Health IT Investment on Record Pace through Q3

October 24, 2017

Through Q3-2017, investment in Health Information Technology & Services (HIT) remains vibrant and on record pace.  HGP monitored 492 HIT investment transactions through Q3, representing 312 US and 180 non-US targets.  While the pace of activity in the US grew at a 19% annual rate over the last 6-years, non-US HIT investing increased at a dramatic 47% rate.  As striking as the deal volume increase is, the dollar value of investment is also rising at a blistering pace, totaling just over $8 billion globally through Q3-2017 of which $5.6 billion was invested in US-based HIT companies.  Total capital invested globally in HIT has increased at an annual rate of 46% since 2011.

Surprisingly, M&A activity has not mirrored the trajectory of investment.  HGP monitored 272 HIT M&A transactions through Q3 – 223 US and 49 non-US, representing an annual increase of just 3% since 2011 and a slight YoY decline compared to 2016 Q1-Q3 volume.

There is undoubtedly an assumption that the total addressable market (aka, revenue opportunity) in the HIT market will increase dramatically to absorb the 46% annual growth rate in investment.  In addition to the need for a larger total addressable market, M&A activity will also need to increase for the market to remain in equilibrium.

Where are investors placing their bets?  Based on the deal highlights in Q3, the following trends are evident:

On the M&A front, three mega-deals were announced during the quarter:

  • Zirmed: Navicure and ZirMed, two of the largest stand-alone clearinghouse vendors, merged to create an entity providing revenue cycle technology to more than 400,000 providers, hospitals, and health systems in a transaction that involved Navicure acquiring ZirMed for $750 million.
  • The Advisory Board: In a creative transaction, Optum Health spent $1.3 billion on the healthcare division of The Advisory Board (Vista Equity purchased the education business for approximately $2.6 billion). With the transaction, Optum, a division of UnitedHealth Group, expands its massive and occasionally conflicting footprint of technology and services that caters to both payers and providers.
  • WebMD: KKR’s Internet Brands acquired WebMD at an enterprise value of $3.7 billion. Also acquiring during the quarter, Internet Brands has assembled a massive portfolio of healthcare content and brands serving both consumers and providers.

On the Investment front, the most prevalent theme was genomic medicine, with nearly $500 million raised across five noteworthy transactions:

  • Tempus: Offering software to physicians to guide treatment decisions based on genetic profiles, Tempus raised $70 million in an investment round led by NEA AND Revolution Growth.
  • Deep Genomics: Developing machine learning technology to understand how genetic variations lead to disease, Deep Genomics raised $13 million led by Khosla Ventures.
  • M2GEN: Developing health informatics that accelerate the discovery, development, and delivery of personalized medicine, M2GEN raised $75 led by Hearst Health Ventures.
  • 23andMe: Offering a personal genetic testing service that allow users to explore their personal predispositions, 23andMe raised $250 million led by Sequoia Capital.
  • Color: Offering physician-ordered genetic tests and counseling, Color raised $80 million in an investment round led by General Catalyst.

The following are noteworthy transactions from the quarter.