Oracle makes major healthcare splash, sets Cerner acquisition
The deal, expected to close in 2022, will cost more than $28 billion, and experts wonder about how the combined company will mesh business lines and cultures.
Oracle provided an end-of-year surprise by announcing its largest acquisition ever in healthcare, making an all-cash tender offer for Cerner Corp.
The deal, which will pay $95 a share for Cerner’s stock, is valued at $28.3 billion in equity value. The acquisition, once accomplished, would give Oracle significant traction in healthcare’s clinical side, augmenting other products that support other business or administrative components in the industry.
The agreement by Kansas City-based Cerner, long rumored to be an interesting acquisition target, caught many industry observers by surprise. Some expressed belief that Cerner’s decision this summer to hire Google Health head David Feinberg, MD, to be its CEO would give Google an inside track in acquiring Cerner.
While some observers see synergies from the acquisition, others say the acquisition will require a mix of two distinct company cultures, and others contend it won’t be easy to offset declines in Cerner’s market share to Epic, which has seen significant growth in the number of systems making the switch to its records systems.
And some suggest that the bidding for Cerner may not be over.
Specifics of the deal
The acquisition, announced on Monday morning, would mean that Cerner will be “Oracle’s anchor asset to expand into healthcare,” according to the announcement, jointly released by both companies. Oracle predicts that the Cerner acquisition will increase Oracle’s earnings per share in the first year of the combination, and “will contribute substantially more to earnings in the second fiscal year and thereafter.”
The transaction is expected to close during 2022, subject to receiving “certain regulatory approvals and satisfying other closing conditions,” including Cerner stockholders tendering a majority of Cerner’s outstanding shares in the tender offer.
In its latest quarter ended September 30, Cerner reported $1.47 billion in revenue, up 7 percent compared with the year-ago third quarter. However, its earnings per share was 59 cents, down 49 percent from $1.16 per share in the year-ago quarter. In its financial statement, Cerner projected full-year revenue growth in fiscal 2021 would be about 5 percent higher than last year. Cerner provides health information technology services, devices and hardware. As of February 2018, its products were in use at more than 27,000 facilities around the world. The company had more than 29,000 employees globally. Most recently, it gained contracts to install its electronic health records systems in Department of Defense and Veterans Administration healthcare facilities, replacing longstanding legacy systems. Those implementations have been struck by problems and delays, and there’s been increasing Congressional concern about protracted timelines and rising costs.
According to data from KLAS Research, Cerner saw its second consecutive year of net market share decrease in 2020, losing a net of 19 hospitals and 10,480 beds. The bulk of that was due to losing a 37-hospital organization that switched to Epic's information systems. The KLAS market share report noted that "over the last six years, Cerner has lost a total of seven large customers (representing 28,000 beds), due mainly to significant, ongoing concerns with Cerner's revenue cycle functionality."
KLAS says Cerner continued to see success in 2020 at the community hospital level, where facilities were "drawn to its pricing and competitive functionality." In addition, Cerner showed continued growth overseas, with contract wins at 42 hospitals in 2020, KLAS noted in an international report on global EMR markets. That's about two-thirds of the wins and migrations by Epic in 2020, KLAS data show.
Still, overseas markets may hold more opportunities for expansion. In its announcement of the deal, Oracle predicts that "Cerner will be a huge additional revenue growth engine for Oracle for years to come as Oracle expands Cerner's business into many more countries throughout the world."
On its side, Oracle offers a range of solutions for healthcare customers, including some for finance and operations, cloud computing, enterprise resource planning, customer experience, data repository services and human resources, among others.
Potential benefits from Oracle
The combination will provide potential technical advantages for Cerner, the companies and industry analysts predict. Oracle expects it will be better able to make advanced computing technologies to Cerner customers, specifically cloud, artificial intelligence, machine learning and other innovations.
For example, the use of Oracle's Gen2 Cloud cloud environment will bring improved uptime performance for Cerner customers, and perhaps provide alternatives for healthcare organizations that are using Cerner in on-premises data centers. Oracle predicts that Cerner will benefit from its technologies. "With Oracle's resources, infrastructure and cloud capabilities, Cerner will accelerate the pace of product and technology development to enable more connected, high-quality and efficient care," the joint announcement noted. "Oracle's focus on usability and voice-enabled user interfaces will dramatically reduce the amount of time that medical providers spend dealing with systems."
"Oracle's Autonomous Database, low-code development tools and Voice Digital Assistant user interface enables us to rapidly modernize Cerner's systems and move them to our Gen2 Cloud," said Mike Sicilia, executive vice president for vertical industries at Oracle. "This can be done very quickly because Cerner's largest business and most important clinical system already runs on the Oracle Database. What will change is the user interface. We will make Cerner's systems much easier to learn and use by making Oracle's hands-free Voice Digital Assistant the primary interface to Cerner's clinical systems. This will allow medical professionals to spend less time typing on computer keyboards and more time caring for patients."
Consistency and availability will be two large benefits for Cerner customers, said Adam Gale, CEO and co-founder of KLAS Research. "A number of Cerner customers are having problems with uptime," Gale said. "That's still front and center for clients as a high priority. This should be a win for customers." Gale also said that Oracle's technical capabilities may bode well for building confidence in Cerner's ability to deliver on contracts to install records systems at the Department of Defense and the VA.
Oracle's ability to supplement medical research by compiling patient records into a knowledge base offers the potential to enable clinical researchers to take advantage of deep analytics to improve evidence-based care, Gale noted.
Since its inception, Cerner has been running on Oracle's databases, said John Moore, founder and managing partner of Chilmark Research, a healthcare IT research consultancy. "They have had a reasonable business relationship but not necessarily one that would have ended up with Oracle acquiring Cerner.
Future challenges
While there are synergies from the combination, Moore also warned that the merging companies will have questions to answer about how the merger will be effectuated.
"Oracle's history with such large enterprise acquisitions is checkered, and their lack of healthcare expertise is troublesome," Moore said. "Unlike previous acquisitions, such as Peoplesoft, Oracle may not be able to come in and make massive cuts in personnel; they will be highly dependent on Cerner's employee base in the near term."
KLAS' Gale raises concerns about that combination of diverse cultures. He typifies Oracle as delivering high-quality enterprise software that "they drop at the door" for customers to implement. "Cerner has to be more high-touch in healthcare; you have to be more connected to the client in a care-centric area. We demand it as an industry, but it's not in Oracle's MO."
The acquisition portends looming changes in previous Cerner partnerships, particularly in shifting the EHR company's relationship in development with Amazon Web Services, a subsidiary of Amazon that provides on-demand cloud computing platforms, said David Chou, senior vice president and chief information officer of Harris Health System and founder of davidchou.health.
Chou sees potential benefit from tightening integration between the electronic medical record of Cerner and the enterprise resource planning capabilities or Oracle. "The data platform would be very interesting, to see how deep Oracle will integrate their data solution with Cerner clients," Chou said. "Can we start with cleaning up the master patient index and the massive amount of duplication that we have within our health system?" Coupling EMRs and ERPs also may provide price discount potential, he added.
Chou also sees big potential opportunities for the Oracle ERP and cloud computing with federal contracts.
The long-term prognosis for the partnership is unclear, said Moore of Chilmark. "Oracle is not a very good strategic fit for Cerner, but we will have to wait to see how this all plays out."
Possible bidding war?
Moore offers the possibility that the acquisition battle may not be over for Cerner. "Another company may outbid Oracle," he said, suggesting Salesforce, "with whom Cerner has an excellent working relationship and is a far better fit strategically."
Other suitors beyond Salesforce might include Microsoft or Amazon, although he said that doing so "would run counter to their AWS business model."
However, Cerner execs seem excited about the potential combination with Oracle. "Joining Oracle as a dedicated industry business unit provides an unprecedented opportunity to accelerate our work modernizing electronic health records (EHR), improving the caregiver experience, and enabling more connected, high-quality and efficient patient care," said Cerner CEO Feinberg. "We are also very excited that Oracle is committed to maintaining and growing our community presence, including in the Kansas City area," where Cerner has in excess of 13,000 employees.