On February 15, Allscripts announced it had officially closed its $100 million acquisition of Practice Fusion, a San Francisco-based EHR company.
Though the deal is completed, confidential documents sent to MedCity in late January show Practice Fusion management seemed to have expected a sale to bring in five times the amount that the deal with Allscripts finally did. Further, a closer look at one of Allscripts’ past acquisitions provides insight into how the Practice Fusion deal could turn out if things go awry.
The San Francisco startup was once on its way to a high valuation. According to a 2016 New York Times article, the startup hired JP Morgan Chase in 2015 to explore the possibility of an initial public offering in 2017. At that time, JP Morgan said Practice Fusion could receive a valuation of around $1.5 billion. It expected revenue for the company to hit $181 million by 2018.
But the outcome — $100 million sale to Allscripts — is a far cry from what Practice Fusion management and others expected.
The confidential documents point to a rollercoaster of events, starting with talks of a sale or financing alternatives in the third quarter of 2015. Practice Fusion composed a special committee of the board and brought in Evercore, an investment banking company, to lend a hand.
At around that time, the board created a management carve-out plan “that provided for the use of up to $30 million of the consideration resulting from a company sale to the management team (plus five percent of any consideration in excess of $500 million),” according to the documents. To stick in that tidbit about an extra five percent, the company had to be either extremely optimistic about its value or completely clueless about potential liabilities.
A Deep-dive Into Specialty Pharma
A specialty drug is a class of prescription medications used to treat complex, chronic or rare medical conditions. Although this classification was originally intended to define the treatment of rare, also termed “orphan” diseases, affecting fewer than 200,000 people in the US, more recently, specialty drugs have emerged as the cornerstone of treatment for chronic and complex diseases such as cancer, autoimmune conditions, diabetes, hepatitis C, and HIV/AIDS.
In 2015, the searching process began. Practice Fusion and Evercore began contacting 27 companies regarding a possible transaction — though the number of parties eventually rose to 40.
As time went by, the startup got offers set at a variety of prices, including $50 million and $90 million, both of which were seen as “inadequate,” according to the confidential documents. Another party was interested in buying for between $175 million and $250 million.
In March 2016, Allscripts expressed interest in a strategic investment in Practice Fusion. But that eventually fizzled out, with the Chicago-based vendor “withdrawing its interest … for internal reasons,” according to the documents. Still, the discussions between the companies continued, and by the first quarter of 2017, Allscripts was potentially interested in acquiring the startup.
In early May 2017, Allscripts submitted a proposal to acquire Practice Fusion for between $225 million and $250 million. But later that month, major healthcare IT news broke: eClinicalWorks agreed to pay $155 million to resolve a False Claims Act lawsuit. The suit claimed eClinicalWorks falsely said its software met Meaningful Use requirements and paid kickbacks of at least $392,000 to specific customers in exchange for promoting its product.
This prompted the DOJ to start looking into the actions of other EHR vendors, including Practice Fusion, which got a request for information in March 2017. Shortly after the eClinicalWorks settlement, Allscripts withdrew its interest in the startup.
But like a moth to a flame, the Chicago company kept coming back to Silicon Valley-based Practice Fusion. By December 2017, Allscripts submitted an offer to acquire Practice Fusion for $80 million. Discussions ensued, and Allscripts company upped its offer to $100 million. Another unnamed party informally offered $130 million, then increased that to $145 million.
Ultimately, Practice Fusion went with the Allscripts bid, in part because of what would happen regarding the DOJ situation. With the Allscripts deal, “stockholders would have no exposure under the representations and warranties for, nor provide any indemnity with respect to, the DOJ EHR investigation,” according to the confidential documents.
Additionally, Allscripts’ $185 million purchase of McKesson’s health IT business was listed in the documents as a reason for the merger. At the time of that acquisition, McKesson’s business was subject to a DOJ investigation like the one Practice Fusion was subject to. Allscripts was thereby considered a top choice because of its familiarity of and ability to handle the situation.
When asked about how the DOJ investigation into Practice Fusion impacted Allscripts’ valuation of the startup and decision to acquire it, an Allscripts spokesperson pointed to the company’s Form 8-K filed on February 15, 2018.
Overall, the offers for the company bounced from $50 million to $250 million. The final price of $100 million was nowhere near the $500 million sale management pined for in the board’s 2015 carve-out plan.
As noted by CNBC and a Practice Fusion tipster who sent MedCity the documents, Practice Fusion management gets a windfall while employee shareholders don’t get anything.
The confidential documents show nine leaders — the seven members of the executive team, plus two members of the leadership team — are in for big bucks.
CEO Tom Langan, who now is CEO of Allscripts’ payer and life sciences business unit, according to his LinkedIn, receives $7 million. Others — Stephen Byrnes (senior vice president and legal counsel), Jonathan Malek (cofounder and CTO), Riyad Omar (chief strategy and corporate development officer) and Eric Weis — each get more than $2 million.
There was only one woman on the list, Vice President of People Stacey Rubin. She nets about $750,000, an amount lower than most of the men.
When asked for a breakdown of the payouts and more information on the negotiation of the Allscripts sale, Practice Fusion sent the following statement via email:
Thank you for your inquiry. EHR software vendors like Practice Fusion have faced riskier market dynamics in light of shifting policy, regulatory and industry landscapes. In light of these shifting landscapes, Practice Fusion ultimately entered into and completed its acquisition by Allscripts, as reported on Allscripts’ most recent earnings call and in its Form 8-K, filed with the SEC on February 15, 2018. We now look forward to the next successful chapter for Practice Fusion as a member of the Allscripts family of companies.
Lawrence Deutsch, an attorney who has worked in representing shareholder rights, but hadn’t closely scrutinized the Practice Fusion documents, observes: “Certainly any situation where a group of shareholders, particularly insiders, benefit from a buyout while another set of shareholders gets nothing, is a situation that raises questions about the fairness of the transaction.”
The sale price was disappointing. Now the question is will Practice Fusion’s future with Allscripts be just as disheartening? Maybe. Allscripts’ history shows it has had troublesome acquisitions.
In 2010, the EHR vendor acquired Eclipsys, an Atlanta-based health IT company, for $1.3 billion.
Two years later, Allscripts fired its board chairman, Phil Pead, and then three members of the board resigned in protest. Pead was the former CEO of Eclipsys. Two of the resigning members of the board were also affiliated with Eclipsys, according to Modern Healthcare. Around the same time, Allscripts CFO William Davis announced plans to step down.
These departures, combined with weak first quarter financial results, prompted Allscripts shares to take a nosedive in the spring of 2012. One of the company’s largest shareholders, HealthCor Management, then filed a notice of exempt solicitation, pinning the problem on Allscripts CEO Glen Tullman and calling for his resignation, according to Forbes.
“The problem is clearly one of execution and a fundamental problem with leadership,” HealthCor founders and portfolio managers Joseph Healey and Arthur Cohen wrote in the notice. “We believe Glen’s continued involvement will irreparably damage the public valuation of this company. We urge the board to ask Glen Tullman to step down and take the proper actions in the interest of shareholder value.”
Tullman refused to step down. So HealthCor filed a lawsuit to be able to wage a proxy fight after Tullman’s refusal, according to Reuters. HealthCor later dropped the lawsuit after Allscripts agreed to nominate three new board members.
But by the end of 2012, Tullman was fired, reported Bloomberg. President Lee Shapiro was also terminated. Paul Black took over as Allscripts CEO.
Ironically, a Practice Fusion tipster who contacted MedCity has also hinted at leadership failure that led to the company being sold for $100 million to Allscripts. According to the tipster, the Practice Fusion executives spent more than $100 million in a 12-month period to more than double the workforce and in moving to more expensive digs.
Photo: Natee Meepian, Getty Images
