Health 2.0 Houston
February 2013
CONFIDENTIAL
Healthcare Growth Partners, LLC
2013
All Rights Reserved
Presenter Background
 Chris McCord is Managing Director at Healthcare Growth Partners
 HGP is an investment bank and strategic advisory firm focused exclusively on HIT
 Closed over 50 HIT transactions since 2007 – sell-side, buy-side, capital raise
 Seen the good and the bad of HIT

Served as CFO of a biotech company from technology transfer through three
rounds of institutional funding totaling over $30mm

Advisor to School of Biomedical Informatics at UT-HSC

Working on own HIT start-up

Continually frustrated by the lack of organized HIT (and other healthcare)
commercialization in Houston

Look at HIT from the perspective of where the investment dollars are going
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Where are we?
You are here.
Phase I (2010-2015)
Phase II (2012-2020)
(HITECH): Install and
ensure the usage of
Phase III (2020+)
electronic medical
(ACA): Lay the
records with the
foundation for reform
20??
capability of
with pilot risk-based (ACO/Bundled
collecting and
aggregating data
across care settings
reimbursement
models that are
dependent on
outcomes, quality
and efficiency rather
than the volume of
service
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Payment): Execute
on a streamlined
system of robust care
coordination and
population health to
maximize quality as
well as efficiency
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(Personalized
Medicine): Using big
data, quality
reporting, and
genetics, optimize
care and medicine
based on
individualized
characteristics
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What’s Trending in HIT Investments & M&A
 Themes
 Communication
 Mobility
 Data Aggregation and Intelligence
 Products
 EMR (not fading as fast as one might think)
 Population Health
 Patient Engagement
 Care Coordination

Near-term Goals
 Productivity and Efficiency Gains – Create sustainability
 Reduced Readmissions – Avoid “never” events, etc
 Higher Quality – Attract patients and provide quality care
 Lower Cost – Easier said than done
 Obtain a Competitive Advantage – For-profit or not, competitive dynamics matter
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The Skeptic vs the Idealist
Does healthcare IT help solve US
healthcare structural flaws & dysfunction…
or does healthcare IT exploit them?
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Incentives, Motivations & Stakeholders
Segment
Skeptic
Idealist

SS & Medicaid Eligibility
Exploit uninsured & gov’t
Provide access

Urgent Care
Cherry pick patients
Provide access and quality

Utilization Management
Deny care – “ration”
Streamline care

Clinical Documentation
Up-code & up-charge
Build intelligence

EMR
Exploit HITECH
Population health

Health Plans
Cherry pick risk
Distribute risk

Medical Necessity
Protect provider
Protect patient
Depending on the motivation, many healthcare stakeholders, including those in
HIT, may have a strong incentive to preserve inefficiency rather than work toward
and efficient market.
Example: A hospital-employed, salaried physician might approach a care plan
differently from an independent physician.
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Big Picture Healthcare Market Evolution
Today
Trajectory
Optimal
Siloed
Connected
Single Database
Patient
Engagement
Doctor in
the mirror
All stakeholders
responsible except
patient
Mix of patient
responsibility plus
patient protection &
means-testing
Market Orientation
Minimal
Referral
management
across sites
Seamless care
coordination
Access, Quality,
Cost
~50mm
uninsured
Access
meaningfully
addressed by ACA
Information
Cost Optimization
Payer Incentives
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Productivity has
decreased (not Utilization Mgmt (payers)
helped by HIT) Resource mgmt (providers)
Minimize MLR
Focus on data and
reach, vs riskmanagement
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ACA falls short
on quality and
cost
Real-time Clinical
Decision Support
Minimized role
(bundled payments,
ACO, etc)
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Pitfalls and Opportunities in HIT
 Big bets being placed on accountable care
 Tuesday’s Wall Street Journal: “Coming Failure of Accountable Care” – Clayton
Christiansen says physician behavior is too hard to change
 Highly complex and highly dependent on HIT
 Driving just about every aspect of HIT innovation – care coordination, big data,
population health, insurance reform, patient engagement, mobility,
telemedicine/monitoring, proliferation of alternative site models
 Industry stakeholders need to ask – how does the vendor value proposition change
if accountable care organizations fail or never take hold? Or even more likely –
what if they take longer than expected and don’t result in the amount of change that
is hoped for?

Biggest pitfalls in HIT
 Getting too far ahead of the innovation curve because the pace of change in
healthcare is most often slower than one would hope and expect
 Focusing too much on product and not enough on sales strategy
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6 Trends in HIT Investments & M&A
 #1 Thesis: Patient engagement is critical to a care coordination
environment
 The ACA arguably makes everyone responsible for patient care except the patient
itself
 Many facets of patient engagement: marketing, self-responsibility vs monitoring,
wellness, drug adherence, readmission management, care coordination
 Heavy investment: eClinicalworks $25mm investment, multiple VC investments
 #2 Thesis: Big data is valuable in so many ways
 Big data can cost big money – Castlight Health has raised over $100mm
 Data on its own isn’t worth much unless it contains actionable intelligence
 Unlike other industries, much healthcare data is not discrete, making it difficult to
manage
 Take special care when contracting (as a provider or vendor) given the power in
data
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6 Trends in HIT Investments & M&A
 #3 Thesis: Health insurance runs the risk of being disintermediated by the
transfer of risk to providers
 Health insurance companies are adept at managing risk – when providers take risk,
the value proposition for insurance companies is reduced
 Insurance companies are capitalizing on their access to data and large patient
populations (plus risk management and huge balance sheets) and expanding their
portfolio of offerings through HIT acquisitions
 #4 Thesis: There’s a strong need to manage the flow of patients and
information across care settings
 HIE’s contain a subset of the tools required to transition care across settings
 Referral management (eg, hospital discharge to home care or SNF) is near-term
opportunity because of the focus on minimizing hospital readmissions
 Early bets on care coordination have faced challenges because market is not yet
that dynamic
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6 Trends in HIT Investments & M&A
 #5 Thesis: Health care needs to be provided in lower cost settings than
the hospital
 Bundled payments will reward providers for diverting care to lower cost settings
when appropriate
 The combination of unique workflow requirements and higher patient volumes make
alternate sites attractive markets for HIT (home health, urgent care, etc)
 When managed appropriate, alternative sites can reduce hospital readmissions
 Home monitoring will take off, but not until providers have reimbursement incentives
(which will require many apps/devices to get FDA approval)
 #6 Thesis: Population health can optimize outcomes through clinical
decision support and other tools
 The core of accountable care, complex population health systems are effectively
driving the decisions around the coordination of care using evidenced-based
medicine
 Heavy patient engagement component
 Population health, when done right, is highly complex and brings together all of the
theses
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Houston HIT Environment
Most of the building blocks are in-place…
$$$ from
Angels
(from
energy)
Large,
Corporate
Feeders
Entrepreneurs can
build this from scratch.
Or the city can recruit
it by showcasing the
benefits.
HIT
Houston
Expanding
Base of
Institutional
Capital
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World Class
Medical
Resources
World Class
Education
Centers
Access to
Incubators
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HIT Valuation Characteristics
Deal activity has deviated away from the typical normal distribution toward a more “bi-modal”
distribution
2012 Transactions - Revenue Multiples
Revenue Multiple
Range
0.0x - 1.0x
Count
14
12
1.0x - 3.0x
10
8
6
>3.0x
4
2
0
<0.5x
0.5x 1.0x
1.0x 1.5x
1.5x 2.0x
2.0x 2.5x
2.5x 3.0x
3.0x 3.5x
>3.5x
Characteristics of Business
Commoditized offering
Product and capability gaps
Low or negative gross and EBITDA margins
High customer attrition
Distressed transaction
Technology scalability
Significant growth prospects
Strategic synergy
Competitive sale process
License model
Expense synergy
Prior relationship with buyer
Rights to data
High revenue synergy
Platform investment
New market entrant
Sustainable business model
Addresses healthcare structural challenges
Revenue Multiple
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HIT M&A (Including Buyout) Trends
HCIT M&A Activity by Year
Number of Transactions
350
300
Total Transaction Value ($mm)
$25,000
Key Metric – Median Deal Value
2007 - $33 million
2008 - $26 million
2009 - $9 million
2010 - $59 million
2011 - $36 million
2012 - $32 million
Number of Transactions
250
$15,000
200
150
$10,000
Total Transaction VAlue
$20,000
100
$5,000
50
0
$0
2007
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2008
2009
2010
CONFIDENTIAL
2011
2012
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Valuation Criteria
 Factors that lead to premium valuations include high recurring revenue, strong revenue
growth, profitability, and large size
 Recurring revenue is more than just a financial statistic – indicative of attrition and
customer stickiness, ROI and strategic pricing models, and adoption and usage
 It should be highlighted that multiples below are on a trailing basis and include 100%
achievement of any contingent consideration
Healthcare Growth Partners narrowed its transaction database to include 117 highly relevant
transactions with disclosed multiples since 2005
Number of
Transaction Type
Transactions
All HGP-Selected Transactions
117
EV >= $100mm
62
EV < $100mm
55
Profitable Companies
93
Non-Profitable Companies
7
Recurring Revenue Model Companies
52
Non-Recurring Revenue Model Companies
50
Recurring Revenue Model Companies and EV<$100mm
19
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Median
Median
Median
Median
EV
$109.1
$340.2
$23.5
$160.0
$33.0
$215.0
$76.7
$22.0
EV/Revenue
2.30X
2.65X
1.80X
2.50X
0.99X
2.80X
1.90X
2.40X
EV/EBITDA
13.1X
13.6X
10.3X
13.2X
nmf
13.2X
12.9X
10.0X
EBITDA
18%
20%
11%
19%
-15%
22%
14%
14%
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VC/PE HIT Evaluation Criteria
Based on our conversations with private equity and growth capital investors focused
on HIT, the following criteria are of high importance to institutional investors
 Financial Metrics:

Strong recurring revenue model

Focus on companies that are beyond proof-of-concept – the universe of early stage investors has
been contracting

The universe of HIT companies that meets the private equity profile is relatively small, and those
companies are highly sought after

Preference for large market opportunity – well in excess of $100mm
 Business Metrics:

The business provides a strong ROI case for its customers

If software-intensive, preference for a SaaS or web-based delivery model

Scalable business model with competitive differentiation

The business addresses a clear and growing pain point within healthcare

An acquirer universe that includes more than a handful of potential acquirers

Business capitalizes on a post-healthcare reform environment

Proven management team
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HIT Capital Raise (Non-Buyout) Trends
HCIT Capital Raising Activity by Year
Number of Transactions
250
Total Transaction Value ($mm)
$1,800
$1,600
$1,400
$1,200
150
$1,000
$800
100
$600
Total Transaction Value ($mm)
Number of Transactions
200
$400
50
$200
0
$0
2007
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2008
2009
2010
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2011
2012
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