Episode 3: Deal or no deal? A look into healthcare IT M&A with Ben Rooks

Justin Steinman:
Definitively Speaking is a definitive healthcare podcast series recorded and produced in Framingham, Massachusetts. To learn more about healthcare commercial intelligence, please visit us at definitivehc.com.

Justin Steinman:
Hello, and welcome to the latest episode of Definitively Speaking. The podcast where we have data-driven conversations on the current state of healthcare. I'm Justin Steinman, Chief Marketing Officer at Definitive Healthcare and your host for this podcast. I'm joined today by Ben Rooks, Founder and Managing Principle at ST Advisors, a boutique consulting firm providing strategic and financial advisory services to healthcare IT and healthcare services firms. Ben started ST Advisors in 2009, and has been somewhat of an industry gadfly for probably longer than he'd care to admit. One might even call Ben the Zelig of the healthcare IT industry.

Justin Steinman:
So Ben, thanks for joining me today. For our audience out there, can you give a quick overview of who ST Advisors is?

Ben Rooks:
Thanks, Justin. The Zelig reference sort of is only going to work for us Gen X and older folks, but I'll take it as a compliment. So, I founded ST Advisors after about a decade as a south-site equity analyst, where I covered HCIT from the dark ages of 1993 to 2002, way before it was a cool sector. Ultimately I realized I just couldn't bear the prospect of another quarterly earnings season. So decided to become an investment banker and help companies do stuff, rather than provide the retrospective commentary. And so I spent about six years bringing that domain knowledge to that side of the market. For any number of reasons, banking just wasn't me. I'm sure that comes as a shock to you.

Justin Steinman:
Yeah.

Ben Rooks:
So I started an advisory practice based on among other things, intellectual integrity and taking the research and banking skills, and then worked with my now partner in Michelle Mattson-Hamilton, who has a corporate strategy background. So we take those three skillsets. Help our clients with strategy, as we did with you, when you were at GE Healthcare with corporate development. Where we act as almost an outsourced SVP of Corp Dev in what we call transaction support, where we act as an M&A coach, or I sometimes describe it, investment bankers are obstetricians, we're the birthing coach and helping companies go to market that way, because chances are the CEO's never done it. And then we have a few ongoing retainer clients, for whom we act as sort of a combination consigliere, cheerleader, therapist from time to time.

Justin Steinman:
All right, well there's a bunch of interesting images there, Ben. So I think let's just jump right in, right. So the reason I invited you on this podcast is that as long as I've known you have seen to be smack dab in the middle of all the macro trends happening in the healthcare IT industry. So what's going on these days?

Ben Rooks:
One of the advantages of having a long tenure, which I guess is a nicer way of saying being on the older side, is I've been through multiple peaks and troughs in the sector. The first HCIT bubble, the .com bubble, et cetera. And this is definitely the longest peak I've ever seen. And I think it's the case for a few reasons. One of which is people finally recognized that better IT can have a real impact on the cost and the quality of care. So Justin, when I had a buy rating on Cerner in 1994, I wasn't wrong. I was just early, as they say on Wall Street.

Justin Steinman:
So look, one of the big trends right now in healthcare IT is M&A, you just talked about it as a peak. 2021 was crazy. According to Baker Tilly, there were 872 reported healthcare M&A transactions that closed in the first half of 2021. Which was up 15% from the 738 that closed in the second half of 2020. I think they're still processing the 2021 second half numbers. So why is there so much M&A activity going on right now? Has healthcare fundamentally changed as a result of COVID? Does COVID impact this? Would this have happened without COVID? Help me understand some of this.

Ben Rooks:
Well, obviously we can't run the experiment and see what would've happened without COVID. But I think there's a few reasons, and one of which was had been driving it for the past couple years, is low interest rates. They make the math easier. Lots of the deals are being financed with debt, and there's easier access to capital so that fuels the fire. When I feel rich, I'm more likely to buy stuff. And low interest rates over the past few years have driven a lot of inflows into private equity firms. And they've raised a tremendous amount of capital, giving them a lot of dry powder that they need to put to work.

Ben Rooks:
The limited partners aren't paying them to hold cash. And so we're so seeing a lot of PE firms buying from other PE firms. But also the strategic buyers who rising stock prices that we've seen over the last few years, and low interest rates, they start doing a make or buy analysis and realize, "Wow, I can acquire this solution or this customer base instead." And that's another driver here, and people are looking to shop for more solutions, and I think a lot of buyers not meaning corporate buyers, but customers, a lot of them are thinking, "Gee if I only had one threat to choke, life would be a little easier from that perspective."

Justin Steinman:
Interesting. So let's talk about one of those strategics though. So Microsoft bought Nuance back in April for nearly $20 Billion. It's second largest biggest acquisition after LinkedIn, of course, prior to the recent announce that Microsoft's going to buy Activision. Why did Microsoft's invest so much money to buy Nuance?

Ben Rooks:
I think part of it was it's a data play to get access to the transcription data that Nuance holds. But it's also another attempt of Microsoft to enter healthcare. I stole this line, but healthcare is the biggest sector of the biggest economy on the history of the world. Everyone wants access to it. But you look at Microsoft's earlier efforts, they bought a bunch of companies, threw them together with your old friends at GE and created Caradigm. And then they literal sold off the parts of Caradigm for quarters on the dollar, pennies on the dollar, not dollars on the dollar. That's for sure. And we've seen a lot of other big tech companies do that.

Justin Steinman:
Why is it so hard for tech companies to succeed in healthcare?

Ben Rooks:
I think healthcare is in many ways fundamentally different. Part of it is the customers are different kinds of buyers. There's a lot more consensus buying in a health system than in a corporation. I think that the idea, the Silicon Valley, Facebook mentality of go fast and break things, I don't want my doctor to do that. I don't want my hospital to do that. We saw that with Theranos. There's slower adoption. I joke all the time. Brooks's second rule of healthcare investing is if you want customers that make rapid and rational decisions, probably don't want to be selling to hospitals. So it's a rough sector, I've seen over my career a lot of executives, and investors and companies say, "Justin, healthcare just needs better technology. And I will take my knowledge of technology and quote, fix healthcare." I'd smile and nod when they say that and then six months later, talk to them again, "So how's it going?" And they're like, "What is wrong with these people?" It's amazing. I call it Steve Case phenomenon when he started Revolution Help, he was a great example of that.

Justin Steinman:
So Ben, what is wrong with these people then? Why is it so hard?

Ben Rooks:
As I said, it's consensus buying. It is often the hospitals are resource constrained. Physicians in many cases, they're small entrepreneurs, and they don't necessarily want to spend a lot of money on an IT system. So the stupidest thing I ever said in my career was, I got my first demo of electronic health record in 1993. I was a young associate analyst, and I saw it and the guy who was demoing it showed me how it worked and I said, "Wow, this is amazing. This can really change healthcare and improve the quality of healthcare and the way it's delivered. I bet in five years every doctor..." I can't even say it with this straight face. "I bet in five years every doctor will be using one of these." Again, not wrong, just early. But what it took for adoption was, we the taxpayers and the federal government had to spend billions and billions of dollars paying the docs to adopt it. It's just really slow and different.

Justin Steinman:
Yeah. I think the phrase that comes in my mind with a little bit of PTSD is, a meaningful use.

Ben Rooks:
Yes. And even when I was a research analyst covering the sector, I was in the healthcare group. I was not in the technology group. I sat down the hall from the analyst who covered Oracle. But in the group of the analysts who covered Pfizer for example, a biotech company. There's always been this verticalization. And I think that needs and perspectives are just very different, and there's some serious entry barriers.

Justin Steinman:
So I think as we're talking about these large technology companies, we'll call it diplomatically finding themselves challenged to succeed, feels about the right way to talk about it. The latest example of this we've been talking about is IBM. They just sold their Watson Health Business to Francisco Partners. So do you think someone like Francisco Partners or frankly, any private equity firm is positioned to succeed in healthcare IT than some of these large commercial public companies?

Ben Rooks:
It's a good question, Justin. And I think they are, because the evidence of history suggests that they're good at that. I mean, it's harder as I said, but if you look at Francisco Partners... And in the interest of disclosure, I should say that ST advisors has worked with a number of their portfolio companies over the years. They are smart investors, and they have done these divisional carve ups before. They bought a company called Capsule Technologies that was freestanding and owned by a telecom company that I have already forgotten the name of. But they ran it for a year or so, streamlined it, got rid of a lot of the sclerosis you see in larger companies, and sold it off to Phillips. And I think it was probably a great return for them.

Ben Rooks:
Similarly, they bought the McKesson Pharmacy Automation Business and sold it to Omnicell a number of years later, another great return. So they're de-risking it through a number of mechanisms. Omnicell could have bought that product when it first hit the market. Phillips you'd think was contacted when Capsule first went to market, but a lot of the big strategic buyers don't want to take a risk of an acquisition. And I've seen this happen over and over again. They would say, "I'd rather pay 2X the price for half the risk, or even 2X the price for a third less risk. And you bring it into a good private equity firm. And I'm a huge fan of the FP team. Fix a bunch of things that probably need fixing, create a better growth profile, get rid of a lot of the big company attributes that it might have had and then you can sell it and make a great return.

Justin Steinman:
Got it. So as we surf around the private equity world, obviously we got to talk about Athena. Are they running the same play here? Selling themselves to private equity?

Ben Rooks:
Well, Athena wasn't exactly didn't sell itself to private equity. You'll recall there was a pretty nasty activist shareholder involved to sort of force the deal. Jonathan Bush, the Founder CEO, didn't wake up and say, "I think I want to sell the private equity." Elliot started acquiring stock, and I don't know if you read the New Yorker article about it, but literally was going through his trash to help force the sale. You put that together, and then so they sold it to Veritas, and then Veritas acquired a lot of the assets from GE Healthcare IT, put it together, it looks like it's a four or 5X multiple they're getting on it. So they've certainly added value in that respect. Although, I'll put added value in quotes. I said to Jonathan and others at the time when the deal happened, "Is this going to make the lives of the other stakeholders besides the financial ones... Is it going to make the lives of Athena's customers better? Or the health systems better? Or the employees better?"

Ben Rooks:
Athena was a transformational company in a number of ways. Were there are a lot of cost savings that private equity and Elliot could force? Yeah. Undeniably, but I wonder, and this is getting old and philosophical again. There's more than maximized shareholder value, it should be part of this idea of stakeholder capitalism. But I just saw they're raising a bunch of debt to finance the deal. And ultimately they'll probably be an IPO, and a ton of investors will make a ton of money on it. So good for them.

Justin Steinman:
Interesting. Very interesting. So let's just stay in the EMR space right now, because Lord knows there's a lot going on. We're 15 minutes in here and we finally get to discuss the granddad of them all. Larry Ellison spending $28.3 Billion in cash. That's capital CASH to buy Cerner. So why is Oracle going to go buy Cerner for $28.3 Billion?

Ben Rooks:
So let's ignore the price tag for a second. When I read the press release on why they're doing it, they talked a lot about secure cloud applications. And I think part of the rationale is Google Cloud, and AWS, and Microsoft Azure are way ahead in healthcare cloud services. And this is a way Oracle can catch up to it. When I was asked what I thought was driving the deal from Oracle's perspective though, my first reaction was hubris, which as we know the gods tend to punish. If I were on the board of Oracle, my first question would be, "Why will you succeed when no other companies have in the past? No other tech companies in the past?" Are you a Princess Bride fan, Justin?

Justin Steinman:
I am indeed a Princess Bride fan. Yes.

Ben Rooks:
So all I could think of is Vizzini saying, "You fell victim to one of the classic blunders. The most famous of which is, never get involved in a land war in Asia." I would add to one of those classic blenders, tech companies typically failed in acquiring HCIT ones. And on that list I've got like GE. GE had a huge healthcare business, but they're acquisitions of IDX and API healthcare were disasters. Siemens acquired SMS. And in the biggest boom the sector had ever seen, lost market share. Mysis acquiring Sunquest and Medic, selling them off at great losses. Sage medical manager, we talked about IBM, ADP acquiring Advanced MD. I could keep going, but I know we only have 40 minutes to speak and it's a long list.

Ben Rooks:
So I wonder what Oracle thinks they can do to succeed here, where literally no other tech companies have been able to do good acquisitions here. Nuance might be an exception. There might be a few others. 3M has made some good, smaller acquisitions. But $28 Billion in cash. I wonder if folks like Francisco Partners and TPG and some other private equity investors when they saw the news, went to their calendars, went like four years out and put "Call Oracle and see if they're ready to sell yet."

Justin Steinman:
So a lot of our listeners actually work in hospitals and IPA's and other places that may be using Cerner. So if I'm a Cerner customer or a Cerner user, should I be worried?

Ben Rooks:
I'd be worried that the ghost of Neil Patterson is going to rise from the grave and start a swath of destruction, the zombie apocalypse. But I think Oracle is not going to make substantive changes in the product architecture, I would think. Are they going to keep investing? Sort of seeing a lot of changes since Neil's passing. And I have to give him a ton of credit, where he predicted where the market was going well before anyone. When Judy Faulkner at Epic was still selling physician practice management software systems to large IDM's, and hadn't even entered the hospital. Neil was talking about clinically focused patient data, well before any companies there. So that's great. And what I wonder with Cerner is are they going to lose their innovation? I know in the last year there's been a huge exodus of talent from Cerner, lots of resumes hitting the street. So I think that's something I'd worry about.

Ben Rooks:
But man, if I was a salesperson at Epic going up against Cerner, I would have to try hard not to rub my hands and cackle with glee over the prospect of competing there. Unless of course the worry for them would be is Oracle just going to buy business, and use their financial might to under price for a while and maintain market share that way. That will be interesting to see. One of my rules of M&A is immateriality means never having to say you're sorry. And if Oracle loses a lot of money on this over the next five years, will shareholders ever find out? But as I said, I would love to have been in the boardroom when they discussed whether to buy it, and how much to spend on it.

Justin Steinman:
Well, I'm glad you brought up Epic because obviously with the center off the market Athena be taken private, it begs the question what's going to happen to Epic? Does Judy ever sell?

Ben Rooks:
So I've learned never to say never, but having spent some time with Judy over the years, I think it's profoundly unlikely. And why would she, the marginal benefit of liquidity for her is nonexistent. And look, I hope Judy lives another 100 years. She is brilliant, and brilliant is a term I use to describe very few people. But what's going to happen when she ultimately passes on? There's rumors of some kind of trust, where Epic equity goes to like a trust that's held by the hospitals that use it or something. I'm fascinated by what's going on there. So if I could be in one board conversation, it would be Cerner or Oracle. If I could read one will and testament and revocable trust, it would definitely be Judy Faulkner's.

Justin Steinman:
Well, I guess we'll have to wait and see what happens to Epic. Let's pivot a little bit. You've talked a lot about healthcare data, and I think healthcare data is a big business, right? We're talking multi-billion dollar deals here, all of which going to use this in quotes, to unite siloed industry data, end air quotes. Let's take a look last year at one deal where we had Ciox health, which merged with Real World Health Data company, Datavant, in a $7 billion deal.

Justin Steinman:
So the combined company, you'll keep the name Datavant will be the license largest health data ecosystem. And again, quoting from their marketing, enabling patients, providers, payers, healthcare, data analytics companies, patient facing applications, government agencies, and life sciences companies to securely exchange patient level data. That's a mouthful. So I'll kind of boil it back down and say, why does data matter so much in this space? I could list up a bunch of other deals, help me understand what's going on here.

Ben Rooks:
Well, data matters because healthcare, at the end of the day, when you treat a patient you get data points about them, lab results, x-rays, you decide on a course of action, write a prescription, do a procedure, and see what the outcomes are, what's changed. And the data behind that can be mined to find out what is the best way to treat patient X. And I think there are a lot of data elements that we have no idea even what they look like yet. So my genotype being different from your genotype, will I respond differently to a drug better or worse? So patients get at Tamoxifen, and if you don't do a genetic screen on them, it could be a waste of chemotherapy suffering and dollars. And none of those, very few of those data exist in the EHR's. So with Datavant and their tokenization technology, they should be able to mind those data for a lot of interesting things, and there's value there.

Ben Rooks:
It's interesting, years ago when I was a banker, I sold the first release of information company, Smart Document Solutions, and no strategic showed up to buy them. And they rebranded as HealthPort. And I went on to sell Chart One, the number two player, and only one strategic showed up and it was HealthPort. And then we worked at ST Advisors, helped develop the strategic plan for the third largest ROI vendor, a company called IOD. And when it sold, guess what? Only one strategic showed up. And it was HealthPort although they'd rebranded as CIOX. So we see the baseball card keeps getting traded from PE fund to PE fund.

Ben Rooks:
This is the most transformational thing, health smart, health boards, CIOX, the progression has done. It'll be interesting to see how they can monetize those assets, but is there a strategic buyer for that business? I got to wonder maybe they IPO it to get their liquid because that's ultimately what New Mountain Capital is in the business of doing. But this is the most interesting acquisition I've seen in that release of information business. And it turns it into this huge data mart where you can find other ways to monetize it.

Justin Steinman:
Got it. So the next kind of related question though, is this is one data mart. And then that's at a macro scale. I've also got the micro-scale data mart, which I refer to commonly as my iPhone. Because my iPhone has my fitness activity, my weight, Lord knows what else. I've got 10 apps on there. It's got my COVID vaccine passport that I got at CVS. But my primary care doctor, who's not affiliated with CVS doesn't know that I got a COVID vaccine, unless I actually call and tell him that I got one.

Justin Steinman:
And then I talked to my telehealth provider three nights ago when I'm sick at 2:00 AM. And so suddenly poor Justin's healthcare data is in 19 different locations. And so I guess the question I would have for you, is there a business out there to stitch all of that together? To create an integrated picture of my health? Or is that just a pipe dream, and it'll never happen?

Ben Rooks:
You'd think there would be a business to do it. And I've spoken to people who've thought about the need for that business. The problem is, who's going to pay for it? Who would you pay a couple 1OO bucks a month for that?

Justin Steinman:
I wouldn't.

Ben Rooks:
Right. Would your physician pay for it?

Justin Steinman:
Nope.

Ben Rooks:
Would your payer do it? You know, there've been Shins and Rios, and all these others Exerciser. It really, it needs to happen to prevent duplicative tests, you and getting people the data they need. But I, for the life of me, can't think of a business model around it. So we're both techy, if not geeky kind of guys, Justin. I don't have a PHR. Do you?

Justin Steinman:
Actually I do have a PHR. Yes.

Ben Rooks:
Oh, okay.

Ben Rooks:
But it's not all connected. It's disaggregated in multiple different locations. I actually have three different PHR's.

Justin Steinman:
Oh, so I would say that means no, you don't have a PHR. I didn't define the term. A PHR is one that one ring to rule them all and have all those data.

Ben Rooks:
Oh no, definitely not.

Justin Steinman:
I have one or two friends who are poly chronic with some interesting things and they actually do have PHR's. And I forget if it's made by, if it's a Microsoft product with their Word solution, or if it's a Google product with their Google doc solution, but that's pretty much it. And they just keep a list of their meds and test results in, like I said, in Word, or Excel or the cloud version of it. But there is no true PHR and I think in my life, one person has answered the question. Yes, I have one.

Ben Rooks:
Yeah, no, mine is a folder on my iPhone that has my login to Teledoc, and my login to Mass General and my login to CVS, and all the passwords are sort of my Last Pass folder.

Justin Steinman:
Right.

Ben Rooks:
And then I log in and create it every time I need it.

Justin Steinman:
Yeah. Which is probably not ideal.

Ben Rooks:
To go back to the Princess Bride. PHR, you keep using that term. I don't think it means what you think it does now. The most interesting effort on that front I've seen, is a company called the Commons Project. That's a good idea. And it has to happen... Sorry, it doesn't to happen. Nothing in healthcare has to happen. It should happen. And I think it would improve as with most good IT solutions, it would lower cost and improve quality. But getting someone to actually pay for it and a way to make money out of it is less likely. But I remain optimistic.

Justin Steinman:
So speaking of words that have more multiple meetings. They may not mean what they want, and people struggling to make money off it. Let's use the healthcare IT danger word, interoperability. People have been trying to get healthcare data interoperability for as long as I can remember. Are we any closer today?

Ben Rooks:
We're a teeny bit closer. In theory, the 20th century cures act is post to prevent data blocking and drive more data sharing. You have CCD's. That's not really interoperability, but it can solve the problem of interoperability through a clinical, through continuative care documents, CCD's, which gives my doc or your doc the information they need to transition the care in theory. ST Advisors worked with a company a few years ago called Diameter Healthcare, which is doing some cool stuff around interoperability there. But go back to the business model. Lack of interoperability has been a business model. How much did Epic, and IDX, and those companies make from, "Oh, you want a report of X, Y, Z? Great, no problem. That'll be $50,000." Or if I'm a health system, well, I guess we could make your data available, but we think those data belong to us, and letting the hospital down the street have access to them, that's not really to our advantage. Or I want to do this x-ray myself because I like the way I do x-ray.

Ben Rooks:
I was in a physician office and listening to the receptionist, talk about someone, answer a call where she was saying, "No, the doctor likes to do his own x-rays because he really likes how they're done." And I thought to myself, the doctor likes billing for x-ray fees. Doing basic rays, spinal radiographs is not rocket science. And if physicians and health systems make money from doing procedures, and software companies like make money from selling access to their data, or helping you run a report to get your data. So a lot of people make money from not doing it. It's one of the reasons why healthcare costs keep going up. What I view as an unnecessary procedure, and perhaps the medical evidence views as a medical procedure, someone somewhere thinks is their bread and butter, or their Porsche and Hawaiian vacation.

Justin Steinman:
Wow. All right. So look, we've covered a lot of ground here and we didn't even get to pharmaceutical or medical devices. I may have to have you come back and talk to me a little bit about those areas. But I kind of want to leave our audience with something to think about, an outlook onto 2022. What should we expect this year in the M&A? Should we expect mental health mergers? Should we expect I won't even lead the witness here. What should we think about this year?

Ben Rooks:
I think the volume of M&A is going to continue this torrid pace we've seen. I see nothing to indicate it's going to stop unless there's an exogenous black Swan event, like a huge interest rate rise or a market correction, which anyone who tells you they can predict is lying. So absent anything like that, for all the reasons we talked about, I think 2022 is still going to be going gangbusters. You've got the dry powder on the side of private equity. You've got a lot of companies that have raised a lot of capital, that are looking to put their money to work. It seems like all the investment bankers I know, and all the PE investors I know, and all the venture investors I know are all saying they're as busy now as they were 12 months ago. So the only thing that makes that stop is the investors and the bankers, and the company's saying, "Yeah, we need to take a break." And I don't think that's too likely to happen. So I think it's going to be full speed ahead.

Justin Steinman:
Excellent. Excellent. Well, Ben, thanks for hanging out with me today. This was a lot of fun. I really appreciate you taking the time.

Ben Rooks:
Oh, thanks for inviting me on Justin. It was really fun to chat with you.

Justin Steinman:
Thanks for listening to Definitively Speaking, a definitive healthcare podcast. Please join me next time for a conversation with Dr. Mark Pimentel, the Executive Director of the Medically Associated Science and Technology program at Cedar Sinai Hospital in Los Angeles. Dr. Pimentel joined Brittany and me for a conversation about the delayed healthcare from the COVID pandemic. Millions of people chose to delay care, or had their care delayed by hospital. And as a country, we're going to feel the impact of those delays for years to come.

Justin Steinman:
Dr. Pimentel will share his insight on all these delays and what we can do to mitigate a potential crisis. If you like what you've heard today, please remember to rate, review and subscribe to the show on Apple, Google, Spotify, or wherever you get your podcasts. To learn more about how healthcare commercial intelligence can support your business, follow us on Twitter at definitiveHC, or visit us at definitivehc.com. Until next time, take care and please stay healthy.