Axios Pro: Health Tech Deals

January 06, 2023

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1 big thing: Merative enters next era

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Illustration: Gabriella Turrisi/Axios

Formerly IBM’s Watson Health, Francisco Partners-backed Merative is a hodgepodge of health tech assets that CEO Gerry McCarthy says is laser-focused on organic growth and open to opportunistic buys.

Why it matters: Merative will have a more intentional strategy under the sponsor’s umbrella, and that could include spinoffs and acquisitions, sources tell Claire.

Details: Merative currently has six business segments: health insights, social program management, clinical development, MarketScan, Micromedex and Merge Healthcare.

Zoom in: McCarthy says Merative is eyeing acquisition opportunities for its clinical development segment, which conducts about 2% of global clinical trials.

  • “There's opportunity for us to continue to find adjacencies within that end-to-end play for clinical trials, as well as to increase our market share within it,” he tells Axios. “So that's an example of one area where we're looking at M&A.”

What they’re saying: Market dislocation and a looming recession will generate increased add-on opportunities for Merative, says Justin Chen, a partner at Francisco Partners.

  • "Many of these acquisitions will be bolt-on deals, and we’re also certainly evaluating several transformative deals, which are possible with Francisco Partners' backing and $20 billion-plus of dry powder," Chen says.
  • Aided by Francisco Partners and a cadre of investment banks, Merative is assessing the market now for bolt-ons and larger deals.

Between the lines: Instead of executing companywide strategic initiatives, like building in artificial intelligence and machine learning capabilities across all products, Merative is taking a more bespoke approach, Chen says.

  • Merative's Merge Imaging business, for example, will partner with AI and machine learning companies instead of building it internally, he adds.

Catch up fast: IBM sold Watson to Francisco Partners in January 2022 — after spending more than $4 billion to build it.

  • Under IBM’s umbrella, Watson rolled up health care data and analytics business Truven Health Analytics, population health company Phytel, and medical imaging business Merge Healthcare.

The intrigue: There’s plenty of opportunity to break up Merative and sell the business piecemeal in the coming years, one health tech banker says.

  • Micromedex, which compiles clinical and pricing data on drugs, is one asset ripe for near-term spinoff, the banker says.
  • Chen declined to comment directly, noting only that "given the strong strategic positioning of Merative's businesses, there are several potential paths to exit in the future."

The big picture: McCarthy predicts more carve-outs and take-privates a la Merative moving forward, as health care strategics right-size their budgets.

  • “We think there's a great opportunity to continue to focus those organizations back to their original roots, and restore them back to investment strategies that make sense, allowing them to be more nimble,” he says.

Editor's note: This story has been corrected to note that Merative's clinical development segment conducts about 2% of global clinical trials, not 17% as its CEO initially cited in an interview.

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