McKesson and Change Healthcare Form $3.4 Billion Joint Venture to Transform Healthcare Payments and Technology

McKesson Corporation’s McKesson Technology Solutions, which encompasses software, commercial services, and healthcare automation, will join forces with Change Healthcare Inc., an analytics and network software company, to establish a new joint venture.

Chicago-based McKesson will hold a 70% stake in the new venture and receive $1.25 billion in cash proceeds, while Nashville, Tennessee-based Change Healthcare and its shareholders will hold a 30% stake and receive $1.75 billion in cash proceeds upon closing of the transaction.

McKesson and Change Healthcare stated that the new venture will serve payers, providers, and consumers by leveraging financial and management technologies to address complex tasks such as medical billing and claims processing. Both companies highlighted their commitment to advancing the capitalization of healthcare and establishing a value-based purchasing and payment system.

The as-yet-unnamed company will be jointly managed by McKesson and Change Healthcare, with private equity firm Blackstone serving as the majority shareholder of Change Healthcare. This new entity will merge nearly all of Change Healthcare’s commercial divisions with the majority of McKesson Technology Solutions, creating a company with total annual revenue of $3.4 billion.

Under the transaction plan, McKesson will merge most of McKesson Technology Solutions into the new company, while the RelayHealth Pharmacy and Enterprise Information Solutions (EIS) divisions will be retained by McKesson Corporation. Change Healthcare, formerly known as Emdeon, has contributed nearly all of its commercial businesses, except for its pharmaceutical and prescription commercial operations, the ownership of which will reside with the shareholders.

The transaction is scheduled to close in the first half of 2017, with an initial public offering (IPO) currently being prepared. John H. Hammergren, Chairman and CEO of McKesson, will serve as Chairman of the new company. Neil de Crescenzo, Chairman and CEO of Change Healthcare, will serve as CEO of the new company. Both have secured support from the new company’s executive team.

“This is a bold, innovative move. We have created a company with enhanced capabilities to help consumers navigate their complex and growing financial and clinical challenges,” Hammergren said in a speech. “The new company will establish more effective approaches in areas such as peer-to-peer payments, healthcare solutions, and clinical capabilities, enabling us to address business issues in a more tax-efficient manner.”

Hammergren also stated that the new company would help customers reduce operational complexity, lower costs, and deliver better healthcare services.

“This merger comes at a pivotal moment in the transformation of U.S. healthcare,” added de Crescenzo. “Together, we will create significant value by leveraging our complementary capabilities to deliver innovative solutions for consumers, generate opportunities for team members, and drive progress within a leading health technology company by addressing three critical challenges in the healthcare sector: cost, quality, and outcomes.”

Neil Simpkins, Senior Managing Director at Blackstone, stated that the two companies’ innovative initiatives and forward-looking strategies have had a positive impact on the healthcare ecosystem.

Change Healthcare’s financial and administrative network processed $8.8 billion in healthcare-related transactions, while the overall market reached $1.7 trillion in 2015. The Nashville Business Journal estimated that Change Healthcare generated approximately $1.4 billion in revenue in 2015 and employed 7,000 people. Blackstone paid $3 billion in 2011 to acquire a controlling stake.

McKesson Corporation employs 76,000 people and has a market capitalization of $39.8 billion, with its spun-off IT division accounting for only 2% of total commercial revenue in fiscal year 2015. On Tuesday, McKesson’s shares rose 2.3% to $176.58 on the New York Stock Exchange.

This deal marks the end of McKesson’s healthcare IT division, which was established in 1974 in Alpharetta, Georgia.