H.I.S.-tory, by Vince Ciotti

© 2013 by H.I.S. Professionals, LLC, all rights reserved.

Episode #106: Cerner

Part 3: PGI & IPO

From PGI -> Cerner (& Lillig -> Patterson)• In 1984 when PGI was taking PathNet to market, they realized the

name lacked a little bit of pizazz (to put it mildly…), so they hired a trio of advertising executives to come up with a hot new name.

• Looking for a name that had both health and technology in it, the trio came up with a number of creative possibilities, such as:– Automated Information Management, Inc. (AIM) & Novus

(ironic how both were later used at SMS: AIM was their Advanced Implementation Methodology, and Novus ≈ Novius)

• Neal rejected both, and the ad gurus produced a list of foreign words for him to consider, one of which caught the eye of Jeanne Lillig, PGI’s 7th employee, who went into Neal’s office and picked:– Cerner – which comes from the Latin “cernere,” meaning to

discern or sift. In Spanish it means “to blossom” and in French “ to encircle.” So after 5 years, PGI became Cerner, and Jeanne underwent a name change too when she later married Neal!

Ups and Downs…• Most HIS vendors eventually take their firms public so the initial

investors (and lucky employees who are given stock and/or purchase options) can cash in on their success. A few exceptions:– Meditech and Epic, two of the biggest and longest success

stories in our biz, have kept themselves private – what their potential worth would be in a public offering is staggering…

• Almost every other leading HIS vendor is publicly traded (McKesson, Siemens, Allscripts, GE, NextGen, CPSI…), and Neal and Co. were no exception, joining the public bandwagon. Cliff Illig gave three primary reasons for their IPO in October, 1986:1. Initial investors expected it to gain a return on their capital.2. Going public increases prospects confidence in the vendor3. Like SMS, Cerner extended generous stock options to valued

employees so they could share in the largess (and risks!)

What If??• I mused back in the episode on SMS’ Initial Public Offering (# 11

at hispros.com) how much the few hundred penny-a-share stocks I was given in 1969 would have been worth today after all the stock splits and revenue growth, up to their sale to Siemens...

• Well, thanks again to April Martin, here’s Cerner’s math:“How much would a single $16 share of Cerner stock purchased in the IPO be

worth today? Here are a few scenarios using yesterday’s $47.49 close: – If you bought one $16 share in 1986, it would be worth $3,039 today. – If you invested $400 for 25 shares, they would be worth $75,984 today.– If you were flush enough to be able to invest $10,000 in Cerner in 1986

(buying 625 shares), those shares would be worth $1,899,600 today. Here’s how you calculate it: take the initial dollar amount invested, divided

by the $16 price to give you a number of shares. Then double that number of shares 6 separate times for the number of stock splits that have occurred since going public. Then multiply the resulting number of shares by the stock price at the close of whatever business day you want.”

On The Other Hand…• Anyone who remembers the year 2008 knows there is a downside

to these incredible profits too – my pension still hasn’t recovered!• Indeed, one of the saddest memories of my career was serving as

President for Sentry Data in the mid-80s under the tutelage of Sheldon Dorenfest who took it over and obtained Chapter XI protection while we tried to find a buyer (#21 at hispros.com).

• Sentry (née DATX) was a red-hot minicomputer vendor who’s stock went up into the $20 range after their IPO, but then tanked due to a number of factors, until bankruptcy took it to pennies.

• I remember taking a call one day from a broker who had steered his clients into investing in Sentry, and wanted to know what the prospects looked like. I just mumbled vague and uncertain generalities until he got the idea…

This One’s Been A Winner!• In Cerner’s case, it’s been all positive however, as shown in the

chart below of the annual revenue for the top 13 HIS vendors that over the past 20+ years (Cerner in appropriately dark green).

National Media Recognition• Within two years of taking PathNet to

market, Cerner had signed agreements with 41 clients, while revenue and # of employees jumped four-fold. This caught the eye of Bill Child’s Healthcare Computing and Communications rag, the source of HIS vendor info back then.

• Playing on a classic line from Butch Cassidy and the Sundance Kid, HC&C entitled a 1986 feature article on Cerner “Who Are These Guys At Cerner Corporation?” The article quoted Terry Armstrong of the giant chain HCA who had picked PathNet earlier: “We looked at all the Lab systems on the market and found PathNet to be most functional.”

Super LIS Sales Track Record• By the end of the 80s, Cerner was dominating LIS competition as

shown in this table from the Dorenfest 3000 Data Base of 1990:

How Did They Do It?• Many of these LIS competitors were hardly pushovers, especially:

#2 Sunquest – who after a few years of ownership change under Misys, is now back as a major player in the LIS niche today.

#3 Meditech – who started out as an LIS vendor and whose Lab suite runs standalone in many hospitals with “foreign” HIS-es.

#6 Citation – who’s LIS led the 1980s’ microcomputer revolution in small hospitals with their IBM PC servers and Novel LAN.

• To see just how Cerner beat these erstwhile competitors, next week we’ll step back in time to re-trace a detailed LIS search our firm conducted for a large hospital about 20 years ago.

• All of the steps we followed back then still apply to buying an EHR today, so it should be an informative story.