Medem enters agreement with electronic health firm

As part of a strategic alliance with Medem Inc., Allscripts Healthcare Solutions Inc. has entered into two financial transactions that could result in its acquiring control of the medical society-founded electronic health company.

But even if Allscripts -- a Libertyville, Ill.-based seller of electronic prescribing and electronic medical records software -- gains voting control, it's anticipated that the societies would retain control of Medem's board, said AMA Trustee William G. Plested III, MD. That's because a major reason Allscripts is investing in Medem is that its value lies in the relationships it has with its medical society founders, which provide health information content to Medem.

"I don't think they have any intent of taking over the board or running the company, because once the AMA and the societies lose control of Medem and the intellectual data we're providing to it, we're going to run, and then of course, they have nothing," Dr. Plested said.

"I think what's important to know is that the current control of the board of Medem remains with the societies as we do this transaction initially and may continue in that fashion for the foreseeable future," said Allscripts President Lee A. Shapiro.

On Aug. 12, Medem issued a three-year secured convertible promissory note under which it can borrow up to $2.1 million from Allscripts. In connection with that deal, Allscripts bought part of J.H. Whitney & Co.'s stake in Medem for $500,000 and has an option to buy out the balance of the Stamford, Conn.-based venture capital firm's Medem holdings for $600,000.

J.H. Whitney paid $20 million in 2000 for what then was 20% of Medem. That investment was made during the dot-com bubble years when the valuations of Internet companies reached stratospheric -- and ultimately unsustainable -- levels.

Allscripts would control 50.4% of Medem's voting capital stock if it exercises its option on the remaining Whitney stake, which expires on Aug. 12, 2007, and also converts the promissory note.

San Francisco-based Medem (link) offers health information, Web sites, online consultation and secure messaging services to more than 90,000 physicians. It was founded and is partly owned by several medical societies, including the AMA.

Medem would not say how much of the $2.1 million promissory note is currently outstanding, but the note's terms bar it from borrowing more than $750,000 per calendar quarter without the prior consent of Allscripts and a group of private investors led by Edward Fotsch, MD, Medem's CEO. The company also issued a $1.4 million secured promissory note to that investor group, according to Allscripts SEC filing.

The $3.5 million covered by the two notes will be used to expand Medem's network and product offerings, Dr. Fotsch said.

Separately, the SEC filing also disclosed that Medem will issue a convertible secured promissory note to the AMA for $600,000 in exchange for in-kind goods and services it is providing to Medem.

As a co-founder of Medem, the AMA had the opportunity to provide that additional funding to Medem but declined because it determined that the company's needs were more than monetary, said Dr. Plested, who also is a Medem director. It would have cost much more than $3.5 million for Medem to build the assets Allscripts could offer through a strategic partnership, including a sales force and electronic records software from scratch, he said.

"Medem, though surviving, had very definite and real needs, which we understood," Dr. Plested said. "We felt we needed to have either a massive infusion of money or a partnership that would offer [not only] some of [Medem's] financial needs but many of the other [non-financial] needs."

The strategic partnership will enable each firm not only to provide a broader array of services but also to gain access to each other's physician customer bases, executives of the two firms said.

Under their alliance, Medem will market Allscripts' e-prescribing software to its physicians at a significant discount. Allscripts also will integrate Medem's online consultation and secure messaging services into its TouchWorks EMR product.