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TriZetto’s more modest acquisitions are winning analysts



TriZetto Looks to Smaller Deals, Big Contracts

A year ago, Newport Beach-based healthcare software service provider TriZetto Group Inc. unveiled plans to buy Westport, Conn.-based IMS Health Inc. in an $8.2 billion stock deal. The staggering price tag led many investors to cut and run,TriZetto’s shares plunged more than 40% on the news. A month later, TriZetto scrapped the deal.

Since then, TriZetto executives have sought to build the company through a series of smaller acquisitions and contracts with big customers.

“TriZetto always will consider acquisitions that are strategic, enhance our market position,or what I call footprint acquisitions, which bring to us a customer base that is in high need of the other types of services we offer,” said Chief Executive Jeff Margolis.

TriZetto helps health plans, benefits administrators and doctors manage data. The company provides and manages software and develops healthcare Web sites for insurers and provider groups, which pay a monthly fee to the company. Rivals range from Annapolis, Md.-based USinternetworking Inc. to big consulting firms.

In the past year, TriZetto’s acquisitions have included Erisco Managed Care Technologies Inc., an IMS subsidiary, for about $220 million in stock, and a $50 million deal for Naperville, Ill.-based Resource Information Management Systems Inc.

On Tuesday, TriZetto is set to release fourth-quarter results, and analysts expect the company to lose 4 cents a share, vs. a loss of 18 cents in the year-ago quarter, according to Thomson/First Call Corp.

In the third quarter, TriZetto’s revenue more than doubled to $19.4 million from the year-ago period, bolstered by acquisitions. The company’s loss from operations was $7.5 million, vs. $2.3 million in red ink a year ago.

Margolis said he projects TriZetto to start generating cash from operations later this year. Meanwhile, the company has had to battle the dot-com stigma. Along with Internet companies, TriZetto saw a big run-up in its stock after going public in late 1999, before crashing after the proposed IMS deal. Last week, the company counted a market capitalization of about $440 million.

TriZetto has had to counter questions raised by Barron’s and Fortune about its viability. Earlier this month, TriZetto took the unusual step of pre-releasing its cash balance as of Dec. 31, which stood at $28 million, thanks in part to an infusion of money from Erisco.

The money, along with projected cash from operations, should be enough for the year, the company said. Both Barron’s and Fortune had suggested TriZetto was running out of cash based on its balance sheet as of Sept. 30, which counted $6.8 million in cash.

Margolis said TriZetto’s model is “very different” than Internet or dot-com companies. Customers include health maintenance organization Humana Inc., CareFirst BlueCross BlueShield of Maryland, Maxicare Health Plans Inc. and New York Presbyterian Hospital.

TriZetto customers tend to sign up for contracts for three or seven years, creating predictability, according to Margolis.

Margolis also said he’s content with TriZetto’s share price, which was about 12 last week, given market conditions. He said he believes analysts have a good read on the company.

“They recognize we’re not a dot-com waiting for a million eyeballs to show up to our Web site,” Margolis said. Bear Stearns Cos. analyst Raymond Falci recently reiterated a buy rating and $30 price target on TriZetto in a research report.

People are starting to recognize the company is solid, Falci said. “They will make money in the next quarter,” he said. Falci also gave TriZetto good marks on integrating recent acquisitions.

“The Erisco acquisition absolutely solidifies the company as a real company,” said Alexander Draper, an analyst with Robinson Humphrey Co. in Atlanta who used to work at Roth Capital Partners Inc. in Newport Beach. “They’re not just a fly-by-night company.”

Healthcare and information technology hasn’t been the easiest business marriage, but that still hasn’t stopped TriZetto.

“The first thing to understand is that it’s not just about doctors embracing technology, but that the healthcare industry is a community of payers, providers and patients,” Margolis said. “If you think about anyone embracing the use of technology, you have to think about how do you make it simple.”

Analysts point to the TriZetto management team as a factor in its bid to wire the industry. Margolis’ background includes a stint as senior vice president and chief information officer at Fountain Valley-based FHP International Corp. prior to its acquisition by PacifiCare Health Systems Inc. of Santa Ana.

Other TriZetto managers also have healthcare backgrounds, analyst Draper said. Healthcare continually rebuffs executives who believe their experience in other business sectors will translate to the industry, he said.

“They have a tremendous amount of experience (in healthcare information technology), but they’re a fairly new management team with Wall Street,” Draper said.

Margolis said that a majority of the company’s time with Wall Street has involved explaining its business model.

“We’re really optimistic that in 2001, (the concept) of providing pre-integrated information services over the Internet is a more acceptable, more understood concept,” he said. n

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