McKesson Corporation MCK announced that it will collaborate with Change Healthcare Holdings to create a new healthcare information technology company. We note that Change Healthcare is a leading provider of software and analytics, network solutions and technology-enabled services, with Blackstone Group as its largest stockholder.
Structure of the New Entity
As per the terms of the agreement, McKesson will offer majority of its Technology Solutions businesses. The company will, however, retain RelayHealth Pharmacy and Enterprise Information Solutions (EIS).
On the other hand, Change Healthcare will contribute all of its businesses to the new company, excluding its pharmacy switch and prescription routing units, which will be owned separately by the current stockholders of the company.
McKesson and Change Healthcare will own approximately 70% and 30%, respectively, of the new company.
This new entity has received funding of $6.1 billion (via funded debt) which will be used to repay existing debt of approximately $2.7 billion of Change Healthcare, make cash payments of $1.25 billion to McKesson and $1.75 billion to Change Healthcare.
What to Expect from the Transaction
The transaction is slated to close in the first half of 2017. As per the agreement, McKesson and Change Healthcare will make efforts to launch an initial public offering post closure. The combination of Change Healthcare’s business with the majority of McKesson’s Technology Solutions business will create a diverse portfolio of technological solutions which should help lower healthcare costs, improve patient access and outcomes, and make it simpler for payers, providers and consumers to manage the transition to value-based care.
The new entity, with combined annual revenues of $3.4 billion, is expected to generate synergies in excess of $150 million by the second year of closing deal. Since the separate entity will focus solely on healthcare technology and technology-enabled services, it should be able to respond more efficiently to customer needs and better deliver next-generation innovations, while addressing the three important areas – cost, quality and outcomes – across the healthcare sector.
Our Take
McKesson’s Technology Business has been facing challenging conditions for quite some time now as revenues continued to decline. Hence, a spin-off of the business was around the corner as the company was looking to focus on its core distribution business.
We believe that the separation is a positive for the company as it can now concentrate on its primary pharmaceuticals distribution business. This business has also been facing headwinds in the form of pricing trends and negative impact from customer consolidation in the healthcare supply chain.
Meanwhile, the company is exploring strategic alternatives for the EIS division and we believe a divestiture of this business is coming up.
McKesson currently carries a Zacks Rank #3 (Hold). Some better-ranked stocks in the healthcare sector include Pfizer, Inc. PFE, Bristol-Myers Squibb Co. BMY and Johnson & Johnson JNJ. While Pfizer and Bristol-Myers sport a Zacks Rank #1 (Strong Buy), Johnson & Johnson is a Zacks Rank #2 (Buy) stock.
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