Health 2.0 Houston

1. Health 2.0 Houston February 2013

2. Chris McCord is Managing Director at Healthcare Growth Partners • HGP is an investment bank and strategic advisory firm focused exclusively on HIT • Closed over 50 HIT transactions since 2007 – sell-side, buy-side, capital raise • Seen the good and the bad of HIT • Served as CFO of a biotech company from technology transfer through three rounds of institutional funding totaling over $30mm • Advisor to School of Biomedical Informatics at UT-HSC • Working on own HIT start-up • Continually frustrated by the lack of organized HIT (and other healthcare) commercialization in Houston • Look at HIT from the perspective of where the investment dollars are going Presenter Background

3. Where are we? You are here.

4. What’s Trending in HIT Investments & M&A • Themes • Communication • Mobility • Data Aggregation and Intelligence • Products • EMR (not fading as fast as one might think) • Population Health • Patient Engagement • Care Coordination • Near-term Goals • Productivity and Efficiency Gains – Create sustainability • Reduced Readmissions – Avoid “never” events, etc • Higher Quality – Attract patients and provide quality care • Lower Cost – Easier said than done • Obtain a Competitive Advantage – For-profit or not, competitive dynamics matter

5. The Skeptic vs the Idealist Does healthcare IT help solve US healthcare structural flaws & dysfunction… or does healthcare IT exploit them?

6. Incentives, Motivations & Stakeholders • SS & Medicaid Eligibility • Urgent Care • Utilization Management • Clinical Documentation • EMR • Health Plans • Medical Necessity Exploit uninsured & gov’t Cherry pick patients Deny care – “ration” Up-code & up-charge Exploit HITECH Cherry pick risk Protect provider Provide access Provide access and quality Streamline care Build intelligence Population health Distribute risk Protect patient Segment Skeptic Idealist Depending on the motivation, many healthcare stakeholders, including those in HIT, may have a strong incentive to preserve inefficiency rather than work toward and efficient market. Example: A hospital-employed, salaried physician might approach a care plan differently from an independent physician.

7. Big Picture Healthcare Market Evolution Minimized role (bundled payments, ACO, etc) Focus on data and reach, vs risk-management Siloed Connected Single Database All stakeholders responsible except patient Mix of patient responsibility plus patient protection & means-testing Minimal Doctor in the mirror ~50mm uninsured Referral management across sites Real-time Clinical Decision Support Utilization Mgmt (payers) Resource mgmt (providers) Productivity has decreased (not helped by HIT) Minimize MLR ACA falls short on quality and cost Access meaningfully addressed by ACA Seamless care coordination Today Trajectory Optimal Information Patient Engagement Market Orientation Access, Quality, Cost Cost Optimization Payer Incentives

8. Pitfalls and Opportunities in HIT • Big bets being placed on accountable care • Tuesday’s Wall Street Journal: “Coming Failure of Accountable Care” – Clayton Christiansen says physician behavior is too hard to change • Highly complex and highly dependent on HIT • Driving just about every aspect of HIT innovation – care coordination, big data, population health, insurance reform, patient engagement, mobility, telemedicine/monitoring, proliferation of alternative site models • Industry stakeholders need to ask – how does the vendor value proposition change if accountable care organizations fail or never take hold? Or even more likely – what if they take longer than expected and don’t result in the amount of change that is hoped for? • Biggest pitfalls in HIT • Getting too far ahead of the innovation curve because the pace of change in healthcare is most often slower than one would hope and expect • Focusing too much on product and not enough on sales strategy

9. 6 Trends in HIT Investments & M&A • #1 Thesis: Patient engagement is critical to a care coordination environment • The ACA arguably makes everyone responsible for patient care except the patient itself • Many facets of patient engagement: marketing, self-responsibility vs monitoring, wellness, drug adherence, readmission management, care coordination • Heavy investment: eClinicalworks $25mm investment, multiple VC investments • #2 Thesis: Big data is valuable in so many ways • Big data can cost big money – Castlight Health has raised over $100mm • Data on its own isn’t worth much unless it contains actionable intelligence • Unlike other industries, much healthcare data is not discrete, making it difficult to manage • Take special care when contracting (as a provider or vendor) given the power in data

10. 6 Trends in HIT Investments & M&A • #3 Thesis: Health insurance runs the risk of being disintermediated by the transfer of risk to providers • Health insurance companies are adept at managing risk – when providers take risk, the value proposition for insurance companies is reduced • Insurance companies are capitalizing on their access to data and large patient populations (plus risk management and huge balance sheets) and expanding their portfolio of offerings through HIT acquisitions • #4 Thesis: There’s a strong need to manage the flow of patients and information across care settings • HIE’s contain a subset of the tools required to transition care across settings • Referral management (eg, hospital discharge to home care or SNF) is near-term opportunity because of the focus on minimizing hospital readmissions • Early bets on care coordination have faced challenges because market is not yet that dynamic

11. 6 Trends in HIT Investments & M&A • #5 Thesis: Health care needs to be provided in lower cost settings than the hospital • Bundled payments will reward providers for diverting care to lower cost settings when appropriate • The combination of unique workflow requirements and higher patient volumes make alternate sites attractive markets for HIT (home health, urgent care, etc) • When managed appropriate, alternative sites can reduce hospital readmissions • Home monitoring will take off, but not until providers have reimbursement incentives (which will require many apps/devices to get FDA approval) • #6 Thesis: Population health can optimize outcomes through clinical decision support and other tools • The core of accountable care, complex population health systems are effectively driving the decisions around the coordination of care using evidenced-based medicine • Heavy patient engagement component • Population health, when done right, is highly complex and brings together all of the theses

12. Houston HIT Environment Most of the building blocks are in-place… $$$ from Angels (from energy) World Class Medical Resources Entrepreneurs can build this from scratch. Or the city can recruit it by showcasing the benefits. HIT Houston World Class Education Centers Large, Corporate Feeders Expanding Base of Institutional Capital Access to Incubators

13. HIT Valuation Characteristics Deal activity has deviated away from the typical normal distribution toward a more “bi-modal” distribution

14. HIT M&A (Including Buyout) Trends Key Metric – Median Deal Value 2007 - $33 million 2008 - $26 million 2009 - $9 million 2010 - $59 million 2011 - $36 million 2012 - $32 million

15. Valuation Criteria • Factors that lead to premium valuations include high recurring revenue, strong revenue growth, profitability, and large size • Recurring revenue is more than just a financial statistic – indicative of attrition and customer stickiness, ROI and strategic pricing models, and adoption and usage • It should be highlighted that multiples below are on a trailing basis and include 100% achievement of any contingent consideration Healthcare Growth Partners narrowed its transaction database to include 117 highly relevant transactions with disclosed multiples since 2005

16. VC/PE HIT Evaluation Criteria Based on our conversations with private equity and growth capital investors focused on HIT, the following criteria are of high importance to institutional investors • Financial Metrics: • Strong recurring revenue model • Focus on companies that are beyond proof-of-concept – the universe of early stage investors has been contracting • The universe of HIT companies that meets the private equity profile is relatively small, and those companies are highly sought after • Preference for large market opportunity – well in excess of $100mm • Business Metrics: • The business provides a strong ROI case for its customers • If software-intensive, preference for a SaaS or web-based delivery model • Scalable business model with competitive differentiation • The business addresses a clear and growing pain point within healthcare • An acquirer universe that includes more than a handful of potential acquirers • Business capitalizes on a post-healthcare reform environment • Proven management team

17. HIT Capital Raise (Non-Buyout) Trends