McKesson to buy ALI Technologies in bid to provide integrated IT

May 15, 2002

Purchase could speed convergence of HIS and PACSMcKesson of San Francisco, the third-largest drug wholesaler in the U.S., announced May 2 its intention to acquire Vancouver, BC-based ALI Technologies with a cash offer of CN$43.50

Purchase could speed convergence of HIS and PACS

McKesson of San Francisco, the third-largest drug wholesaler in the U.S., announced May 2 its intention to acquire Vancouver, BC-based ALI Technologies with a cash offer of CN$43.50 per share (about US$340 million).

The company, which is ranked 31 on the 2002 Fortune 500 with annual revenue of $42 billion, will use the ALI acquisition to expand its flagship information systems offering, Horizon Clinicals, to include data, documents, voice, and medical images. ALI provides medical image management and PACS. The company has high-profile installations at Cedars-Sinai Medical Center, Johns Hopkins University Hospital, St. Luke's Episcopal Hospital, and Kaiser Permanente.

The acquisition promises to extend ALI's reach into the U.S. medical marketplace. McKesson has 40 times more sales staff than ALI (500 versus 12) and its information systems are installed in about half of all U.S. hospitals larger than 200 beds, according to the company.

The deal has been cleared by ALI's board of directors. Subject to shareholder approval, the acquisition could be final within 90 days.

Under the terms of the agreement, ALI staff associated with sales, installation, development, and support will become part of McKesson's Atlanta-based Information Solutions division. They will continue to operate from their offices in Vancouver, BC.

The acquisition could contribute to the trend toward integrating digital imaging technology with healthcare information systems. McKesson strategists hope it will give the combined company an advantage over firms that cannot offer medical imaging as an integrated part of a hospital information system.

Two months before acquiring ALI, McKesson president and CEO John Hammergren predicted that McKesson could become the "Microsoft of healthcare." Hammergren plans to realize that ambition by positioning McKesson to take advantage of the push toward integrated solutions in the healthcare technology market. With the acquisition of ALI, he said, McKesson will be able to capitalize on two trends: one in HIS and the other in digital imaging.

"More than 40% of all medical exams use digital technology and that percentage is increasing rapidly as digital x-ray technology is being deployed," he said. "New medical device technology in these digital applications is also creating a rapid increase in the number of images created per exam. Electronic image networks and sophisticated imaging workstations are increasingly viewed as a necessity to properly interpret these complex cases."

Founded in 1833, McKesson makes most of its money as a drug wholesaler to large superstore chains like Wal-Mart. In recent years, however, it has expanded--mostly through acquisitions--into healthcare information technology.

Its first major IT acquisition was problematic. McKesson acquired HBO & Co. (HBOC) three years ago. At the time, HBOC was considered a leader in hospital information systems. Shortly after the acquisition, however, it was revealed that HBOC's accounting practices were below par. The news knocked McKesson's stock down 47% in one day, decimating $9 billion in shareholder value. McKesson's share price (now in the low $40s) never regained the peak of $65 that it reached just before the HBOC acquisition. That was the bad news.

The deal also created good news. McKesson's $14 billion investment in HBOC laid the groundwork for its Information Solutions division. The keystone of that division is Horizon Clinicals. With ALI, McKesson will be in a position to meet the demand that Hammergren believes is at hand.

"Recent surveys indicate that nearly half of our near-term clinical prospects are actively looking for a new medical image management solution," he said.

Healthcare has lagged behind other industries in adoption of information systems. Hospitals are only now catching up and joining the push toward standardized, open systems that swept the mainstream technology market years ago. With the addition of ALI's product line, McKesson will be able to offer practitioners "anytime, anywhere" access to patient information, according to Graham King, president of McKesson Information Solutions.

"This acquisition allows us to automate diagnostic workflow and expand our offering to the specialists who are so essential to consistent, high-quality care delivery," he said.

McKesson has many challengers in the integrated healthcare solutions market. Siemens acquired Shared Medical Systems (SMS) in response to the same trend that spurred McKesson's bid for ALI. Agfa HealthCare also has ambitions beyond imaging into enterprise-wide information technology. Sensing an up-tick, IBM, Oracle, PeopleSoft, SAP and other technology companies are also jockeying for positions in medical IT. What most of the mainstream technology companies don't have, however, is a digital imaging component.

Advances in digital imaging have made it the crown jewel in hospital information systems. ALI Technologies' recent financial reports reflect the boom in medical imaging in general and PACS in particular. ALI reported sales of CN$56 million for the 12 months ended March 31, 2002--up 108% compared to last year. Net income in the most recent quarter was up 450% over the same quarter last year.

ALI's numbers may partly explain why McKesson is willing to pay CN$43.50 a share for a company whose stock was trading under CN$10 as recently as October 2001. Another reason is that McKesson sees medical imaging as a critical component of any comprehensive healthcare information system. The company plans to deploy ALI's UltraPACS medical image management system in conjunction with its Horizon Physician Portal. Together, the two products will provide clinicians with integrated access to the complete patient record.

Before McKesson began shopping for a company that would provide the PACS technology, it considered building the technology internally or partnering with another company, according to Randy Spratt, chief technology officer. Both options were rejected. Building from the ground up would take too long, Spratt said. And partnering would not allow the degree of control over future development of medical imaging technology that McKesson wanted.

When the company decided to buy, Spratt said, ALI was a clear favorite. During due diligence before the acquisition, McKesson hired an independent firm to conduct a satisfaction survey of ALI's customers. Out of a score of 5, he said, ALI earned an impressive 4.8.

Besides loyal customers, Spratt said, ALI is structured in a way that will make it scalable. The technology will be able to meet the surge in demand that exposure to McKesson's current customer base is expected to generate. Exposure to that demand may have influenced ALI CEO Greg Peet to sell.

"By joining forces with the leading provider of clinical information systems, we see a tremendous opportunity to extend our reach and take advantage of the enormous market that exists for next-generation, enterprise-wide image management solutions," Peet said.