMR (25 deals) Median: 3.2x Std. Dev.: 1.9x 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 (6 deals) Median: 2.5x Std. Dev.: 2.7x Payer-oriented software and services vendors focused on traditional utilization management. HealthHelp (WNS), Alere (Abbott), HSM & CDMI (Magellan) Clinical Trial Mgmt (13 deals) Median: 2.3x Std. Dev.: 1.0x 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 (5 deals) Median: 1.9x Std. Dev.: 0.7x 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.: 1.1x Project-based IT consulting and staff augmentation companies generally serving provider organizations. HCI Group (Tech Mahindra), CynergisTek (Auxilio), Encore (Quintiles), Vonlay (Huron) Outsourced Services (15 deals) Median: 1.4x Std. Dev.: 1.2x Includes non-RCM outsourced services primarily serving payers as well as providers. Connextions (TeleTech), Edco (ExamWorks), Patriot National (Ebix), HealthPlan Holdings (Wipro) Health IT M&A (Including Buyout) Overview 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: 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 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 Pricing Alignment with ROI Pricing methodology that aligns with customer ROI the vendor wins when the customer wins General Considerations Market leadership (or opportunity to lead) = favorable supply/demand characteristics at exit Large and growing market opportunity with strong financial characteristics = recurring revenue and growth, inherent scalability if not profitability, strong management, and size Scalable Distribution Model Efficient distribution model (eg, customer acquisition cost < customer value) Data Rights Contract structures that contain explicit rights to data 12 3 1 2 3 5 6 4 Copyright 2018 Healthcare Growth Partners 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) Health IT M&A Activity The following chart summarizes annual M&A activity since 2013, according to the Healthcare Growth Partners database. Health IT M&A activity has continued to grow at a modest rate since 2014, and 2018 has been no exception to that rule. After 371 transactions in 2017, health IT M&A activity is set to match or exceed that volume, closing 186 transactions in 1H-2018. 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. 13 3 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
Four years ago, HGP introduced the HGP Health IT Market Evolution. The Health IT Market Evolution classifies the health IT market across four phases of innovation: Software Infrastructure, Expanding Care Continuum, Patient Empowerment, and Personalized Medicine. Driven by an expanding infrastructure of mobility and data and propelled by value-based payment reform, the evolution is likely to result in a decentralized and personalized care delivery model that will ultimately cater to a discretionary and informed consumer patient.
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.