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Venture Capital’s Perspective on Healthcare Information Technology

Eugene D. Hill, IIISV Life Sciences Advisers, LLC

Health Information Technology Symposium Massachusetts Institute of TechnologyJuly 19, 2006

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Information Technology

High margins

High growth rate

Compelling value proposition: reduced costimproved outcomes

Rapid Technology change

High capital market value

3

The Substance

Key IssuesThe Market

The Management

The Method

The Money

The Metrics

4

Market

MacroSize (>$500M p.a.)

Growth Rate (>10% p.a.)

Concentration (<30%)

Barriers to Enter

DriversAging Demographics

Scientific Innovation

Consumerism

Cost Escalation

MicroEconomics (Pricing, Operating

Margins)

Customers

Segmentation

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Health Care I/T Market

Size: Healthcare $1.7T (15.0% GDP) 7% CAGR

Healthcare IT $20B; 12% CAGR

Characteristics: FragmentedHealth Plans (500)Hospitals (5,000)Nursing Homes (20,000)MDs (650,000)RNs (2,200,000) est.

Labor intensiveLow Margin (except Rx)Highly regulatedData intensive/Information poorTechnologically backward

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Innovation Adoption – Life CycleM

ark

et P

enet

rati

on

Time

100%

0%

EarlyAdoption

Chasm

Early

Maj

ority

Late Adopters

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Adoption

DriversEconomic

Regulatory

Psychological

Demand

EnablersFinancial

Regulatory

Technological

Standards

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Health Care I/T Barriers to Adoption

Structural» Fragmentation» Decision process

Economic» Cost benefit ROI -- Increased revenue

Reduced timeReduced cost

» Macro – reimbursement» Micro – margins

Operational» Work flow integration

Technological» Legacy system integration» Standards: Articulation

ComplianceRegulatory

» HIPPA

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Venture Capital Deal Flow

Projects Funded

Business Plans Received

ProjectsEvaluated

10

Key Focus Areas

Major Risk FactorsTechnological

Market

Regulatory

Operational

Obvious Show Stoppers

Better, Faster, Cheaper, or Brave New

World

11

Methodology

Business Model

Value PropositionWhat?How big?To whom?

Distribution Strategy

Competitive Differentiation

Growth Strategy

Technology

12

Competitive Analysis

Market Share

Mind Share

Momentum

Differentiation

Buyer Motivation - Painkiller or Vitamin?

Sales Cycle

Pricing

13

Marketing

Product

Price

Promotion (advertising)

Place (distribution)

Packaging

Customer

Business (Enterprise)

Consumer (Retail)

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Business Model Product

application software

data

Servicesubscription application

clearing house

Traditionalsoftware license fee

Annual maintenance

Issuesgross margins

working capital

Emergingsubscription/ASP

transaction based

Pricing

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Pricing

TraditionalSoftware License Fee

Annual Maintenance

EmergingSubscription

Transaction Based

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Valley of Death

Gro

ss M

arg

in

Average Sale Price

< $1.5K > $250K

ASP Pricing Model

Organization Size/Financial Resources

Financial BarrierTo Adoption

Market

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Management Orientation Missionary

Mercenary

Management AttributesSTAGE

Start-up

Early

Expansion

Late

KEY ATTRIBUTES

Passion, Vision

Persistence, Tenacity

Process, Systems

Profits

FOCUS

Development

Entry/Pilot

Adoption

Penetration

18

Health Care I/T

Clinical

Administrative

Financial

DataCapture

TransactionProcessing

DataBase

DecisionSupport

FOCUS

F U N C T I O N

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Disruptive Technology

Technology Paradigm Shift:

Moore’s Law (Speed/Cost Inverse Relationship)

Metcalfe’s Law (Network Effective)

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Healthcare/IT Evolution

2000s1990s1980s1970s1960s

Ap

pli-

cati

on

Manufacturer/Distributor

Customers

Financial (Billing/Acctg)

Financial (Billing/Acctg/ Claims)

Vendors

Administrative(Scheduling)

HumanResources

Financial(Billing/

Accounting)

Administrative(Human

Resources)

Clinical (Lab,Rx, Radiology)

Clinical (EMR,PACS, Protocols)

Clinical

MBR/ERP

SFAClinical

(Data Base)

Clinical (EDC,Registry)

Sales (E-Detailing)

GovernmentInsurance Cos.

Facilities (Hospitals)

MDs MCOsClinical LabsImaging Ctrs

Consumers

EDSCSC

McDonald DouglasIBM

RIMSHSTHBOSMS

MediTech

McKessonEclypsisMedMgrEnvoy

WebMD

GESiemens

Provider

Payor

ERISCOIDXCernerMedicComtec

EzCapTrizettoAmicasEpic

Legislation/Region

Medicare/Medicaid

PPS(DRG)

RBRVSHIPPA

HRA/HSAHMO

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Technology Evolution - Network

2000s1990s1980s1970s1960s

Arc

hi-

tect

ure

Spee

dC

onne

ct-

ivit

y

Proprietary(SNA)

Non-proprietary-packet(TCPIP)

KB MB GB

WiredCopper Fiber

Wireless-Analog Digital

Swit

ches

Con

ten

t

Analog OpticalDigital

VoiceData

Graphic-Static Dynamic

AcademicGovernment

Commercial

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Technology Evolution - Hardware

2000s1990s1980s1970s1960s

Pla

tfor

mSt

orag

eP

roce

ssor

Mainframe PC Laptop PDAMini

Workstation Server

DiscMag Tape

Floppy, 5 ¼ 3 ½ CDRAID SAN

ArchitectureSpeedType

Media

CapacityI/O

KB MB GBSCSI

TBFiber Channel

4 bit 8 bit 16 bitMHz

32 bitGHz

CMOSIC Micro RAM

USB

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Technology Evolution - Software2000s1990s1980s1970s1960s

Lan

guag

e

Proprietary Open Source

Dat

aB

ase Non-Relational

Proprietary(ISAM/VSAM)

RelationalNon-Proprietary

ASCII

Arc

hi-

tect

ure

Mainframe Mini Client Server2 Tier 3 Tier

WebnTier

Con

-te

nt Text Graphics

Voice

Inpu

t CharacterPunch CardMag Tape

GraphicFloppy CD

Machine(Binary)

Compiled1st 2nd 3rd(Basic)

Object-Oriented(C, VB)

Ownership

Code

Platform

Assembler

Machine Specific Intra-operative(Java)

OwnershipStructure

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Technology Cost

$

Time

Software

Hardware

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Healthcare Data

Insurers

Hospitals

MDs

Enterprise

Rx