Capital Continues to Pump into Healthcare Technology, What this Means for Georgia

As the healthcare industry continues coming to grip with the recently passed Obamacare legislation, we must now move on with other issues of importance that are contributing to the ongoing expansion of the industry, as well as economic development through jobs and new business growth.  There is perhaps no better place to observe this growth and the valuable contributions to the overall healthcare industry than what is taking place in healthcare technology, or “HCIT,” as it is commonly referred to in the industry.

HCIT has frequently been referred to as the fastest growing segment of the healthcare industry measured by revenues and investment activity, and one of the most rapidly expanding sectors in the entire US economy.  And as the industry has speculated about the changes that will come from Obamacare for some time now, HCIT companies are being pursued as some of the most influential and well-positioned players that will play a critical role in making those policies happen.

According to The Healthcare Investor blog published by McGuireWoods, multiple US firms have announced increased focus in and expansion of healthcare technology products.  Qualcomm, a global technology and communications firm, has set aside $100 million to be directly invested in HCIT products and solutions.  Insight Venture Partners has invested over $40 million in handheld applications that allow for greater efficiencies and streamlining of processes for clinicians.  And companies like Airstrip Technologies have raised millions of dollars to develop solutions that improve quality in medical services via enhanced healthcare informatics and tools supporting clinical processes.

In Georgia, the HCIT sector is one of our biggest.  In fact, Georgia could be considered the “Silicon Valley of healthcare technology,” as the recently-founded, Atlanta-based Institute of Healthcare Information Technology (IHIT) has argued.  According to a 2010 study from the Coker Group, a healthcare-focused financial services firm headquartered in Atlanta, the state of Georgia represents the largest concentration of HCIT firms in the US, when measured by revenue and market capitalization.  Furthermore, HCIT has been one of the largest contributors in Georgia’s commercial growth over the past five years and the sector is expected to account for the greatest number of new jobs over the next 10 to 20 years.  Indeed, numerous studies have concluded that healthcare technology will represent the largest concentration of human capital demand over the next decade.

The HCIT sector has already experienced a significant level of growth in recent years and Georgia has played a critical role in this expansion of economic value, with the state representing a major concentration of HCIT investment and transaction activity in recent years.  This includes everything from early-stage venture investing in healthcare technology start-ups to later-stage M&A deals involving companies that have achieved significant market share and represent compelling value within the marketplace.

According to data published by the National Venture Capital Association, venture capital investments in HCIT increased 78% in 2011, rising to more than $765 million.  This only represents investments in companies that are considered to be in earlier stages of growth.  Investments in mid-stage and later-stage HCIT companies have grown at dramatically higher percentages and amounts than the growth in venture-stage deals.

The overall level of investment in healthcare technology companies has doubled since 2006, and we even continued to see overall growth as capital became scarce during the recent economic downturn when investors have cut back much of their investment amounts and deal volume.  Indeed, many investors have flocked to healthcare, and specifically healthcare technology, as a safer and more sustainable long-term play, in hopes that as the population continues to age and the government continues to burden the industry, the need for anything that can help make the industry, and the companies therein, run more efficiently will not be diminishing any time soon.

Growth has continued in 2012 as well, and it continues to outpace growth levels in a number of categories.  According to analysis from the Coker Group and data from S&P Capital IQ, there have been nearly 280 transactions involving HCIT companies since the beginning of 2012 for a total value of more than $1.64 billion.  These numbers include transactions of all sizes and in companies of all stages of growth.  Of those transactions, 119 were M&A deals, while 154 were private placements, and there have been approximately 6 IPOs of healthcare technology companies year to date.

These HCIT deals that have taken place in the first half of 2012 ranged in value from $340 million on the high end to less than $200,000 on the low end.  The total value of M&A transactions involving HCIT companies was over $975 million and more than $590 million has been invested via private placements in HCIT firms.  And thus far in 2012, we have seen approximately 6 initial public offerings involving HCIT companies, representing over $75 million in transaction values among companies that represent over $500 million in total market capitalization.

Perhaps the largest and most notable of those IPOs that have taken place in 2012 was that of Greenway Medical Technologies, Inc., a medical software company based in Carrollton, Georgia.  Greenway, which completed its IPO valued at over $65 million and is currently listed on the NYSE, has been a major up-and-comer within the HCIT community for the past 15 years.  Indeed, Greenway’s practice management, billing and electronic health records software have been adopted in medical practices and hospital facilities throughout the US, with market share estimates at over 10% for EHR adoption in medical practices alone.

The story of Greenway is a proud one for Georgia and it is similar to numerous other stories involving healthcare technology companies in Georgia over the past two decades.  Georgia could, and indeed should, be considered the epicenter of America’s HCIT sector, in that the state comprises nearly $5.7 billion in HCIT revenues and well over $15 billion in total market capitalization.  This equates to nearly 15% of the companies that make-up the national HCIT sector being based in Georgia.

So, what do all these trends and estimates mean for you?  To answer that, we have to consider some of the outcomes that these trends will likely have on various stakeholders and how what happens in the HCIT sector today can impact essentially every US resident in the future.

First, HCIT continues to attract significant attention from capital investors, and we are confident that the amount of capital invested in healthcare technology will only continue to grow over the next decade or more.  This is encouraging for both HCIT companies and the healthcare industry as a whole, because HCIT as an industry sector is still relatively young.  As such, the sector continues to progress through new stages of the life cycle and the participants within that process have experienced different effects of that growth, most of which is very positive.  This fosters innovation and progression towards more market alternatives, ultimately solidifying HCIT as an independent sector of its own in the long run.

In addition, this growth is beneficial to the broader healthcare industry, as well as for patients all over the world, because healthcare technology is generally focused on enhancing financial and clinical efficiencies within the overall healthcare delivery system.  Most of the HCIT solutions and products on the market fall into one or both of two general categories – there are solutions focused on enhancing clinical quality and/or those centered on increasing financial efficiencies.  Both of these things are good … good for investors and companies; good for healthcare consumers; good for providers of medical services; and, good for the overall economy.  Simply put, deploying the most advanced clinical capabilities into areas where there is low access to quality healthcare is something that will be positive for all stakeholders and there is a tremendous amount of value to be achieved from this.

But there’s more, because these categories represent two of the most critical areas of improving the US healthcare system.  To put it bluntly, the healthcare system will not be sustainable in the future without the advantages and benefits that come with innovation and advances in technology.  Clinical quality improvements will not be achieved and at some point in the relatively near future, the business model of providing healthcare services will no longer be economically viable without the efficiencies creating by technology resources.  As such, any technology that can address and perhaps remedy these areas of weakness in the current model will have tremendous value potential in the healthcare system of the future.

Another meaning of these trends is that while the industry continues to grow and represent a hot area for investors and entrepreneurs alike, there is still so much more to be done.  Healthcare technology is still very much in its infancy, and as such, we have barely even grazed the surface, in terms of the overall potential that remains out there in this marketplace, not to mention the value that can result from ongoing innovation in the years ahead.  Again, this is extremely encouraging for investors, owners of HCIT companies and the overall increasing population of medical patients throughout the world today.

And finally, the future growth that will undoubtedly be experienced in HCIT is ultimately great news for Georgia, because we are currently standing on a nearly untapped field of potential value opportunity that can generate historical growth for Georgia’s economic and commercial dominance in the future.  The state already represents the most potent economic cluster of healthcare technology in the country and has the largest concentration of HCIT companies and revenues than any other US state.  As such, Georgia truly should be considered the epicenter of healthcare technology, as well as a major hub for both healthcare advances and technological innovation.

However, the opportunities that lay ahead in HCIT and what has been done thus far must continue to be fostered and shaped, in order for us to reap the full potential that currently exists and which will emerge in the future.  The potential for Georgia’s healthcare technology industry will create jobs, attract billions of dollars in capital from investors, expand physical infrastructure and communications capabilities throughout our advanced commercial hub, and ultimately result in one of the most productive eras of innovation that we have ever witnessed.

At the end of the day, games on your iPad are interesting and social media websites are fun, but healthcare technology is innovation that will directly improve and save lives.   As such, this kind of innovation will be a far greater game-changer in the annals of history than any other aspect of technological evolution witnessed thus far.  And frankly, I would prefer Georgia to lead in this area of innovation over any other alternative and we are living in an exciting time, because this is just the beginning!

Mark Reiboldt is an economist in the investment banking and financial advisory services division of Coker Group Holdings, LLC, a healthcare-focused financial services firm headquartered in Atlanta, Georgia.  He can be reached here.

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