Insider View: Jon Hoeksma

ISoft, one of the two big clinical software suppliers to the National Programme for IT in the NHS, has seen its share price plummet, following a big downward revision of its forecast revenue figures.

The scale of the fall has been dramatic. In just one week, the company has seen its share price fall by almost 60%. The sharp fall leaves the Australian company, which in the past has proved remarkably resilient to setbacks, a potential takeover target.

Such a scenario would have significant implications for the NHS. At the start of the month, CSC, iSoft’s partner in the North, Midlands and East of England, finally managed to get the latest version of the company’s Lorenzo electronic patient record system live at University Hospitals of Morecambe Bay NHS Trust.

In theory, at least, that leaves CSC clear to deliver Lorenzo to three fifths of the NHS. Yet iSoft last week told the Australian Stock Exchange that its 2010 earnings would be £30m lower than predicted, due to the ‘political uncertainty’ in the UK associated with May’s general election.

ISoft told the stock market that this had affected both milestone payments for its NPfIT work and discussions about opportunities in the South of England, which has been without a local service provider since Fujitsu exited the national programme in 2008.

Spooked

One iSoft watcher told E-Health Insider that the revenue warning ‘spooked’ investors (it also forced the company to issue a press release apologising to CSC and NHS IT agency NHS Connecting for Health for any “unintended criticism” of them).

The revenue warning also underlines how dependent iSoft remains on the national programme. The company has a big, installed base of legacy systems in the NHS, is hoping to pick up business in England outside NPfIT, and is active in both Australia and parts of Europe, such as Germany.

In February, executive chairman and chief executive Gary Cohen argued NPfIT was becoming “less relevant” to group revenues. Yet as soon as iSoft issued its revenue warning, its share price fell.

Political uncertainty

E-Health Insider understands that the delays at Morecambe Bay cost iSoft the full milestone payment it expected, reducing it from £6m to £3m; although it may recoup the difference on later sites.

Even more important, in revenue terms, the delays prevented iSoft securing its anticipated deal with CSC to sell Lorenzo to trusts in the South of England, where ASCC procurements for acute and other systems are effectively on hold. The revenue from such an anticipated deal appears to have been figured into previous 2010 earnings forecasts.

A 2 June research note on iSoft by Deutsche Bank, issued the same day as the earnings revision, states: “The primary driver of management’s earnings downgrade was the failure to reach an agreement with CSC to deliver Lorenzo outside the northern NPfIT clusters, highlighting the significant risks associated with iSoft’s position in the programme.”

The Deutsche Bank research note says that the change in UK government increases the risks faced by the company “with IT representing a relatively easy for governments to reduce or delay expenditure.”

The new government is, of course, a Conservative-Liberal Democrat coalition. In the run up to the election, both parties were committed to reducing or scrapping the scope of the national programme.

Since the election, it has become clear that the Treasury will be looking for big savings on any government programmes that are allowed to continue.

The deal with CSC for the NME, which was left unsigned when Morecambe Bay failed to go-live on the deadline given to it by NHS chief information officer Christine Connelly in March, must be under close scrutiny.

New politics, same task

If something recognisable as the national programme survives, ISoft needs to prove that it can reliably deliver at scale to the NHS. This remains a work in progress. Only a handful of further sites look set to follow Morecambe Bay by the end of 2010, which will hold back revenue.

The list includes Birmingham Women’s NHS Foundation Trust, Pennine Care NHS Foundation Trust, and Kettering General NHS Trust, and – publicly at least – doesn’t extend much further.

The Deutsche Bank note says iSoft will make a net loss in 2010 and 2011. It goes on to say that the sharp falls in share price create the “potential for a takeover approach.”

The main likely potential buyers would be large US and European healthcare IT vendors, such as Epic, Cerner, Agfa and CompuGroup; the latter agreed to buy iSoft for £160m back in July 2007, only to be trumped by IBA Health.

The other source of potential bidders would be large technology firms looking to buy into the healthcare IT sector. Firms such as HP, Dell, Microsoft and Oracle have all been out shopping. But the main focus of these firms is the US market, chasing the $30 billion HITECH federal investment in healthcare IT and electronic records – and iSoft has very little presence in the US.

Any potential bonus a buyer would get Lorenzo, the next generation clinical software that the NHS has invested so much in and which it has so far proved willing to persist with. This is not to be discounted.

Morecambe Bay shows there is still at the end of the tunnel. Given focus, time and further resources Lorenzo has the potential to come good over the next few years, and provide much of what the NHS has been waiting for. Success in the NHS would offer a springboard to sell to other publicly funded healthcare systems.

What has become clearer in the past week is that iSoft’s future remains utterly bound to its ability to deliver good quality systems to the NHS. The market conditions have worsened, but the fundamental challenge remains the same.