Venture capital in health IT drops to $956M in Q3, but global investment increasing

Venture funding in the digital health and health IT sectors dropped by 46 percent in the third quarter of 2014 compared to the previous quarter, going from a massive $1.8 billion in 161 deals to $956 million in 212 deals, according to a report from Mercom Capital Group. The second quarter, the report said, was […]

Venture funding in the digital health and health IT sectors dropped by 46 percent in the third quarter of 2014 compared to the previous quarter, going from a massive $1.8 billion in 161 deals to $956 million in 212 deals, according to a report from Mercom Capital Group.

The second quarter, the report said, was exceptionally high for VC, calling it  “a rare quarter.” While down over the quarter, VC funding in the third quarter for the sector was still the second highest funding level since 2010. Year-to-date, VC funding has totaled $3.6 billion.

Meanwhile, mergers and acquisitions in the health IT space have more than doubled in cost while fewer transactions occurred – there were 55 M&A transactions in Q3 totaling $4.7 billion, compared to 57 transactions totaling $2.2 billion in Q2 2014. All of the M&A activity in health occurred with practice-focused companies, according to the report.

So-called consumer-focused technologies, which includes mobile health, received 65 percent of all VC investments in the third quarter of 2014, with $623 million in 140 deals, yet it was down from $678 million in 100 deals in Q2 2014.

Mobile health led the way with $345 million in 82 deals, followed by telehealth, which had its best quarter, with $101 million in 16 deals. Personal health followed with $85 million in 24 deals, social health with $70 million in three deals, and scheduling, rating and shopping had $23 million in 15 deals.

The majority of VC raises in health IT were less than $2 million during the third quarter, with over 100 deals carried out by 252 investors, ranging from angels, VCs, private equity and corporate VCs. It also included 12 accelerators and incubators, the report said.

Increasingly, the sector is attracting investment from beyond the U.S.

Companies from 18 other countries participated in funding in the third quarter this year, compared to 13 in the second quarter. With almost $200 million raised in 38 deals, countries outside of the U.S, accounted for about 21 percent of the fundraising this quarter – the largest share since Mercom started tracking funding activity in 2010. U.S. companies raised $760 million from 174 deals.

California led the U.S. by a long shot in the number of deals, with 54, followed by New York at 17 deals, Texas and Massachusetts with 11 deals apiece and Pennsylvania with eight deals. Among cities, the San Francisco Bay Area had the highest number of funding deals with 46, followed by New York with 17.

Reflecting the global interest, two of the top five largest deals occurred in China. The largest VC deal during Q3 this year was the $70 million raise by DXY, on online community for medical institutions and providers in China.

Rounding out the top five VC deals were: Proteus Digital Health, which raised $52 million; Teledoc, which raised $50.3 million; Chunyu, a Chinese mobile healthcare app developer that connects patients and doctors, raised $50 million; and HealthEdge, a provider of a cloud-based or on-site integrated financial, administrative and clinical software platform for healthcare payers, raised $30 million.

Practice-centric companies netted $333 million in 72 deals in the third quarter of 2014, compared to $1.1 billion in 61 deals in Q2. Within this space, revenue cycle management led the way with $75 million in eight deals, and data analytics followed with $71 million in 19 deals.

While consumer-centric companies dominated the fundraising, M&A was a different story, with 46 of the 55 transactions involving practice-focused companies. Consumer-centric companies saw just nine M&A transactions, the report said.

Of the top M&A deals, the largest was the $2.7 billion acquisition of TriZetto, a provider of healthcare IT software and solutions that help payers and providers, by Cognizant, a multinational IT, consulting and business process outsourcing company.

Cerner’s acquisition of Siemens Health Services was second, at $1.3 billion. Conifer Health Solutions, a subsidiary of Tenet Health Corporation, acquired SPi Healthcare, a provider of revenue cycle management and physician billing services, for $235 million.

The known level of debt and public market financing in health IT amounted to $28 million in four deals in Q3 2014, compared to a massive $1.5 billion in five deals in Q2 2014.