Across sectors in global healthcare private equity in 2018, investor interest in HCIT strengthened, with deal volume surging to 48 deals in 2018 from 32 deals in 2017. HCIT saw massive growth among provider and related services, which increased to 35 deals from just 18 in 2017. Disclosed values for HCIT deals climbed back toward the 2016 peak, reaching $8.6 billion, thanks to two provider-focused deals worth more than $1 billion each (see Figure 7). As in recent years, a majority of HCIT assets are designed to support providers.
Disclosed deal value reached the highest level since 2006 as a few large buyouts pushed provider sector deals to nearly double in size
As the healthcare industry increasingly relies on software and technology solutions, both financial sponsors and corporate acquirers flocked to HCIT assets in 2018. These solutions have started to move beyond just capturing patient data electronically and now harness that data in order to improve patient outcomes and reduce costs. Deal count rose for the third consecutive year to a record 48 deals, compared with 32 in 2017, with fully 73% of deals occurring in the provider sector. Disclosed deal value rebounded from $1.9 billion in 2017 to $8.6 billion in 2018, still short of the record $15.5 billion in 2016.
Two large deals by Veritas Capital Partners accounted for much of the value during the year. Veritas Capital acquired General Electric’s revenue cycle, ambulatory care and workforce management software units for $1.1 billion. And several months later Veritas teamed with Elliott Management’s Evergreen Coast Capital to acquire athenahealth, a vendor of software as a service (SaaS)–based RCM and EMR solutions to healthcare providers, for $5.7 billion in a take-private transaction. Veritas recently combined the RCM and EMR pieces of the GE acquisition with athenahealth under the athenahealth brand, and then carved out the GE workforce management business as a standalone entity.
Competition for HCIT deals remains intense and valuations high, with roughly three times as many buyers pursuing deals as there are buyout deals available each year. Potential buyers thus have to bid aggressively and invest heavily in the deal process. HCIT also attracts significant interest from funds that have not historically invested in healthcare, such as tech-focused Vista Equity Partners, which made its fourth healthcare-focused investment in Alegeus Technologies, a healthcare benefits administrative platform. Further, corporate acquirers are chasing HCIT assets aggressively, including assets previously owned by buyout firms, accounting for some of year’s largest deals. Inovalon acquired Ability Network, a cloud-based SaaS technology for managing administration and clinical tracking, from Summit Partners for $1.2 billion.
Provider-focused HCIT investments were the most prevalent because digital technologies have progressed further among providers relative to other healthcare sectors. Investment opportunities, however, vary across the provider sector.
Acute care provider consolidation in recent years has produced large, multispecialty health systems. In parallel, RCM and EMR companies, such as Epic and Cerner, have established themselves as the leading resources for these large acute care providers. Veritas combined athenahealth with GE’s RCM and EMR solutions, as previously mentioned, in an attempt to be the third-largest company in the space. Future HCIT growth in acute care, however, will more likely come from providing additional modules, greater analytics or point solutions such as governance, risk management and compliance, patient safety, and patient engagement. Companies providing bolt-on services could be attractive investment opportunities for buyout funds.
By contrast, the ambulatory care RCM and EMR space remains more fragmented than acute care. Despite the presence of major companies such as Epic and Allscripts, buyout funds have opportunities to invest, mostly in niche category leaders focused on a narrower subset of clinics. For example, Pamlico made a stake investment in Connexin Software, a provider of EMR and PPM systems for pediatric clinics, with the intent of further growing the company’s niche leadership.
As the US healthcare system gradually shifts from fee-for-service to more value-based payment models, many provider HCIT solutions overlap with payers to promote coordination between the two groups. Companies and investors alike are deploying technology to bend the cost curve for delivering care. For example, CD&R acquired a majority stake in naviHealth, and Veritas portfolio company Verscend acquired Cotiviti for $4.9 billion. Both companies provide IT solutions designed to help risk-bearing healthcare organizations use patient data to improve patient outcomes and reduce costs in value-based care settings.
Interest has been healthy in the areas of behavioral health and home care as well. GI Partners and TA Associates acquired Allscripts Health Solutions’ stake in Netsmart Technologies for $525 million. Netsmart provides software and technology solutions designed to connect behavioral health, social services and post-acute records to improve outcomes and reduce costs. GI Partners previously partnered with Allscripts to acquire the company for $950 million in 2016. Netsmart, with sponsor backing, also acquired Change Healthcare’s home care and hospice products in April 2018 to develop a broader suite of connected health records.
Interest in biopharma-focused HCIT assets stayed steady in 2018, with a focus on helping biopharma companies more efficiently conduct clinical trials. Recruiting and tracking patients can be cost intensive and time intensive, especially for specialty drugs with smaller patient populations. GenStar Capital acquired CRF Health, a provider of eCOA and eConsent software solutions that help contract research organizations and pharma companies improve clinical trial efficiency and better track trial data and experience. On the corporate side, pharmaceutical company Roche looked to creatively leverage a provider-focused IT asset when it acquired Flatiron Health, an oncology-focused electronic records company, for $1.9 billion. Roche hopes to draw insights from Flatiron’s data to improve clinical trial designs and results and to better inform its future research. We expect interest will grow in data analytics solutions that support biopharma across the life cycle from research to commercialization.
Moving forward, we expect to see an increased focus on HCIT assets that provide interoperability between platforms, with analytics solutions harnessing that data to make better clinical decisions and drive better patient outcomes. In one such 2018 deal, HgCapital acquired Orion Health’s Rhapsody business, a healthcare data interoperability platform serving healthcare providers. Additionally, cloud-based data storage solutions are emerging as an alternative route to interoperability. Major players, such as Google, through its cloud healthcare application programming interface solution, and Amazon Web Services, continue to improve their cloud-based solutions that remove the barriers to data interoperability to further enable healthcare data analytics and machine learning.
Given that many of these sectors are still in early days, plenty of investing opportunities exist in next-generation payer and provider technologies. The field, however, also requires a growth-equity mindset. To that end, KKR made a $57 million Series B investment through its Health Care Strategic Growth Fund in Clarify Health Solutions, which provides data analytics solutions to better measure performance and value for value-based payment programs. In addition to PE firm interest, venture capital funds and corporate venture capital arms have been making significant investments in the HCIT payer and provider spaces. Leading telehealth platform American Well raised $350 million across two rounds led by Allianz and Philips, plus a third round of $75 million in July, and personal health insurance platform Oscar received two rounds of funding totaling $540 million led by Alphabet.
Most HCIT segments remain fragmented, with winners yet to be determined and opportunities still open for platform creation. This has led to investors executing creative deal approaches in a bid to build category leaders. Veritas Capital’s strategy of combining GE’s HCIT assets with athenahealth illustrates how investors are making big bets. And investors are leveraging these platforms to execute tuck-in M&A strategies. For example, Bain Capital’s Waystar platform, rebranded in 2017 following the acquisition of Zirmed by Navicure, acquired Connance to further expand its capabilities in acute care RCM. This trend is taking hold on a smaller scale as well. Early in 2018, Pamplona Capital Management bought out cosponsor Welsh, Carson, Anderson & Stowe’s stake in GetWellNetwork, a patient engagement technology firm. In November, Pamplona executed an add-on investment with the acquisition of California-based HealthLoop, a digital health start-up focused on post-discharge patient engagement, to build a broader geographic footprint and create an end-to-end engagement platform.
We expect HCIT deal activity to continue growing in 2019 as the healthcare industry further embraces digital solutions and ways to harness existing data sources. Solid strategies will include targeting niche category leaders or building category-leading platforms through add-on acquisitions or well-defined value-creation plans. Many opportunities sit at the intersection of payer and provider, though we do expect life sciences companies to embrace HCIT solutions in a more meaningful way in the coming years. Given the number of entities investing in HCIT and the high level of strategic activity, leaning in to buy prize assets could pay off, as could spending time and effort to build a prize asset from multiple smaller assets.