Analysis: July Health IT M&A Activity; Public Company Performance

– Healthcare Growth Partners’ (HGP) summary of Health IT/digital health mergers & acquisition (M&A) activity, and public company performance during the month of July 2020.

While a pandemic ravages the country, technology valuations are soaring.  The Nasdaq hit an all-time high during the month of July, sailing through the 10,000 mark to post YTD gains of nearly 20%, representing a 56% increase off the low water mark on March 23.  More notably, the Nasdaq has outperformed the S&P 500 (including the lift the S&P has received from FANMAG stocks – Facebook, Amazon, Netflix, Microsoft, Apple, Google) by nearly 20% YTD. 

At HGP, we focus on private company transactions, but there is a close connection between public company and private company valuations.  While the intuitive reaction is to feel that companies should be discounted due to COVID’s business disruption and associated economic hardships facing the country, the data and the markets tell a different story.

While technology is undoubtedly hot right now given the thesis that adoption and value will increase during these virtual times, the other more important factor lifting public markets is interest rates.  According to July 19 research from Goldman Sachs,

“Importantly, it is the very low level of interest rates that justifies current valuations. The S&P 500 is within 4% of the all-time high it reached on February 19th, yet since that time the level of S&P 500 earnings expected in 2021 has been pushed forward to 2022. The decline in interest rates bridges that gap.”

Additionally, Goldman Sachs analysts also estimate that equities will deliver an annual return of 6% over the next 10-years, lower than the long-term return of 8%.  Future value has been priced into present value, and returns are diminished because the relative return over interest rates is what ultimately matters, not the absolute return.  In short, equity valuations are high because interest rates are low. 

What happens in public equities usually finds its way into private equity.  To note, multiple large private health IT companies including WellSkyQGenda, and Edifecs, have achieved 20x+ EBITDA transactions based on this same phenomenon.  From the perspective of HGP, this should also translate to higher valuations for private companies at the lower end of the market.  As investors across all asset classes experience reduced returns requirements due to low interest rates, present values increase across both investment and M&A transactions. 

As with everything in the COVID environment, it is difficult to make predictions with certainty.  Because the stimulus has caused US debt as a percentage of GDP to explode, there is an extremely strong motivation to keep long-term interest rates low.  For this reason, we believe interest rates will remain low for the foreseeable future.  Time will tell whether this is sustainable, but early indications are positive.

Noteworthy News Headlines

Noteworthy Transactions

Noteworthy M&A transactions during the month include:

  • Workflow optimization software vendor HealthFinch was acquired by Health Catalyst for $40mm.
  • Sarnova completed simultaneous acquisition and merger of R1 EMS and Digitech.
  • Payment integrity vendor The Burgess Group acquired by HealthEdge Software.
  • Ciox acquired biomedical NLP vendor, Medal, to support its clinical data research initiatives.
  • Allscripts divests EPSi to Roper for $365mm, equaling 7.5x and 18.5x TTM revenue and EBITDA, respectively.

Noteworthy Buyout transactions during the month include:

  • HealthEZ, a vendor of TPA plans, was acquired by Abry Partners.
  • As part of a broader wave of blank check go-public transactions, MultiPlan will join the public markets as part of Churchill Capital Corp III.
  • Also as part of a wave of private equity club deals, WellSky partially recapped with TPG and Leonard Greenin a rumored $3B transaction valuing the company at 20x EBITDA.
  • Edifecs partnered with TA Associates and Francisco Partners in another club deal valuing the company at a rumored $1.4B (excluding $400mm earnout) at over 8x revenue and 18x EBITDA.
  • Madison Dearborn announced a $410mm take private of insurance technology vendor Benefytt.
  • Nuvem Health, a provider of pharmacy claims software, was acquired by Parthenon Capital.

Noteworthy Investments during the month include:

Public Company Performance

HGP tracks stock indices for publicly traded health IT companies within four different sectors – Health IT, Payers, Healthcare Services, and Health IT & Payer Services. Notably, primary care provider Oak Street Health filed for an IPO, offering 15.6 million shares at a target price of $21/ share. The chart below summarizes the performance of these sectors compared to the S&P 500 for the month of July:

The following table includes summary statistics on the four sectors tracked by HGP for July 2020:

About Healthcare Growth Partners (HGP)

Healthcare Growth Partners (HGP) is a Houston, TX-based Investment Banking & Strategic Advisory firm exclusively focused on the transformational Health IT market. The firm provides  Sell-Side AdvisoryBuy-Side AdvisoryCapital Advisory, and Pre-Transaction Growth Strategy services, functioning as the exclusive investment banking advisor to over 100 health IT transactions representing over $2 billion in value since 2007.

HGP Semi-Annual Health IT Market Review: 6 Key Trends to Know

HGP Semi-Annual Health IT Market Review: 6 Key Trends to Know

Healthcare Growth Partners, an
Investment Banking and Strategic Advisory firm exclusively focused on the
transformational health
market, today announced the release of its Semi-Annual Health IT Market
Review report that summarizes M&A and private equity activity across health
IT, health information services, and digital health.

Report Background/Methodology

This edition of the report includes feedback from our survey
of private equity professionals and their response to COVID-19, as
well as an overview of trends seen in the first half of 2020 including
COVID-19’s slowdown of the financial markets, digital health
IPOs, investment activity, and mergers and acquisitions. The report leverages
the Healthcare Growth Partners database to evaluate M&A and investment
trends, valuation multiples, and capital markets activity across the health IT,
health information services, and digital health sectors.

The Semi-Annual Report includes the following:

– Overview of COVID-19’s Impact on Health IT M&A and
Investment Trends

– Results from HGP’s Private Equity
Survey Covering COVID-19 and Health IT Investing

– Health IT Market Analysis

– Health IT M&A and Investment Activity

– Health IT Valuation Trends

– Macroeconomic Trends

Key Findings

Here are six key findings from the health IT semi-annual market report:

1. 1H 2020 US M&A Activity: M&A saw a sharp decline in April followed by a tentative recovery in May and June. The universe of strategics bifurcated between passive and active acquirers, contracting the field of buyers. Due to the liquidity crunch and uncertainties about the reopening of the economy, it is likely M&A activity will remain stunted through the rest of 2020.

2. 1H 2020 US Investment Activity: activity is down across most health IT investment themes because of COVID-19. This is in part due to a contracting deal pipeline as well as overall risk-aversion. The primary exception is the remote delivery of care, which swiftly gained interest as a result of CV-19. Deal pipeline activity appeared to be returning in late Q2, indicating a stronger 2H.

3. IPO Trends: The surge in health IT IPOs that started in 2019 continued into 2020, with 4 companies completing their IPO, and another 2 hoping to capitalize on the market’s rebound in 2H 2020. Strong public valuations are enticing new offers.  

4. Public Equity Valuations: Companies that facilitate the remote delivery of care saw significant rises in value, while those susceptible to a replacement market or the recent downturn in case volume saw value decline. As evident by the NASDAQ, tech valuations are at record highs.

5. Private Equity Valuations: Over the short-term, investors were slightly bearish on valuation and deal flow, but seem to expect that health IT may be more resilient than the overall market in the long-term with both valuations and interest expected to rise over time.

6. Health IT Sector Interest: Patient-facing solutions have gained interest in the COVID-19 era as well as those leveraging data, including AI to enhance outcomes and the delivery of care. Sectors directly impacted by the reduction in procedures, such as RCM faced near-term challenges.

For more information, the full report is available for
download here.