Healthcare IT M&A Update – November 2022

Heightened Medical Data Accessibility Supports Healthcare IT M&A Growth

Throughout 2022, the influx of digital patient records and misinformation regarding public health has generated significant demand for technologies with core competencies in collecting, organizing, and delivering accurate patient data. Fueled by stringent regulations supporting information accessibility, buyers in the Healthcare Information Technology (IT) sector have capitalized on the information-dense environment, engaging in mergers and acquisitions (M&A) to incorporate healthcare data management providers with the potential to automate processes and enhance the quality of care.

Healthcare IT M&A Proves Non-Cyclical Amid Economic Turmoil

Healthcare IT M&A volume has remained on pace with 2021 levels despite current economic uncertainty, with 218 transactions announced or completed year-to-date (YTD). Public healthcare players have recorded strong revenue growth throughout 2022 as medical products and services are considered mission-critical regardless of economic conditions. As a result, Healthcare IT sector participants have attracted interest from public buyers across various segments of the Healthcare industry, comprising 17.9% of total YTD sector deals. Of note, McKesson (NYSE:MCK), a leading wholesaler of pharmaceutical products, has announced two acquisitions in the Healthcare IT space to-date. In June 2022, McKesson announced its acquisition of HCA Healthcare’s (NYSE:HCA) personalized medicine software business GenoSpace for an undisclosed sum. GenoSpace’s platform hosts healthcare data and provides decision-making analytics and reporting tools to clinical labs and healthcare providers. Following the announcement, McKesson entered into a definitive agreement to acquire Rx Savings Solutions (RxSS) for an enterprise value of $875 million (September 2022). RxSS develops Software-as-a-Service (SaaS) healthcare consumerism solutions enabling prescription medication cost-savings for employers, employees, and insurance providers. Upon completion of these transactions, both businesses will become part of McKesson’s Prescription Technology division which generated $1.1 billion in revenue in Q1 fiscal year 2023, an increase of 21% year-over-year (YOY), according to the company’s most recent investor presentation.¹

M&A purchase multiples in the Healthcare IT sector have averaged a robust 4.4x EV/Revenue from 2019 through YTD 2022, outpacing the broader Technology, Media & Telecom industry average of 2.8x EV/Revenue during the same period. Sector M&A purchase multiples have been uplifted by enterprise buyers paying premium valuations to expand virtual health solutions for customers and employees. Notably, Amazon (Nasdaq:AMZN) entered into a definitive agreement to acquire One Medical in July 2022 for an enterprise value of $4 billion, equivalent to 4.5x EV/Revenue. One Medical's virtual care solutions will serve as Amazon's re-entry into the Healthcare IT space as Amazon will shutter its proprietary telehealth platform Amazon Care in December 2022, according to the company's website.²

"We think healthcare is high on the list of experiences that need reinvention. Booking an appointment, waiting weeks or even months to be seen, taking time off work, driving to a clinic, finding a parking spot, waiting in the waiting room then the exam room for what is too often a rushed few minutes with a doctor, then making another trip to a pharmacy—we see lots of opportunity to both improve the quality of the experience and give people back valuable time in their days," said Neil Lindsay, Senior Vice President of Amazon Health Services, in a press release.³

Private Equity Bolsters Healthcare IT Portfolios

Private equity firms have increasingly pursued add-on transactions in the Healthcare IT sector as software targets offer immediate, measurable efficiencies to reduce administrative burdens for care providers. To-date in 2022, private equity buyers accounted for nearly half (48.2%) of total sector transactions, an increase of 5% YOY. Sector add-on deals (39% of total YTD transactions) have steadily risen over the past five years as sponsors look to enhance their portfolios' interoperability and serve a myriad of patient needs through a single software platform. In a recent example, HgCapital-backed Intelerad Medical Systems acquired Life Image for an undisclosed sum (September 2022). Intelerad develops an electronic health record (EHR) platform serving hospitals, private practices, and radiology groups. The addition of Life Image's clinical image exchange network allows Intelerad to include scans, x-rays, and other medical imagery in its digital health record reports. Life Image marks Intelerad's eighth add-on transaction since joining HgCapital's holdings in January 2020 (undisclosed), demonstrating the sponsor's aggressive buy-and-build strategy.

21st Century Cures Act Final Rule Restricts Healthcare Information Blocking

The Office of the National Coordination for Health Information Technology (ONC), a staff division within the U.S. Department of Health and Human Services, released the 21st Century Cures Act in 2016 with two key components: information blocking and supporting ONC certification criteria, according to the Federal Register.⁴ The initial legislation intended to limit practices likely to interfere with, discourage access to, or exchange electronic health information (EHI) to protect patients' private health data. In addition, the law revised developers' certification criteria to support the information blocking provisions.

As of October 6, 2022, healthcare organizations are required to provide patients unrestricted access to their full health records in digital format under federal rule, according to the ONC.⁵ In March 2020, the ONC proposed the Final Rule, which included a set of regulations focused on the advancement of interoperability and only limited data-blocking practices within healthcare IT systems. The amendment increased accessibility to healthcare data for patients and providers and established patients' rights to obtain medical records from healthcare organizations at any time. The enactment of this legislation marks the onset of a patient-mediated data economy, with significant revenue and M&A opportunities for sector players delivering EHR software solutions.

Unfettered Healthcare Information Spurs Healthcare IT Deal Activity

Healthcare IT providers specializing in patient data sharing became attractive M&A targets in anticipation of the Final Rule implementation and have continued to garner buyer interest following the latest legislation amendment. Strategic and private equity-backed buyers have capitalized on the heightened accessibility of healthcare information, completing synergistic acquisitions to enhance product lines, transparency, and interoperability. Several recent notable transactions in the space are outlined below.

• The Firmament Group-Backed e4 Services Acquires Intellis (September 2022, Undisclosed) - In September 2022, e4 Services acquired Intellis for an undisclosed sum. The transaction was funded by The Firmament Group's majority growth equity investment in e4 Services, completed in September (undisclosed) just prior to the acquisition of Intellis. e4 Services specializes in health information management (HIM), clinical documentation integrity (CDI), and complex project management solutions for the Healthcare industry. The combined entity creates one of the nation's leading HIM and coding solutions providers, enhancing the transparency of patient medical records and healthcare organizations' revenue cycle management (RCM) processes.

"The combination of e4 and Intellis creates a holistic service provider to healthcare systems across the country, delivering a one-stop shop to healthcare executives looking to improve their HIM, coding, and IT functions and infrastructure. We have known the e4 team for years and are already comfortable working as a team to optimize customer experiences and accelerate our growth trajectory," said David Van Doren, Co-Founder of Intellis, in a press release.⁶

• Third Wave Recovery Systems Acquires SRX (September 2022, Undisclosed) - Third Wave Recovery Systems (TWRX) acquired healthcare data software provider SRX in September 2022. Terms of the transaction are undisclosed. With a focus on the Skilled Nursing and Long-Term Care (LTC) segments, SRX's platform enables medical professionals and patients to access rebates, drug databases, compliance determinations, and health records data in real-time. "I'm pleased to have the opportunity to collaborate with talented healthcare executives on a disruptive business model. TWRX is positioned as a market leader, predicated on transparency and compliance in an industry that has been historically opaque," said Ed Lagerstrom, CEO at TWRX, in a press release.⁷ The transaction demonstrates strategic buyers' interest in acquiring data-sharing capabilities and underscores healthcare information transparency as a key motivator for engaging in accretive sector transactions.
• Availity to Acquire Diameter Health (August 2022, Undisclosed) - Leading healthcare information network Availity announced its acquisition of Diameter Health in August 2022 for an undisclosed sum. Diameter Health's proprietary software ensures clinical data quality and interoperability for compatible EHR and RCM networks. Upon completion of the transaction, the combined solutions are expected to provide seamless information exchanges between healthcare providers, insurance carriers, technology partners, and patients. The acquisition will also enable Availity to create summarized, comprehensive health record reports for digital distribution.

"Clinical data is tremendously valuable, but the ability to structurally and semantically normalize multi-source, multi-format clinical data, and further enrich and deploy that data to drive action is still an emerging capability in healthcare. Diameter Health is a leader in unlocking clinical data’s full potential," said Mary Lantin, President and COO at Diameter Health, in a press release.⁸

To discuss the impacts of the 21st Century Cures Act on your operations, provide an update on your business, or learn about Capstone's wide range of advisory services and Healthcare IT sector knowledge, please contact us.

Endnotes

1. McKesson, "Q1 Fiscal 2023 Investor Presentation," https://s24.q4cdn.com/128197368/files/doc_financials/2023/q1/MCK-Q1-FY23-PresentationSlides_FINAL.pdf, accessed October 10, 2022.

2. Amazon, "Changes to the Amazon Care Service," https://amazon.care, accessed October 11, 2022.

3. Amazon, "Amazon and One Medical Sign an Agreement for Amazon to Acquire One Medical," https://press.aboutamazon.com/news-releases/news-release-details/amazon-and-one-medical-sign-agreement-amazon-acquire-one-medical, accessed October 11, 2022.

4. Federal Register, "21st Century Cures Act," https://www.federalregister.gov/documents/2020/05/01/2020-07419/21st-century-cures-act-interoperability-information-blocking-and-the-onc-health-it-certification, accessed October 12, 2022.

5. The Office of the National Coordinator for Health Information Technology, "Understanding Electronic Health Information," https://www.healthit.gov/sites/default/files/page2/2021-12/Understanding_EHI.pdf, accessed October 12, 2022.

6. CISION, "Firmament Facilitates Merger of e4 and Intellis," https://www.prnewswire.com/news-releases/firmament-facilitates-merger-of-e4-and-intellis-forming-healthcare-rcm-and-it-industry-leader-301633570.html, accessed October 13, 2022.

7. CISION, "Third Wave Recovery Systems (TWRX) Acquires SRX," https://www.prnewswire.com/news-releases/third-wave-recovery-systems-twrx-acquires-srx-a-leader-in-pharmaceutical-rebate-management-services-for-the-skilled-nursing-and-long-term-care-industry-301624816.html, accessed October 13, 2022.

8. Availity, "Availity Acquires Diameter Health," https://www.availity.com/News/2022/August/Availity-to-Acquire-Diameter-Health-a-Leader-in-Clinical-Data-Interoperability, accessed October 13, 2022.