SAN FRANCISCO (03/30/2000) - Canary-swallows-cat is an old Internet story. But when online health care company TriZetto announced the $8.2 billion acquisition of an old-line, much larger medical industry stalwart called IMS Health on Wednesday, Wall Street got indigestion.
Wall Street, apparently seeing an old-economy sheep in Internet clothing, sent TriZetto's stock plunging 42 percent on Wednesday. The name of the new company will be TriZetto, but TriZetto's current shareholders would own just 15 percent of the combined companies and IMS executives would take the top two management slots. Newport Beach, Calif.-based TriZetto calls itself an application services provider, meaning that it enables health plans and physicians to file medical claims, make referrals and transact other business online.
The company went public last October, and its stock skyrocketed from a $9 opening-day price to a high of $88.50 on March 1. That market cap allows TriZetto to swallow IMS Health, a 40-year-old multinational company that provides research and information management services for the pharmaceutical industry. Although IMS Health's $6.6 billion market cap is four times greater than TriZetto's, the former company's stock price has been stuck in the 20s.
News of the merger didn't help; IMS dropped nearly 24 percent, closing at $16.50. The complicated nature of the deal seemed to confuse investors, judging by analysts' questions at a conference call announcing the acquisition.
When the merger closes, the new company would issue three separate stocks. One would represent the combined company, trading under TriZetto's symbol.
The second would be a tracking stock for the pharmaceutical research business of IMS, trading under its existing ticker symbol. The third stock would be for Strategic Technologies, an IMS subsidiary that would be spun off as an independent company that would provide sales services to the drug industry.
"What this structure accomplishes is preserving the distinct equity profiles of each company while enabling common management," IMS CEO Victoria Fash told analysts. "We're capturing the best of both worlds in the old economy and the new economy."
Fash would become CEO of the new company. Despite the Street's skepticism, executives at both companies portrayed their merger as the creation of a health care b-to-b powerhouse focused on the pharmaceutical industry. TriZetto will Web-enable IMS' pharmaceutical research services. IMS tracks the sale and use of pharmaceutical products, and maintains a massive database on the prescribing history of doctors as well as the prescription drug-buying history of consumers. By merging with TriZetto, IMS may be able to mine medical claims and physicians' records to collect more detailed information on how drugs are used and prescribed.
"This new entity will be uniquely positioned," said TriZetto CEO Jeff Margolis, who would become vice chairman and president of the combined companies. "The pharma[ceutical] data in combination with payer and [physician] data - which will only be used on a permissive basis - will [provide] insights [customers] cannot receive from any other company."
That supposed synergy, however, could also pose problems for TriZetto. Health plans that use TriZetto's services are struggling to contain drug costs, which have become the single largest expense for many managed-care organizations. The pharmaceutical industry, on the other hand, naturally prefers that doctors prescribe expensive brand-name drugs.
The new company would provide more competition for Healtheon/WebMD, which connects doctors, patients and health plans over the Internet. TriZetto would get a boost in its battle with Healtheon/WebMD to sign up health plans.
Healtheon/WebMD would also face more competition in the development of online services for the drug industry. In January, the company struck a strategic relationship with pharmaceutical services company Quintiles to develop Net services for drug companies.
"TriZetto is a competitor and this [merger] gives them more money," Healtheon/WebMD chief medical officer Charles Saunders said today. "But I think the jury is out whether they'll effectively gain synergy from the relationship."