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 <$1mm Revenue $5-10mm Revenue >$20mm Stage of Growth Chart (for Companies <$100mm in Revenue) $5,093 $35,736 $14,014 $53,916 $22,533 $18,475 $359 $2,520 $1,084 $747 $721 $105 192 274 285 297 301 150 40 47 51 77 70 36 0 50 100 150 200 250 300 350 2013 2014 2015 2016 2017 1H-2018 $- $5,000 $10,000 $15,000 $20,000 $25,000 $30,000 $35,000 $40,000 $45,000 $50,000 $55,000 $60,000 Deal VolumeDeal Value ($mm)Deal Value - US Deal Value - Non-US Deal Volume - US Deal Volume - Non-US Health IT M&A (Including Buyout) Health IT M&A Valuation Proof-of-concept is value created when a company shows that its product can be successfully sold and deployed in a commercial setting. The proof-of-concept inflection point is generally of more importance to venture investors than it is to acquirers, as companies at this stage tend to be too immature to realize significant value through a sale. Growth scalability occurs when an earlier stage company begins to show profitability or at least scale at high levels of growth, although the organization is still small and lean. Mature scalability takes place after a company has matured to a level where it takes on real infrastructure, and the company begins to show strong profitability after building out a mature corporate organization. Although the size of a company at each inflection point can vary significantly based on a company's product or services and sector, the general rule of thumb in health IT is that proof of concept occurs at revenue of less than $1 million, growth scalability occurs in the $5 to $10 million revenue range, and mature scalability occurs starting in the $20 million revenue range. 14 3 Copyright 2018 Healthcare Growth Partners HIT Software Companies HIT Services Companies Revenue Multiple EBITDA Multiple Transaction Value Revenue Multiple EBITDA Multiple Transaction Value All Transactions # of Transactions 160 75 162 51 32 51 Median 3.9x 14.0x $ 110.99 1.8x 9.7x $ 95.00 Mean 5.0x 15.3x $ 466.39 2.1x 10.6x $ 516.81 <$30mm Transactions # of Transactions 49 14 44 14 8 14 Median 3.0x 8.3x $ 9.08 1.2x 9.0x $ 12.50 Mean 4.8x 10.9x $ 11.27 1.4x 9.2x $ 12.57 $30-100mm Transactions # of Transactions 33 13 33 12 7 12 Median 3.8x 10.0x $ 48.00 1.7x 8.0x $ 66.50 Mean 5.6x 12.5x $ 52.02 1.8x 7.8x $ 60.47 $100-500mm Transactions # of Transactions 54 27 59 17 11 17 Median 4.4x 15.0x $ 195.00 2.1x 10.0x $ 247.30 Mean 5.0x 17.5x $ 222.98 2.9x 11.0x $ 297.32 $500mm-$1B Transactions # of Transactions 11 9 13 4 2 4 Median 4.7x 16.2x $ 725.00 1.8x 11.5x $ 606.60 Mean 5.1x 16.2x $ 698.31 1.9x 11.5x $ 619.55 >$1B Transactions # of Transactions 13 12 13 4 4 4 Median 3.8x 17.5x $ 2,428.56 2.5x 17.4x $ 4,193.29 Mean 4.5x 17.9x $ 3,931.43 2.6x 16.9x $ 4,480.73 Health IT M&A (Including Buyout) Health IT M&A Valuation, continued Continuing the analysis on the prior page, HGP evaluated the distribution of transaction size by target enterprise value. HIT Software valuations experience a nice inflection above $30mm in value, which steadily climbs until approximately the $1B valuation mark. HIT Services multiples experience a similar inflection at $30mm, and a second inflection at $100mm especially with higher percentile transactions. The second inflection is in part due to a private equity universe that has expanded leverage capacity for larger transactions, which in turn drives up valuation multiples. In the first half of 2018, Healthcare Growth Partners monitored 186 health IT and related services M&A transactions, compared to 371 transactions in 2017. In terms of aggregate deal size, $18.5 billion in transaction value has been announced in the first half of 2018, already nearing the $23 billion of total transaction value reported in all of 2017. The $54.6 billion number in 2016 was skewed by several large transactions, including the $9 billion sale ($4.9 billion equity) of Alere to Abbot Labs, the $2.6 billion sale of Truven to IBM, and the $13.5 billion ($8.8 billion equity) acquisition of IMS by Quintiles. The median revenue multiple in the first half of 2018 was 4.9x for HIT Software, a strong increase from 3.7x in 2017, and 2.0x for Health IT Services, on par for trends from 2017. It is worth noting that the half-year of data for 2018 does mean these statistics are derived from a smaller sample size, thus increasing the uncertainty of these estimates. Detailed annual trends can be found in the following bar chart. It should be noted that multiple trends can be very volatile given the limited availability of data. Refer to Appendices A and B for a list of notable M&A and Buyout transactions in 1H-2018. 15 3 HIT Software Revenue Multiple Distribution by Target Enterprise Value Percentile <$30mm $30-100mm $100-500mm $500mm-$1B >$1B 90th Percentile 10.5x 12.0x 9.3x 7.5x 8.0x 75th Percentile 4.8x 6.9x 6.4x 7.0x 6.4x 50th Percentile 3.0x 3.8x 4.4x 4.7x 3.8x 25th Percentile 1.9x 2.8x 3.1x 4.0x 3.1x HIT Services Revenue Multiple Distribution by Target Enterprise Value Percentile <$30mm $30-100mm $100-500mm $500mm-$1B >$1B 90th Percentile 2.4x 2.6x 6.2x nm nm 75th Percentile 1.8x 2.5x 3.8x 3.3x 3.1x 50th Percentile 1.2x 1.7x 2.1x 1.8x 2.5x 25th Percentile 0.8x 1.1x 1.6x 0.7x 2.2x Copyright 2018 Healthcare Growth Partners Health IT M&A (Including Buyout) Median M&A Multiples 2010 2018 It is important to note that transaction multiples are based on trailing-twelve-month financial information, assume the achievement of all contingent consideration, such as earnouts, and most EBITDA multiples do not include any adjustments for unusual items. It is also important to note that less than one-third of transactions contain a disclosed multiple, therefore the multiple data represents only a portion of the overall transaction activity. HIT M&A Deals by Quarter 16 3 Copyright 2018 Healthcare Growth Partners 1.2X 1.2X 1.2X 1.4X 1.2X 2.1X 1.8X 2.0X 2.0X 9.0X 14.0X 16.0X 9.0X 10.0X 9.0X 10.0X 9.6X 9.6X 0.0X 5.0X 10.0X 15.0X 20.0X 2010 2011 2012 2013 2014 2015 2016 2017 2018 Health IT ServicesRevenue EBITDA 63 56 55 58 71 97 76 77 91 68 92 85 99 86 104 85 97 89 91 94 82 104 0 20 40 60 80 100 120 Qtr1 Qtr2 Qtr3 Qtr4 Qtr1 Qtr2 Qtr3 Qtr4 Qtr1 Qtr2 Qtr3 Qtr4 Qtr1 Qtr2 Qtr3 Qtr4 Qtr1 Qtr2 Qtr3 Qtr4 Qtr1 Qtr2 2013 2014 2015 2016 2017 2018 2.1X 2.1X 2.3X 4.7X 3.8X 3.8X 3.8X 3.7X 4.9X 11.0X 12.0X 10.6X 14.0X 14.0X 14.0X 13.0X 14.3X 17.0X 0.0X 5.0X 10.0X 15.0X 20.0X 2010 2011 2012 2013 2014 2015 2016 2017 2018 Health IT Software Health IT Capital Raises (Non-Buyout) The chart below summarizes quarterly private-equity and venture capital activity in Health IT and related services since 2008, according to the Healthcare Growth Partners database. The data below and in this section do not include buyout private equity activity. In 1H-2018, Healthcare Growth Partners monitored 418 capital raise transactions, on track to far surpass the 661 investment transactions in 2017. HIT Investment Activity HIT Investment Deals by Quarter Refer to Appendix C for a list of notable non-buyout capital raises in 1H-2018. 17 4 Copyright 2018 Healthcare Growth Partners 68 68 70 78 75 100 116 92 87 122 102 115 107 97 135 154 128 189 186 153 196 219 0 40 80 120 160 200 240 Qtr1 Qtr2 Qtr3 Qtr4 Qtr1 Qtr2 Qtr3 Qtr4 Qtr1 Qtr2 Qtr3 Qtr4 Qtr1 Qtr2 Qtr3 Qtr4 Qtr1 Qtr2 Qtr3 Qtr4 Qtr1 Qtr2 2013 2014 2015 2016 2017 2018 $2,849 $4,544 $6,173 $5,554 $7,367 $4,846 $254 $870 $1,012 $2,384 $3,187 $3,390 245 311 360 360 406 277 42 73 68 134 255 141 0 50 100 150 200 250 300 350 400 450 2013 2014 2015 2016 2017 1H-2018 $- $2,000 $4,000 $6,000 $8,000 $10,000 $12,000 Deal VolumeDeal Value ($mm)Deal Value - US Deal Value - Non-US Deal Volume - US Deal Volume - Non-US Healthcare Capital Markets HGP tracks a basket of stock indices within health IT and closely related sectors. It is important to consider sectors outside of pure "HIT" because the universe of health IT and related services encompasses many companies that share similar characteristics to other healthcare sectors. What classifies a company in the universe of health IT and related services, and ideally creates a valuation premium, is a strong information technology and data component that creates scalability and competitive strength. This is particularly relevant to services organizations that use technology and data analytics to streamline their operations. With this in mind, HGP considered six sectors when evaluating the performance of publicly traded companies details of the components of these sectors can be found on page 21. U.S. stock markets ended 2017 with gains of approximately 20%. Strikingly, the HGP HIT Index, which gained 25.7% in 2017, picked up another 21.6% in 1H 2018 to lead the HGP Healthcare Indices. The PBM Index, which has been in the crosshairs of both regulatory and competitive moves, was the largest decliner falling 7.3% over the period. Other than PBM, all of the HGP Healthcare Indices outpaced the S&P 500, which showed paltry gains of 1.7% during the period. The chart and the table on the following page summarize the performance of the HGP health IT and services indices in 1H 2018. HIT & Related Index Performance 1H 2018 18 Copyright 2018 Healthcare Growth Partners Jan. 30 Amazon, Berkshire, JPM Partnership announced Feb. 15 Roche announces $2.1B Flatiron acquisition Mar. 8 Cigna announces Express Scripts acquisition May 14 Trump targets Medicare, PBMs in plan to lower drug prices Jun. 8 Trump Administration says it won't defend key provisions of the ACA Jun. 28 Amazon buys PillPak, online pharmacy, for nearly $1B -20.0% -10.0% 0.0% 10.0% 20.0% 30.0% 12/31/2017 1/31/2018 2/28/2018 3/31/2018 4/30/2018 5/31/2018 6/30/2018 Health IT HIT & Payer Services PBM Healthcare Services Payers CRO S&P 500 5 HIT Index Performance Detail 1H 2018 Company Share Price % Change EV/ Rev EV/ EBITDA Company Share Price % Change EV/ Rev EV/ EBITDA Allscripts -17.5% 1.7X 8.7X iRhythm Technologies 44.7% 13.9X NMF Athenahealth 19.6% 4.8X 17.5X Medidata Solutions 27.1% 7.2X 29.8X Benefitfocus 24.4% 4.4X NMF MINDBODY 26.8% 6.5X NMF Care.com 15.7% 3.1X 18.6X Model N 18.1% 3.7X NMF Castlight Health 13.3% 3.3X NMF NantHealth 8.5% 5.3X NMF Cerner -11.3% 3.6X 11.9X NRC Health 0.3% 6.9X 20.7X Computer Programs & Systems 9.5% 2.1X 11.5X Omnicell 8.1% 2.8X 17.7X Connecture 115.6% NA NA Oneview Healthcare -18.7% 4.3X NMF Cotiviti 37.0% 6.2X 15.3X Orion Health Group -11.1% 1.0X NMF ehealth 27.2% 1.7X 15.7X Premier 24.6% 2.7X 8.2X Evolent Health 71.1% 2.7X NMF Quality Systems 43.6% 2.3X 14.6X Fitbit 14.4% 0.6X NMF Roper Technologies 6.5% 6.5X 19.0X Health Insurance Innovations 29.7% 1.8X 9.4X Simulations Plus 38.2% 13.4X NA HealthEquity 61.0% 15.5X NMF Streamline Health Solutions -16.6% 1.2X 15.4X HealthStream 17.9% 3.0X 17.5X Tabula Rasa Healthcare 127.6% 6.6X NMF Hms Holdings 27.6% 3.4X 14.4X Teladoc 66.6% 9.8X NMF Inovalon Holdings -33.8% 2.3X 8.1X Veeva Systems 39.0% 12.2X NMF Invitae -19.1% 3.8X NMF Vocera Communications -1.1% 4.5X NMF IQVIA 2.0% 2.9X 13.7X Healthcare Capital Markets 19 5 Copyright 2018 Healthcare Growth Partners 1H 2018 Index Performance S&P 500 1.7% Payers 11.8% NASDAQ 8.8% PBM -7.3% CRO 6.6% Healthcare Services 12.0% HIT 21.6% HIT & Payer Services 10.3% 20 Revenue Multiples EBITDA Multiples Sector 2018E 2019E 2018E 2019E Health IT 4.9x 4.2x 15.3x 13.5x CRO 2.8x 2.6x 13.7x 12.7x Payers 0.7x 0.7x 10.7x 9.6x PBM 0.6x 0.5x 7.9x 7.4x Healthcare Services 1.3x 1.3x 9.1x 9.0x HIT & Payer Services 1.5x 1.4x 10.8x 9.7x Healthcare Capital Markets The Health IT IPO market has all but dried up in the last two years. Following nine IPOs in 2014 (Care.com, IMS, Castlight, Everyday Health, Medical Transcription Billing, Imprivata, HealthEquity, Connecture, Orion), eight IPOs in 2015 (Inovalon, Press Ganey, Teladoc, Evolent, Invitae, Fitbit, Mindbody, Adherium) and five IPOs in 2016 (Tabula Rosa, Oneview, Cotiviti, NantHealth, iRhythm), not a single health IT IPO issued in 2017 and 2018. Valuation multiples across the healthcare sector remain strong. The HIT and CRO sectors receive the most significant valuation premiums over the rest of the market. 5 Copyright 2018 Healthcare Growth Partners 0 2 4 6 8 10 2013 2014 2015 2016 2017 IPOs Healthcare Capital Markets As discussed previously, HGP tracks six indices across the health IT and services sectors. The components of each index are listed below. Each index is based on an equal-weighted portfolio. 21 5 Copyright 2018 Healthcare Growth Partners Sector Components Health IT (HIT) Allscripts - NAS:MDRX Athenahealth - NAS:ATHN Benefitfocus - NAS:BNFT Care.com - NYS:CRCM Castlight Health - NYS:CSLT Cerner - NAS:CERN Computer Programs & Systems - NAS:CPSI Connecture - PINX:CNXR [Private as of May 4, 2018] Cotiviti - NYS:COTV ehealth - NAS:EHTH Evolent Health - NYS:EVH Fitbit - NYS:FIT Health Insurance Innovations - NAS:HIIQ HealthEquity - NAS:HQY HealthStream - NAS:HSTM Hms Holdings - NAS:HMSY Inovalon Holdings - NAS:INOV Invitae - NYS:NVTA IQVIA - NYS:IQV iRhythm Technologies - NAS:IRTC Medidata Solutions - NAS:MDSO MINDBODY - NAS:MB Model N - NYS:MODN NantHealth - NAS:NH NRC Health - NAS:NRC Omnicell - NAS:OMCL Oneview Healthcare - ASX:ONE Orion Health Group - NZE:OHE Premier - NAS:PINC Quality Systems - NAS:QSII Roper Technologies - NYS:ROP Simulations Plus - NAS:SLP Streamline Health Solutions - NAS:STRM Tabula Rasa Healthcare - NAS:TRHC Teladoc - NYS:TDOC Veeva Systems - NYS:VEEV Vocera Communications - NYS:VCRA Payers - Constituents Aetna - NYS:AET Anthem - NYS:ANTM Centene - NYS:CNC Cigna - NYS:CI Humana - NYS:HUM Molina Healthcare - NYS:MOH UnitedHealth Group - NYS:UNH WellCare - NYS:WCG HIT & Payer Services DXC Technology - NYS:DXC Conduent - NYS:CNDT Huron Consulting Group - NAS:HURN CBIZ - NYS:CBZ DST Systems - NYS:DST [Private as of April 24, 2018] Kforce - NAS:KFRC Navigant Consulting - NYS:NCI Accenture - NYS:ACN CACI International - NYS:CACI Corvel - NAS:CRVL Tivity Health - NAS:TVTY Magellan Health - NAS:MGLN WageWorks - NYS:WAGE PBMs - Constituents BioScrip - NAS:BIOS CVS Health - NYS:CVS Express Scripts Holding - NAS:ESRX Rite Aid - NYS:RAD Walgreens Boots Alliance - NAS:WBA Healthcare Services - Constituents Amedisys - NAS:AMED Brookdale Senior Living - NYS:BKD Civitas Solutions - NYS:CIVI Community Health Systems - NYS:CYH Encompass Health Corp - NYS:EHC Envision Healthcare - NYS:EVHC HCA Management Services - NYS:HCA Kindred Healthcare - NYS:KND Laboratory Corporation of America Holdings - NYS:LH LifePoint Health - NAS:LPNT Mednax - NYS:MD Quest Diagnostics - NYS:DGX Select Medical Holdings - NYS:SEM Tenet Healthcare - NYS:THC Universal Health Services - NYS:UHS CROs - Constituents Charles River Laboratories International - NYS:CRL Icon - NAS:ICLR IQVIA - NYS:IQV PRA Health Sciences - NAS:PRAH Syneos Health - NAS:SYNH 22 Macroeconomics 2018 Macroeconomic and Market Summary The booming stock market of 2017 faced a rough first half in 2018, with the Dow Jones shedding more than 1,000 points (4.1%) in the final three weeks of 1H. The index has been increasingly vulnerable to volatility as the US continuously threatens China with tariffs and restrictions, accentuating the global trade conflict and heightening the probability and fear of a full-blown trade war. These fears were confirmed July 6, 2018 as the Trump Administration imposed tariffs on $34 billion worth of Chinese products which were quickly met by similar tariffs from China on US goods. The energy sector rose 5% in the first half of 2018, while broader healthcare rose only 4%, a slowdown from 15% of the prior year. Investors will continue to anxiously await the outcome of talks between the US, Canada, and Mexico regarding NAFTA in hopes of avoiding further trade barriers imposed on these US allies. Driven by expectations that the Federal Reserve will raise rates quickly this year, the dollar continues its rally, rising 5.1% in the second quarter per the WSJ Dollar Index and standing near its highest level in a year. For Q2 2018, out of 109 S&P 500 companies, 62 have issued negative EPS (Earnings per Share) guidance, and 47 have issued positive EPS guidance, according to the data provider FactSet. Companies issuing negative guidance account for 57%, which is well below the 5-year average of 72%. The US economy started the year with modest GDP growth of 2.2%. Economists attribute the initial subdued growth to weak consumer spending at a 1.1% rate which may have been a result of a slow reaction to the $1.5 trillion tax cuts. GDP growth picked up in Q2 with a forecasted rate of 3.8% or higher after a quarter marked by strong gains in personal income and consumer spending. The first half of 2018 witnessed the lowest unemployment rate since 1969 of 3.8% in May with a slight bounce back up to 4% by the end of June. Economists attribute this record low rate to record high job openings and believe the rate has room to dip even further. An average of 207,000 jobs a month have been added in 2018, the majority being in healthcare and construction. In line with market expectations, the Federal Reserve has raised the target range of the federal fund from 1.75% to 2.00% in June. 6 Copyright 2018 Healthcare Growth Partners -6.0% -4.0% -2.0% 0.0% 2.0% 4.0% 6.0% 8.0% 10.0% 12.0% 14.0% 12/29/2017 1/29/2018 2/28/2018 3/31/2018 4/30/2018 5/31/2018 6/30/2018 DJIA S&P 500 Nasdaq 23 Macroeconomics 2018 Macroeconomic and Market Summary, cont'd The beginning of 2018 saw a drastic correction in the cryptocurrency market, ending the parabolic growth of 2017. Though cryptocurrencies lost up to 95% of their value, the ICO market has continued to surge as investors continue to pour money into them. Initial coin offerings raised $11.8 billion this year, more than double the total raised in 2017. In response to regulatory scrutiny, startups have turned to the private market, limiting offerings to accredited investors. In line with the ICO market's success, the US IPO market has experienced a surge of new companies coming to market with 105 IPOs raising $28.6 billion dollars. Dropbox and Spotify's IPOs signal a new trend of large private tech companies finally coming to market, which is indicative of another strong half for 2018. Small-cap healthcare companies, primarily biotech, account for 40% of all IPOs. An interesting player in the IPO market was Spotify with its huge success in an untraditional direct listing in April, though it is still uncertain whether this success could be repeated by other companies. Investors deployed $57.5 billion to 3,997 venture-backed companies in 1H, exceeding the full-year total for six of the past ten years, according to the PitchBook-NVCA Venture Monitor. The first half of 2018 was characterized by what appears to be the new normal, where capitalization is concentrated into fewer, larger deals. 2Q of 2018 was the 5th consecutive quarter with 10+ venture- backed IPOs, proving the continued strength of the venture-backed IPO market fueled by biotech companies. Looking to the second half of the year, VCs and startups face two significant public policy issues: 1) immigration, specifically the Department of Homeland Security's decision on whether to rescind the International Entrepreneur Rule (IER); and 2) the Trump Administration's continuous scrutiny on foreign investment in the US. Despite these political challenges, the venture ecosystem appears to be on track to set another record high for the 2nd half of 2018. Propelled by technological disruption, an increasingly robust economy, low interest rates, record high stock prices, and a paramount court decision, global M&A volume reached its highest levels since 1H 2007, with total deal volume of $2.35 trillion, up 57% from 1H 2017. Of the 17,611 deals in 1H, 25 mergers were valued at $10 billion or more, beating 2007's prior record of 20. The US alone saw a 74% increase in volume compared to 1H 2017, with $1.06 trillion via 4,425 US-targeted transactions. A continuation of this pace globally would mean deal volume reaching a record high of $4.8 trillion by the end of 2018, surpassing the prior record of $4.3 trillion in 2007. A considerable driver for this impressive activity is the growing threat from Amazon.com Inc., Netflix Inc., and other Silicon Valley giants that continue to disrupt industries. As industries ranging from media to healthcare feel the competitive heat, companies are rushing to seek strategic combinations to maintain relevance amidst the furor of disruptors. Further, the court ruling allowing AT&T Inc. to proceed with the $80 billion purchase of Time Warner Inc. has given the green light to companies considering similar mega deals. Amazon's announcement of its partnership with J.P. Morgan and Warren Buffet to reduce healthcare costs has similarly been a catalyst for deal making in the healthcare industry. Noteworthy deals in healthcare include Cigna Corp's $54.8 billion acquisition of Express Scripts Holding Co., Japans' Takeda Pharmaceutical agreement to buy London-listed Shire for $63.1 billion, and Amazon's purchase of PillPak, an online pharmacy, for just under $1 billion. These factors, combined with the clearer understanding of the new tax code, point to an equally busy, if not more, second half of 2018. However, the M&A market faces a new onset of threats in the second half including market volatility, elevated stock prices making transactions more expensive, political instability, and uncertainty on how the trade war will affect the market. 6 Copyright 2018 Healthcare Growth Partners Health IT Headlines Overview Notable headlines from 2018 are outlined in the following pages on a quarterly basis. The headlines in 2018 illustrate the significant influence that policy and regulatory intervention has on the incentives that dictate health IT investment and innovation trends, the increasing vertical integration across healthcare, and the expanding presence of non-traditional companies in the health IT market. Q1 Headlines CMS unveils new voluntary bundled payment program The Bundled Payments for Care Improvement (BPCI) Advanced model is the first advanced payment model launched by the Centers for Medicare & Medicaid Services under the Trump administration, and includes 32 clinical care episodes for participating providers to choose from, according to an announcement from CMS. Twenty-nine of the care episodes included in the model are inpatient, while the remaining three are outpatient, according to CMS. Care episodes in the model include major joint replacement, spinal fusion and both inpatient and outpatient percutaneous coronary intervention. MedPAC Sinks MIPS, Recommends Alternative Program The Medicare Payment Advisory Commission (MedPAC) voted 14-2 to in favor of killing the Merit-based Incentive Payment System (MIPS) and replacing it with an alternative model of reimbursement. While the numbers appear to signal a strong consensus for the proposed recommendations, a handful of members who voted to nix the program expressed hesitation. Trump signs stopgap funding bill with CHIP funding, tax delays A short-term spending bill funding the federal government through Feb. 8 was signed into law by President Donald Trump on January 22nd, ending a three-day shutdown. The measure, approved by the Senate and House earlier Monday, will also extend funding for the Children's Health Insurance Program for six years, suspend the medical device and health insurance taxes through 2019, and delay the tax on high-cost health plans through 2021. Rising medical care, drug costs drive growth in health care spending A report from the Health Care Cost Institute found health care spending for people with employer-sponsored health insurance rose 4.6% from 2015 to 2016, even though utilization has remained steady or fallen. Spending on brand-name prescription medications increased 110% between 2012 and 2016, but utilization fell 38%, while the average price for surgical admissions rose 30% even as utilization dropped 16%, the report shows. Partnership aims to disrupt health care Amazon, Berkshire Hathaway and JPMorgan Chase & Co. are partnering on a new venture designed to cut spending on health care while improving services for their US workforces. The independent venture will initially focus on technology designed to simplify and improve the transparency and quality of health care, the companies said. Roche to acquire Flatiron Health for $2.1 billion Flatiron's conceit has been that large amounts of data could be used to speed up and, in some cases, replace the arduous process of conducting clinical trials where patients are randomly assigned to one treatment or another, allowing them to be compared. The data space has heated up as the Food and Drug Administration, spurred by pressure from Congress, has expressed interest in using such "real-world data" in the drug approval process. The FDA itself has been one of Flatiron's collaborators. 24 7 Copyright 2018 Healthcare Growth Partners Health IT Headlines Q1 Headlines, cont'd Medtronic Moves to a New Health-Care Model: Pay Only if It Works Medtronic, the world's largest medical-device maker, specializing in such products as implantable cardiac devices and insulin pumps, is increasingly signing supply contracts with customers that adjust prices based on how well the products work in patients, rather than simply having the customer pay a fixed per-unit cost regardless of a device's performance in individual patients. Fed initiative to put patients in control of their health data The Centers for Medicare and Medicaid Services announced on March 6 at the HIMSS18 conference in Las Vegas the launch of the MyHealthEData initiative, which CMS Administrator Seema Verma claimed is the first time any administration has set in motion a coordinated initiative to truly make patients the focus of the healthcare system by using the federal government's full authority to ensure providers and insurers give patients control of their medical records. Cigna Is Buying Express Scripts in a $54 Billion Health Industry Deal Cigna agreed to buy Express Scripts Holding for $54 billion in cash and stock, another move toward consolidation between U.S. health insurers and the companies that oversee patients' drug benefits. The acquisition is a shakeup for the industry that runs prescription drug programs for insurers and employers, negotiating prices with drugmakers and sometimes delivering treatments directly to patients. Express Scripts, which manages plans covering more than 100 million people, and its rivals are becoming more aggressive with tactics to control costs, increasingly denying coverage of some drugs or requiring high co-payments for expensive treatments. Walmart talking with Humana on closer ties; acquisition possible: sources Should the talks lead to a tieup, it would be the latest deal to bring together a retail chain and a health insurer in the last few months, following CVS Health Corp's $69 billion deal to acquire Aetna Inc and Cigna Corp's $54 billion deal to buy Express Scripts Holding Co. Walmart approached Humana earlier this month and the deliberations are preliminary, two of the sources said. While the conversations have focused on new partnerships, an acquisition of Humana by Walmart is also something being discussed, the sources added. Q2 Headlines Trump administration eases ACA essential health benefit requirements The Centers for Medicare and Medicaid Services (CMS) released proposed payment policies for fiscal year 2018 that aim to "reduce burdens for hospitals so they can focus on providing high quality care for patients," CMS Administrator Seema Verma said. The proposed rule would result in 2.9% higher inpatient operating prospective payments, reduce payments to long-term hospitals by nearly 3.75%, and relax clinical quality measure reporting standards for hospitals with an electronic health record system. CMS proposes new payment model for skilled nursing facilities The CMS has proposed a value-based payment model for skilled nursing facilities that would increase Medicare payments to participating providers, link reimbursement to health outcomes, ease regulatory burdens and develop new transparency requirements. The agency also proposed updates to rates and payment policies for inpatient rehabilitation facilities, inpatient psychiatric facilities and hospice care. 25 7 Copyright 2018 Healthcare Growth Partners Health IT Headlines Q2 Headlines, cont'd Trump targets Medicare, PBMs in plan to lower drug prices The Medicare program could soon see major policy changes by the Trump administration in its quest for lower drug prices, and not everyone is happy. The administration's long-promised blueprint to lower drug prices was not short on proposals to the federal program. Among the many provisions listed include value-based arrangements for drug pricing, more transparency on prescription drug prices, and possible changes for pharmacy benefit managers. HHS Secretary Alex Azar said the administration is looking at allowing private payers to negotiate reimbursement for Medicare Part B drugs used in hospitals and doctor's offices. "More broadly, the president has called for me to merge Medicare Part B drug payments into Part D, where negotiation has been so successful," he said. Trump administration says it won't defend key provisions of ACA Legislation that repealed the penalty associated with the requirement that most Americans enroll in health coverage has made the mandate unconstitutional, the Justice Department wrote in a brief filed at a Texas court June 7th. The tax law passed last year also nullifies the Affordable Care Act's provisions that prevent coverage denials for people with pre-existing conditions and block insurers from charging people in the same community different rates depending on their health status, age, gender and other factors. White House announces plan to reorganize HHS, other federal agencies The White House Office of Management and Budget has proposed integrating the Supplemental Nutrition Assistance Program into HHS and renaming the agency the Department of Health and Public Welfare as part of a sweeping plan to reorganize the federal government unveiled June 21. The proposal, which faces tough odds of obtaining approval in Congress, also calls for the creation of the Council on Public Assistance, which would supervise food stamps, Medicaid and other programs and have the authority to impose uniform work provisions in those programs. Amazon buys PillPack, an online pharmacy, for just under $1B A week after appointing a CEO for its healthcare joint venture with Berkshire Hathaway and JPMorgan, Amazon announced an acquisition that underscores how it also hopes to have a more direct and more commercial role in the world of healthcare in the coming years. The company has purchased PillPack, an online pharmacy the lets users buy medications in pre-made doses. The Boston-based startup PillPack primarily caters to customers who take multiple medications. PillPack streamlines delivery of prescription and over-the-counter medications by pre-sorting them into handy dose packets sent directly to customers' doors nationwide in monthly supplies. The company boasts that it works with doctors and insurance companies to manage refills and cost coverage on customer's behalf. To do so, it holds pharmacy licenses in all 50 states, developed proprietary pharmaceutical software, and is an in-network pharmacy with most pharmacy benefit managers, including Medicare Part D plans features that were likely eye-catchers for Amazon. News of the deal rattled drug retailers, who have long feared Amazon's entry into their realm. Shares of Walgreens, CVS, and Rite Aid plunged the day of the announcement, collectively losing $12.8 billion, according to CNBC. 26 7 Copyright 2018 Healthcare Growth Partners About Healthcare Growth Partners Healthcare Growth Partners (HGP) is an exceptionally experienced Investment Banking & Strategic Advisory firm exclusively focused on the transformational Health IT market. We unlock value for our clients through our Sell-Side Advisory, Buy-Side Advisory, Capital Advisory, and Pre-Transaction Growth Strategy services, functioning as the exclusive investment banking advisor to over 100 health IT transactions representing over $2 billion in value since 2007. Our passion for healthcare inspires us to not only create value for our clients, but to also generate broad, overarching improvements to the functionality and sustainability of health. With our focus, we deliver knowledgeable, honest and customized guidance to select clients looking to execute high value health IT, health information services, and digital health transactions. Contact Information Christopher McCord Managing Director chris@hgp.com 2001 Kirby Drive, Suite 814 Houston, TX 77019 (713) 955-7935 www.hgp.com Securities offered through HGP Securities, LLC, member FINRA & SIPC, broker-dealer affiliate of Healthcare Growth Partners, LLC. Sources of Information: Bureau of Economic Analysis, Bureau of Labor Statistics, S&P Capital IQ, CMS, Company press releases, Company SEC filings, Health Data Management, Healthcare Growth Partners database, HealthLeaders Media, HIStalk, Mercom Capital Group, Modern Healthcare, The New York Times, Mergermarket, MarketsandMarkets Research, Allied Market Research, FierceHealthcare, StartUp Health, Rock Health, Pitchbook, Thomson-Reuters, Renaissance Capital IPO Intelligence, Dealogic, and The Wall Street Journal. These statistics are presented for informational purposes only. While the information presented has been obtained from sources deemed to be reliable, no representation or warranty, express or implied, is made as to the accuracy or completeness of such information. 27 8 Copyright 2018 Healthcare Growth Partners 28 HGP Transaction Experience 9 Copyright 2018 Healthcare Growth Partners Copyright 2018 Healthcare Growth Partners 29 HGP Transaction Experience 9 30 HGP Transaction Experience 9 Copyright 2018 Healthcare Growth Partners Appendix A Strategic M&A Highlights 31 Quarter Acquiror Seller Deal Size ($mm) Q1 Allscripts Healthcare Solutions Practice Fusion $100 Q1 Elsevier Via Oncology na Q1 AXA Group Maestro Healthcare Technology $155 Q1 Grifols MedKeeper $200 Q1 StateServ Medical Network Medical (dba HospiceLink) na Q1 Press Ganey Associates Patient Experience Business of HealthStream $65.5 Q1 WebPT BMS Practice Solutions na Q1 Roche Holding AG Flatiron Health $2,100 Q1 Hyland Software Allscripts OneContent $235 Q1 R1 Intermedix $460 Q1 Inovalon Holdings ABILITY Network $1,200 Q1 Cognizant Technology Solutions Corporation Bolder Healthcare Solutions na Q1 Centene RxAdvance Corporation na Q2 Netsmart Technologies Change Healthcare (Home Care and Hospice Solutions) na Q2 AMN Healthcare Services MedPartners $195 Q2 Health Catalyst Medicity na Q2 Allscripts Healthcare Solutions HealthGrid $110 Q2 MTBC Orion HealthCorp na Q2 IQVIA Advanced Health Media $127.5 Q2 ResMed HEALTHCAREfirst na Q2 Sun Life Financial Maxwell Health na Q2 WebMD Health Corp. Jobson Healthcare Information na Q2 Alight Solutions Compass Professional Health Services na Q2 Medidata Solutions Shyft Analytics $195 Q2 Quest Analytics BetterDoctor na Q2 Verscend Technologies, Inc. Cotiviti $4,900 Q2 Amazon PillPack $1,000 Q2 Exlservice Holdings SCIO Health Analytics) $240 10 Copyright 2018 Healthcare Growth Partners Appendix B Financial Sponsor Buyout Highlights 32 Quarter Acquiror Seller Deal Size ($mm) Q1 Elliott Management Corporation athenahealth $6,500 Q1 Undisclosed Caring.com na Q1 NovaQuest Capital Management, RTI International Clinical Ink na Q1 Francisco Partners Management Connecture $111.9 Q1 Pamplona Capital Management GetWellNetwork na Q1 HGCapital MediFox na Q1 Clayton, Dubilier & Rice NaviHealth na Q1 HGCapital Orion Health Group $255 Q1 K1 Capital PerfectServe na Q1 Marlin Equity Partners Virgin Pulse, RedBrick Health na Q1 Accel-KKR I-Med S.A. na Q1 VSS Caravan Health na Q1 Clearlake Capital Group ProVation Medical $180 Q1 Renovus Capital Partners Continuing Education Alliance, LLC and Practicing Clinicians Exchange na Q1 Stone Point Capital Genex Services na Q1 Water Street Healthcare Partners, JLL Partners Dohmen Life Science Services na Q1 Parthenon Capital Partners RedCard Systems na Q1 Parthenon Capital Partners Trinity Partners na Q1 Rothschild & Co, TA Associates Datix na Q2 LLR Partners Medbridge Education na Q2 Great Hill Partners Vatica Health na Q2 Main Capital Partners RVC Medical IT na Q2 Water Street Healthcare Partners, JLL Partners Triplefin na Q2 Waud Capital Partners Pharmacy Partners Holdings na Q2 Vista Equity Partners Allocate Software na Q2 Stone Point Capital Mitchell International na Q2 Tianjin Dazhen Asset Management, East Ocean Ventures RADLogics na 10 Copyright 2018 Healthcare Growth Partners Appendix B Financial Sponsor Buyout Highlights, cont'd 33 Quarter Acquiror Seller Deal Size ($mm) Q2 Montagu Private Equity Maincare Solutions na Q2 Aquiline Capital Partners Aspirion Health Resources na Q2 New Capital Partners Collect Rx na Q2 Nautic Partners PPS Analytics na Q2 Norwest Venture Partners Target PharmaSolutions $60 Q2 Mainsail Partners FairWarning na Q2 GPB Capital Holdings Health Prime International na Q2 Veritas Capital GE Healthcare (Information Technology Division) $1,050 Q2 Pamlico Capital Connexin (dba Office Practicum) na Q2 Altaris Capital Partners Clearwater Compliance na Q2 Insight Venture Partners CentralReach na Q2 General Atlantic Landmark Health na 10 Copyright 2018 Healthcare Growth Partners Appendix C Private Equity Highlights (non-buyout) 34 Quarter Investor Target Raise ($mm) Q1 MidCap Financial, Claremont Creek Ventures, Foresite Capital Management, Microsoft, TPG Biotech, WuXi NextCODE, GV DNAnexus $58 Q1 Temasek Holdings, EDB Investments, Arboretum Ventures, 5AM Venture Management, Jazz Venture Partners, Bridge Builders Collaborative Pear Therapeutics $50 Q1 Westview Capital Partners Jopari Solutions Q1 GV, Oak HC/FT Partners, F-Prime Capital Partners, Deerfield Management Company, Polaris Partners Quartet Health $40 Q1 Bristol-Myers Squibb, New Enterprise Associates, Inova Strategic Investments, Co- win Healthcare Fund, Helsinn Investment Fund, Windham Venture Partners, Maryland Venture Fund, Undisclosed Personal Genome Diagnostics $75 Q1 Allianz X American Well Corporation $59.2 Q1 Susquehanna Growth Equity eVive Health $43 Q1 Five Arrows Principal Investments CBA Informatique $61.2 Q1 StartUp Health, Wanxiang Healthcare Investments, Prolog Ventures, Digitalis Ventures, 7wire Ventures, AI Life Sciences Investments CareDox $16 Q1 Mainsail Partners Bio-Optronics $30 Q1 SoftBank Capital, SBI Investment Co. Ping An Healthcare Management $1,000 Q1 Elevate Ventures, Mosaic Health Solutions, HealthQuest Capital, Echo Health Ventures, Cambia Health Solutions, Lewis & Clark Venture Capital Springbuk $20 Q1 Zaffre Investments, Mayfield, Seventure Partners Zipongo $35 Q1 Intermountain Healthcare R1 RCM $20 Q1 Ping An Ventures, OurCrowd Tyto Care $25 Q1 Seventure Partners, Gilde Healthcare Partners, GIMV NV, Lightstone Ventures, Medtronic, New Enterprise Associates Foundry Innovation & Research 1 (FIRE1) $49.6 Q1 NWS Holdings Medopad $28 Q1 Breyer Capital PAIGE.AI $25 Q1 Battery Ventures Curve Dental na Q1 Advanced Power Electronics Corporation, SB China Venture Capital Codoon $20 10 Copyright 2018 Healthcare Growth Partners Appendix C Private Equity Highlights (non-buyout), cont'd 35 Quarter Investor Target Raise ($mm) Q1 BlockVC Fund, Blockchain Labo, Blockchaininvest Hedge Fund, Dfund, Preangel, Synco Medicalchain $20 Q1 Clal Insurance Enterprises Holdings Ltd. (TASE: CLIS), Meitav DASH Investments Ltd (TASE: MTDS) OrCam $30.4 Q1 Lemhi Ventures, Ascension Ventures Bind Benefits $60 Q1 Sun Life Financial, New Enterprise Associates, Mubadala Investment Company, Maverick Capital, The Founders Fund, GV, Health Velocity Capital, Blue Cross and Blue Shield Association, Sandbox Industries, Noro-Moseley Partners CollectiveHealth $110 Q1 Dragoneer Investment Group PointClickCare $146 Q1 Illumina, Kleiner Perkins Caufield & Byers, Mayo Clinic, Sutter Hill Ventures, Warburg Pincus, DFJ Growth Helix $200 Q1 IVP, Redpoint Ventures Hims $40 Q1 aMoon Partners, Horizons Ventures Limited Medial EarlySign $30 Q1 Accomplice, The Durant Company, Mousse Partners, National Football League Players Association, NextView Ventures, Promus Ventures, Thursday Ventures, Two Sigma Ventures, UAE71 Capital Whoop $25 Q1 Draper Fisher Jurvetson, Y Combinator, Tencent Holdings, Khosla Ventures, Dolby Family Ventures, Data Collective, Baidu Venture, B Capital Group, Monsanto Growth Ventures Atomwise $45 Q1 Chartered Investment Managers Pte Ltd ContinUse Biometrics $20 Q1 Hudson Bay Capital Management BewellConnect $30 Q1 Alphabet, Johnson & Johnson Verb Surgical $500 Q1 Rand Capital, F-Prime Capital Partners, Bain Capital Centivo $31 Q1 Venrock, The Founders Fund, Scifi VC, Caffeinated Capital, Ev Williams Obvious Ventures, Creandum, Playground Global Virta Health $45 Q1 Sequoia Capital, Xianghe Capital, Qiming Weichuang Venture Capital, Genesis Capital Advisors, Advantech Capital Infervision $47.4 Q1 Kinship Trust Company, New Enterprise Associates, Revolution Growth, T. Rowe Price Tempus Labs $80 Q1 New Enterprise Associates Care Zone Inc. $50 Q1 Arboretum Ventures, HealthQuest Capital Jentryx (dba BioIQ) $26.5 10 Copyright 2018 Healthcare Growth Partners Appendix C Private Equity Highlights (non-buyout), cont'd 36 Quarter Investor Target Raise ($mm) Q1 Verily Life Sciences, CapitalG, Eight Partners, Fidelity Investments, The Founders Fund, General Catalyst Partners, Khosla Ventures, Thrive Capital Oscar Insurance Corporation $165 Q1 Andreessen Horowitz, McKesson, Madrona Venture Group, Carrick Capital Partners, Cross Creek Advisors Accolade $50 Q2 Tencent Holdings, Sequoia Capital, Qiming Venture Partners Miaoshou Doctor $79 Q2 New Enterprise Associates, ITOCHU Technology Ventures, Georgian Partners, Flare Capital Partners, Everyday Health, Emergence Capital Partners, Bessemer Venture Partners, Australia Venture Fund, Ziff Davis Publishing Holdings WellTok $75 Q2 Undisclosed DXY.cn $100 Q2 Portag3 Ventures, Partech Ventures, CNP Assurances, Xavier Niel, Index Ventures Alan $28.3 Q2 Flare Capital Partners, Lakestar Advisors, New Enterprise Associates, Oxeon Partners, Amgen Ventures Aetion $36.4 Q2 Merck & Co., Microsoft, Sapphire Ventures, Zaffre Investments, 7wire Ventures, Investment AB Kinnevik, General Catalyst Partners, DFJ, Kleiner Perkins Caufield & Byers Livongo Health $105 Q2 Draper Fisher Jurvetson, Section 32, Mayo Clinic, Canaan Partners, Casdin Capital, LifeForce Capital Vineti Technology $33.5 Q2 Woodford Investment Management BenevolentAI $115 Q2 Health Velocity Capital, Blue Cross and Blue Shield Association, Sandbox Industries, Noro-Moseley Partners Contessa Health na Q2 Elephant RealSelf $40 Q2 Blue Ivy Ventures, Centene Corp., HLM Venture Partners, Optum Ventures RubiconMD $13.8 Q2 Yadong Xingchen Yishengzhan $23.9 Q2 Shasta Ventures, Tenaya Capital, Venrock, Princeville Global, Goldman Sachs Doctor on Demand $74 Q2 Angel Investors, Roivant Sciences Datavant $40.5 Q2 American Medical Association Health2047 $27.2 Q2 Venrock, Angel Investors, Social Capital, First Round Capital Suki (fka Robin AI) $20 Q2 Undisclosed Century Kaige (dba Kaige Health) $31.4 Q2 The Riverside Company Soothe $31 10 Copyright 2018 Healthcare Growth Partners Appendix C Private Equity Highlights (non-buyout), cont'd 37 Quarter Investor Target Raise ($mm) Q2 Crown Ventures, Providence Ventures, Venrock, Casdin Capital, Glynn Capital Management, Tenaya Capital, Greylock Partners Lyra Health $45 Q2 Undisclosed Innovaccer $25 Q2 Blueprint Health, Health Enterprise Partners Intraprise Health na Q2 Pelion Venture Partners, Trilogy Equity Partners, Enfield Ventures, Eclipse Ventures, Broadway Angels Owlet Baby Care $24 Q2 M Ventures, Temasek Holdings, Jazz Venture Partners, Canepa Advanced Healthcare Fund, Brooklands Capital Strategies, Amgen Ventures Akili Interactive Labs $55 Q2 AIA Company, NWS Holdings Guahao.com (WeDoctor) $500 Q2 The San Francisco 49ers, WndrCo, Angel Investors, Lerer Hippeau Ventures, Blue Pool Capital, Greycroft Partners, Canvas Venture Fund, IVP, Female Founders Fund, Advancit Capital Thrive Global $43 Q2 Arboretum Ventures, Baird Capital, Deerfield Management Company, Merck & Co., Pfizer Venture Investments, Renaissance Venture Capital Fund Strata Oncology $26 Q2 JMI Equity CipherHealth na Q2 Norwest Venture Partners, Mayfield Fund, New York Presbyterian Fund, Bessemer Venture Partners Qventus $30 Q2 Kleiner Perkins Caufield & Byers Beam Technologies (Beam Dental) $22.5 Q2 Polaris Partners, .406 Ventures, Flare Capital Partners, F-Prime Capital Partners, GE Ventures, Humana, Khosla Ventures, Temasek Holdings Iora Health $99.7 Q2 Bascom Ventures, Trans-Pacific Technology Fund, RLJ Equity Partners, Angel Investors, IRA Capital, Inflection Capital, Fidelity Investments Get Heal, Inc. (dba Heal) $20 Q2 Thrive Capital, Andreessen Horowitz, Naspers Ventures Honor $50 Q2 Polaris Partners, General Catalyst Partners, 7wire Ventures OM1 $21 Q2 L Catterton, BrandProject Vitamin Packs na Q2 btov Partners, Global Sources, Polytech Ecosystem Ventures, Zurcher Kantonalbank, SVC, Swisscom, BlueOcean Ventures AvaWomen $30 Q2 Social Capital, McKesson, Safeguard Scientifics, Hikma Ventures, 3M Ventures, SR One, Aptar Pharma Propeller Health $20 10 Copyright 2018 Healthcare Growth Partners Appendix C Private Equity Highlights (non-buyout), cont'd 38 Quarter Investor Target Raise ($mm) Q2 The Kraft Group, Andreessen Horowitz, Polaris Partners CAMP4 Therapeutics $30 Q2 Aurum Ventures, Intermountain Healthcare, Dolby Family Ventures, aMoon Partners, OurCrowd, NVIDIA GPU Ventures, Khosla Ventures, Johnson & Johnson Innovation - JJDC Zebra Medical Vision $30 Q2 FirstMark Capital, F-Prime Capital Partners, Goldman Sachs, Volition Capital TraceLink $60 Q2 Norgine Ventures, Surgical Intelligence caresyntax $31.9 Q2 Index Ventures, Creandum, Accel Partners, Project A Ventures KRY $66 Q2 Angel Investors Medici $22 Q2 McKesson, Sealed Air, The Emerson Group, CPG Company RB Pharmapacks $32.5 Q2 SPDB International, Gaocheng Capital, ICBC International Shanghai Yitu Network Technology $200 Q2 Benchmark Capital, F-Prime Capital Partners, Fidelity Investments, Thrive Capital Benchling $14.5 Q2 Insight Venture Partners, Millennium Technology Value Partners, 14W Aaptiv $22 Q2 Insight Venture Partners, Sound Ventures Calm.com $27 Q2 Hangzhou Lianchuan Investment Management, SenseTime, Wanxiang Healthcare Investments Helian Health $75 Q2 Data Collective, Dolby Family Ventures, The Founders Fund, Future Shape, Lux Capital Management Vium $24 Q2 The Founders Fund, Thrive Capital, Lakestar Advisors, Sound Ventures, Angel Investors, Investment AB Kinnevik Cedar, Inc. $36 Q2 Tritium Partners DCS Global na Q2 Bpifrance, Johnson & Johnson, MAIF, Angel Investors Dreem $36.7 Q2 Shareholder Value Management, Undisclosed Nuvo Group $30 Q2 UnitedHealth Group, Lemhi Ventures Bind Benefits $70 Q2 Undisclosed American Well Corporation $290.6 10 Copyright 2018 Healthcare Growth Partners