Q1 2015: Steady Investment Growth and Record-Breaking M&A Activity in Digital Health

Previously, StartUp Health released a detailed report on investment and financing in the internet healthcare sector for Q1 2015 (Click here for details). Recently, various institutions have successively released reports on venture capital and financing in the internet healthcare sector for Q1 2015. VCBeat’s compilation of these reports reveals that investment in the overall internet healthcare industry continued its steady upward trend in Q1 2015. In addition to the six major sectors, represented by big data analytics, continuing to lead the way, Q1 2015 also witnessed record-breaking merger and acquisition activity.

Q1 Investment Overview

Data

In 2014, investment in the internet healthcare sector reached a record $4.1 billion, more than double the 2013 figure and equivalent to the total investment of the previous three years combined. As we moved into 2015, VCBeat considered the biggest question to be whether this growth momentum could continue. Of course, with only one quarter having passed, it is still too early to draw any conclusions.



According to Rock Health data, in the first quarter, the year-over-year growth rate of the forward P/E ratio for digital health companies reached 80%, with total venture capital investment amounting to $630 million. This figure represents a 15% increase over the average of the previous 16 quarters, while the average deal size declined to $10 million. Meanwhile, data from Mercom Capital Group shows that digital health investments in Q1 2015 fell by 35% compared to Q4 2014 (which saw 134 deals totaling $1.2 billion), with 142 deals totaling $784 million. Since 2010, total venture capital investment in the digital health sector has reached $10 billion.



Since Rock Health’s statistics only consider single investments of over $2 million disclosed within the United States, there are discrepancies between the two datasets. However, by synthesizing data from both sources, VCBeat believes it is evident that the internet healthcare investment and financing market continues to maintain the slow-start trend observed in the first quarter. Although there has been a decline compared to Q4 2014, the overall trajectory remains steadily upward.

Raj Prabhu, Co-Founder and CEO of Mercom Capital Group, stated that apart from mobile health, investments across other sectors declined in the first quarter, while significant mergers and acquisitions (M&A) involving mobile health companies also took place. There were already 10 M&A deals in the first quarter of 2015, compared to a total of only 21 for the entire previous year. This trend suggests that exits in the mobile health sector will proceed quite smoothly.

Distribution by Investment Stage

Regarding the distribution across investment stages, the pattern in the past quarter was largely consistent with that of the previous four years. Angel and Series A investments accounted for 60%. As the industry continues to evolve, VCBeat anticipates that startups will rapidly mature and seek further funding. Series B investments comprised 21%, with ClassPass’s $40 million and Collective Health’s $32 million ranking as the top two Series B financing deals of the quarter.

In the first quarter, there were a total of 65 early-stage investments exceeding $2 million, including 16 investments in incubators or accelerators. The number of early-stage investments in incubators and accelerators is slowing down; there were only 6 such investments in the previous quarter, compared to 16 in the current quarter, whereas there were 35 in the first quarter of 2014.

The largest single investment in the first quarter was Health Catalyst’s $70 million, followed by $55 million for big data analytics company Ayasdi. Two deals were valued at $40 million each, for Advance Health and ClassPass. Collective Health secured a $38 million Series B round, while India-based Practo raised $30 million in its Series B financing.



A total of 288 investment firms and four incubators or accelerators participated in investments during the first quarter. Among them, 11 firms engaged in multiple rounds of investment, with the most active investors including GE Ventures (4 deals), Rock Health (3 deals), and Kaiser Permanente Ventures (3 deals). VCBeat believes that the strong activity displayed by a large number of investment firms in the first quarter will surely set the tone for continued growth in investment volume in the next quarter.

Six Major Fields

According to Rock Health data, investments in six major sectors accounted for 61% of the total investment volume in Q1 2015. Given the ongoing penetration of technology into healthcare and health reform, it is unsurprising that big data analytics, consumer health engagement, digital medical devices, and population health management ranked among the top areas. Meanwhile, fields such as digital diagnostics, electronic health records (EHR), and clinical tools have once again come into focus. Notably, investments in solutions for clinical workflows reached $63 million, reflecting a growing demand to improve healthcare efficiency, enhance treatment outcomes, and strengthen patient-centered care.



Mergers and Acquisitions Activities

This was a record-breaking quarter for mergers and acquisitions (M&A). According to data from Rock Health, 42 M&A deals were disclosed in the United States, nearly half of the total number of M&A transactions in all of 2014 (which stood at 95). Among these, there were 19 M&A transactions involving digital health companies.

According to Mercom Capital’s statistics, there were 56 mergers and acquisitions (M&A) in the first quarter of 2015, compared with 52 in the fourth quarter of the previous year. Of these, 42 deals were in the medical practice sector, while 14 were in the consumer healthcare sector. In the first quarter, 10 mobile health companies were acquired, along with seven medical practice management companies, five EHR/EMR companies, and three companies each in the fields of medical imaging and big data analytics.

Among M&A deals with disclosed amounts, mobile health companies accounted for $578 million. The largest single disclosed transaction was Under Armour’s $475 million acquisition of MyFitnessPal, a nutrition data and fitness tracking platform that enables users to monitor their health goals and access nutritional information. This was followed by Huron Consulting’s $325 million acquisition of Studer Group, which provides healthcare consulting services.

Performant Financial Corporation acquired Premier Healthcare Exchange, a provider of advanced cost management solutions for health insurance plans and third-party administrators, for $130 million. HealthStream acquired HealthLine Systems for $88 million. Under Armour also acquired Endomondo, a developer of fitness community and fitness tracking applications, for $85 million.

Furthermore, one internet healthcare company went public this quarter: big data analytics solutions provider Inovalon raised $600 million through its IPO.



Notable M&A transactions include:

Under ArmourAcquisition of MyFitnessPal

Sports apparel manufacturer Under Armour acquired the nutrition data tracking platform MyFitnessPal for $475 million. MyFitnessPal had previously announced that its registered user base exceeded 80 million. Under Armour aims to leverage MyFitnessPal to forge stronger connections with athletes, build greater brand loyalty, and promote healthier, more active lifestyles. Ultimately, however, all of this is geared toward selling more athletic shoes and apparel.

AthenahealthAcquisition of RazorInsightsand webOMR

Athenahealth is entering the EHR market through these two acquisitions in the first quarter of 2015. Athenahealth first acquired RazorInsights, which specializes in cloud-based EHR solutions for rural areas, thereby securing a key entry point into rural and community hospitals. Subsequently, Athenahealth acquired webOMR, a cloud-based clinical application tool developed by Beth Israel Deaconess Healthcare.

FitbitAcquisition of FitStar

The acquisition is conservatively estimated at $17.8 million. FitStar’s two fitness coaching apps have surpassed 3 million downloads. For Fitbit, entering the fitness coaching sector is a natural move. This is not only because the two companies already share overlapping user bases, but also because the acquisition enables Fitbit to offer differentiated software services within its ecosystem.