The Healthcare IT (HCIT) M&A market is witnessing significant activity, a sign the sector’s predicted expansion and transformation is taking shape. While most deals in 2011 can be categorized as smaller tuck-ins, two marquee transactions were announced this summer: ExpressScripts’ $29 billion acquisition of Medco, a pharmacy benefits management provider, and Blackstone’s $3 billion acquisition of Emdeon, a revenue cycle management and medical data services provider. As consolidation and HCIT spending continue to accelerate, we believe the healthcare market is poised for increased M&A activity and growth. Government financial incentives and regulations requiring automation in healthcare practices will continue to be the main drivers in the sector for the next several years. The HCIT market in the U.S. is expected reach $40 billion by the end of 2011 and grow at an impressive 24% compound annual growth rate (CAGR) from 2012-2014. 1 Spending on healthcare software is expected to rise 20.5%, from $6.8 billion in 2010 to $8.2 billion in 2011. 2 A large portion of the growth will come from spending on electronic health record (EHR) systems and mobile applications. Signal Hill Chase Sanders Director [email protected]Sector M&A Update: Healthcare IT 2011 Sector M&A Update: Healthcare IT 2011 www.signalhill.com Q/Q Rev Growth Key Factors Driving Continued HCIT Investment and M&A Some of the key factors that we see driving investment and consolidation in the HCIT sector are as follows: Increased government initiatives and healthcare • reform: Spurred by attractive government incentives that began in 2011 and greater clarity surrounding meaningful use rules, hospitals will invest billions of dollars into certified EHR systems. Although many hospital systems were already planning to invest in EHRs, the government’s new regulations considerably condensed their timelines. The criteria for meaningful use will be staged in three steps over the next several years, with Medicare penalties beginning in 2015. Stage 1, currently in process through 2012, sets the baseline for electronic data capture and information sharing. Skyrocketing cost of healthcare delivery to • patients, physicians and providers: The largest contributor of increasing medical costs comes from care providers, which account for up to 81% of the medical benefit. 3 Growth in medical costs for 2011 has been primarily driven by provider cost-shifting from Medicare to commercial payers due to rate cuts, increased bargaining power from continued provider consolidation (physicians and hospitals) and large capital investments by hospitals for IT systems and professionals. Desire to improve patient safety and health outcomes: • An estimated 80% of serious medical errors involve miscommunication between caregivers when a patient is transferred or handed off. 4 Improvements in the completeness, accuracy and accessibility of patient information can reduce defective hand-offs by an average of 52%. 5 Innovative technology from niche players: Niche • players continue to develop new technologies to capture and use data and drive change in the HCIT space. These niche markets are large enough to provide significant venture capital returns, with readily foreseeable exit opportunities as large strategics consolidate and become “one-stop-shops.” IN THIS ISSUE: M&A Update - Healthcare IT 2011 2 HCIT M&A By The Numbers 2 Public HCIT Company Multiples 3 Noteworthy Recent Transactions 4 Largest HCIT Transactions 5 Venture Investments in HCIT 6 Public HCIT Equity Performance 7 HCIT Public Company Data 8 Precedent HCIT Transactions 10 References
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The Healthcare IT (HCIT) M&A market is witnessing significant activity, a sign the sector’s predicted expansionand transformation is taking shape. While most deals in2011 can be categorized as smaller tuck-ins, two marqueetransactions were announced this summer: ExpressScripts’$29 billion acquisition of Medco, a pharmacy benefits management provider, and Blackstone’s $3 billion acquisitionof Emdeon, a revenue cycle management and medical dataservices provider. As consolidation and HCIT spendingcontinue to accelerate, we believe the healthcare market ispoised for increased M&A activity and growth.
Government financial incentives and regulations requiringautomation in healthcare practices will continue to be the main drivers in the sector for the next several years. The HCIT market in the U.S. is expected reach $40 billionby the end of 2011 and grow at an impressive 24% compound annual growth rate (CAGR) from 2012-2014.1
Spending on healthcare software is expected to rise 20.5%,from $6.8 billion in 2010 to $8.2 billion in 2011.2 A large portion of the growth will come from spending on electronic health record (EHR) systems and mobile applications.
Sector M&A Update: Healthcare IT 2011 www.signalhill.com
Q/Q Rev
Growth
Key Factors Driving Continued HCIT
Investment and M&A
Some of the key factors that we see driving investment andconsolidation in the HCIT sector are as follows:
Increased government initiatives and healthcare•
reform: Spurred by attractive government incentivesthat began in 2011 and greater clarity surroundingmeaningful use rules, hospitals will invest billions ofdollars into certified EHR systems. Although many hospital systems were already planning to invest inEHRs, the government’s new regulations considerablycondensed their timelines. The criteria for meaningfuluse will be staged in three steps over the next severalyears, with Medicare penalties beginning in 2015. Stage 1,currently in process through 2012, sets the baseline forelectronic data capture and information sharing.
Skyrocketing cost of healthcare delivery to •
patients, physicians and providers: The largest contributorof increasing medical costs comes from care providers, which account for up to 81% of the
medical benefit.3 Growth in medical costs for 2011 hasbeen primarily driven by provider cost-shifting fromMedicare to commercial payers due to rate cuts,increased bargaining power from continued provider consolidation (physicians and hospitals) and large capital investments by hospitals for IT systems and professionals.
Desire to improve patient safety and health outcomes:•
An estimated 80% of serious medical errors involvemiscommunication between caregivers when a patientis transferred or handed off.4 Improvements in the completeness, accuracy and accessibility of patientinformation can reduce defective hand-offs by an average of 52%.5
Innovative technology from niche players: Niche •
players continue to develop new technologies to capture and use data and drive change in the HCITspace. These niche markets are large enough to providesignificant venture capital returns, with readily foreseeableexit opportunities as large strategics consolidate andbecome “one-stop-shops.”
IN THIS ISSUE: M&A Update - Healthcare IT 2011
2 HCIT M&A By The Numbers
2 Public HCIT Company Multiples
3 Noteworthy Recent Transactions
4 Largest HCIT Transactions
5 Venture Investments in HCIT
6 Public HCIT Equity Performance
7 HCIT Public Company Data
8 Precedent HCIT Transactions
10 References
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H e a l t h c a r e I T 2 0 1 1
HCIT M&A By The Numbers
HCIT M&A activity has grown steadily since 2008. The total number of announced deals grew substantially in 2010 andthe expected deal count for 2011 is on pace to exceed it. Median deal size for 2011 grew slightly over 2010, continuing a positive trend since a low in 2009. The median revenue multiple for 2011 also grew slightly compared to 2010 to 2.5x. The continued expansion of these metrics signals increased market confidence and the growing value of HCIT to strategic and financial investors.
Figure 1: HCIT M&A Deal Metrics, 2008-2011
Figure 2: Signal Hill HCIT Composite Enterprise Value / LTM Revenue Public Company Trading Multiples
% change from prior year - 60.4% 37.7% 11.3% - 23.9%
Total Enterprise Value ($M) $3,607.0 $10,610.1 $8,106.2 $7,848.0 $7,177.0 $5,869.8
% change from prior year - 194.2% -23.6% -3.2% - -18.2%
Median Announced Deal Size ($M) $51.6 $10.5 $59.0 $60.0 $61.3 $60.0
% change from prior year - -79.7% 461.9% 1.7% - -2.1%
Median EV/TTM Revenue Multiple 2.2x 1.1x 2.4x 2.5x 2.7x 2.5x
% change from prior year - -50.0% 118.2% 4.2% - -7.4%
*2011 data excludes the EV $34 billion ExpressScripts/Medco transaction.
Public HCIT Company Multiples
Public HCIT company revenue trading multiples are a key indicator of the health of the market and began expanding at a healthy clip in 2011, peaking at 3.2x. However, macroeconomic head winds from a slowing U.S. economy and concernsof a spreading debt crisis in Europe have since depressed HCIT revenue trading multiples to around 2.4x over the last few months.
Sep-09 Feb-10 July-10 Dec-10 May-11 Sep-11Source: Signal Hill
3.4x
3.2x
3.0x
2.8x
2.6x
2.4x
2.2x
2.0x
1.8x
3.4x
3.2x
3.0x
2.8x
2.6x
2.4x
2.2x
2.0x
1.8x
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Note: Payor IT: HMSY and SXCI; Pharma IT: ACCL, CGM-FR, EPOC, ERT, MDSO and WBMD; Physician IT: AH, ATHN, COP-DE, MDRX, QSII and ZIXI; Hospital IT:
CERN, CPSI, MCK, MDAS, MEDW and OMCL; Imaging IT: ICAD, MRGE, OSIS and SECT.B-SE; and Services IT: ABCO, EM and HSTM.
Noteworthy Recent HCIT M&A Transactions
Emdeon / Blackstone (Enterprise Value: $3,061 million; 2.8x revenue): Private equity firm Blackstone agreed to acquire•a controlling interest in Emdeon, a provider of revenue and payment cycle management solutions, connecting payers,providers and patients in the U.S. healthcare system. Under the terms of the merger agreement, holders of Emdeoncommon stock will receive $19.00 per share in cash, representing a 39% premium to its average 30-day trading price.This transaction marks a complete exit from Emdeon by General Atlantic, the private equity firm that bought a 52% stake in the company in 2006 from HLTH for $1.25 billion. The remaining private equity shareholder, Hellman &Friedman will retain a minority equity interest in Emdeon.
Vangent / General Dynamics (EV: $960 million; 1.3x revenue): General Dynamics, a provider of information technology,•systems engineering, professional services and simulation and training support to government customers, agreed toacquire Vangent, a provider of health informatics and information exchange, electronic health records, data analyticsand business-process outsourcing solutions, also to government customers. The acquisition will add depth and breadthto GD’s IT operations, which provides HCIT systems and solutions to federal, commercial and military customers. It isthe second time in four years Vangent ownership has changed; Veritas acquired the company from Pearson for $600 million in 2007.
Sage Software Healthcare / Vista Equity Partners (EV: $320 million; 2.8x revenue): Vista Equity Partners, a private•equity firm focused on enterprise software and technology businesses, agreed to acquire Sage Software Healthcare, aprovider of practice management and EHR offerings. The transaction will allow Sage to focus on other U.S opportunitieswithin its core customer base. Sage will make a loss of up to 70 million pounds ($108.4 million) through the sale and redistribute cash proceeds of $320 million to shareholders by buying back shares.
Figure 3: Current Signal Hill HCIT Subsector Composites Median Enterprise Value / Revenue Trading Multiples
The table below provides a snapshot of public company trading multiples broken down by key subsectors of HCIT.
4.5x
4.0x
3.5x
3.0x
2.5x
2.0x
1.5x
1.0x
0.5x
0.0xHospital IT Imaging IT Payor IT Pharma IT Physician IT Service IT
2.2x
1.9x
2.3x
1.2x 1.2x 1.2x
3.4x
3.0x
2.5x
1.4x 1.4x1.2x
4.0x
3.3x
2.9x
3.5x
3.1x
2.6x
LTM 2011E 2012PSource: Signal Hill
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H e a l t h c a r e I T 2 0 1 1
Gateway EDI / TriZetto (EV: $230 million; revenue multiple unavailable): TriZetto, a healthcare payment software and•services provider, agreed to acquire Gateway EDI, a St. Louis-based provider of healthcare revenue cycle managementsolutions. The acquisition will enable TriZetto to offer an integrated end-to-end payment information product.Gateway EDI’s leadership will remain in place and will operate the company as an independent subsidiary.
Vitalize Consulting / SAIC (EV: $190 million; 2.5x revenue): SAIC, a scientific, engineering, and technology •applications company, agreed to acquire Vitalize Consulting, a provider of clinical, business and IT services for healthcareenterprises. The acquisition enables SAIC to expand in the commercial health provider market and leverage its information integration and data analytics expertise with Vitalize Consulting’s HCIT and clinical workflow optimizationcapabilities to further grow as commercial and Federal health markets converge.
Medical Present Value / Experian (EV: $185 million; 4.1x revenue): Experian, a global information services company,•agreed to acquire Medical Present Value, a provider of data, analytics and software in the RCM market. MedicalPresent Value’s revenue CAGR over the past three years has exceeded 30%, driven primarily by new business wins.The acquisition will provide Experian a more comprehensive set of products and services across the healthcare payments life cycle and help clients manage multiple vendors through a single point of contact.
M*Modal / MedQuist (EV: $130 million; 5.4x revenue): MedQuist, a provider of integrated clinical documentation •solutions for healthcare, agreed to acquire M*Modal, a provider of speech recognition and natural language processingsoftware enabling structured data to be pulled from dictation and placed in an EHR. The deal will allow MedQuist toprovide advanced speech understanding technologies and services that seamlessly capture the physician narrative.MedQuist intends to enhance further the integration of M*Modal’s front-end speech recognition technology withMedQuist’s clinical documentation platform.
Figure 4: Largest HCIT Transactions by Enterprise Value, 2010-2011
09-Jul-10 MultiPlan, Inc. BC Partners &Silver LakePartners
$3,100.0 NA Provider of healthcare cost management solutions that deliver transactionbased services to insurers, health plan administrators, and other payersof healthcare services.
04-Aug-11 Emdeon, Inc. The BlackstoneGroup
$3,061.0 2.8x Provider of revenue and payment cycle management and clinical information exchange solutions.
09-Jun-10 Eclipsys Allscripts $1,205.0 2.3x Provider of advanced integrated clinical, revenue cycle and performancemanagement software, clinical content and professional services.
16-Aug-11 Vangent, Inc. GeneralDynamics
$960.0 1.3x Provider of health informatics and information exchange, electronichealth records and data analytics, as well as state-of-the-art businessprocess outsourcing solutions to federal clients.
14-Sep-10 The BroadlaneGroup
MedAssets, Inc. $850.0 5.1x Provider of supply chain management, strategic sourcing of suppliesand services, capital equipment lifecycle management, medical deviceor PPI cost management, centralized procurement, clinical and leanprocess consulting, and clinical workforce optimization.
16-Apr-10 Phase Forward Oracle Corp. $575.9 2.7x Provider of integrated data management solutions for clinical trials anddrug safety.
07-Dec-10 Medicity Inc. Aetna Inc. $500.0 NA Offers a broad range of products and services that enable health systems,hospitals, physician practices and health information exchanges tosecurely access and exchange health care information.
22-Sep-11 Sage Group /Sage SoftwareHealthcare LLC
Vista EquityPartners
$320.0 2.8x Provides electronic healthcare records (EHR) and medical practicemanagement software for the medical sector with features for businessintelligence analytics, patient online self-service, reporting andtransaction processing.
14-Sep-10 ChamberlinEdmonds &Associates, Inc.
Emdeon, Inc. $260.0 NA Provides comprehensive eligibility services through technology-enabledpatient access solutions nationwide for hospitals, government agenciesand managed care organizations.
05-Mar-10 AMICAS, Inc. MergeHealthcareIncorporated
$240.1 3.3x Offers a suite of image and information management solutions including radiology PACS, cardiology PACS, radiology information systems, cardiovascular information systems, revenue cycle managementsolutions and enterprise content management tools designed to powerthe imaging component of the electronic medical record (EMR).
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HCIT Venture Capital Investments
Venture Capital investments in the HCIT sector witnessed significant growth during 2010 and 2011. As of September 30,the number of investments was up more than 10% compared to 2010, while total dollars invested already exceeds thetotal amount for all of 2009.
*2011 as of 9/30/10. Percentage change compared to same period in 2010.
Figure 5: HCIT Venture Capital Investments, 2005-2011*
Business process management technology for healthcare continued to bring in the majority of venture capital investmentsduring the first three quarters of 2011. Revenue cycle management witnessed a large increase in investments, while theother subsectors witnessed declines, mostly due to general market weaknesses.
Figure 6: HCIT Venture Capital Investments by Subsector, 2005-2011*
*2011 data as of 9/30/10.
Source: VentureXpert/ThomsonOne
2005 2006 2007 2008 2009 2010 2011(E)As of 9/30
2011*TOTAL as of
Q3 2011
Total Number of Investments 42 54 53 55 45 69 67 49 367
Percent change over previous period - 28.6% -1.9% 3.8% -18.2% 53.3% -2.9% 11.4% -
The HCIT equity subsectors for Services, Payor, Physician, Hospital and Imaging outperformed the NASDAQ Compositeover the last year, up 56.6%, 40.6%, 31.9%, 28.1% and 20.0% respectively. Only the Pharma HCIT equity subsector under-
performed the NASDAQ Composite over last year, down 38.7%.
Figure 7: One Year Signal Hill HCIT Composite vs NASDAQ Composite
Figure 8: One Year Signal Hill HCIT Sub-sector Composites vs NASDAQ Composite
Note: Payor IT: HMSY and SXCI; Pharma IT: ACCL, CGM-FR, EPOC, ERT, MDSO and WBMD; Physician IT: AH, ATHN, COP-DE, MDRX, QSII and ZIXI; Hospital IT: CERN, CPSI, MCK, MDAS, MEDW and OMCL; Imaging IT: ICAD, MRGE, OSIS and SECT.B-SE; and Services IT: ABCO, EM and HSTM.
Public HCIT Equity Performance
The Signal Hill HCIT Composite performed in line with the NASDAQ Composite over the last quarter of 2010 and outperformed the NASDAQ through Q3 2011, up 22.7% over the last year.
40%
30%
20%
10%
0%
-10%
40%
30%
20%
10%
0%
-10%
Source: Signal Hill
Sep-10 Dec-10 Feb-11 May-11 Jul-11 Sep-11
70%
60%
50%
40%
30%
20%
10%
0%
-10%
-20%
-30%
-40%
-50%
70%
60%
50%
40%
30%
20%
10%
0%
-10%
-20%
-30%
-40%
-50%Sep-10 Dec-10 Feb-11 May-11 Jul-11 Sep-11
Payor IT NASDAQ Composite Pharma IT Physician IT Hospital IT Imaging IT Services IT Source: Signal Hill
Signal Hill HCIT Composite NASDAQ Composite
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Figure 8: HCIT Public Company Data
Source: Signal Hill Market Data Financial Data Valuation Data
cycle and performance management software, clinical
content and professional services.
16-Apr-10 Phase Forward Oracle Corp. $575.9 2.7x 42.7x 18.4x Provider of integrated data management solutions for
clinical trials and drug safety. Specifically, its SaaS-
based Integrated Clinical Research Suite manages
clinical development and safety processes from Phase
1 clinical trials through regulatory submission and post-
approval monitoring.
05-Mar-10 AMICAS, Inc. Merge
Healthcare
Incorporated
$240.1 3.3x NM 114.7x Offers a suite of image and information management
solutions – from radiology PACS to cardiology PACS,
from radiology information systems to cardiovascular
information systems, from revenue cycle management
solutions to enterprise content management tools
designed to power the imaging component of the
electronic medical record (EMR).
02-Mar-10 Cerrus Ltd Advanced
Computer
Software Plc
$0.6 0.6x NA NA Cerrus' principal product is Saturn, a community
care and support management solution, which
manages the delivery of care, resource management
and organizational financial requirements for over 60
community health & social care providers.
02-Mar-10 Concuity The Advisory
Board Company
$34.5 6.9x NA NA Provider of revenue cycle management software and
services specializing in contract profitability, contract
compliance, denial management, and revenue process
and lifecycle improvement.
22-Feb-10 UltraGenda BV iSOFT Group
Limited
$14.4 3.0x NA NA Provides an Enterprise-Wide Multi-Resource
Scheduling software solution that enables healthcare
organizations to schedule and manage appointments
and resources to improve efficiencies within multiple
operational provider facilities
01-Feb-10 Global Med
Technologies,
Inc.
Haemonetics
Corporation
$62.6 2.0x 36.8x 20.2x Healthcare information technology company which
markets a breadth of software solutions and services
that span the blood supply continuum, from blood
collection to the hospital transfusion center to the
patient care environment.
Signal Hill Disclaimer
The information and opinions in this report were prepared by Signal Hill. The information herein is believed by Signal Hill to be reliable and has been obtained from andbased upon public sources believed to be reliable, but Signal Hill makes no representation as to the accuracy or completeness of such information. Signal Hill may provide,may have provided or may seek to provide M&A advisory services to one or more companies mentioned herein. In addition, employees of Signal Hill may have purchasedor may purchase securities in one or more companies mentioned in this report. Opinions, estimates and analyses in this report constitute the current judgment of the authoras of the date of this report. They do not necessarily reflect the opinions of Signal Hill and are subject to change without notice. Signal Hill has no obligation to update,modify or amend this report or to otherwise notify a reader thereof in the event that any matter stated herein, or any opinion, estimate, forecast or analysis set forth here-in, changes or subsequently becomes inaccurate. This report is provided for informational purposes only. It is not to be construed as an offer to buy or sell or a solicitationof an offer to buy or sell any financial instruments or to participate in any particular trading strategy in any jurisdiction.
Data cited herein is sourced from Signal Hill’s database and derived from publicly available sources – additional information is available on request.
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