obamacare and the health it opportunity with christopher mccord

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


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


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


2011

$36 Million


2011

Not Disclosed


2011

Not Disclosed

Has acquired

2011

Not Disclosed

Has acquired

2011

Not Disclosed

Has acquired

2011

Not Disclosed

Has acquired

2011

Not Disclosed


2011

Not Disclosed


2011

Not Disclosed

OptiLink Divisionhas been acquired by

2012

Not Disclosed


2012

Not Disclosed

Clinical Mobility Vendor


Undisclosed

2012

$12 Million


2012

Not Disclosed


2012

Not Disclosed

Has been recapitalized by

2012

Not Disclosed


2012

Not Disclosed

Has acquired

2012

Not Disclosed

Has acquired

2012

Not Disclosed

Has acquired

2012

Not Disclosed


2012

Not Disclosed


2013

Not Disclosed


2013

http://www.cardonhealthcare.com/index.html

http://www.bluffpt.com/

http://www.ghnonline.com/


HGP Historical Transaction Experience

$26 Million


2010

Not Disclosed


2010

Not Disclosed


2010

Not Disclosed

Has acquired certain assets from

2009

$4 Million


2009

Not Disclosed


2010

Not Disclosed


2006

Not Disclosed


2008

Not Disclosed


2008

Not Disclosed


2007

Not Disclosed

Cardiology Division has been acquired by

2007

$12 Million


2007

$41 Million

Financial Advisor forits sale to

2008

$142 Million

Has acquired

2008

Not Disclosed


2008

Not Disclosed


Management

2008

Not Disclosed


2008

Not Disclosed


2008

Not Disclosed

Has acquired theNavicare Product Line of

2009

Not Disclosed


2009

Not Disclosed

Has acquired

2008

Not Disclosed


2009

Not Disclosed


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

http://www.docusys.net/index.asp


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


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.


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)


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

?


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


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


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


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


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.




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.




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


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


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


Transcend

Nuance Public

Mediconnect

Verisk VC

Coderyte 3M VC

eResearch

Genstar Public

Truven Veritas Public Sub

Extend Twrs Wat VC

DRG Piramal VC


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


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


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


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


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


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


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

obamacare and the health it opportunity with christopher mccord

Business

recapitalization byhas

healthcare technology

servicesmost active

byreceived funding fromhas

healthcare investment

buyside sellside totalhgp

services sectorsover

softwareenabled services