(Story updated at 12:41 p.m. ET)
After a tough year of losses and cost-cutting, McKesson Corp. is looking to divest its technology business in a joint venture with Change Healthcare Holdings.
The San Francisco-based drug distributor and technology company announced Tuesday that it would merge the majority of its technology business with nearly all of the holdings of the Blackstone Group-owned provider of revenue-cycle management, data network and analytics services.
The combined company would have combined pro forma revenue of $3.4 billion as of the fiscal year ended March 31. Reuters estimated the companies' combined value at $10 billion.
After the companies launch an initial public offering for the company following the close of the deal, McKesson expects to exit the investment in a "tax-efficient manner," as noted in their news release. The deal, which is still subject to closing conditions, is expected to close in the first half of 2017.
"There are many paths we could have chosen, and I'm confident this was the right one," McKesson CEO John Hammergren said during a conference call with reporters.
Before divestment, McKesson will own 70% of the new company and will receive cash proceeds of approximately $1.25 billion after the deal closes, pending customary closing conditions. Nashville-based Change Healthcare will own approximately 30% and receive $1.75 billion, according to a release.
In an interview with Modern Healthcare, Hammergren stressed that the technology segment's margins and profit growth were strong, even though it faced some revenue challenges due to the sales of certain businesses.
"This divestiture was clearly inspired by opportunity, not McKesson trying to change strategy or get out of a business," Hammergren said, noting that McKesson's intent to retain 70% of the company before divestiture should send a signal that it sees promise in the new company.
McKesson is far from the only healthcare supply chain company that has tried to build a technology business. Most of the major distributors and many of the major group purchasing organizations have some kind of technology component to their business.
Hammergren said the challenges for healthcare companies trying to get into technology from scratch include an unfavorable customer adoption curve, unpredictable reimbursement and competing priorities from a horde of other companies looking to get their product in front of providers.
An acquisition-focused strategy in technology is also difficult for a distributor like McKesson because acquiring promising, high-value small technology companies can be extremely expensive, Hammergren said. This strategy isn't necessarily conducive to the way that healthcare distributors are valued, he said.
The Wall Street Journal this month had quoted sources who alleged that McKesson was weighing a separation of its IT unit. A McKesson spokeswoman told Modern Healthcare then that the company doesn't comment on "rumors and speculation."
Neil Simpkins, a senior managing director with Blackstone, said the firm is "extremely pleased" to be a part of the new company. Change Healthcare CEO Neil de Crescenzo said the company "will create significant value by bringing together complementary capabilities from both organizations."
McKesson also announced Tuesday that it is exploring strategic alternatives to sell its enterprise information solutions business, a division that provides core hospital information systems.
The Change Healthcare transaction is not contingent on the sale of the enterprise information solutions business, executives said. The transaction also doesn't include all of the companies' businesses: McKesson will retain its enterprise information solutions business for a potential sale, as well as its RelayHealth pharmacy technology business, while Change will retain its pharmacy switch and prescription routing business, which will be owned separately by current Change Healthcare stockholders.
“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," Pat Blake, an executive vice president of McKesson and group president of McKesson Technology Solutions, said in a statement.
Declines in this business have repeatedly contributed to unfavorable results for McKesson, which recently cut nearly 4% of its workforce. Those changes were mainly driven by changing customer relationships, including a potential loss of major customer Rite Aid Corp., which is awaiting approval of its acquisition by Walgreens.
McKesson's distribution business, which has carried the company despite poor performance in the technology segment, is expected to benefit from a recently solidified deal with Wal-Mart Stores. McKesson recently signed a new sourcing agreement for generic drugs and an expanded long-term distribution agreement with the big box chain.
Hammergren pointed to pending acquisitions like that of Canadian drug store chain Rexall, British chain Sainsberry and Irish drug distributor UDG Healthcare as signs of continued growth in the distribution business. He emphasized that the divestiture won't "create a void in McKesson or a void in our strategy," and that Tuesday's transaction is "optimizing the performance of an asset we held for a long time."