Healthcare IT – October 2021

Artificial Intelligence Propels Data Management in Healthcare IT

Acquisitions and investments in the Healthcare IT sector continue to outstrip prior periods, as strategic and financial buyers and investors continue to place a high priority on adding AI and data-centric capabilities to their offerings and portfolio companies

David DeSimoneManaging Director, Capstone Partners

The Healthcare industry continued to be a major contributor to the U.S. economy, accounting for 18% of the gross domestic product (GDP) in 2020, according to Deloitte.¹ Prior to the pandemic, care and treatment comprised 80% of total healthcare spending ($4 trillion). However, care and treatment accounted for 60% in 2021 as organizations increasingly allocated capital towards healthcare information technology (HCIT), which represented 16% of total healthcare spending ($640 billion). Armed with significant levels of dry powder and healthy balance sheets, private equity and strategic buyers have deployed capital in the HCIT industry to capitalize on favorable COVID-induced tailwinds such as the acceleration of telehealth, showcasing importance of updated IT infrastructure, and heightened efficiency of artificial intelligence (AI)-enabled platforms. The HCIT merger and acquisition (M&A) market in 2021 to-date outpaced the same period in 2020 by 7% year-over-year (YOY), with 220 transactions announced or completed. Strong M&A activity is expected to continue through year end and into 2022 as companies seek to consolidate the fragmented industry and healthcare players integrate innovative solutions to improve care and meet legal requirements.

Strategic buyers accounted for 58% of deals in 2021 to-date, led by emerging, privately owned companies engaging in multiple acquisitions to establish market leadership and bolster advanced capabilities. Of note, Recuro Health, a developer of integrated digital healthcare solutions, completed four acquisitions in 2021 to expand its AI-enabled platform and suite of at-home care services. Recuro’s digital and virtual services leverage aggregated data collected through remote patient monitoring (RPM), empowering patients to actively engage in their health no matter their location or circumstance. In their most recent transaction, Recuro acquired MyLifeIQ for an undisclosed sum (September). MyLifeIQ captures and delivers patient data through wearable devices, combining variables involved in general health and lifestyle assessments. “This solution is designed for anyone at any age who wants to live better. We use the person’s unique DNA, which contains the map to one’s whole body and how it operates, to determine what is best for each individual. By fine-tuning environmental elements like exercise, food, sleep, and medications, we match these factors with the DNA to create a high-performing body. Our objective is to make life easier by providing an actionable, personalized guidebook that improves health and vitality,” said Gina Fioretti, Executive Director at Recuro, in a press release.²

The HCIT industry has also experienced record levels of financing activity, as venture capital funding in the first half of 2021 ($13.8 billion) already nearly exceeded full year 2020 levels ($14.1 billion), according to Rock Health.³ Investors utilized blitz-funding tactics to accelerate capital deployment timelines and continued to focus on larger deals in the space, evidenced by the 828 venture capital deals in the first half of 2021 amounting to similar levels of total funding as the 1,375 deals in full year 2020. Additionally, many investors participated in later stage financing rounds to provide additional capital to companies which they previously funded, exemplified by telehealth platform developer Roman Health Ventures' (Ro) $500 million series D capital raise led by returning investors General Catalyst, FirstMark Capital, and TQ Ventures (March). The funding enabled Ro to expand into telemedicine through pharmaceutical distribution partnerships.

Data Management Becomes Increasingly Vital to Healthcare IT Systems

The investment in data management capabilities by healthcare providers has progressed in three waves: data collection, sharing, and analytics. A healthcare IT network involves a diverse set of public and private data collection systems including health surveys, administrative enrollment and billing records, and medical records. The levels of patient data collected digitally increased substantially during COVID-19 with the accelerated adoption of telehealth services, telemedicine, and RPM through wearable devices. As a result, HCIT companies providing AI-enabled data sharing platforms experienced heightened demand from organizations seeking to streamline the flow of information with electronic health records (EHR).

HCIT providers focused on patient data sharing have also become attractive targets in M&A and captured premium revenue purchase multiples. Of note, Nuance Communications (Nasdaq:NUAN) entered into a definitive agreement in April to be acquired by Microsoft (Nasdaq:MSFT) for an enterprise value of $19.4 billion, equivalent to 13.0x revenue, exceeding the 2021 HCIT industry average of 6.3x. The transaction is expected to close by December 31, 2021. Nuance provides conversational and cognitive AI innovations to enhance human intelligence and increase productivity. Its Healthcare segment, comprising 62% of total revenue in 2020,⁴ delivers clinical language understanding solutions which capture patient record information and improve the clinical documentation process. Additionally, Nuance launched Cloud for Healthcare in Q4 2020 with added features including appointment scheduling and integration with EHR on its secure platform, according to a press release.⁵

21st Century Cures Act Final Rule Implements Electronic Health Record Interoperability

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.⁶ The initial legislation intended to limit practices that were likely to interfere with or discourage access, exchange, or use of electronic health information (EHI) to protect patients' private health data. In addition, the law revised developers' certification criteria to support the information blocking provisions.

In March 2020, the ONC proposed the Final Rule which included a set of regulations focused on the advancement of interoperability and 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. Since the enactment of the rule in September 2020, demand has escalated for EHR software from healthcare providers, healthcare IT developers, and health information networks with a global market size of $32 billion in 2021, according to Global Market Insights.⁷ The global EHR market is projected to grow at a 6.4% compound annual growth rate (CAGR) to reach $46.4 billion by 2027 as organizations continue to seek ONC compliance by integrating EHR software into their IT networks.

Public Companies Capitalize on Electronic Health Record Adoption

Top public companies in the HCIT industry have continued to position themselves as data leaders, creating a sustainable business model to improve margins, generate free cash flow, and serve clients with innovative solutions. EHR software has emerged as a core function for the basis of value-added services including predictive analytics, clinical research, and legible, complete documentation. As a result, partnership development has accelerated in order to expand EHR networks and accumulate participating physicians and patients. Allscripts Healthcare Solutions (Nasdaq:MDRX) recently demonstrated this strategy by signing a partnership agreement with PRA Health Sciences, which was acquired by ICON (Nasdaq:ICLR) in February ($12.3 billion, 3.9x revenue), to bolster its EHR network reach by 25,000 physicians and 40 million patients across the U.S., according to its Q2 earnings call.⁸ Allscripts' Veradigm business operates a linked EHR claims patient database sourced from, and directly connected to, clinical platforms. Through the partnership, Allscripts was able to capture a larger share of the EHR market with limited overhead costs, driving its Q2 earnings to $69 million EBITDA, an increase of 27% YOY.

"The partnership will use Veradigm's study source platform alongside PRA's clinical research technology support, so that physicians can offer clinical research as a care option for their patients. This is another example of the value of the last-mile connection to the physician and patient that Veradigm brings to life science companies and at a scale that is unmatched in the industry," commented Richard Poulton, Allscripts President and CFO, during the earnings call.

Endnotes

1. Deloitte, "Breaking the Cost Curve," https://www2.deloitte.com/xe/en/insights/industry/health-care/future-health-care-spending.html, accessed July 29, 2021.

2. Recuro Health, "Recuro Health Acquires MyLifeIQ…," https://recurohealth.com/recuro-health-acquires-mylifeiq-brings-epigenetics-precision-medicine-to-its-rapidly-expanding-suite-of-digital-health-solutions/, accessed September 13, 2021.

3. Rock Health, "H1 Digital Health Funding: Another Blockbuster Year…In Six Months," https://rockhealth.com/reports/h1-2021-digital-health-funding-another-blockbuster-year-in-six-months/, accessed July 29, 2021.

4. Nuance, "Annual Investor Reports," https://investors.nuance.com/annual-reports, accessed July 29, 2021.

5. HealthTech Magazine, "What Microsoft's Nuance Acquisition Means for the Healthcare Industry," https://healthtechmagazine.net/article/2021/07/what-microsofts-nuance-acquisition-means-healthcare-industry, accessed July 29, 2021.

6. Federal Register, "21st Century Cures Act: Interoperability, Information Blocking, and the ONC Health IT Certification Program," https://www.federalregister.gov/documents/2020/05/01/2020-07419/21st-century-cures-act-interoperability-information-blocking-and-the-onc-health-it-certification, accessed August, 2, 2012.

7. Global Market Insights, "Electronic Health Record (EHR) Market Size…," https://www.gminsights.com/industry-analysis/electronic-health-record-market, accessed August 2, 2021.

8. Allscripts Healthcare Solutions, "Q2 2021 Earnings Call," https://investor.allscripts.com/static-files/ad14260d-40ee-4fda-aa71-90e527f02101, accessed August, 13, 2021.