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Healthcare IT from the Investor’s Chair 8/23/10

August 23, 2010 News 10 Comments

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First, let me offer my apologies to all, especially Mr. H. and Inga, for the heinous length of time between posts. It won’t happen again.

It’s been an interesting time with multiple industry-shifting M&A transactions (but not much in the way of public equity activity). The big question on everyone’s minds these days is not “Who is Salt?” but rather, “What is Ingenix?” (a) a drunken sailor? (b) a whale at the HCIT casino? (c) just too darned wealthy? (d) a genius assembling parts in a way that has yet to become clear? I would submit it’s actually (e), all of the above.

Let’s take each in turn. Ingenix, as all likely know by now, is the wholly-owned IT subsidiary of UnitedHealth Group, one of the largest publicly traded managed care companies. Mr. HIStalk himself recently posted a list of its recent buys.

The first thing that’s noteworthy to me is its dramatic movement from only managed care-focused companies — such as Symmetry, Claredi, or AIM — towards first the hospital business office (CareMedic, Executive Health Resources) and then towards the clinical side of the healthcare system (Picis and, most recently, Axolotl).

When Ingenix tried to buy managed care claims system vendor TriZetto a few years ago, it was going to make the questionable bet that its competitors would purchase their core systems from them. A stretch, but one with precedent. Now it’s betting that hospitals and physicians will not only pay real money to the Great Satan of Managed Care, but that they’ll entrust their clinical data to it as well.

(A provider-focused HIE vendor I know was recently licking their virtual chops over the prospect of selling against a managed care company. Even consumers will likely start to wonder if they want UnitedHealthcare to have the moment-by-moment deep clinical data inherent in some of the recent purchases).

Let’s talk valuation for a moment. As a buyer, Ingenix is, in many ways, ideal for a number of reasons. First, recall that by SEC regulation, public companies have to disclose any material information to their shareholders. The definition of material, however, is open to some debate.

When you’re owned by a company with a $35.5 billion market capitalization that expects to generate $5 billion of cash this year, materiality is a blessedly high bar (by way of comparison, Cerner’s total market cap is $5.7 billion). What this means is that outside shareholders can’t second guess the prices paid. It is, in effect, like a transaction between private companies.

Let’s imagine for a moment that Eclipsys was a private company. Because of their relative sizes, Allscripts still would have had to disclose the purchase price. It would also have been held, at some level, accountable to its shareholders for what it paid, imposing an additional layer of market discipline. Ingenix/United, in contrast, doesn’t view any of its acquisitions in the space as financially material, which no doubt helps loosen the purse strings.

An even better attribute in a buyer than ability to remain silent is ability to pay. At the time of its last earnings release (Q2), Ingenix’s parent United raised its guidance for cash from operations by $200-600 million (or almost as much as CPSI’s enterprise value). I’m sure Bill Gates’ kids would concur — when your parent generates that kind of money, you can pretty much buy what you want if they’ll let you! So when your business generates cash of almost $14 million per day, money is just not a problem.

Now I wonder is this a casino whale or a drunken sailor? One smart HCIT company president opined to me that this characterization was offensive to drunken sailors everywhere, but perhaps he’d just been outbid. Personally, I’m leaning towards whale. Unlike Misys in the 90s, United clearly understands healthcare and Ingenix clearly understands HCIT. Even some of the prices paid, if scuttlebutt is to be believed, aren’t totally irrational (though they are unquestionably aggressive).

Let’s consider Picis as an example. The company was widely rumored to have sold for about 3x 2009 revenue or about 12x 2010 EBITDA. By way of comparison, Eclipsys is selling to Allscripts for 2.1x trailing revenues and 10.5x forward EBITDA. Who’s getting the better deal? Eclipsys has a much broader product offering, but Picis’ products have great depth in the few areas of the hospital in which it plays. Both companies are coming off difficult years with fairly robust growth forecasts. Both have a great ARRA/Meaningful Use story to tell, which pushes their multiples upward.

Bottom line, to me, it appears to be a very aggressive, but not totally absurd price. Now, on the pricier side, Executive Health Resources was purchased for over $1 billion, and I’ve heard Axolotl went for as much as 9x trailing 12-month revenues, which seems a different story.

Finally, there’s the matter of motivation, which I expect is multi-fold. I have no doubt that there’s a grand strategy at play here that will be likely be revealed by the company once the pieces are assembled. But in addition to that, each year the operational dollars that are deployed towards these IT solutions are almost certainly to be counted towards patient care (as opposed to other business purposes). This will have the effect of making the optics of its medical loss ratio appear more attractive to government regulators. Further, I believe there will ultimately be some actual patient care improvements in many cases.

Ordinarily I’d say time will tell if the prices paid are fair, appropriate, or even reasonable; but in this case absent a total implosion, lack of materiality will likely make it difficult ever to learn. I’m aware of a few assets that Ingenix is on the hunt for. I’m sure, to their current shareholders, that the price paid will quite material indeed.


Ben Rooks is the founder of ST Advisors, LLC, a consultancy which works with HCIT companies and their sponsors typically on issues around strategy, financing and outcomes/exit planning . He earned an MBA in healthcare management from The Wharton School of the University of Pennsylvania, was a leading healthcare IT equity research analyst and then worked as an investment banker in over 25 successfully closed healthcare and medical technology transactions valued from $40 to $365 million.

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Currently there are "10 comments" on this Article:

  1. Ingenix also has at least one subsidiary I know of as well and wrote about it back in May, and they bought a company called China Gate which is in China to promote Chinese drugs and medical devices globally.


    “We are well versed in ICH, European and United States Food and Drug Administration (FDA) requirements on Good Clinical Practice (GCP). “

    Everyone can take a stab at how they might think this fits into the puzzle as I am tired and don’t feel like going there today:)

  2. In the case of Ingenix buying up company after company, the one thing you can be sure of is they will face a horrendous problem of integrating these piece meal solutions and will probably not even try.
    In the words of a former GE executive, after GE had gobbled up a group of companies, “integration stops at the marketing brochure”, i.e., there is no plan to provide a seamless solution.

  3. Expect a spin-off … Ingenix will utilze United Healthcare’s money for acquisitions and then become a separate company when they’re done with building their portfolio.

  4. I think the more interesting question is, who is Andrew Slavitt and how did he become so influential at United Health? He’s got the pedigree: Wharton, McKinsey, Goldman. This is a deep strategy guy. There is a plan here, and probably a pretty frickin’ good one.

  5. If you look at the acquisition that have happened over the last 2 yrs – you have to wonder what they are attempting to do – other large HIT companies have done the same, bought the software and services companies to create a whale of services and products – the leadership of Ingenix have Dads/Moms checkbook to spend, but the truth is, what is Ingenix about in the HC market – like others before them, they are weak in their execution, integration and messaging. The real winners are the owners who sell out and cash the check, and bolt to the door. Many careers and good people are ruined with companies that go on acquisition sprees. It’s just a matter of time before the Parent looks at the child and asked, “Why did we spend this money?”

    And Ben – if you are going to write a column, can you get more detail and specifics – if not you are hypothesizing and selling your notions – this industry has enough of that. The M&A market today in HIT is about market share grab – the grabbers will grow their top line by acquisition, but eventually the bottom will fall out because they created a mess with no strategy. Customers, patients and employees will will be the victims of this grab and our healthcare industry will be no better in the long run. Isn’t it ALL about the patient?

  6. It would be interesting to see where Mr. Rooks, if he had $100k of his own money to invest, he would put it in HIT stocks (remembering many of the larger players are privately held) or if he would put it anywhere near healthcare tech stocks at all. Or where in healthcare, etc.

    Just curious, but it would be good to get a perspective on what the “value” and therefore “bet worthiness there is of the compaines that are publicly traded out there.

    Not asking for a Cramer moment but rather some perspective on if any of these companies are worth betting your own money on.

  7. Thanks everyone for the comments, I appreciate them.
    CantSay, I’m not sure what you mean when you ask for more details and specifics. As I said, United doesn’t need to disclose purchase price or size of the acquired companies, so by definition, what I’m doing is hypothesizing (and giving away, not selling my notions). If there are some specific topics you’d like me to address, I’d be happy to in my next Ask the Chair – just shout them out or e-mail them directly.

    That said, “ALL about the patient”? Whenever was that the case for healthcare in America? From hospital officers or insurer executives earning millions of dollars in compensation to investors looking to earn a return on their capital or entrepreneurs looking to earn a return on their time – for better or worse, healthcare in our country is fraught with capitalism and all the good and bad incentives that means. From physician owned imaging centers and beyond – as one of my Wharton healthcare profs said “follow the money ” – though I don’t think that was his line.

    As far as what stocks I’d invest in, part of why I’m glad I’m not an analyst anymore is I don’t have to answer questions like that! Besides, don’t want to get Mr. H in trouble 🙂


  8. With all due respect, and I really mean it; Axolotl purchase was not even near 9x revenue. It sold for 2/3x revenue. It was shopped for over a year. Axolotl would have taken 4/5x, but many passed because the technology was stale and state market comes with an expiration mark.

    I do agree with the idea of integration. Ingenix is building a mountain of a conglomerate, and nothing will be integrated, but you can bet all the money in the world it will be all marketed, and that is where it stops.

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