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Vendor Consolidation: The Wait is Over
Health Data Management Magazine, January 2006
A year ago, an industry observer summed up 2004 as "a year of a lot of tire kicking" with vendors getting ready to buy but not pulling the trigger. But some of those triggers now have been pulled, and vendors and their customers can expect consolidation to continue, experts say.
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The past year saw more acquisitions-and at more favorable prices for sellers. Further, Waukesha, Wis.-based GE Healthcare's buy of Burlington, Vt.-based IDX Systems Corp. was the first billion-dollar deal in five years.
Health Data Management tracked at least 55 deals in 2005, up from 43 in 2004.
The impetus behind the consolidation trend is the fact that many health care organizations want to consolidate the numbers of vendors they do business with.
The effort to build a national health information network-anchored by regional health information organizations-has put a premium on information systems interoperability. To ease the task, providers are looking to reduce the number of disparate systems in their organizations, says Randall Lipps, chairman, president and CEO at Omnicell Inc., a Mountain View, Calif.-based vendor of ancillary information systems. As a result, "hospitals want to buy a total solution from a single vendor," he adds.
This means vendors need to broaden their portfolios fast, and many feel the only way to do so is via acquisitions. "You can't effectively grow business today without acquisitions," Lipps contends.
That's why Omnicell, which struggled through much of 2005, expects to seriously consider being an active buyer in 2006 as its finances improve. But Lipps acknowledges the tables could be turned with Omnicell-best known for its medication management technology-being the seller.
"Any vendor that is a public company is for sale," he notes. "There's been a lot of interest in the past about Omnicell. We resisted because it didn't make sense, but it's my view that valuations are getting higher."
Higher valuations means sellers can command higher prices than in past years. And some of the prices seen in 2005 were surprisingly high.
Online supply vendor Neoforma Inc., for example, has a history of financial losses but sold to rival Global Healthcare Exchange for $200 million. Philips Medical Systems paid $280 million for picture archiving and communication systems vendor Stentor Inc., which expected 2005 revenue of about $50 million. That's a huge multiple, but a smart move for Andover, Mass.-based Philips, says Vishal Wanchoo, president and CEO at rival firm GE Healthcare's Information Technologies subsidiary in Barrington, Ill. "Clearly, they had to have their own PACS," he adds.
PACS were a hot item in 2005 with at least six vendors selling. Among those deals, McKesson Corp. paid $105 million for Medcon Ltd., which had 2004 revenue of $17 million. Orthopedics vendor Stryker Corp. paid $50 million for eTrauma.com, with $18 million in revenue in 2004. Agfa Corp. bought technology partner Heartlab Inc. for $132.5 million, more than four times revenue. Mercury Computer Systems Inc. paid 2.3 times revenue for Germany-based SOHARD AG.
Prices paid for PACS vendors may have been high, but many of these companies were growing rapidly, notes Gene Mannheimer, senior vice president of research at the San Diego-based investment firm Caris & Company. "PACS vendors are growing revenues at 40% to 50%, hence the high multiples paid."
Merge Healthcare paid $387 million in stock to acquire Cedara Software of Toronto. Richard Linden, president and CEO at Merge, declines to say what the multiple was, but acknowledges it was fairly high.
"I'm less interested in valuation models based on multiples of revenue," Linden says. "I do deals based on profitability, cash flow and accretive earnings to shareholders in 12 months or less. I would exceed normal multiple revenue parameters if the deal met that criteria."
The most frugal PACS deal may have been Emageon Inc. paying $40 million for cardiology vendor Camtronics Medical Systems Ltd., with $38.1 million in 2004 revenue.
PACS will continue to be hot this year, observers say, and some predict that AMICAS Inc. and DR Systems Inc., among other vendors, will be likely acquisition candidates. "There are certain segments of health care converting rapidly to digital imaging," Linden says. "A standalone PACS vendor probably realizes its life span is short right now."
One vendor that should have bought a PACS is Cerner Corp., contends Vince Ciotti, principal at HIS Professionals Inc., a Santa Fe, N.M.-based consulting firm. But he gives the company credit for trying to build integrated applications rather than buying second-rate technology. "Cerner has more pure architecture than most vendors," he adds. "They don't buy junk, brand it and call it integrated."
Cerner officials did not respond to requests for an interview. Known for making small, niche acquisitions, the Kansas City, Mo.-based company in 2005 paid $11 million for the Bridge Medical bedside medication management system from AmerisourceBergen Corp., Chesterbrook, Pa.
Some observers brand that buy as one of the smartest of the year. "I wish I could have bought it, I would have paid a lot more," laments Lipps at Omnicell.
Lipps believes Bridge Medical has an excellent patient safety product that is ahead of its time, and a company like Cerner can wait for the market to catch up. "It is a heavy-duty, intensive application that requires a hospital to be ready on so many fronts," he adds. "Cerner implements complicated order sets. The acquisition is a good fit, but expect slow growth."
Other prospects
Electronic medical records vendors catering to physician practices could be another hot item this year as major hospital vendors fill out their enterprisewide portfolio.
Two vendors to watch, Mannheimer says, are Allscripts Inc. and NextGen Healthcare Information Systems, a subsidiary of Quality Systems Inc.
"They have hot products in the fast-growing market for ambulatory medical records software, but many would-be acquirers may balk at the valuation," he adds.
NextGen President Patrick Cline agrees his company is an attractive candidate for acquisition, but would be "extremely expensive."
"The climate in 2006 will favor acquisitions of companies with electronic records products and other clinical offerings," he says. "But at present, I doubt NextGen will be one of them."
Health care information technology consulting firms offer providers and payers a wide variety of services. One service, for instance, is helping organizations figure out how the change in ownership of a technology firm will change the business relationship.
In 2006, many organizations will have to determine how the acquisition of their consulting firm will change that relationship.
That's because several well-known consulting outfits-including Capgemini LLC, Daou Systems Inc., Healthlink Inc. and Superior Consulting Co.-changed hands in 2005.
Firms that didn't sell in 2005 were fielding an increasing number of calls about their willingness to be acquired, says Giordano at CareTech Solutions. Further, the inquiries were more serious than in previous years, he adds.
Many consultants have branched out to offer proprietary software or outsourced information technology services, notes consultant Ciotti at HIS Professionals.
Conversely, many large vendors have formed consulting divisions in recent years. "The line is blurring between consultants and vendors," Ciotti says. "Consultants will get bought and sold, just like vendors."
The smartest deal in the consultant sweepstakes, Ciotti believes, was Affiliated Computer Services Inc. of Dallas paying one times revenue for Superior, which has struggled financially for several years.
"Superior gave them a very good entry into health care," he adds. "ACS didn't have strength in the industry outside of running data centers, which they do very well."
Software vendors catering to health insurers joined in the renewed consolidation activity in 2005. DST Systems Inc. led the way with its $324.6 million acquisition of the health plans solutions division of El Segundo, Calif.-based Computer Sciences Corp.
Kansas City, Mo.-based DST, with $2.4 billion in revenue during 2004, is a vendor of data processing and software services for the financial, insurance and communications industries.
The CSC unit it bought sells case, utilization and medical management information systems; predictive modeling and case-mix adjustment applications; Web portals; and the PowerSTEPP core payer information system. It also has a modest business selling practice management software to hospital-based physicians.
Prior to purchase
Before the acquisition, DST's major health care services included transactions processing and its Automated Work Distributor business process management suite of services. Targeting hospitals and payers, these include rules-based document imaging and workflow management technology, and integration blueprints for disparate information systems.
Through its DST Output subsidiary, the company also provides print and electronic communications between insurers and providers or members. These include enrollment forms, payments, explanation of benefits and promotional materials.
Now, the company has a ready-made market from the 100 payer clients of the CSC unit for the services of DST Output, says Stephan Sabino, president of DST's new Health Solutions Division.
Further, the company is combining existing and acquired technology to introduce new applications in 2006, Sabino says. These include new accounts receivable software and a benefits configuration tool with templates to speed development of new benefit programs.
DST may soon make some more acquisitions, Sabino says, although DST is only about a half-year into integrating what it bought from Computer Sciences. "We'll certainly keep our eye out for anything interesting," he adds.
For instance, the company is studying how to use its workflow technology to further enable better communication between providers and payers.
Big buyer?
Some industry observers, asked to speculate on which health I.T. vendors might be active acquirers in 2006, picked The TriZetto Group Inc. as due for a major buy.
The Newport Beach, Calif.-based company, which primarily serves payers, answered the call early, announcing in mid-November that it would acquire CareKey Inc. The Boston-based company sells personal health records and disease/case/utilization management software. TriZetto will pay $60 million, plus up to $40 million more through 2008 contingent on CareKey meeting certain sales and performance targets.
TriZetto has focused on core payer information systems, helping insurers manage the 10% to 20% of premium dollars that go toward administrative costs, says Jeffrey Margolis, chair and CEO. "Now, we want to help payers manage the other 80% to 90% spent on the cost of actual health care," he adds.
The acquisition will enable expansion of an existing relationship between the companies. CareAdvance Enterprise, a product that combines CareKey's software with the claims database in TriZetto's Facets payer information system, has been the most successful component of any TriZetto product line since its mid-2004 introduction, Margolis says.
CareAdvance Enterprise enables the analysis of claims data to identify individuals due for preventive care or in need of a disease management program. Under the previous relationship, however, TriZetto could market the component only to existing Facets clients. When the acquisition closes, it can market the component to other clients and the entire payer market.
VHA Inc., an Irving, Texas-based provider alliance, has entered several strategic partnerships with vendors. These include significant equity stakes in Healthvision, Neoforma Inc. and Solucient LLC.
But VHA in 2005 for the first time bought a vendor to fill a need of members. It acquired Goodroe Healthcare Solutions, a Norcross, Ga.-based vendor of software to collect and analyze outcomes data.
Room for improvement
Some segments of health care, such as cardiac catheterization, orthopedics and neurology "have a great need for improving the quality and efficiency of care," says Jeff Hayes, previously COO at Goodroe and now a senior vice president at VHA. "You obviously have more influence over a vendor if you own it."
Goodroe's software integrates to various information systems to collect data on how medical/surgical supplies, pharmaceuticals, medical devices and labor are used for certain procedures. It then compares usage patterns with treatment outcomes, helping hospitals and physicians identify combinations that work and to set performance benchmarks.
Integrating the software with materials management information systems can help physicians learn how different devices are priced, Hayes says. "We can work with them to get better pricing, or switch to lower-priced but equally effective methods."
A small fraction of Goodroe's more than 100 hospital clients use the software to support "gain sharing" programs. Under gain sharing, hospitals and physicians share profits from procedures that have become more cost effective without compromising quality.
VHA didn't buy Goodroe to focus on that part of the market, Hayes says, "but there is definitely an opportunity to look at gain sharing."
Sidebar
Speculation Ends as GE Buys Big
For several years, health care information technology observers have waited on GE Healthcare to make a big move in the industry.
The Waukesha, Wis.-based vendor of medical and imaging devices and ancillary departmental information systems for hospitals in 2002 had broadened its presence by acquiring practice management and electronic medical records software for physician practices.
The buys of Millbrook Corp. for practice management and MedicaLogic Inc. for electronic records were part of GE's strategy to eventually "cover the gamut of health," says Vishal Wanchoo, president and CEO at GE Healthcare Information Technologies in Barrington, Ill.
Even then, he adds, the expansion wasn't done. "We've always known we had to make a move in the inpatient space with hospital information systems."
GE Healthcare made that move last year by agreeing to buy IDX Systems Corp. of Burlington, Vt., for $1.2 billion. The companies expect the deal to close early this year.
Outlook ahead
IDX will substantially increase GE Healthcare's presence in the ambulatory care field. But about 300 hospitals also use IDX's inpatient electronic records software, opening that market to GE, Wanchoo says.
Having a suite of products to serve inpatient and outpatient markets will be important to GE and other vendors as delivery systems and regional health information organizations look to consolidate vendors and ease integration work, he adds. "For a company to succeed in the outpatient arena will be tougher and tougher unless it has a good inpatient presence."
In 2006, integrating its products will be the priority for GE Healthcare, Wanchoo says. The company early in the year expects to introduce a new version of its Millbrook and Logician products integrated on the same database.
Integrating IDX into GE's technologies and culture will be the big task this year. To ease that job, Wanchoo expects most of IDX's leadership to stay with the company. IDX CEO James Crook, Jr., will stay for the first year of the transition; he is the only senior executive to publicly state he will leave.
GE Healthcare's buy of IDX was a smart move to build its portfolio and market presence quickly, says James Giordano, president and CEO at CareTech Solutions, a Troy, Mich.-based consulting firm.
"Whatever happens with the building of a national health information network, no one wants to be left behind," he explains. "To provide a full-service offering, GE had to make an acquisition."
More on horizon?
Some other observers aren't confident GE is in the core health I.T. market for the long haul.
Consultant Vince Ciotti, president at HIS Professionals Inc. in Santa Fe, N.M., predicts the company will sell IDX within three years. "Most large multibillion dollar, multinational firms buy into health care I.T. for a few years then get out," he contends.
But Wanchoo says the industry should not be surprised to see GE make more buys in 2006. "There clearly won't be any acquisition the scope of IDX, that doesn't make sense," he adds.
There are some holes in its product line, however, that GE Healthcare will look to fill.
On the medical imaging side, for instance, GE built radiology and cardiology information systems in-house, but is looking at adding established vendors for pathology and dermatology, Wanchoo says.
The company also may expand into the consumer sector, he adds. It is looking at Web portal, personal health records, and physician-patient consultation software.
Expect more buys from GE even as it works to digest IDX, says Gene Mannheimer, senior vice president of research at Caris & Company, a San Diego-based investment firm. "Although GE may have its hands full with IDX, don't rule them out to be an acquirer of virtually any health care I.T. company in the sector."
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