$293M cash flow to health IT

By Erin McCann
08:52 AM

Venture capitalists are tapping into the healthcare IT market at a $293 million pace last quarter alone, according to a Mercom report released in July. 

The report, highlighting merger and acquisition (M&A) activity within the healthcare IT sector, found that Q2 total funding amount and the number of deals reached their highest levels since 2010, with 28 healthcare IT venture capital (VC) deals occurring. 

"The strong uptrend that started in Q2 2011 has continued for four quarters in a row," said Raj Prabhu, managing partner at Mercom. "Also significant is the continued strong M&A activity in the sector, providing investors and companies with viable exit strategies."

A total of 61 different investors participated in funding rounds, with San Francisco-based Founders Fund and Palo Alto, Calif.-based Venrock involved in multiple deals.

"We've seen a steady rise in VC funding for the past four quarters and over 100 investors have invested so far this year," Prabhu said. 

He cited the HITECH Act of 2009, the Affordable Care Act and health information exchanges as responsible for giving the market momentum.

"VCs are seeing enormous opportunities in the market for consumer participation that can unlock cost efficiencies, transparencies and efficiencies to be gained through data analytics," Prabhu said. "This demonstrates significant momentum and interest in the investment community as they see HIT to potentially be a very large market." 

In Q2, health information management (HIM) companies received the most funding as a technology group, with $247 million in 19 deals, followed by telemedicine companies with $19 million in three deals and personal health record companies reaching $16 million with four deals.

Moreover, the report cites only two new funds in Q2 that centered their efforts on health IT. Wayzata, Minn.-based Lemhi Ventures launched a $150 million venture fund available to new technology companies that aim to address drawbacks present in the current healthcare system, and Minneapolis-based ABILITY Network, and Greenwood Village, Colo.-based Recondo Technologies are among several of the companies in which Lemhi Ventures has invested.

The New York-based Pallwoda Group has also announced a health technology fund in an undisclosed amount for Q2. Officials say the group will focus on companies addressing issues pertaining to cost transparencies and remote patient monitoring. 

The top VC funding deal this quarter was for $100 million, raised by Castlight Health, a provider of healthcare Web and mobile-based transparency solutions.

Practice Fusion, the Web-based EMR tech developer, who raised $34 million, garnered second place. 

Tying for third and both raising $30 million was Valence Health, a provider of clinical integration, data collection and analysis software, and Liaison Technologies, cloud-based and data management solutions provider.  

Honorable mention deals include the $14 million each raised by health services company Carena and Awarepoint Corporation, an RTLS company. 

The average VC deal size in Q2 was $10.5 million, according to report findings. 

There were 39 merger and acquisition transactions in Q2, amounting to $2.9 billion.

Top M&A transactions included Thomson Reuters' HIT business, acquired by Veritas Capital for $1.25 billion; Decision Resource Group, a health information company acquired by Piramal Healthcare Limited for $635 million; and Extend Health, a private Medicare insurance exchange acquired by Towers Watson for $435 million.

In Q2, HIM companies accounted for 17 M&A transactions followed by 11 transactions for revenue cycle management companies.

This uptick in healthcare IT VC funding follows the broader VC market trend that witnessed a 17 percent increase in dollar funding, according to findings from July's MoneyTree Report, published by PricewaterhouseCoopers LLP (PwC) in conjunction with the National Venture Capital Association (NVCA). 

Despite the upward VC trend observed for health IT in 2012, some industries did not experience such all around positive consistency with VC funding. The MoneyTree Report showed the market saw Q2 funding decline in both biotechnology and the medical device market, dipping 9 percent in funds and 6 percent in deals compared with the previous quarter.  Officials say this decline may be partially attributed to the Food and Drug Adminstration's (FDA's) Reform Act of 2012, which slapped $609 million in fees onto the medical device industry. 

Moreover, the recent Supreme Court ruling in favor of the PPACA also includes a new tax provision requiring medical device companies to hand over a 2.3 percent excise tax on certain medical devices, starting January 2013.  

"These fees are not large compared to total revenues of the companies, but the burden of the fees is a concern for an industry that has been recovering from the recession," said Bruce Carlson, publisher of a Kalorama Information report examining the impact of the Supreme Court ruling on the medical device industry.

"Given the regulatory challenges currently impacting the Life Sciences industry and the amount of capital required to fund these companies, it's no surprise that investments in this industry have declined for the fourth consecutive quarter," said Tracy T. Lefteroff, global managing partner of the venture capital practice at PwC US, in PwC press release. 

Lefteroff continued, "If funding levels in the second half of the year remain consistent with the first half of the year, VC investing in 2012 will fall short of the nearly $30 billion invested in 2011 but will exceed the $23 billion invested in 2010."