McKesson Sells IT Division...To Dump Earlier Mistake???

You've all heard by now that healthcare giant McKesson will spin off its IT division. Here's the bullet from Fortune:

Healthcare services provider McKesson said it would combine most of its information technology business with Change Healthcare Holdings to form a new company with combined pro forma annual revenue of $3.4 billion.

Change Healthcare, a provider of software and analytics, network solutions, and technology-enabled services, will contribute all of its businesses to the new company, with the exception of its pharmacy switch and prescription routing business.

Tennessee-based Change Healthcare is majority owned by Blackstone Group.

The new company will be able to offer managed care companies technologies for financial and payment solutions as well as tools for administrative and clinical management, said McKesson, which has a market value of about $39 billion.

AuntMinnie.com elaborates:

In a pair of June 28 announcements, McKesson said it will create a new standalone healthcare IT company in partnership with Change Healthcare Holdings, the revenue cycle management firm formerly known as Emdeon. The new entity will have estimated annual revenues of $3.4 billion, with McKesson owning 70% of the firm and Change shareholders owning the remainder.

The new firm will combine all of Change's operations with most of McKesson's Technology Solutions division, which includes its Imaging and Workflow Solutions unit, which offers enterprise PACS software as well as image management applications for radiology and cardiology. Other operations in the division include Health Solutions, Business Performance Services, and Connected Care and Analytics units.

In announcing the spin-off, McKesson Chairman and CEO John Hammergren said the move would "establish a more efficient suite of end-to-end payment and claims solutions, as well as clinical capabilities," while also "unlocking the value" of the Technology Solutions business. McKesson and Change are also positioning the move as one that will help their healthcare customers navigate the transition to value-based healthcare.

Following the closing of the transaction, McKesson and Change plan to pursue an initial public offering for the new venture. McKesson will then exit its investment in the new company.

McKesson said the spin-off will not include its Enterprise Information Solutions division, which it will retain as it "explores strategic alternatives" for the division. This business includes electronic health record (EHR) software, such as McKesson's Paragon hospital information system. McKesson's RelayHealth Pharmacy division also is not included in the spin-off.

So the new company will have PACS and some other stuff, but NO EHR. Fortune adds, "The new company will be able to offer managed care companies technologies for financial and payment solutions as well as tools for administrative and clinical management, said McKesson, which has a market value of about $39 billion." Doesn't sound like a ripe market for the PACS offering.

Why would McK give birth to a partially-formed offspring like this? Good question. AuntMinnie's Brian Casey continues:

Speculation that McKesson might be seeking a divestiture surfaced in early June, when an article in the Wall Street Journal suggested that the company might be looking at options due to pricing pressures in its core drug distribution business.

The article indicated that the Technology Solutions business had $2.9 billion in sales in its most recent fiscal year (end-March 31) and operating profit of $519 million, which is just a fraction of the $188 billion in sales and $3.6 billion in operating profit produced by McKesson's drug distribution business.

The move is a sign that ongoing changes in the industry are affecting even some of the largest players, according to Michael Cannavo, principal of PACS consulting firm Image Management Consultants.

"It is interesting to see moves by many of the larger companies to either start refocusing their core offerings or consolidating their products with other vendors' offerings," Cannavo said. "End users used to be concerned about the smaller vendors not surviving, or at least the products they bought surviving. Now the larger vendors are starting to have some of these very same issues. The sad reality is no one vendor is considered a safe bet anymore."

The Wall Street Journal elaborates:

Companies often consider separations of units whose profit margins, expected trading multiples or strategies differ dramatically from those of core businesses. It has been happening more as shareholder activists and other investors push companies to narrow their focus.

Spinoff activity peaked among U.S. companies in 2014, with a record 58 transactions worth $164 billion, according to FactSet. They have fallen off a bit since then, though in the past year several big companies have pursued such moves, including Hewlett-Packard Co., Baxter International Inc. and Xerox Corp.

McKesson has announced cost cuts and layoffs as it grapples with price pressures brought on by consolidation among its customers.

And again from Fortune:

Morningstar analysts said McKesson’s healthcare IT business never fit the firm’s overall strategy and was an impaired asset from the beginning as a result of the accounting fraud. (See below.)

“Management has not made any material investments within this business over the past several years, and to our understanding, the technology was two to three generations behind other major HCIT players,” they wrote in a note.

Let's look at a bit of McKesson history, courtesy of the Wiki:

Founded in New York City as Olcott & McKesson by Charles Olcott and John McKesson in 1833, the business began as an importer and wholesaler of botanical drugs. A third partner, Daniel Robbins joined the enterprise as it grew, and it was renamed McKesson & Robbins following Olcott's death in 1853.

The company successfully emerged from one of the most notorious business/accounting scandals of the 20th century—the McKesson & Robbins scandal, a watershed event that led to major changes in American auditing standards and securities regulations after being exposed in 1938. In the 1960s, McKesson & Robbins merged with Foremost Dairies of San Francisco to form Foremost-McKesson Inc.

Yes, they merged with a Dairy.

McK decided to get into informatics at the end of the last century. From Fortune again:

In 1999, McKesson entered the healthcare technology sector by purchasing a large tech company, HBO & Co., for $14.5 billion. Shortly after the deal, auditors discovered that HBO & Co. had been fraudulently boosting sales, eventually leading to a shareholder lawsuit that cost McKesson nearly $1 billion.

Oops. WSJ:

But after it was completed, auditors found evidence that HBO executives had fraudulently booked revenue and inflated the Georgia company’s profits. Several HBO officials were indicted on federal charges, and its chairman was eventually sentenced to 10 years in prison. McKesson shares didn’t recover to their pre-scandal levels for more than a decade.

In the meantime, McK did do something wise...it dumped the PACS that came with HBO and bought a much better product from ALI. Erik Ridley's 2002 AuntMinnie.com article gives an interesting glance into those primitive times:

With PACS seen increasingly as the imaging layer of an electronic patient record, it's no surprise that healthcare information systems vendors would want a piece of the action. The bid by HIS firm McKesson Information Solutions to acquire Canadian PACS provider ALI Technologies for $340 million (U.S.) is the latest acquisition/partnership among PACS and HIS vendors.

For McKesson, the decision to reenter the PACS market reflects its desire to offer a complete electronic patient record, including support for digital image management, said Randy Spratt, senior vice president of technology and standards for McKesson Information Solutions of Alpharetta, GA.

If completed, the deal would mark McKesson's second go-round in the PACS market. McKesson Information Solutions' predecessor, HBOC, had acquired PACS developer Imnet Systems in 1998. McKesson later bought HBOC in early 1999, but abandoned the unit's PACS initiative two years ago.

The architecture of the Imnet PACS technology was not sufficient for many reasons, including its lack of adherence to open standards and lack of a practical image distribution method, Spratt said.

"We probably did not fully appreciate the depth of technical expertise that was required for the viewers and workstations of medical images as opposed to document images," he said. "Without a complete product and without the skill set and expertise, we determined that it would take more time and risk to get it to market than it would to close that product down and look for another."

In acquiring ALI, McKesson receives a true PACS success story, an independent that was able to thrive in a market dominated by larger modality and film vendors. Focusing initially on ultrasound miniPACS, ALI became one of the leaders in the niche before electing to expand into radiology PACS.

ALI implemented that expansion in part by purchasing independent PACS firm Olicon Imaging Systems in 1999. Today, ALI has an installed base of over 500 installations worldwide. While ultrasound PACS orders still make up the majority of the vendor's installed base, roughly 66% to 75% of the firm's new system revenues are being generated from radiology PACS orders, said Greg Peet, ALI's president and CEO.

Ha. I feel vindicated on several levels. I had been told for years that AMICAS was unworthy of my attention because it was a small company ready to be plucked and destroyed. But Merge bought AMICAS and IBM bought Merge, making this one of the most solid systems out there. And Big Iron McKesson is dumping its PACS. Go figure. And the McKesson PACS story itself tells us that a Big Iron (or shall we say, larGE) company can buy another PACS and make it work, rather than destroy it.

We shall see what becomes of one of the more beloved systems out there. I'm thinking it might be wise to put purchase decisions on hold for a while...