Orion Health: How it all went horribly wrong

A picture of pensiveness: chief executive Ian McCrae (right) and chairman Andrew Ferrier at the Orion IPO breifing in October 2014. Photo / Jason Oxenham

At Orion Health's 20th anniversary celebration in 2013, there was only one topic on everybody's lips — the healthcare software maker's possible IPO.

Director and minority investor Andrew Ferrier (soon to become chairman) was ebullient about the possibilities of a public listing.

Co-founder, majority shareholder, and chief executive Ian McCrae, was noticeably more reticent.

He spoke nostalgically about how his company winged it when it first entered the US market, with a house in Santa Monica serving as its US office. Sometimes there would be 15 people in the home, with couches pressed into service as beds.

McCrae recalled how then country manager Paul Viskovich phoned him and complained: "I've just done a job interview in my bedroom. It's just not appropriate."

He swapped amusing war stories about early sales with colleagues. But when talk turned to the IPO, his mood tightened.

While Ferrier spoke about possible big payoffs, McCrae fretted about the scrutiny that comes with going public, and the way the short-term horizon of some shareholders can pressure long-term strategy.

Regardless, there was a huge wave of hype about Orion, which had been growing at 15 to 20 per cent a year to hit revenue of $100 million, with talk about it heading toward $1 billion turnover as it rode the Obamacare wave in its largest market, the US. It was seen as the next Xero.

The day it listed, on November 26, 2014, the hype seemed justified — Orion's share price hit $6.27. That valued the company at $1b and McCrae's personal stake at about $530m.

But in the months ahead, McCrae's worst fears were released. The stock tanked as Orion missed its prospectus forecasts.

The CEO blamed contract delays, but many investors had no patience for that explanation. Shares fell 46 per cent to $3.13, making Orion the worst-performing stock of 2015.

The following year saw a fresh challenge with the election of Donald Trump who, while he wasn't able to deliver on his promise to abolish Obamacare, did crimp and undermine the scheme, and throw the healthcare and health insurance industries into a period of uncertainty.

Later, looking back on events at Orion's 2018 annual meeting, McCrae said his company had struck a perfect storm. Just as it needed to invest heavily in the cloud, the billions the Obama administration had allocated for integrating healthcare records was beginning to run out. Some of Orion's largest customers in the US stopped spending, or went bust.

Through it all, McCrae repeated the mantra that these were short-term challenges.

Orion's share price performance on the NZX since its November 2014 IPO.

Healthcare providers in the US and elsewhere would have to modernise and share their records online, he said, while developments like DNA sequencing and personalised healthcare would dramatically expand the scope and importance of patient records.

Shareholders needed to understand that revenue would be lumpy, given the complex process of selling to large, often state-owned health organisations,which could be subject to months or even years of delays.

But investors didn't buy it. It didn't help that Orion repeatedly missed its revenue forecasts and continually pushed out the date when it would hit profitability.

Orion's co-founder, majority shareholder, and chief executive Ian McCrae, says the company faced a "perfect storm" when Obamacare was amended by the Trump administration. Photo / Jason Oxenham

The company was "consistently over-optimistic" with its guidance, Craigs Investment Partners deputy head of institution research, Stephen Ridgewell said.

The start of 2017 saw Orion warn it would lose $32m-$38m (it lost $34m) — more red ink than expected as revenue fell. The company was also starting to run out of cash.

Then Forsyth Barr analyst Blair Galpin said in a note to clients that the healthcare software company was "running on empty".

McCrae grew tetchy about analyst talk that he had this company had left it too late to raise more cash, leaving itself in a weak negotiating position. He strongly denied that a reluctance to give up majority control was behind Orion's failure to raise new funds, with the dilution of his holding that would entail.

Similarly, he was clearly exasperated with commentary that said he was a control freak, or took the parallel tack that he was better suited to a position like chief product officer — and that he should relinquish the founder-as-CEO role like the Vaughan Roswell at Vend and Shaun Ryan at SLI Systems before him, among other tech start up examples.

In May 2017, McCrae put millions of his own money into Orion as he led a $32.9m raise.

That gave Orion wiggle room to undertake a strategic review and a restructure, which saw around 20 per cent of its 1250 staff culled, and R&D spending slashed. It did not help talk that the founder had trouble letting go of the reins.

At Orion's annual meeting in September last year, McCrae and his fellow directors and managers faced universally-hostile questions.

Most indicated they were only voting for the buyout because it was the only viable option to recoup at least a modest amount of their investment.

And many are still angry.

One told the Herald as the privatisation bid was announced: "Orion leaves a stain on the market. People are decrying the state of the capital markets but why would you IPO when this sort of thing happens?

"For investors the outcome is really only one step up from receivership."

Now, likely much to his relief, McCrae (who did not immediately return a request for comment), will soon no longer have to listen or respond to such criticism.

January saw a complex deal close whereby UK private equity outfit HG Capital buy 75 per cent of Orion's cashcow core software business, known as Rhapsody, while Orion maintained control of its loss-making two other divisions, Hospitals and Population Health, which McCrae maintained could be turned around.

An associated share buyback saw most investors bail, boosting McCrae's holding from 50.1 per cent to just under 86 per cent.

This week a company associated with McCrae, Grafton Health, offered $1.22 per share to buy out remaining shareholders and take the company private.

Craigs' Ridgewell was not a fan of Orion's move to sell Rhapsody, which he called the company's "golden goose".

In his view, Orion could have boosted its share price to $2.90 by closing its loss-making divisions and concentrating on Rhapsody.

But having got to this point, Ridgewell said the buyout offer announced this week was "reasonable".

"I'd see this as a fair and reasonable result for the minority investors who chose not to participate in the buyback as they are being offered the same price ($1.22) as the buyback price was struck at. Given the very low free float of around $13m post the buyback and low level of investor interest, the ongoing costs of listing, and potentially significant additional capital requirements for the business to reach breakeven, the most appropriate structure for the business is to be owned privately," he said.

The private buyout is expected to go through, and McCrae will be back to his happy place — away from public investor scrutiny.