The Health Care M&A Monthly: E-Health Attracts Investors--

Interest In Technology, Health Care IT Spurs Deal Making

Over the past 12 months, investors have shown great interest in the e-Health sector. Technology has been hot. The NASDAQ Computer Index, which contains several e-Health concerns, has risen from 587.3 on March 9, 2009 to 1,118.7 on February 26, 2010, for an increase of 90%. It thus outstripped the Dow Jones Industrial Average, which rose from 6,626.9 to 10,325.3 during the same period, for an increase of 56%. Some of this investor interest has translated into deal making during the period, most prominently with TPG Capital’s $5.2 billion leveraged buyout of IMS Health (NYSE: RX), announced last year (see our December 2009 issue).

The e-Health industry has seen a steady stream of M&A activity since the beginning of 2010, although it has yet to fetch up deals with the scope and size of TPG-IMS. February’s largest e-Health deal involves the use of  bankruptcy reorganization to prepare a company for sale. Warburg Pincus, TowerBrook Capital Partners and Community Health Systems (NYSE: CYH) are selling Spheris, a provider of document services for hospitals. Based in Franklin, Tennessee, Spheris provides acute care facilities with medical transcription services. The buyer is MedQuist (NASDAQ: MEDQ), a New Jersey-based company that also provides medical transcription technology and services. Under terms of the deal, MEDQ will pay $75.25 million in cash and assume certain liabilities, which effectively constitutes a stalking horse bid. MEDQ is buying Spheris’ domestic business while CBAY (AIM: CBAY), MEDQ’s majority shareholder, is buying Spheris India Private Limited. The deal would endow MEDQ with an enhanced scale of operation, making it one of the largest medical transcription companies in the United States. Spheris entered bankruptcy with $75.6 million in secured loans and $125.0 million in unsecured debt. Blame the break-neck speed of technological innovation for bringing Spheris to this point: significant changes in technology pushed down the prices for the company’s services and depressed revenue, leaving it unable to service its debt.

Quality Systems (NASDAQ: QSII), a California company that develops and markets health care information systems, is paying up to $26.0 million for Opus Healthcare Solutions, a Texas-based company that delivers Web-based clinical solutions to hospital systems and integrated delivery networks across the country. Under terms of the deal, QSII will pay $12.0 million in unregistered and contractually restricted stock. It will also pay up to an additional $14.0 million in stock, based on the target’s future performance. Opus, including its recent acquisition of Sphere Health Systems, is to become part of QSII’s NextGen Healthcare Information Systems.

IBM (NYSE: IBM) announced plans to acquire Initiate Systems, a Chicago-based provider of record-matching technology to prescription drug and other health information network exchange systems. Initiate’s software provides algorithms for identifying a patient’s prescription history, which calculate the probability that diverse, multiple records involve a specific patient rather than rely on a unique patient identifier, say an SSN. This allows it to facilitate the identification and transfer of records between different organizations. Its software is currently deployed at 2,300 health care sites and is used by 40 health information exchanges. Clients include the Veterans Affairs Department, CVS Caremark (NYSE: CVS), Ochsner Health System, Humana (NYSE: HUM) and the Alberta Ministry of Health and Wellness. Initiate’s investors include In-Q-Tel, a venture capital firm established by the Central Intelligence Agency, which made an investment in 2006. We don’t know how much In-Q-Tel originally invested or what sort of return it got, but as taxpayers we are naturally curious. We also imagine that other software has superseded Initiate’s software in its ability to profile persons of interest for the intelligence community, allowing Initiate’s products to come on to the commercial market. Apparently, IBM likes what it sees and is prepared to help Initiate reset its sights from a regional to a global horizon.

Health Tech Holdings, a Nashville-based health IT company, is acquiring MEDHOST. Based in Addison, Texas, MEDHOST is a software solutions provider, specializing in emergency department information services. This acquisition will allow the buyer to develop an integrated emergency department system for its Healthcare Management Systems’ enterprise-wide solution for community hospitals. The combined companies are expected to generate revenue of about $100.0 million in 2010.