An Exclusive Interview with Jon Phillips, Managing Director of Healthcare Growth Partners

Jon Phillips is a guru of healthcare IT business activity in his role as managing director of Healthcare Growth Partners. I'm sure he knows all the juicy stuff about which companies are looking to be bought, which ones passed on buying others, or how the long-term strategies of players large and small are changing. I'd be lousy at his job because I can't keep my mouth shut when I know something everybody else doesn't (which is why I'm a poor HIStalk scribe instead of a boardroom player) but Jon chooses his words carefully and keeps confidences close to the vest.

I'm fascinated with the inner workings of HIT deal-making, so I was pleased when Jon agreed to be interviewed for HIStalk. I should mention, too, that he is an HIStalk sponsor, for which I'm appreciative but that otherwise had no bearing on our discussion.

Tell me about what Healthcare Growth Partners does.

Healthcare Growth Partners focuses on providing strategic and advisory services to healthcare technology companies. We offer consulting and investment banking services focused on healthcare. I founded the company almost five years after helping build the William Blair healthcare IT practice from a very small business into one of their largest. Last year, I decided to spin it out onto my own.

I recognized that there’s a lot of activity that goes on in the healthcare IT market involving companies under $25 million revenue. Those companies need more help than the pure transaction services that investment bankers usually provide. I get charged up working with marketing, strategic planning, and partner strategy. When you look at these smaller vendors, they have great talent, but they’re small and they don't have a lot of people. You see great products and ideas, but the challenge is the chasm between a $1-2 million business and a $10 million business. They need a fair amount of help.

Before working for Blair, I did five years of management consulting with Deloitte. Healthcare Growth Partners lets me combine my transaction experience from William Blair with my strategy and operational experience with Deloitte into a full advisory firm.


How did GE's acqusition of IDX change the HIT marketplace?

Some people say it means there will be more aggressive competition in radiology, such as when Philips acquired Stentor. GE gets an installed base that helps them further grow the Centricity PACS solution. Some believe it will help GE go after revenue cycle more aggressively with the Flowcast offerings, changing some of the business models of how software and services are delivered to large physician groups.

The acquisition is both an opportunity and a threat to the mid-market or best-of breed-vendors. Companies like Allscripts have to be scratching their heads about the underlying strategic rationale and what GE’s long-term perspectives are.

GE is a well-run company and if any company can make an acquisition like this work, it’s them. They also have a very long timeline. This step, their Intermountain deal, and their Amersham business signal that they’re looking at a future that’s very far out, looking to redefine the competitive landscape. If the mid-tier folks don’t understand that, GE will have written sectors of the market out of existence.

GE's objective when they started investing in healthcare IT was to pick up products with strong customer bases and market presence and get them to a common technology platform. The strategy hasn’t changed, but they have more pieces in place and a broader product offering than almost anyone out there. They can have significant influence on how people compete. When GE gets involved in a hospital deal, they may not win, but they change the game, certainly more effectively than Siemens did with SMS. For example, they could bring hardware and financing into a software deal, making other companies no longer competitive. By virtue of their heft, they can slow down the sales cycle and cause second guessing by the decision makers.

I don’t think the integration of IDX and the molding of their disparate software offerings into a single platform is a piece of cake to do. They have a lot of integration challenges. They are experienced in doing that, but there’s a window still open for now in which competitors can scope our their landscape.


Why didn't they buy a company with bigger market share or better products?

There was a pricing disconnect. To buy Cerner and Eclipsys would have cost more than GE was willing to pay. With IDX, there was only one other statement of interest from a potential acquirer and their bid was lower than GE's. The market is speaking as to what those assets were worth. GE’s job is to wring value out of that.

The timing of the IDX acquisition is interesting. You had a new head of GEMS IT. There’s an aspect where if you’re the new guy in the chair, you have a bias toward action because the person in the chair before you isn’t there, either because of something they did or something they didn’t do. If you just stay the path, you’re falling into the definition of insanity, doing the same thing and expecting a different outcome. They wanted to become broader. Rumor was they looked at a number of other players out there and landed on IDX, who was in a tough position because of their UK issues and the Stentor acquisition by Phillips. Rich Tarrant wanted to run for Senate, too. Willing seller, willing buyer, and IDX was the right candidate

I think this is a shift in GE's strategy. They realized the growth of the industry and needed a bigger presence. Cerner would be too expensive. Eclipsys will sell at some point, but I don’t think their shareholders were ready for a deal since there was too much value to pull the trigger yet. When you run through the list of potential companies to acquire, there weren’t many that could have an impact on a company like GE.

With GE's HIT offerings combined with high-margin items like biotechnology and biomedical equipment into one large business, doesn't that ensure that their HIT business will look good no matter what?

They won’t hold the IT division’s feet to the fire now, but eventually they will. If I had to pick a large healthcare IT organization to run, that one would be at or near the bottom of my list. They have so much going for them just because they’re GE, but trying to figure out which products to go with and which marginal ones to get rid of, where do you take it? They’re in a tough spot if the poor product has great market share. You can’t try to force migrations or sunset products. Stay in front so folks don’t go in a different direction, but focus on customer service and then when it comes time to make the decision about migration, they’re more inclined to go with you.

Eclipsys is finding the same thing, particularly in a subscription model. You’re getting paid over time, so the #1 thing to do is to keep your customers happy or they’ll walk. One of Cerner’s big priorities when they bought VitalWorks was to focus on customer service. It’s easy to take your customers for granted and the little guys are waiting to take them away from you. That’s how NextGen has worked their way up. They were standing there waiting in the wings as EMRs started to take off, where they could then sell practice management solutions to those same customers unhappy with their old one. That’s where you start seeing that churn, you get the door open with a new product. Migration’s a pain, but if someone has enough reason, they'll switch.


It seems that going public makes small companies worse once they fall into the never-ending quarterly earnings cycle.

The objective of most companies is either to be sold or go public. Sometimes a company is happy just to make money and not grow, but not often. The pressures increase exponentially on a publicly traded company. Even just trying to go public makes you so focused on financial results that you lose sight of the strategy.

To go public, you need to be a $50 million company. If you’re a $20 million company, you might go out and make acquisitions just to get bigger, even though they don’t follow the strategy. Sometimes companies cut back on services or support just to pretty themselves up for a sale.

My standard advice for companies is to run the business as if you’ll be running it independently with no extra capital and no buyer. Then, if something good happens, you can always build on that. You don’t try to position the business for sale or for an investment and then find you’ve got an asset without much worth. Focus on the business. The rest of that stuff will come.


You've said that large vendors aren’t good at innovation. Who will provide it?

I think it will come from the small companies. I looked back at transaction activity over ten years in healthcare IT and some of those that were the most successful were strategic, but more product- or market entry-focused rather than the big, “I’m going to change the world” transaction.

Think of McKesson ALI. That worked out for everyone involved. Everyone wondered why they paid those multiples, but they had a clear strategy around it and developing it themselves would have taken longer. They could bring ALI rapidly to market and increase prices. That was one of their best acquisitions, in both concept and execution. Innovation will find its way to big companies either because they’re fast followers or because they're doing acquisitions.

Big companies have phenomenal development talent, but it’s much harder for them to keep in touch with their customers. Small companies know if they lose a customer they're in big trouble.


Who’s next in line to be acquired?

Eclipsys will be sold, but the timeline is a couple of years, probably not this year. In terms of strategic activity, Allscripts needs to take some strategic steps. Misys needs to take some steps. They have very sttractive assets on the healthcare side and they can position themselves as buyer of choice for a lot of people. I think QuadraMed will try to build the company back up, maybe to sell eventually.

With First Consulting Group, it comes back to who would buy them. It’s tough when application companies buy services businesses. They already have a professional services organization internally, but could buy an organization to avoid hiring people. The problem is that all the consultants are out there generating revenue and if you move them to your existing customers, you’re just swapping revenue for revenue without adding growth. First Consulting needs to be bought by someone like a Perot or someone with a longer perspective who can afford to do it because it’s long-term. They’re in a tough position.

You’ll continue see action in the mid-market size, say $25-75 million businesses, maybe Picis or SIS or A4. Mediware is a public company already, but they could do better with a financial sponsor.Those companies are close to figuring out whether they can go public or not and are big enough to talk to both strategic and financial acquirers, giving them a greater chance for a better outcome.

You’ll see more financial investments in HIT in 2006 than in recent years. People have made a lot of money in the public markets, so I think you’ll have more financial sponsors who want to invest.

Let's say you have to invest your life savings in one HIT company, public or private. Who do you pick for a one- and five-year term?

For the one-year term, Eclipsys. I’m a big fan of what Andy Eckert has done so far. They have good products and the subscription model is great if you can effectively implement it.

For the five-year term, I'll name three: Cerner, Merge Healthcare, and Quality Systems. For a five-year investment, you want to pick the entity that’s heads and shoulders above their independent competitors. You can throw stones at Cerner, but they’re a well-run company. Merge’s Cedara transaction made them incredibly well-positioned to grow fast and generate a lot of cash. Quality Systems has great products and has struck a balance on how to grow at a good clip without sacrificing their customers along the way.


Who wins and who loses if RHIOs go bust?

Healthvision loses. A lot of folks jumping into HIT because of Brailer’s press releases lose. Despite some of the releases, the historical vendors seem to be adopting more of a wait-and-see approach on interoperability, especially when it comes to RHIOs. If they take off, great, HIT doesn’t move fast enough that they can’t get on the train. If it doesn’t work out, non-traditional players will be kicking themselves in how they got into healthcare IT.


A small company of developers wants advice on what products to build. What do you tell them?

It’s a twist on interoperability. Build a solution that can, either on the front or back end, access hospital information like a true dashboard, a solution that allows access to information from multiple sources within the four walls of the hospital. You’ll always see department-specific solutions, so there’s an interesting opportunity to go in and say, "I don’t care if you’re using Cerner at this hospital and Eclipsys at that hospital, I’ll give you something that will work for both."

It isn’t as grandiose as RHIOs, but it could be an interesting step. For example, I’ve worked with a company whose middleware fits between PACS and any archive and lets you plug-and-play PACS into it. Those kinds of solutions give more flexibility to purchasers like hospital CIOs because it’s a nightmare to get things to work together.


Siemens has been awfully quiet lately. What's going on with them?

Soarian has obviously taken them a lot longer than they thought. They’ve had some real setbacks along the way. Siemens as an organization has the patience to see Soarian through. The question is, when you look at where they sit in the marketplace, are they really #1 or #2 in healthcare IT? The answer is no. So, if the strategy is to be a market leader, should they just lump it in with their other hospital technology businesses and claim to be a market leader? Or, do they just get out of it? I don’t think they’ll get out of healthcare IT, but you’ll start to see more pressure on themselves to gain relevancy with Soarian. What you hear now is that they’re irrelevant, and no one wants to be in that position.


Can companies that aren't making money in this boom market hope to compete?

They can compete for a little while. Smaller companies that aren't making money will just cut price to get sales, doing irrational things in the marketplace. Larger companies are more inefficient. There’s no structural reason they can’t make money, but they’ve got too many VPs or whatever their problems are.

If you look at who’s profitable, you have to grow if the market’s growing. With the smaller companies, they can make a little bit of money but they have to think much bigger, because the cost of being a $30 million public company can really hurt you. They need to get bigger. All of the big players got big by acquisition, either a small amount or large amount, so even though I’m biased as an M&A advisor, I think any growth strategy must include acquisition. I give lots of credit to MEDITECH and Epic for having grown large without M&A, but the rest of us need to


Who do you admire most in the industry?

I have to say, even though people will throw tomatoes at me, I admire Neal Patterson a lot. He’s at the top of things and Cerner has walked a long road to get there. He has a passion for this space and I admire him for standing up.

Do you read HIStalk?

Absolutely, within minutes of getting the update e-mail. We sponsor too, of course. Sometimes you get wind of deal that I'm aware of and I'll get e-mails asking if I've seen what HIStalk just said. You've got the attention of people in the industry.