5 Technologies That Drove Health Care M&A in 2014
Cloud computing and data analytics are among the technologies spurring a wave of health care M&A
As the Affordable Care Act brings more patients into the U.S. health care system, the need to pare down costs and improve efficiencies has become more urgent. Increasingly, health care providers and investors spent much of 2014 turning to and investing in technology companies for solutions. (See video below.)
“What you’re seeing now is a lot of consolidation, and you need those great clinical workflows and great data solutions to get the best return on the investment,” says Mike Jackman (pictured), general manager of specialty solutions healthcare IT at GE Healthcare, a division of General Electric (NYSE: GE).
GE Healthcare has made several technology acquisitions and expects to make more.
The Affordable Care Act is one of the factors fueling the trend. Higher patient inflows cause physician groups and hospitals to merge, and those larger health care organizations require suitable technology to handle the influx of patients.
“We are living in the biggest transformation in health care ever experienced,” says Alan Portela (pictured below), CEO of AirStrip Technologies, a mobile health care technology company.
A shortage of caregivers, including a decline in generalists; the ACA’s guiding of more than 30 million new patients into the system; and baby boomers reaching retirement age are factors that are all causing shifts in the health care model.
“This is prompting health care to move from the hospital model to an outcome- or value-based model,” says Portela.
For hospitals and physician groups, as well as other health care organizations, upgrading and investing in new technology systems can help take costs out of running the business.
“At a high level, most health care service providers are under cost pressure,” says Mark Carter, managing director of Boston private equity firm TA Associates, which invested in institutional pharmacy software company SoftWriters Inc. in 2013.
“The provision of health care services has become more and more complex with the regulatory environment. What happens generally when those two forces bear down on any industry is that people look to alleviate some of the cost burden and drive efficiencies,” Carter says.
“The ratio of companies that are utilizing technology to help produce revenue is growing compared to where it was two, five or seven years ago,” says Matthew Evans, managing director in Chicago lending firm Monroe Capital’s health care group.
Here’s a look at five technologies fueling health care M&A.
1) CLOUD COMPUTING
As physician group and hospital mergers continue, technology service companies are looking to develop large, cloud-based programs to manage workflow to serve the bigger groups.
“Cloud technology in general has taken off inside health care,” says Kyle Ambrester, vice president of business development for health care group AthenaHealth. “We’ve been growing at 30 percent per year.”
In January 2013, AthenaHealth took mobile health care application maker Epocrates private in a $293 million deal. At the time of the acquisition, AthenaHealth, headquartered in Watertown, Massachusetts, said that it hoped the deal would help expand its network of doctors. Now, about 50 percent of physicians use the service, says Armbrester. “Epocrates helped us touch physicians in a personal way,” says Armbrester.
AthenaHealth developed a program called MoreDistributionPlease, where it looks for innovative companies, and after a beta testing and boot camp period to show they can deliver results, ties their services in with the Epocrates program. Then, doctors can shop and look for new services. The program contributes to AthenaHealth’s M&A pipeline. “We’re hungry and we’re always looking for the hottest entrepreneurs in the cloud space,” Armbrester says.
In December, Modernizing Medicine Inc. closed a deal for Aesyntix Health Inc., which develops software for billing, inventory and group purchasing services.
In May, cloud software company TrialScope purchased PharmaCM, which provides technology services for clinical trial registration and transparency, from Deloitte. Terms of the deal were not disclosed, but it included a $5 million investment by TrialScope’s investors for technology development and sales and marketing. Edison Ventures, Dublin Capital Partners and NewSpring Capital are among the buyer’s investors.
“This acquisition was a strategic move for both parties and will benefit all involved — especially our customers. By bringing to market the best tools and technologies to optimize this process, we are not only providing tremendous value in time, cost and resource savings, but compliance and transparency in an increasingly complex and global environment,” says Thomas Wicks, TrialScope’s chief operating officer, in a statement.
In June, payments company Wex Inc. made a deal for Evolution1, which provides hosted technology and payments products for the health care industry, including mobile payment systems for health savings accounts, health reimbursement accounts and flexible spending accounts. Evolution1 develops 1Cloud, which provides similar cloud-based services. The deal is valued at $532.5 million.
2) DATA ANALYTICS
Buyers are also looking at analytics tools as targets, because the technologies can help improve patient care and reduce health care costs.
In April, Palo Alto, California-based private equity firm Symphony Technology Group bought health care data company MDdatacor, a provider of data integration and analytics to health care payers and providers. The target was combined with other Symphony assets into a new company called Symphony Performance Health. The newly formed company provides data, applications, analytics and consulting services to provider, payer and health system clients in an attempt to help them gain insights into patient populations, as well as physician and clinician practice patterns. Symphony Technology bought the company from Noridian Mutual Insurance Co., a Fargo, North Dakota-based insurer.
In October, Philadelphia private equity firm LLR Partners acquired a stake in Phreesia Payment Services, which provides electronic payment services and data management to health care companies with the goal of streamlining workflow. LLR's $30 million investment is expected to help the company expand its tablet product across the U.S.
In another private equity analytics acquisition, SFW Capital Partners, in May, invested in Essen BioScience Inc., which provides analytical instrumentation, software, and other services for life science research. Ann Arbor, Michigan-based Essen makes IncuCyte Zoom, an imaging system used for cell analysis by pharmaceutical companies, including Amgen Inc. (Nasdaq: AMGN), AstraZeneca plc (NYSE: AZN), Merck & Co. (NYSE: MRK) and others. Rye, New York-based SFW says the investment should help the company develop new products and expand sales and support capabilities.
In June, HealthTrust agreed to buy the operations of Cardiac Data Solutions, which provides clinical and operational data to physicians with the goal of helping them make more informed decisions.
“By comparing hospital and clinical data to national and regional benchmarks, service providers are able to obtain actionable data which can be used to improve the quality of care provided to patients and reduce costs and lengths of stay,” says HealthTrust CEO Ed Jones in a statement. Brentwood, Tennessee-based HealthTrust planned to rebrand the assets and use them, in combination with assets it already owned, to create a database for hospital operators. The buyer, which provides cost-management services and supply-chain services to health care providers, is an affiliate of Parallon Business Solutions LLC, which provides health care business and operational services.
In June, Fitzroy Health LLC, a New York investment firm, bought drug information company RJ Health Systems International LLC, the owner of ReimbursementCodes.com, an online database that serves as a coding and pricing guide for health care insurers, drug manufacturers, pharmacy benefit managers and providers. Rocky Hill, Connecticut-based RJ Health Systems provides pharmaceutical reimbursement and coding information and services for the health care industry.
3) ELECTRONIC HEALTH RECORDS
In September, private equity firm Kohlberg Kravis Roberts & Co. LP (NYSE: KKR) announced a deal for an 80 percent stake in Panasonic Healthcare Co., which sells electronic health record systems, as well as blood sugar-monitoring systems, medical computers and medical laboratory equipment. KKR’s plans for the company after the $1.67 billion transaction include accelerating growth by building out global sales channels to major overseas healthcare facilities and delivering enhanced products and services.
Also in September, private equity firm Vista Equity Partners, which owns Vitera Healthcare Solutions, agreed to take Greenway Medical Technology Inc. private in a $644 million transaction. After the deal, Vitera, a company that provides financial technology services to medical professionals, and Greenway, an electronic health record, practice management and services group, now operate as one company under the Greenway brand. Vista Equity, headquartered in San Francisco, focuses on investing in software- and technology-enabled businesses. The company expects customers to benefit from electronic health records, revenue cycle management, public health and interoperability services that will help providers meet regulatory requirements.
4) MEDICAL DEVICES
In March, AirStrip Technologies bought Sense4Baby Inc., a smartphone-based maternal and fetal monitoring system that can be used for non-stress testing for high-risk pregnancies. Sense4Baby, headquartered in La Jolla, California, allows doctors to remotely monitor women with high-risk pregnancies so the patients do not need to travel. The technology includes a wearable device that allows doctors to monitor fetal heart rate, maternal heart rate and uterine contractions remotely through a cell phone. The sensor allows doctors to remotely monitor the women, reducing re-admissions to the hospital, says AirStrip’s Portela. The buyer, which is backed by venture capital from Sequoia Capital, Qualcomm Inc. and the Wellcome Trust, provides mobile technology and data integration services for doctors. The group is open to other M&A transactions. “We’re starting to look at body scanners for clinical disease,” says Portela. “We’ll look at partnerships or acquisitions, depending on how many vendors there are.”
Intuitive Surgical Inc. (Nasdaq: ISRG), in April, closed a deal for Luna Innovations Inc.’s (Nasdaq: LUNA) shape-sensing technology and related patents. Sunnyvale, California-based Intuitive picked up Luna’s fiber optic shape-sensing and localization technology, which uses an invasive fiber that can help health care professionals monitor three-dimensional shapes. The buyer develops technology for robot-assisted minimally invasive surgery, and bought the technology with $12 million, with the potential to pay an additional $18 million upon certain technical milestones, according to the company.
5) PROJECT MANAGEMENT SOFTWARE
Specialized project management software is flourishing in the medical arena, adding to a growing list of deals.
Boston private equity firm TA Associates, in 2013, bought pharmacy management software provider SoftWriters, which is designed to reduce costs, streamline processes and improve accuracy. “SoftWriters is the central nervous system of the institutional pharmacy,” says Carter, referring to the category of specialized medication providers serving residential care providers. The group provides downstream services, helping skilled nursing facilities and assisted living facilities get the medications their patients need, and then helping the upstream side – payers and insurance plans – get paid.
The institutional pharmacy space is fragmented, with more than 2,900 providers, and SoftWriters is working to penetrate more of those sites, according to Carter. TA is also hoping to expand the scope of SoftWriters’ services, add on adjacencies through acquisition, and grow the group into a software platform that can serve the entire continuum of pharmacies.
Private equity firm GI Partners, in December, agreed to acquire Canadian health care company Logibec Inc. from Omers Private Equity. Logibec provides health care information technology services and supports clinical and administrative information systems in health care facilities.
In October, Optum picked up MedSynergies Inc., a provider of services to physician groups. The Irving, Texas-based target provides physician practice, referral and revenue management to physician groups that are aligned with large health systems.
GE Healthcare announced in April that it would buy Montreal, Quebec-based software developer CHCA Computer Systems Inc. CHCA develops operating-room management software used by clinicians and administrators to monitor information about planned, underway or completed surgeries.
GE Healthcare had distributed the Opera software since 2003, and the acquisition will allow for the continued growth of the Opera software in Quebec and into new countries.
The group has already brought the software to Scotland, where it is doing well, according to Jackman. “They’ve been able to prove that now they can operate their operating rooms more efficiently,” he says. The purchase fits in with GE Healthcare’s growth strategy, which is one part organic and one part acquisition-oriented. The company created its own technology software platform called Predix, and invested in a center of development in Silicon Valley. The acquisition part comes in when the company finds a unique application, or part of a service, that drives outcomes, says Jackman.
“There are going to be things we want –whether its analytics software or some other outcomes-based solution. We’re moving hard into cloud,” Jackman says. “We have a session every month where we look at who is out there, and what they are doing. Even though you might not see it in the number of deals, in the background we’re always looking. When we do decide to do something, we move fast.”
The company agreed to buy another software company, API Healthcare Corp., a provider of human management software, in January.
Most technology segments surrounding the health care space have been penetrated by dealmakers, and in the future experts expect there to be a few breakout companies.
Big players such as Apple Inc. (Nasdaq: AAPL), Samsung and Google Inc. (Nasdaq: GOOG) have each exhibited interest in the health care space. Dealmakers at ACG New York’s 6th Annual Healthcare Conference in March suggested that the advent of mobile health care technology gives the big players in the tech space the opportunity to buy up mobile health care apps and combine the companies into large health care groups.
In June, Apple unveiled the Health mobile app, which provides users with a dashboard to track health and fitness data. In connection with the announcement, the tech giant said it developed a new tool for app developers in partnership with health records group Epic Systems, called HealthKit, which should allow other health and fitness apps to access data from Apple’s Health app. The new app also allows users to create an emergency card with important health information, including allergies, blood type and medical conditions.
In September, Google announced a new biotechnology company, Calico, that will specialize in aging and diseases, and be led by Apple chairman Arthur Levinson. Google, with a program called Google Health, had previously tried to enter the health and wellness space, but the product “didn’t catch on the way [they] would have hoped” and was discontinued, according to a company blog post. Google Health was supposed to give consumers easy access to personal health and wellness information, and was discontinued in early 2013.
Samsung is already deep into the health care space and owns technology for ultrasounds, digital radiology, in-vitro diagnostics and probes. The company, in an effort to build up its medical imaging business, bought NeuroLogica, a Danvers, Massachusetts-based company that develops medical imaging products and portable CT scanners, in January 2013.
Before mobile applications become attractive M&A targets, dealmakers will need to see data and that the business demonstrates a return on investment. “That’s where you’ll see more institutionalized investors be able to underwrite investments into these companies,” says Monroe’s Evans.
“Usually with health care there are too many regulatory hurdles to have entire states or nations adopt one tool or device very fast,” says Paul Hastings partner Rob Carlson.
Overall, dealmakers aren’t expecting transactions to slow down in the health care technology space. “I think we’re going to see some emerging companies taking market share and ultimately go on to become the winners, and that will spur valuations,” says TA’s Carter.
Profitable companies with good technology are already creating competitive auctions.
“We’re starting to see companies with outcome-oriented business models, and a lot of capital flowing toward models like that,” says Armbrester.
“They are the number one targets in the market right now – when companies are showing outcomes and results, that’s what gets us excited,” says Armbrester. “This is where a lot of the activity is going to come from in the next two to three years.”
Activity in the health care sector is expected to rise. Dealmakers predict transactions in the sector will increase at a more rapid rate than the overall M&A market, according to the April edition of the Mid-Market Pulse, a monthly index for middle-market dealmakers created by Mergers & Acquisitions and sponsored by McGladrey LLC.
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