1 November 2019
How much is MedicalDirector worth this time around?
Over the next decade In the last month, one of our two largest GP-based patient management systems, MedicalDirector (MD), has been reported as being up for sale by it’s private equity owner, Affinity, and has simultaneously launched itself, with a fair bit of fanfare, into the lucrative UK market.
The two announcements hardly seem coincidental. Affinity has owned MD for coming up to four years now and private equity firms like to sell within five years if they can. But MD’s core performance since it was acquired by Affinity has been plagued by a failure of its cloud-based product Helix to gain traction, and by aggressive and clever competition, which seems to have depleted its market share for its core desktop product.
So what might happen here, given a significant proportion of Australian GPs are MD customers and this looks like it could be a defining moment for the software group?
MD began it’s life as far back as 1990 in the study of a Bundaberg-based doctor, and part-time software coding enthusiast, Dr Frank Pyefinch, who was frustrated with the work involved in manually processing prescriptions. It started as Dr Pyefinch’s personal system and got its name and first customer in 1992.
Although technically not the first software system to help doctors prescribe, it quickly became the largest and most used in Australia. At one point it probably controlled nearly 90% of all the desktops of GPs in Australia who used an electronic PMS.
For a brief period it became a part of the dotcom boom of the early 2000s. It was acquired by a start-up called Health Communication Network (HCN) for about $6m in 1998-99. Seven years later, Primary Health Care stumped up some $111m to buy HCN (at $1.20 per share) but before that happened the value of HCN, whose only meaningful asset was MD, had at one point hit $4.20 a share, valuing the company at nearly half a billion dollars.
But even given that dotcom peak, most analysts felt Primary CEO Ed Bateman had paid way over the money for MD, despite the promise of digital in health, and the possible synergies across his existing network of Primary practices.
Dr Pyefinch left left HCN one year before the Primary sale, frustrated at the direction HCN was taking the product, and the investment being returned to the product. A year later he started Best Practice. His premise was simple. Be the most customer-centric PMS on the market – love doctors and what they want and be a GP-led business. As a GP himself, and one who loved the sector and technology enablement for doctors, he felt he was at a distinct advantage.
When MD was sold to private equity firm Affinity just three and half years ago there were a few surprised faces at the $155m price tag. By then, Best Practice had firmly established itself as another major system offering, with a share of market nearly the same as MDs. Telstra had been a buyer before Affinity swooped in, but only of 50% and at a price nearly 35% lower than Affinity paid. In addition, new cloud-only vendors such as MediRecords and Clinic to Cloud had entered the market.
Revenues of MD at the time of the sale were reported at about $36m a year. It was a high-margin business and it had been rapidly putting its prices up over the preceding few years, so its profit margin may have been as high or higher than the $18m back then. That made the price nearly 9x EBITDA, which isn’t that unusual for a software platform business. But it was a bit unusual in Australian healthcare, where platforms were not as mature and promising as in markets such as accounting, where Xero was already making an impact. It was likely a bet on the future by Affinity that healthcare would go the way other markets were in digitally transforming around cloud-based platforms.
Other than they may have mistimed the ‘age of healthcare platforms’, another major issue for Affinity was likely just how much of the margin of MD was being used at the time of the sale to prop up a stressed parent company in Primary. It was thought MD might not have been investing the right amount into ongoing product development to maintain and build its market share and chase opportunities in other markets.
Fast forward to the last few weeks. The financial media was abuzz with gossip that Affinity has been talking to investment bankers with a view to considering near-term exit options. Soon after MD announced that it had won the right to participate in the lucrative £484 million UK government investment program to upgrade GP practice software and clinical health record technology through its GP IT Futures program.
MD’s CEO, Matthew Bardsley, couched the UK move in terms of the company winning a major new contract, and as it being“transformational” for the company. At first this felt like the group had secured a deal with the National Health Service where it would be adding a major new revenue line to their accounts and rapidly expanding in the near future. That would have been transformative for the company and likely positioned the group very well for a near term sale.
“Our selection by the NHS is an incredibly significant endorsement of MedicalDirector’s Helix software platform and capability to help reinvigorate the UK healthcare system,” Mr Bardsleyisaid in a press release.
“To be awarded a contract by the NHS is real validation of our Helix platform and its ability to deliver substantial benefits to healthcare markets around the world. We are the leading healthcare software platform in Australia and now our capability is being recognised by one of the largest and most important medical markets globally with over £220 billion of annual healthcare expenditure.”
But the NHS contract turns out to be only the beginning of what looks like a long, potentially high risk and expensive journey for MD. It has only won the right to participate in the UK market. It actually hasn’t won any monetary contracts with any entities that control regional GPs in the UK.
The size of the prize if MD does crack the UK market is indeed big. But so is the risk.
In order for MD to do that, it is now going to need to do a fair bit of development work in order to be able to tap Helix into the NHS IT ‘spine’, and make it fit for purpose, for a system of GP payments that involves a lot of very detailed data reporting for capitation.
The existing systems in the UK have a lot more functionality than any of the Australian systems around generating detailed data on patient outcomes as a key element of how the NHS is paying its GPs. It is much more akin to systems in New Zealand.
Once MD has done that, it then needs to win the hearts of local GP management groups – like PHNs here – which would be deciding to use MD Helix over and above three long-term incumbent players. Obviously to do all this MD will need to have a significant local development and support presence in the UK for local clients to be comfortable.
This all looks like a long way to go and a lot of upfront investment before the first pounds flow.
But there are other potential issues MD might have in its UK venture. One of many issues for MD’s cloud-based Helix system in Australia is the many integrations required for PMS packages for things like secure messaging, and payments. Most are legacy integrations which don’t suit cloud-system architecture. That situation exists in the UK as well.
In a scathing report earlier this week, peak health industry IT newsletter PULSE IT assessed that MD’s numbers don’t add up to its PR rhetoric. PULSE IT pointed out the following:
- MD claims it has 52% market share and up to 20,000 doctor users in Australia
- Best Practice has 4729 Bp Premier sites subscribing, encompassing 24,788 FTE doctors
- The above two sets of numbers don’t add up to MD having 52% market share.
In fact, if you consider that there are about 7000 GP practices in Australia you might assess that BP has a GP share somewhere in the mid to high 50s. Notably, BP does not like to measure its business this way. But if you add in all the other smaller market players, like ZedMed, Meditech, and new players like MediRecords, who collectively have somewhere between 12 and 15% of the market, then MD’s actual market share might be below 30%.
There’s another set of numbers which don’t add up. When Affinity acquired MD, it’s reported revenues were $36m. In Wikipedia, it’s reported revenues today are $65m. OK, Wikipedia isn’t such a great reference point, but it is strange in the circumstances.
PULSE IT’s assessment of the situation is pretty stark: “If Affinity does manage to sell MedicalDirector, we expect it will take an absolute bath”.
Private equity isn’t known for taking a bath unless it really has too. More likely is that if all these numbers do turn out to be as rubbery as people are suggesting, Affinity will have to wait.
But then it is going to need to decide whether to sink more money into the venture and fund the significant UK investment. That is potentially a big risk for MD. And if MD does go the UK path, Australian market share is seemingly still burning, and what will happen to their focus on Australian users?
But MD may have to go to UK and give it their all. If the analysts are right and they aren’t growing here, then making it in the UK, though risky, makes strategic sense now.
If they did and succeed even a little then presumably they would be the most experienced Australian vendor in a system that must move over the next decade to outcomes based measurement.
If MD isn’t at a major crossroads yet, it feels like it might be there soon.
Declaration of interest: The author is a non executive director of MediRecords, which is a new cloud based PMS in Australia, which competes in the cloud PMS market to some degree with Helix.
Note received from PULSE IT Journalist Kate McDonald:
Mate, if you are going to shamelessly rip off my work, at least have the courtesy to add a link to my original blog so readers can see where you sourced the information you so shamelessly ripped off.
And you need to learn the difference between it’s and its. It’s not hard.
She’s right about the its and it’s