When electronic medical-records system developer Allscripts Healthcare Solutions announced it was buying IT competitor A4 Health Systems for $272 million in cash and stock, it also announced it had renegotiated a joint marketing deal with GE Health Systems, the new parent of IDX Health Systems.
The two agreements give Chicago-based Allscripts one less competitor and a wider footprint in ambulatory-care IT, which Dan Michelson, chief marketing officer for Allscripts, describes as a $5 billion market.
But it also clears the path for GE to go nose-to-nose with Allscripts in selling EMRs to IDX practice-management system clients.
"It's a very logical thing to do," Michelson said of the deals announced Jan. 19, a few hours after teams of negotiators reached an agreement around 1: 45 a.m.--and in time to make the announcement to Allscripts employees that morning at their annual meeting in Orlando, Fla.
Vinson Hudson, an IT market consultant from Austin, Texas, said, "I think you're going to see more of this type of thing," particularly more acquisitions by publicly traded IT companies such as Allscripts. Now that sales of EMR systems to office-based physicians are picking up, "You have companies that have to show to their stockholders they have the momentum in the ambulatory-care sector."
And the quickest way to come up with "a bigger footprint," Hudson said, is to buy it.
Allscripts had been focusing its sales efforts, as have many ambulatory-care EMR vendors, on larger physician practices, initially of 75 physicians or more, but more recently, according to Michelson, targeted practices of 20 doctors or more. That's about an $800 million market, Michelson said, but the question now, he said, as IT is being embraced by smaller practices, is how do you get at the remaining $4.2 billion market segment controlled by smaller groups?
"The majority of practices are 25 physicians or less," Michelson said. "When you look at deals in that space, two out of three times they're going for a combination deal with an EMR and a practice-management system."
Through the first half of its 10-year joint marketing agreement with IDX, Allscripts could sell an interface offering its TouchWorks EMR and the practice-management system, or PMS, developed by IDX, which also focused its sales efforts of PMS systems on larger groups. But that agreement with IDX, which does not have its own EMR for physician offices, also precluded Allscripts from buying its own PMS for smaller groups, Michelson said.
On Jan. 5, GE closed on the acquisition of IDX, which had a 17% stake in Allscripts. That ownership interest passed through to GE, but had little bearing on the recent renegotiations, according to Michelson. The change of ownership, however, afforded Allscripts the opportunity to try and amend the joint marketing agreement with the new IDX owner.
Now, Allscripts is free to sell A4's EMR-PMS suite in the small-office market, where 92% of A4's sales to date have been to groups of 10 physicians or less, Michelson said.
According to a company statement, for 18 months, GE and IDX will continue to market Allscripts TouchWorks EHR and GE's Centricity EMR systems to their existing customers while Allscripts will continue to sell the Allscripts-IDX suite to the IDX customer base. During this period, Allscripts has agreed not to sell A4 practice-management systems to current IDX customers. Outside the IDX customer base, both Allscripts and GE may sell their own EMR and PMS systems to any potential customer. After 18 months, GE and Allscripts agree to continue to support integration of each other's products for the remaining five years of the pact.
Allscripts said in a statement it will finance the acquisition with $215 million in cash and 3.5 million shares of Allscripts stock, valued at about $57 million. The deal has been approved by its board of directors but remains subject to stockholder and regulatory approval.
The acquisition is expected to close in the first half of this year. According to Allscripts, A4 had revenue in excess of $75 million in 2005 and net income of about $8.3 million.
For GE, the deal provides comfort to its existing IDX and Allscripts customers, said Stephen Gorman, a vice president and general manager at GE Healthcare. "We wanted to send a message to the marketplace that going forward we're going to do the right thing for them," Gorman said.