Health IT Investments Approach $500 Million In Q1

Venture capitalists plug a record $493 million into healthcare technology, with consumer-focused companies receiving the lion's share.
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Venture capital investments in the health IT sector continue to accelerate, according to the latest report from the Mercom Capital Group, a global communications and consulting firm. In the first quarter, health IT firms raised a record $493 million, compared with $1.2 billion for all of last year. The number of VC deals jumped to 104 from 51 in the previous quarter and 30 in the prior-year period.

"The trend we began to see last year of VCs investing in consumer-focused companies like mobile health, telehealth, personal health, social health, and scheduling, rating & shopping has become much more pronounced," commented Raj Prabhu, CEO of Mercom Capital Group, in a news release. "The enormous market opportunity in consumer-focused health has appeared to pique the interest of investors and is likely to continue to grow as witnessed by the surge in VC activity."

Of the five companies that received the largest infusions of VC funds in the first quarter, only one -- Fitbit, a vendor of mobile wellness apps that received $30 million -- was a pure consumer play. Health Catalyst, which got $41 million, offers a data warehousing solution; xG Health Solutions, the recipient of $40 million, offers population health data analytics and patient and population-focused care management tools. NantHealth, which raised $31 million, aims to deliver next-generation care through the use of advanced secure fiber networks, cloud computing and wireless mobile technology. One Medical Group, which took in $30 million, is a national concierge practice with an advanced health IT infrastructure.

[ Today's investments are tomorrow's realities. See what's ahead; read Health IT In 2018: Crystal Ball Predictions. ]

It's not surprising that the deals involving the biggest dollar amounts would involve health IT infrastructure, Prabhu told InformationWeek Healthcare, because those companies need more capital than a startup that is developing a mobile health app. However, he emphasized, the vast majority of firms that received VC funds were consumer-related health IT companies in areas like personal health, social networking and telehealth.

The impact of the industry's transition to value-based care and population health management is not attracting VCs to health IT as much as the consumer market potential is, Prabhu added. Partly because of the new availability of healthcare data to consumers on mobile devices, he said, "The market potential on the consumer side of health is huge."

The growing trend of healthcare companies investing in or forming health IT companies is also visible in Mercom's data. Health Catalyst, for example, raised $8 million of its $41 million in VC funds from Kaiser Permanente Ventures and CHV Capital, which is affiliated with Indiana University Health. And xG Health Solutions is a spinoff of the Geisinger Health System.

"VC firms like to go into a deal with these corporate VCs or big healthcare organizations, because the risk is a little spread out," Prabhu said. "Also, with these big guys coming in with a lot of money and expertise, the outlook is better."

The number and combined value of disclosed merger and acquisition (M&A) deals did not change much from the fourth quarter, noted Prabhu. In the first quarter of 2013, there were 46 M&A transactions. Twenty-two health information management companies were acquired, followed by 11 health IT "service providers." The biggest M&A deal, valued at $293 million, was Athenahealth's acquisition of Epocrates, a leading provider of mobile educational content to physicians. Just behind that was Allscripts' purchase of dbMotion, a vendor of interoperability products, for $235 million.

Over the period from 2010 to 2012, the Mercom report noted, the biggest acquirers of health IT firms have been other companies in the field, including McKesson (six deals), Quality Systems (6) and CompuGroup Medical (5). Among these and other health IT firms on the acquirer list, Prabhu said, some make synergistic purchases that help them accelerate their capabilities. Others are buying market share.

Prahbu doesn't know whether the second quarter will be as big as the first. But he said he was confident that VC funding for 2013 would exceed that of 2012.

"Everybody's excited about this sector," he said. "It's one of the few areas that's hot, and everyone understands it has great potential. Considering what happened in the first quarter, we're on pace for this to be a great year."

Regulatory requirements dominate, our research shows. The challenge is to innovate with technology, not just dot the i's and cross the t's. Also in the new, all-digital The Right Health IT Priorities? issue of InformationWeek Healthcare: Real change takes much more than technology. (Free registration required.)

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