Assessment: Ingenix Makes HIE Move Acquiring Axolotl

Last week, Ingenix announced that it would be acquiring Axolotl.  Probably no one was happier than the folks at Gilat Satellite Networks who had invested $4.5M in Axolotl over ten years ago, had written off that investment during the dot-com bust in 2001 and now is looking at getting some $24M in cash plus another $3M by year’s end.  Gilat receiving $27M from the sale of Axolotl (we estimate Axolotl’s sales in FY09 to be about $15-18M) signals only one thing: Ingenix paid a kingly ransom to acquire Axolotl, in excess of 8x 2009 sales.

This begs the question: Why did Ingenix pay so much for such a small HIT vendor?

Having interviewed a couple of Axolotl competitors about this deal and completing a briefing call this morning with Ingenix executives Bill Miller, EVP for Provider Solutions and Art Glasgow, CTO along with our broader analysis of the market, vis a vie the forthcoming HIE Market Report (yes, its coming, really it is), following are some thoughts and perspectives.

Ingenix is a company that grows by acquisition having acquired some 50+ companies since 1996. Since the beginning of 2010, the company has made 5 acquisitions already and based on the call with Ingenix today, there will be more. Miller stated on the call that Ingenix has primarily served the payer market but sees a convergence of administrative and clinical processes, thus has been making targeted acquisitions in the provider HIT market (e.g., CareTracker, a PM/EMR solution, Picis, an EMR for ED, QualityMetric for outcomes measurement) and now Axolotl. Miller inferred in the call that part of its provider acquisition strategy is to acquire companies with strong brand recognition in the provider market. Clearly, Axolotl has that in the HIE market, particularly among publicly-led HIEs, or RHIOs.

As one competitor put it: “Ingenix bought into the market.” And as another one stated, (Axolotl’s top competitor): “We are very happy.” Ingenix paid heavily for brand and for an established presence in the market (Axolotl has roughly 250 hospitals using their Elysium HIE platform and currently support four state-wide HIEs). As an independent company similar to Axolotl, the second vendor must be seeing the potential for a very large pay-out should they be acquired, thus not too surprising that they would be happy with this deal. But that second vendor may also be developing a slightly nervous twitch as very large players with deep pockets such as Carlyle Group (they own Carefx), GE, IBM, McKesson (owners of RelayHealth), Microsoft, Thomson-Reuters (partner with Care Evolution) and now Ingenix enter the HIE market. Let’s not count out the EHR vendors such as Cerner, Epic, and others who are also developing their own HIE solutions. The writing is on the wall: In five years time there will no longer be small, independent HIE vendors.  Those independent HIE vendors that survive will be a division of a far larger company.

During our call with Ingenix, Glasgow stated that Ingenix’s core competency is analytics and this is the focus of internal R&D expenditures. For all other HIT application areas, Ingenix would rather make an acquisition than organically build. Coupling Ingenix’s analytical capabilities with Axolotl’s Elysium platform creates some intriguing possibilities both from the perspective of Ingenix selling more of its portfolio in a larger more comprehensive HIE platform sale, but also creating the possibility for the HIE organization to create a sustainable model for future viability as articulated in an Ingenix White Paper (caution PDF). With forthcoming changes in healthcare via reform, new payment models etc., analytics will become an increasingly critical need for providers and HIE vendors are ideally positioned to provide such capabilities. Yet based on our research, virtually all HIE vendors have weak analytics capabilities. Microsoft is one of those at the forefront in this area with their Amalga platform, but their overall HIE solution is still a work in progress.

Glasgow also went on to state that Ingenix sees the HIE market moving to a PaaS model and Ingenix will continue to support Axolotl’s current development efforts to open up its APIs to third party vendors. The move to PaaS in the HIE market is still a nascent trend but one we believe will stick. Chilmark is planning to do a deeper dive on the subject in a future report. In the near-term we will be talking to Medicity later this week getting a deep-dive briefing on their forthcoming iNexx platform, which is at the forefront of among HIE vendors in creating a PaaS for the HIE market.

Some Challenges:
With any acquisition, there are always challenges, from alignment of staff (and even rationalization), to setting priorities for future R&D, to soothing customer and prospect fears as to what the acquisition means to their current or future investment. Challenges we foresee include:

Recouping their investment. Ingenix paid dearly for Axolotl, a company with a strong brand in the market, but also a company with an older platform that has proven difficult for some to implement and maintain. Axolotl clearly recognizes that Elysium needed to be re-architected and is well down the development path to address this need. Thus, Ingenix needs to continue to invest in Axolotl beyond the purchase price to insure Elysium transitions to a modern platform to support a PaaS model. This is not easy work, nor is it inexpensive and it is likely that there will be changes to Axolotl’s pricing structure to compensate for this investment.

Quelling market fears, part one. Ingenix has a mixed history with providers, having been sued by the NY Attorney General, and dragged before Congress last year for reportedly providing data to payers that shortchanged patients and providers. Ingenix has tried to come clean on the issue, but it has left a bad taste in the mouth of many. Now that Ingenix is jumping into  the very public arena of HIE, they will need to convince state agencies, providers and consumers that their intentions are noble, that data will be used to help improve care and ultimately outcomes while insuring that personal health information will remain secure and private.

Quelling market fears, part two. An acquisition nearly always generates some consternation on the part of existing customers and future prospects, with the number one issue being: Is their investment safe (i.e., the acquirer will not sunset the product and continue to invest in R&D)? With over 50 acquisitions in 14 years, Chilmark assumes that Ingenix is pretty savvy at how to acquire a company, leverage the assets, keep customers happy and build from there. But against that backdrop, Ingenix must address a market that has a lot of concerns over vendor/product viability. It is incumbent on Ingenix to educate the market that it indeed has a clear strategy for Axolotl and its Elysium platform. That the strategy aligns with market needs. that it includes continued support (R&D $$$ to modernize Elysium) and that they will continue to offer the level of support (if not better) that customers have come to expect from Axolotl.

Final Assessment:
Ingenix’s strategy for the HIE market is in very close alignment with what Chilmark Research is seeing as well: The move from simple messaging, i.e., pushing lab data around, to higher order capabilities such as analytics and the move to a PaaS model for HIEs.  While these are clearly the future trends for HIEs, the timing as to when these trends take hold is still very much in question.  The HIE market remains convoluted, messy and difficult, if not near impossible to make sense of.  Adding to the issue of complexity is market maturity wherein many buyers are often just looking for the most basic of capabilities.  Even Axolotl recognizes this releasing Elysium Express a few weeks back to address this basic market need.  Hopefully, Ingenix is a very patient company and fully understands the nature of the market it has just paid a princely sum to enter as it may be sometime before they recoup their investment in Axolotl.