HBO & Co., a vendor of healthcare software mainly for the maturing hospital market, now is targeting the wide-open spaces of underdeveloped physician group practices as its next frontier of computerization.
And in what's become a standard practice, the Atlanta-based company is using common stock to buy its way into new software markets, this time by acquiring CyCare Systems, a Scottsdale, Ariz.-based seller of software and services to physician groups.
Under terms of a letter of intent signed May 10, 5.1 million shares of CyCare would be traded for 2.2 million shares of HBO & Co. at the average share price computed during a 20-day period leading up to CyCare's shareholder vote on the transaction.
The price would be capped at $125.50 per share of HBO & Co. stock, making the deal worth as much as $276 million, said Anne Davenport, director of investor relations.
Wild buying on news of the acquisition eclipsed that top price. HBO & Co. stock gained $17.50 per share, to $130.50, on the NASDAQ exchange in the two trading days following the May 10 announcement. On May 15, it closed at $124.75.
Trading volume rose from the usual 600,000 shares per day to 1.4 million May 10 and nearly 1.6 million May 13.
CyCare shares, which trade on the New York Stock Exchange, closed at $47.38 on May 15.
Investor analysts and industry observers said the stock run-up was a response to the deal's potential to penetrate a physician market that's increasingly becoming a key element of healthcare computerization efforts.
"HBO has found that in some cases, hospital-based clients are making a big push to share data with the physician practices in their areas," said Raymond Falci, a healthcare analyst with New York-based NatWest Securities.
With a product to fill that need, HBO & Co. could leverage its hospital business to grab a sizable share of physician practice business. "Most physicians have next to nothing, so there's a lot more to go in the physician market," Falci said.
Within that underdeveloped market sector, the area of clinical software is the most acutely unmet need, he said.
A survey released in February by the integrated healthcare consulting practice of Coopers & Lybrand found that only 22% of the 484 physician group practices surveyed have some or all of their patients' clinical records computerized.
Some estimates peg the market opportunity as high as $5 billion for clinical software in physician practices, Falci said.
Davenport said the access to CyCare's practice management business not only would instantly provide "a large presence in the physician marketplace" but also would buy HBO & Co. an established client base for its new clinical software system aimed at physician practices.
Called the Smart Medical Record, the electronic patient charting and clinical assistance system was inherited through the July 1995 acquisition of Pegasus Medical, a privately held Israeli software company. Davenport said the system would complement CyCare's "back office products."
In addition to practice management systems, CyCare is a major vendor of claims processing services, with a stable of about 400 third-party payers to which it can electronically send healthcare claims and billing data and then route the responses to providers.
"They're structuring a sound deal," said J. Steve Rushing, a partner with the Atlanta office of Andersen Consulting. "It's a natural expansion for HBO into those segments of the market."
It also enlarges the already bulging workload facing the company's technical specialists, who must find a way to integrate an array of disparate information systems acquired during the past two years.
Those acquisitions include Ibax Healthcare Systems and Serving Software in 1994, and First Data Health Systems Group and CliniCom in 1995. Stock swaps financed all but the Ibax deal.
Earlier this year, HBO & Co. signaled it was moving away from a preoccupation with acquisitions and toward integrating the movement of data across the company's diverse lineup (March 11, p. 8).
The acquisition of CyCare would add a line of computer "architecture" that's already close to HBO & Co.'s at the basic hardware and operating levels, Rushing said. But he added: "The data model is obviously different. They'll have to come up with a way to pull that together."
HBO & Co.'s appetite for new deals while digesting and assimilating previous ones is not a surprise considering pressures from the investment community, Rushing said. "Wall Street's breathing down their necks to continue this growth," he said.
As HBO & Co. acquires companies, it gets the one-shot benefit of additional earnings during the year of the acquisition, Falci said.
CyCare had 1995 revenues of
$63 million, of which 70% represented recurring revenues through long-term contracts rather than onetime product sales. HBO & Co. had 1995 revenues of $495.6 million.
The steady stream of revenues from CyCare would add to HBO & Co.'s ability to insulate itself from quarterly fluctuations in earnings that have hurt smaller healthcare software companies dependent on multimillion-dollar system sales to line up properly with costs of doing business (May 13, p. 30).
Davenport said a definitive agreement to execute the transaction was being negotiated last week. The deal also requires regulatory approvals and the nod from CyCare shareholders.
Meanwhile, HBO & Co. shareholders last week authorized an increase in total shares necessary to enable a 2-for-1 stock split in the form of a stock dividend payable to stockholders of record on May 27. The intention to split the stock was announced in February.