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Healthcare Growth Partners, LLC 2013 All Rights Reserved
CONFIDENTIAL
HIT Market Perspective
October 2013
CONFIDENTIAL 2HEALTHCARE GROWTH PARTNERS
About HGP
HGP is focused exclusively on healthcare technology and services.
HGP’s HIT domain expertise is unmatched.
HGP has deep relationships with decision makers across the industry.
HGP has experience across a range of technologies, in terms of SaaS, web-based, and client server, as well as software-enabled services.
All engagements are driven by the senior team- no “hand-offs” to junior staff.
Results speak for themselves: Over 50 transactions completed since inception, all in healthcare technology and services; Most active firm in the healthcare IT and services sectors; Over 70% completion rate for sale assignments; Numerous repeat engagements by clients.
HGP is passionate about our clients and their businesses.
HGP named to Inc. 5000 for two consecutive years (2012 & 2013) with 400%+ growth.
Investment Bank Buyside Sellside Total
HGP 14 26 40Firm A 4 25 29Firm B 1 21 22Firm C 3 10 13Firm D 2 10 12Firm E 3 6 9Firm F 0 7 7Firm G 3 3 6Firm H 4 2 6Firm I 2 0 2
M&A Transactions since 2008
CONFIDENTIAL 3HEALTHCARE GROWTH PARTNERS
Sector Focus
ProvidersHospitalsPhysicians
Others
PayersInsurance
MCOsEmployers
SuppliersPharmaDevicesBiotech
ConsumersPatients
MembersFamilies
• Departmental Systems• Enterprise Systems• Revenue Cycle• Patient Throughput• Patient Access• Business Intelligence
• Specialty Systems• Transaction Processors• Content Providers• Others
ServicesTechnology
• Management Consulting• IT Consulting• Operational Consulting• IT Staff Augmentation• Staffing
• Business Office Outsourcing• Administrative Services• Case Management• Others
• Claims Systems• Case Management• Credentialing• Population Management• Predictive Analytics• Enrollment
• Marketing• Others
• Pharmacy Benefit Management
• Radiology Benefit Management
• Disease Management
• Business Office Outsourcing• Benefit Portals• Others
• Clinical Trial Management• EDC• ePRO• Site Management• Regulatory Management• Quality Assurance
• LIMS• eDetailing• Others
• Contract Research Organizations
• Site Management Organizations
• Outsourced Sales• R&D Services
• Specialized Staffing• Others
• Personal Health Records• DTC Software• Content Providers• Others
• Care Advocacy• Benefit Portals• Care Management• Others
CONFIDENTIAL 4HEALTHCARE GROWTH PARTNERS
HGP Recent Transaction Experience
Not Disclosed
Strategic advisor in recapitalization by
2010
$105 Million
Has acquired
2010
Not Disclosed
Has been recapitalized by
2011
Not Disclosed
Has been acquired by
2010
$4 Million
Received funding from
&
2011
Not Disclosed
Has acquired
AssuranceRx, LLC
2010
Not Disclosed
Has been acquired by
2011
$36 Million
Has been acquired by
2011
Not Disclosed
Has been acquired by
2011
Not Disclosed
Has acquired
2011
Not Disclosed
Has acquired
2011
Not Disclosed
Has acquired
2011
Not Disclosed
Has acquired
2011
Not Disclosed
Has been acquired by
2011
Not Disclosed
Has been acquired by
2011
Not Disclosed
OptiLink Divisionhas been acquired by
2012
Not Disclosed
Has been acquired by
2012
Not Disclosed
Clinical Mobility Vendor
Has been acquired by
Undisclosed
2012
$12 Million
Received funding from
2012
Not Disclosed
Has been acquired by
2012
Not Disclosed
Has been recapitalized by
2012
Not Disclosed
Has been acquired by
2012
Not Disclosed
Has acquired
2012
Not Disclosed
Has acquired
2012
Not Disclosed
Has acquired
2012
Not Disclosed
Has been acquired by
2012
Not Disclosed
Has been acquired by
2013
Not Disclosed
Has been acquired by
2013
CONFIDENTIAL 5HEALTHCARE GROWTH PARTNERS
HGP Historical Transaction Experience
$26 Million
Has been acquired by
2010
Not Disclosed
Has been acquired by
2010
Not Disclosed
Has been acquired by
2010
Not Disclosed
Has acquired certain assets from
2009
$4 Million
Received funding from
2009
Not Disclosed
Has been acquired by
2010
Not Disclosed
Has been acquired by
2006
Not Disclosed
Has been acquired by
2008
Not Disclosed
Has been acquired by
2008
Not Disclosed
Has been acquired by
2007
Not Disclosed
Cardiology Division has been acquired by
2007
$12 Million
Has been acquired by
2007
$41 Million
Financial Advisor forits sale to
2008
$142 Million
Has acquired
2008
Not Disclosed
Has been acquired by
2008
Not Disclosed
Has been acquired by
Management
2008
Not Disclosed
Has been acquired by
2008
Not Disclosed
Has been acquired by
2008
Not Disclosed
Has acquired theNavicare Product Line of
2009
Not Disclosed
Has been acquired by
2009
Not Disclosed
Has acquired
2008
Not Disclosed
Has been acquired by
2009
Not Disclosed
Has been acquired by
2009
Not Disclosed
Has acquired
2009
Fairness Opinion
Not Disclosed
Has acquired Imaging Division of
2010
Has partnered with
2010
Not Disclosed
Has been funded by
2010
Not Disclosed Fairness Opinion
Has acquired
2010
CONFIDENTIAL 6HEALTHCARE GROWTH PARTNERS
HGP Leadership
Christopher McCord, CFA, Managing Director ([email protected]) Consultant for Mercury Ventures
CFO of Marval Biosciences
Healthcare strategy consulting and financial advisory at VMG Health
Technology corporate finance at KPMG
MBA, Kellogg School of Management | BS Engineering, Vanderbilt University
Jon Phillips, Managing Director ([email protected]) Founder of Healthcare Growth Partners in 2005
Healthcare investment banking at William Blair
Healthcare strategic and operational consulting at Deloitte Consulting
Chairman of Streamline Health (Nasdaq: STRM)
Charitable board memberships with Kick off for Kids (vice chair) and the Ray Graham Association
MBA, Kellogg School of Management | BA Economics, DePauw University
Amit Aysola, Vice President ([email protected]) Investment banking at Demeter Financial Group, Robert W. Baird and Banc of America Securities
Product and Account Manager at Plan Data Management (acquired by The TriZetto Group)
Systems Analyst with the Healthcare Practice at Deloitte Consulting.
MBA, Fuqua School of Business at Duke University | MS Biomedical Engineering, University of Michigan | BS Industrial and Operations Engineering, University of Michigan
CONFIDENTIAL 7HEALTHCARE GROWTH PARTNERS
WHERE ARE WE?
Phase I (2010-2015)
(HITECH): Install and ensure the usage of electronic medical records with the capability of collecting and aggregating data across care settings
Phase II (2012-2016)
(ACA Implementation): Lay the foundation for reform with pilot risk-based reimbursement models that are dependent on outcomes, quality and efficiency rather than the volume of service
Phase III (2016+)
(ACO/Bundled Payment): Execute on a streamlined system of robust care coordination and population health to maximize quality as well as efficiency with the goal of delivering higher value
Phase IV: 20??
(Personalized Medicine): Using big data, quality reporting, and genetic analytics, optimize care and medicine based on individualized characteristics and genomics
We are here.
CONFIDENTIAL 8HEALTHCARE GROWTH PARTNERS
HEALTHCARE STAKEHOLDERS REACT TO COST, ACCESS, AND QUALITY INITIATIVES
Providers
• Direct Impact• Risk-based
pilots• Readmission
penalties• Fraud scrutiny• Quality
reporting• ICD-10 (non-
ACA)
• Indirect• Resource
constraints• Consolidation• Focus on care
continuum
Payers
• Direct Impact• Public HIX• Private HIX• Rate hike caps• MLR caps• Medicaid
expansion• Coverage
requirements
• Indirect• Expanding
capabilities
Employers
• Direct Impact• Insurance
requirements (min employees/ hours)
• Indirect• Defined
contribution• Private HIX• Wellness
initiatives
Med-Pharm
• Direct Impact• Higher taxes• Comparative
effectiveness• Sunshine Act
• Indirect• Care
management• Big data• Genomics• Personalized
medicine
Patients
• Direct Impact• Greater
protections (pre-existing conditions, denials, caps)
• Greater coverage
• More choice• Non-
discrimination
• Indirect• Greater
Responsibility
Information Technology – Quality & Cost (aka, Value)
CONFIDENTIAL 9HEALTHCARE GROWTH PARTNERS
Blurring lines between providers and payers• As providers manage risk, both payers and providers see opportunity to crossover• Examples such as Wellpoint acquiring CareMore, Cigna acquiring Alegis Care, providers with
captive insurance programs
Lack of transparency mitigates trust• Quality and pricing remains an issue that the insurance industry has never addressed• Start-ups like Oscar Health and MedImpact can change the game, but face challenging
incumbents
HIX’s change the distribution landscape and touchpoint with members• Benefits brokers and administrators getting in the HIT game due to broad employer distribution• Beneficiaries will need help navigating• Enables entry point for patient engagement (25mm more insured by 2023, 31mm uninsured)
ACO formation requires know-how, data, tools, and collaboration• Can leverage employer relationships, patient populations, provider networks, access to data,
and balance sheets to lend support to ACO formation• Increasing the need for hospital-physician alignment and referral management
Provider organizations assume risk that was previously borne by carriers• By design, insurance organizations manage risk across populations• Continued need to manage large patient populations beyond the ACO• Rapidly acquiring/developing new tools
Payers Pivot
?
CONFIDENTIAL 10HEALTHCARE GROWTH PARTNERS
Providers Pivot
The number of insured is going to increase by 25 million by 2023• Demand for healthcare will inevitably go up, particularly among under-served populations• Managed Medicaid will require more “management”• Care will need to be managed and delivered in cost-effective settings (home, mid-levels, etc)
Utilization management is trending to real-time clinical decision support• Retrospective utilization management is getting closer to the point-of-care• Requires integration between big data, EMR and CDS system• Pulling data from disparate sources and putting proven intelligence around that data
Intensive focus on care coordination and care management• Care coordination involves managing the patient (and data and referrals) across care settings• Care management involves actively engaging with patients throughout the care episode• Demographic-specific: A pediatric case is very different from geriatric (care keepers, etc)
Readmission penalties put the spotlight on post-acute care• Acute care facilities have rapidly responded to readmission penalties (proving penalties work)• Enhancing discharge process and post-acute follow-up, as well as providing an entry point for
provider organizations to get into home monitoring and linking to care management
Quality and pricing transparency is still lacking• Without patient advocates, the market is opaque• Given the shift toward greater patient responsibility (given health plan design), favorable quality
and transparency measures are likely to be rewarded, hence investment in data
CONFIDENTIAL 11HEALTHCARE GROWTH PARTNERS
PATIENTS PIVOT REACT
The Affordable Care Act put in place a
number of patient protections…
• Elimination of pre-existing limitations• Structural changes to insurance caps and denials• Protections against premium rate hikes• Expanded coverage (children up to age 26, Medicaid expansion,
employer requirements, etc)• Broader coverage (mental health, etc)• Greater choice (insurance exchanges)• Non-discrimination (no premium variability for higher-risk vs lower-risk
patients – cuts at the heart of the insurance model)• Sunshine Act (reduce the risk of clinical decisions based on kick-backs)• Readmission penalties and never-events (increase quality and reduce
error)
…only to result in market forces driving
toward patient responsibility
• Health plan selection through insurance exchanges (public and private)• Trending toward higher deductible plans as beneficiaries opt in to these
plans by choice, aided by employers steering employees toward higher deductible policies
• Readmission penalties are resulting in more non-acute care management
• Mobile technology and information-connectivity is a patient engagement macro tailwind
• Patients are faced with the conundrum of rising costs, greater choice, more responsibility, and access, but lack the information transparency to make informed decisions
CONFIDENTIAL 12HEALTHCARE GROWTH PARTNERS
A COMMON GOAL
Lines are blurring because providers, employers, and payers are working toward variations of a common goal – alignment that has historically been elusive
• Employer Interpretation: Shift the benefits burden to patients through private HIX defined contribution plans, which indirectly result in lower coverage plans that decrease options and increase patient responsibility, and also incorporate other tools that improve workforce health and productivity to help manage that additional burden assumed by employees
• Payer/Provider Interpretation: Ensure patients are proactively monitoring the health of themselves and their dependents, to preempt health complications and utilize efficient care settings, and not to overlook the consequential benefit of consumer marketing
• Result: The ACA on its own didn’t engage the patient – stakeholders and market forces are aligning to engage patients in ways that have a demonstrable ROI
Goal: Engage the patient to take greater responsibility
• Provider Interpretation: Align with key referring providers and give them the technology and care management tools to ensure seamless care transitions
• Payer Interpretation: Land grab as many ACO’s as possible, and deliver value through know-how, data, and provider and patient networks
• Result: Hospitals and payers are acquiring and partnering across the entire care continuum in ways that require data exchange, patient engagement, and care management as well as creating new forces that enable collaboration and competition that previously didn’t exist
Goal: Create risk-based systems that align providers across the care continuum
CONFIDENTIAL 13HEALTHCARE GROWTH PARTNERS
TRENDING INVESTMENT VERTICALS
Employer Wellness
Benefits Management
Health Consumers
Patient Engagement
Big DataPM & EMR
Remote Care
ACO Tools
ACO-Oriented RCM
Guiding Theses• Transparency
• Cost & Quality• Risk-Management
• Employer & Provider (& increasingly patient) vs Ins Carrier
• Patient vs Consumer Engagement• Informed, connected patient
• Utilization Management• Real-time CDS
• Care Coordination• Non-Acute care focus
CONFIDENTIAL 14HEALTHCARE GROWTH PARTNERS
MARKET MOVING HIT INVESTMENT ACTIVITY IN 2012 AND YTD 2013
Sector Thesis Notable Investment Activity
EmployeeWellness
Closely related to patient engagement, geared toward self-funded employers with incentive-based programs to reduce healthcare costs.
Benefits Management
Geared toward employers and consumers, businesses that aggregate data with an eye toward transparency in quality and pricing (aka, value). Includes health insurance exchanges (HIX).
Oscar Health
ACO Tools
These vendors promise everything from population health management, care coordination, analytics, engagement, and referral management, yet actual capabilities tend to be narrower.
CONFIDENTIAL 15HEALTHCARE GROWTH PARTNERS
MARKET MOVING HIT INVESTMENT ACTIVITY IN 2012 AND YTD 2013
Sector Thesis Notable Investment Activity
Health Consumers
Consumer-oriented health content and products that generally bypass the healthcare system.
Patient Communic-ations
View the patient as “connected consumers”, solutions that aim to engage patients on behalf of markets served (employers, payers, providers, etc)
Data – Clinical Decision Support & Population Health
Offer tools that not only aggregate and warehouse data sets, but build intelligence that enable data to better manage large populations and enable real-time clinical decision support.
CONFIDENTIAL 16HEALTHCARE GROWTH PARTNERS
MARKET MOVING HIT INVESTMENT ACTIVITY IN 2012 AND YTD 2013
Sector Thesis Notable Investment Activity
PM & EMR
Still going strong, PM & EMR has concentrated down to SaaS solutions with large distribution networks, vendors focused on physician specialties, and vendors serving the post-acute market.
eHealth Solutions
ACO-Oriented RCM
Includes RCM vendors who engage in patient access, bundled payments, and hospital-physician alignment.
Remote Care Enabling Platforms
Technology-enabled care models that strive to manage the patient in the home environment, a reflection of HIT intersecting with healthcare services/care delivery.
Consulting MD
CONFIDENTIAL 17HEALTHCARE GROWTH PARTNERS
TECHNOLOGY-ENABLED HEALTHCARE DELIVERY – WHO TO WATCH?
Humedica (2013), Connextions (2011), Ventures Group
Coventry (2012), Healthagen (2011), Prodigy (2011), Medicity (2010)
Linkwell (2013), Amerigroup (2012), SoloHealth (2012), Bloom (2011), CareMore (2011), HealthyCare Solutions
Certify Data (2012), Anvita (2011), Concentra (2010)
PureWellness (2013), Clairvia (2011), Resource Systems (2011), IMC Health (2009)
Medical Referral (2013), 360Fresh (2012), Pivot Health & Cielo Med (2011), Southwind (2010), Crimson (2008)
Array (2013), $11mm Carnegie Mellon Partnership, $100mm Medical Mall
Data warehouse initiative, UPMC Health Plan CardioCom (2013)
Health Catalyst, Telcare, AssureRx, Airstrip
Navihealth, Hello Health, Patientco, change:healthcare, Essence Group, Bloom Health, Phreesia
Quantros, Navihealth, Vivify, GetWellNetwork, BodyMedia, Phreesia
Aviacode, Vivify, Awarepoint, Shareable Ink
Transparent Insurance ($40mm investment in July ‘13)
35mm member “transparent” PBM
Competitive Dynamics
Oscar Health
CONFIDENTIAL 18HEALTHCARE GROWTH PARTNERS
TECHNOLOGY-ENABLED HEALTHCARE DELIVERY – KEY TAKEAWAYS
Healthcare IT is on the front-end of a long-term growth cycle (see slide 8) Putting $20mm+ to work is challenging in pure HIT, but it’s happening with greater frequency
given long-term plays on big data (see slides 14-16) Generally requires $200mm+ exit – few $200mm+ HIT exits are VC-backed (2012 & 2013) and
reflect a mix of high-growth and turnaround scenarios:
In healthcare, sometimes you want to think BIG and small
A big risk is getting too far ahead of the innovation curve despite the temptation External Sensitivities: Regulatory swings, workflow challenges, stakeholder politics Scalable HIT investment models historically enable <$100mm exits without compromising IRR
(smaller capital base) – larger exits are fewer, and today’s big plays are yet to-be-proven wins
Target Acquiror Seller
Epocrates
Athena VC, Public
dbMotion
Allscripts VC
Mgd Health
Roper PE
Med Man
Zotec Public Sub
CardioCom
Medtronic
NA
APS Univ Amcn
Public
eScreen Alere VC
Target Acquiror Seller
Transcend
Nuance Public
Mediconnect
Verisk VC
Coderyte 3M VC
eResearch
Genstar Public
Truven Veritas Public Sub
Extend Twrs Wat VC
DRG Piramal VC
Target Acquiror Seller
Aeroscout Stanley VC
M*Modal One Equity
Public
MaxIT SAIC PE
Sunquest Roper PE
Quantim Nuance PE
JA Thomas
Nuance NA
Milliman Hearst Private Sub
CONFIDENTIAL 19HEALTHCARE GROWTH PARTNERS
HIT CHALLENGES AND OPPORTUNITIES
• Distribution Models: Successful HIT companies win on execution (“we have a great product but lack the sales channel” is a message often heard).
• Workflow, Utilization and Adoption: Whether selling to providers or payers, vendors need to ensure utilization of their products, particularly when selling into a PMPM model, and minimizing workflow disruptions for providers to ensure clinical and administrative adoption.
• Sales Cycle: Sales cycles of 9-18 months are not atypical.
Operating Characteristics
• Competition for Investment: There’s no shortage of funds claiming to be HIT experts – using various forms of differentiation: Strategic LPs (health systems, health plans), Advisory Boards (comprising thought leaders across the industry), Synergy Across the Portfolio (cross-sell, potential customers, know-how), Marketing the Big Wins.
• Opportunistic vs Investment Thesis Strategies: Investors act on a mix of opportunism and investment thesis. The latter can be challenging given the scarcity of viable assets that can play into an investment thesis.
• Valuation: There is a sharp inflection point for businesses that show momentum in “hot” sectors, resulting in high subsequent financing valuations.
Investment Characteristics
The rising HIT tide will not lift all boats
CONFIDENTIAL 20HEALTHCARE GROWTH PARTNERS
HIT VALUATION CHARACTERISTICS
Deal activity has deviated away from the typical normal distribution toward a more “bi-modal” distribution
Revenue Multiple Range
Characteristics of Business
0.0x - 1.0x Commoditized offeringProduct and capability gapsLow or negative gross and EBITDA marginsHigh customer attritionDistressed transaction
1.0x - 3.0x Technology scalabilitySignificant growth prospectsStrategic synergyCompetitive sale processLicense modelExpense synergy
>3.0x Prior relationship with buyerRights to dataHigh revenue synergyPlatform investmentNew market entrantSustainable business modelAddresses healthcare structural challenges
CONFIDENTIAL 21HEALTHCARE GROWTH PARTNERS
HIT VALUATION OUTLIERSN
umbe
r of T
rans
actio
ns
Revenue Multiple0.5x 1.5x 3.0x >4.0x
Typical Distribution
Num
ber o
f Tra
nsac
tions
Revenue Multiple2.5x 3.0x 4.0x 5.0x >5.0x
The Long Tail
Size Growth Recurring Revenue Profitability SaaS/Web
Data Rights Market (see below) Accountable Care Supply/Demand
The Long Tail
AnalyticsCareCoordination
Interoperability
Patient Engagement
HIT Platforms
Post-Acute
Select EMR
CONFIDENTIAL 22HEALTHCARE GROWTH PARTNERS
CHARACTERISTICS OF OUTLIERS
• Single database enabling robust analytics• Delivery model that creates scale on the cost side, and recurring revenue on the top line
SaaS Architecture and Delivery
• Pricing methodology that aligns with customer ROI – the vendor wins when the customer wins
Pricing Alignment with ROI
• Efficient distribution model (eg, customer acquisition cost < customer value)
Scalable Distribution Model
• Addresses healthcare structural flaws rather than take advantage of them in an effort to deliver sustainable change in a post-ACA environment
Reform-Centric Value Proposition
• Contract structures that contain explicit rights to data
Data Rights
• Market leadership (or opportunity to lead) = Favorable supply/demand characteristics at exit• Large and growing market opportunity, strong financial characteristics = recurring revenue &
growth, inherent scalability if not profitability, strong management, size
General Considerations
CONFIDENTIAL 23HEALTHCARE GROWTH PARTNERS
HIT M&A (INCLUDING BUYOUT) TRENDS
Annualized 2013 as of June 30 Note deals announced in Q1 2013 likely include a number of Q4 2012 transactions 2013 activity 30% lower than 2012
CONFIDENTIAL 24HEALTHCARE GROWTH PARTNERS
HIT CAPITAL RAISE (NON-BUYOUT) TRENDS
Note deals announced in Q1 2013 likely include a number of Q4 2012 transactions 2013 activity 22% higher than 2012 Investment valuations tend to be superior to M&A valuations