Ending months of speculation, McKesson opted last month to separate its IT business so that it could focus its resources on its growing drug distribution business.
Under a plan outlined last June, McKesson will combine a majority of its IT unit, Technology Solutions, with revenue cycle management firm Change Healthcare to form a new company. McKesson will hold 70% ownership and Change Healthcare 30%, with cash proceeds of about $1.25 billion and $1.75 billion, respectively once the transaction concludes.
According to several sources, Technology Solutions, with $2.9 billion in sales last fiscal year and an operating profit of $519 million, was never more than a mid-tier player in the health IT space.
The new company would have $3.4 billion in pro forma combined total annual revenues for the fiscal year ending March 31, and could generate more than $150 million in annual synergies by the second year following the close of the deal, according to McKesson. The deal includes an initial public offering.
McKesson cited a number of strategic advantages with the move, including integrated reimbursement management, network-enabled value through combined quality/risk analytics, clinical decision-making, and value-based payment capabilities.
“The new company will establish a more efficient suite of end-to-end payment and claims solutions, as well as clinical capabilities, while unlocking the value of our MTS business in a tax-efficient manner,” McKesson Chairman and CEO John Hammergren said in a release.
The deal does not include McKesson’s Enterprise Information Solutions division, which provides core hospital information systems like Paragon and OneContent. McKesson said it is looking into strategic options for that business.
“We appreciate the critical importance of the electronic medical record (EMR) and other core information systems to the success of our provider customers,” Pat Blake, executive vice president and group president of McKesson Technology Solutions, said in separate statement. “As we embark on building a new, EMR-agnostic technology company with Change Healthcare, we believe that it is in the best interest of our customers to identify a strategic alternative that will allow for more focus on core provider information systems.”
Industry watchers had speculated that McKesson might unload its acute care IT business after the company sold its ambulatory EHR assets to e-MDs in March, Health Informatics reports.
The Wall Street Journal had also reported in early June that McKesson was weighing a separation of its IT unit as it wrestles with pricing pressures on its drug distribution business — big bucks compared with Technology Solutions at $188 billion in fiscal 2015 sales and an operating profit of $3.6 billion.
McKesson has been increasing its leverage in the pharmaceutical distribution market with a spate of recent acquisitions, including Manhattan Beach, CA-based Vantage Oncology, Cary, NC-based Biologics, Inc., and UDG Healthcare in Ireland. The company has also agreed to buy Ontario-based Rexall Health for $2.2 billion.
There have been other signs of change, as well. In March, McKesson announced it would cut about 1,600 employees, or 4% of its U.S. workforce.
When it came to IT, Hammergren told the WSJ that opportunities for right-priced deals were scarce.
Reaction to the news has been favorable, with several financial analysts giving the company a “buy” rating.
Morningstar senior analyst Vishnu Lekraj wrote in a research note following the announcement, “We believe McKesson’s move to streamline its operations and divest direct day-to-day control of its HCIT operations as highly positive and in line with our thinking.”
Lekraj said the business didn’t align with McKesson’s overall strategy, and was an impaired asset from the outset due to accounting fraud in one of the IT unit’s early acquisitions of HBO & Co., which led to a shareholder lawsuit costing McKesson upwards of $1 billion.
“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,” he said.
Meanwhile, Baird analyst Eric Coldwell called McKesson “the distributor to own intermediate term” and said shares “should be bought right here, right now, Benzinga reports. He gave the company an “outperform” rating and a target price of $220 per share.
Leerink Swann analyst D. Larsen also gave McKesson a “buy” rating, setting the target price at $200 a share, according to The Cerbat Gem.
Lekraj believes the company will end up selling the IT unit’s assets to a current HCIT player or private equity firm. McKesson will likely “try to maximize their value through some tax strategy tactics that will increase the value of the line,” he told Healthcare Dive.