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No Let-Up for Health I.T. Mergers
Health Data Management Magazine, January 1, 2008
Health care information technology acquisition activity that picked up speed in 2006 kept up the pace in 2007. There were no blockbuster billion-dollar buys, with the exception of the $2.35 billion Eastman Kodak Health Group acquisition by Toronto-based Onex Corp. that included far more medical imaging modality technologies than software.
But there were at least eight deals valued at more than $100 million by the count of Healthcare Growth Partners, a Chicago-based mergers and acquisitions advisory firm. And the pace of software vendors trading hands was brisk-at least 14 sales in April alone-with plenty of household names in the mix.
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And some vendors made bold moves in 2007, particularly Misys Healthcare Systems of Raleigh, N.C. The company returned to its ambulatory care roots by selling its Sunquest hospital ancillary software unit to San Francisco-based Vista Equity Partners for $381.5 million, and by divesting its Misys CPR inpatient electronic health records software to Reston, Va.-based QuadraMed Corp. for $33 million.
Health Data Management tracked a total of 70 deals in 2007 through November (see charts, pages 44, 46).
One key reason for the activity was the entrance of equity investment firms into the market. "This was the year of private equity making a play in health I.T.," says Jonathan Phillips, a managing director with Healthcare Growth Partners.
But it also was a year where expected heavy activity in the ambulatory electronic health records sector didn't happen. The EHR sales were few, with the most significant being San Francisco-based McKesson Corp.'s pickup of Practice Partner of Seattle.
Still, combined with 2006 acquisitions, the past two years have seen substantial consolidation of the ambulatory EHR vendor market, notes Laura Jantos, a principal at ECG Management Consultants, Seattle.
Digging Into Deep Pockets
At least seven private equity firms bought health I.T. vendors in 2007, some more than once.
The list includes: Battery Ventures buying the integration unit of Quovadx Inc. and the portal business of Healthvision; Thurston Group and ABRY Partners picking up physician vendor Companion Technologies (now HealthPort) and document imager SDS (formerly Smart Document Solutions); Vista Equity Partners acquiring the Sunquest ancillary hospital software of Misys Healthcare Systems; Insight Venture Partners and Bessemer Venture Partners purchasing human resources/behavioral health vendor Netsmart Technologies; Francisco Partners buying hospital information systems vendor Dairyland Healthcare Solutions; Primus Capital Funds picking up hospital information systems vendor Healthcare Management Systems; and Onex Corp. acquiring Kodak's Health Group (now CareStream).
Equity firms have been interested in health care I.T. for some time, Phillips says. A favorable credit environment for the first half of the year made it possible for more aggressive valuations to be paid, but that's easing now with the credit crunch, he adds.
But for a while, the perfect storm for the financial markets was brewing. In recent years, an enormous amount of capital has been raised, and the push by private equity was driven by a lot of money sitting around, Philips explains. "All the funds had money to put to work, and all the lenders had money waiting to be put to work."
The initial moves by equity firms in 2007 could spur additional acquisitions in coming years, adds Jason Baker, also a managing director at Healthcare Growth Partners. "They generally don't just buy one company," he contends. After a "platform investment," these firms often then make complementary buys.
That already happened twice in 2007 with Battery Ventures buying Healthvision after Quovadx and Thurston Group picking up SDS after Companion Technologies.
Filling Out Portfolios
The same pattern frequently applies to software companies buying other vendors. For example, Burlington, Mass.-based Nuance Communications in 2006 spent $357 million for Dictaphone Corp. and spent much of the year digesting its dictation and transcription software, and its 4,000 clients-75% of them hospitals.
Then in 2007, Nuance followed up by making three focused acquisitions to bring new value to Dictaphone's products. In the spring, it paid $58 million for Focus Informatics Inc. of Woburn, Mass., marking its entrance into providing in-house medical transcription services.
Two more buys came in October. New York-based Commissure Inc. expanded services for Nuance's core radiology client base by offering decision support software to aid clinicians in selecting the appropriate examinations. Commissure's benchmarking software enables physicians to show insurers the degree to which their ordering practices are consistent with their peers, which may result in payers dropping pre-certification requirements.
Nuance also bought Dallas-based Vocada Inc., which sells software that enables instant messaging to referring physicians when a specialist finds a critical test result that warrants immediate notification. The software can help providers meet a Joint Commission on Accreditation of Healthcare Organizations patient safety goal to improve the timeliness of reporting critical test results and values, says Peter Durlach, senior vice president of Nuance.
Ambulatory EHRs may not have sold like hotcakes in 2007, but that doesn't mean interest is waning. "There's going to have to be another wave of consolidation in this base," Jantos says.
Many smaller vendors still are overvaluing their companies, says Philips of Healthcare Growth Partners. "That makes consolidation challenging," he adds. "The majority doesn't understand their true worth. Some did, but then along came athenahealth."
When Watertown, Mass.-based athenahealth Inc.-known more for its practice management software and bundled outsourced billing services than for its EHR-had a blockbuster initial public offering in September, other vendors started to think they were worth more than they really are, Philips explains.
Too many small EHR vendors lack the resources to grow their business, particularly with the high costs involved in certifying their product with the Certification Commission on Health Information Technology, Jantos contends.
Further, Jantos says, some larger vendors with multiple EHR products-such as GE Healthcare and Allscripts LLC-might at some point shed a product line. "I don't think it is reasonable that they will continue to put all their products through CCHIT certification."
Other uncertified vendors are not likely to be bought unless sellers are certain they can make the systems certifiable, contends Steven Lazarus, president of Boundary Information Group, a Denver-based consulting firm.
Further, there isn't yet evidence that physicians will pick up the pace at which they adopt EHRs, he adds. "It doesn't mean physicians are going to stop adopting EHRs, but I don't see this big ramp-up coming."
If a sizable number of hospitals launch donation/subsidy programs to help independent community physicians adopt EHRs, acquisition activity could quickly pick up, says Sunny Sanyal, COO of the McKesson Provider Technologies division in Atlanta. "We're seeing more interest than activity in subsidy programs," he adds. "They're working their way through the mechanisms."
But with its Practice Partner acquisition, McKesson filled a product line hole, Sanyal notes. And the firm already has made several sales related to hospital subsidy programs, he says.
Following several moves in 2006, some observers a year ago predicted banks increasingly would enter the health care electronic data interchange market. But, for a number of reasons, that hasn't yet happened.
Market trends facing claims clearinghouses are not good because the fees paid by insurers for electronic claims and related transactions are declining, says Philips at Healthcare Growth Partners. Many payers also are encouraging use of their Web sites to exchange transactions for free. "Banks are taking a wait-and-see attitude," he adds. "They're trying to figure out 'Where's the money?'" In time, he believes, the banks will come in.
Another reason banks are hesitant is because they are used to real-time transactions and see clearinghouses and their trading partners using old technology that doesn't adequately support real-time, notes consultant Lazarus.
Further, banks aren't going to be in an acquisition mode in 2008 because many face huge write-downs on the mortgage front and will be looking to cut back operations, he contends.
The health care EDI industry, however, offers opportunities for companies that accommodate real-time financial and clinical transactions, Lazarus contends. "There is opportunity, and the traditional clearinghouses have not jumped into the gap. But if you don't have the real-time infrastructure in place, buying a clearinghouse without real-time is worthless."
Grading The Sales
As more health information becomes automated, an increasing amount of electronic data can be accessed and analyzed. "There's lots of data to mine and that data will be valuable," says Dave Kauppi, president of Mid Market Capital Inc., a Hinsdale, Ill.-based investment banking firm.
That's why Kauppi ranks acquisitions by Stamford, Conn.-based Thomson Healthcare among the smart deals of 2007. Thomson, already flush with decision support applications, bought Neofax, a Raleigh, N.C.-based vendor of neonatal decision support software, and Health Care Data Inc., an Encinitas, Calif.-based reporting and outcomes analysis vendor.
Kauppi also likes Computer Sciences Corp.'s pickup of First Consulting Group Inc., Long Beach, Calif. He believes El Segundo, Calif.-based CSC can combine its outsourcing expertise in other industries with FCG's outsourcing experience in health care.
"CSC's outsourcing reputation in other industries is pretty sterling," he contends. "Put CSC's process disciplines on top of FCG's market expertise and that's a pretty good marriage."
Battery Ventures' buy of the Quovadx Cloverleaf integration business was a smart move, Lazarus says. "That's a good product; the right people can do well with it."
Mergers and acquisitions advisor Philips is high on McKesson's purchase of Awarix Inc. of Birmingham, Ala., and its patient care visibility software. The dashboard application enables an easy look at the status of all patients on a floor, such as a patient who has been waiting 45 minutes to be discharged while the emergency department is asking for a room.
"This capability will give McKesson an opportunity to start new conversations with non-customers," he says. "It will be a door-opener."
Some observers found it puzzling that Revolution Health sold its ConnectYourCare suite of Web-based products to manage high-deductible health plans with health savings accounts. After all, ConnectYourCare was one of several acquisitions Washington-based Revolution Health made in 2005 while building its consumer-oriented health care Web site, which launched in April 2007. Yet five months later, the HSA portal was shed.
ConnectYourCare was designed for insurers and employers to offer to their members and employees, so it simply didn't fit with Revolution Health's tight focus of direct consumer engagement, contends Michael Singer, president of the vendor's investment unit.
But Phillips doesn't understand how ConnectYourCare could be outside the realm of tight consumer engagement. "Going after consumers without partnerships with providers, payers and employers is a tough battle," he contends.
Looking Ahead
Some observers believe health care I.T. merger and acquisition activity will continue to be robust in 2008.
Tighter credit, a fallout from the mortgage meltdown, means smaller companies will become more serious about finding buyers and will have more realistic price tags, Philips says. "We're certainly hearing buyers say they are relieved because there are things they want to do and it was becoming expensive."
The bottom line from investment banker Kauppi: "The merger and acquisition sector is going to be alive and well. Lots and lots of money and innovation are flowing toward health care."
But, the bottom line from consultant Lazarus is far more sober: "It's an election year and the economy's in the toilet."
Companies will wait to see what new policies-such as scrapping the RHIO strategy or mandating EHR adoption-come from a new administration in Washington, he notes. "My guess is it's not going to be a hot year."
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