March 2018 M&A activity highlighted continued momentum on several compelling themes:
- Digital mental health and wellness solutions are demonstrating value. With the millennial population continuing to challenge the norm with unique preferences and values, quickly growing digital self-care platforms have continued to attract mind share and institutional investment. In Q1’18, the top 2 grossing digital self-care apps by revenue in the U.S., Calm and Headspace, generated $14 million in combined iOS and Android revenue. Additionally, the top 10 digital wellness apps (e.g. mindfulness and meditation) generated nearly 3 times as much revenue in Q1’18 compared to Q1’171. B2C apps such as Headspace, Digipill, Simple Habit, and most recently, Calm, have all pulled in institutional capital, noting that private equity investors are valuable partners in perfecting subscription-based business models, enterprise businesses, and international expansion opportunities. In addition, organizations such as Quartet Health and Happify, who are both B2B and B2C, pulled in outside investment within the past year, further highlighting the attractiveness of this market.
- Vertical integration continues to drive the M&A agenda for dominant industry participants. One theme we discussed in a previous blog continues to showcase itself in a big way, with the largest players in the healthcare industry continuing to diversify their capabilities, entrench their market presence, and add a new dimension with the end objective of improving patient outcomes and enhancing cost efficiency. Below, we profile two monumental transactions that come on the heels of the mega merger between Aetna and CVS that was announced last quarter. Cigna’s announced acquisition of Express Scripts and Inovalon’s acquisition of ABILITY Network are two more examples of healthcare industry vertical integration; Walmart’s rumored acquisition of Humana could potentially transform the retail giant into a healthcare powerhouse overnight, which is significant at a time where health service providers are pairing off with retailers (specifically pharmacy/drug store chains) in order to reduce costs, strengthen networks, and defend against new threats such as Amazon.
- Continued robust investment and capital formation activity in physician practice management. In an unabated theme, investors continue to drive significant activity in physician practice management across a wide range of specialties. This theme continues to play out in specialties where the practice management model is mature, such as dental, where Heartland Dental and others have been growing successfully in the large, fragmented dental market for over 20 years. Most other specialties are more nascent in practice management development, and we are observing a race to create leading platforms that can become one of the few natural consolidators in smaller market segments such as eye care and women’s health.
Several transactions announced in March align with these themes:
- Calm, a mental health and wellness start-up company focused on meditation, is reportedly raising $25M in a round led by Insight Venture Partners, though the deal has not yet been officially announced. Founded in 2012, Calm has quickly grown to a business with $40M of revenue in 20172. Though the app is free, the company charges $60 a year for a subscription, which includes content such as a library of meditative guidance and audio programs intended to guide users through stress relief and anxiety. As of the beginning of 2018, Calm has approximately 20 employees. Company leaders have intentions to eventually grow beyond meditation to a consumer brand, with products such as books and clothing; founder Michael Acton Smith has even compared the future of the brand to Nike.
- Cigna’s $67B deal for Express Scripts is the latest indication that the health care industry’s biggest players believe they must diversify their offerings and forge integrated solutions to compete with their peers. The deal allows Cigna to extend beyond their core commercial insurance business and have a deeper role in managing drug spend, which is increasingly seen as a key component of managed care companies. The combined company will have approximately $142B of revenue based on 2017 reported results, and is expected to close by the end of 2018 (pending shareholder and regulatory approvals).
- Inovalon, a predominantly payer-facing analytics, quality and risk assessment company, entered into a definitive agreement to acquire ABILITY Network, a provider-focused SaaS-based revenue cycle management and connectivity platform, for $1.2 billion. The acquisition represents another example of vertical integration within the healthcare industry and will significantly expand Inovalon’s presence and access to data within the provider market. Further, ABILITY’s customer base of over 44,000 acute, post-acute and ambulatory sites provides Inovalon’s existing customer base with a direct connection to providers and their patients. Additionally, data from ABILITY’s platform will feed into and enhance Inovalon’s analytical capabilities and differentiation in the marketplace. The transaction will be highly accretive to Inovalon and closed in early April 2018.
- KKR announced that it will acquire a majority interest in Heartland Dental, the largest dental support organization (DSO) in the United States, from Ontario Teachers’ Pension Plan and other existing shareholders. Founded in 1997 and based in Effingham, IL, Heartland provides non-clinical administrative support services to more than 840 offices and 1,300 dentists across 35 states. This investment comes roughly six years after Ontario Teachers’ November 2012 majority investment. At the time, Heartland consisted of 397 supported practices throughout 21 states. Today, Heartland has over 11,000 employees and the Company generates an estimated $1.3B of revenue.
- LLR Partners announced the formation of Eye Health America, a practice management services organization established to support the expansion of leading eye care practices in the Southeastern U.S. Consequentially, Eye Health America announced the acquisition of The Eye Associates, Clemson Eye and Piedmont Surgery Center, providers of advanced eye care and ambulatory surgery services. At the time of formation, Clemson Eye had four locations, Eye Associates had six locations, and Piedmont operated a single surgery center.
TripleTree and TT Capital Partners continuously monitor the market to identify the forces and themes impacting the healthcare industry. Thanks for reading and let us know if you have any feedback!