The TriZetto Group, Inc

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The TriZetto Group, Inc.

567 San Nicolas Drive, Suite 360
Newport Beach, California 92660
U.S.A.
Telephone: (949) 719-2200
Toll Free: (800) 569-1222
Fax: (949) 219-2197
Web site: http://www.trizetto.com

Public Company
Incorporated: 1998
Employees: 1,500
Sales: $292.2 million (2005)
Stock Exchanges: NASDAQ
Ticker Symbol: TZIX
NAIC: 518210 Data Processing, Hosting, and Related Services

The TriZetto Group, Inc., is a public company based in Newport Beach, California, that provides a wide range of healthcare information technology (IT) products and services. Its name alludes to the Italian musical term terzetto, a three-part composition. Serving health plan payers, benefits administrators, and other healthcare entities, TriZetto offers its own threesome of services: the implementation of information technology infrastructures; the installation of a broad portfolio of Enterprise Software applications; and the gathering and reporting of information. To help clients control costs, TriZetto offers outsourcing solutions, including billing management services, staffing, and claims processing. It also provides consulting services to help develop appropriate IT systems and assist clients in getting the most out of them. The company estimates that its services impact 100 million people in the United States. Taken public in 1999, TriZetto is listed on the NASDAQ.

DISEASE LEADING TO
COMPANY'S 1997 FOUNDING

TriZetto was founded by its chairman and chief executive officer, Jeffrey H. Margolis. In 1982, when he was just 19 years old and a student at the University of Illinois, Margolis was diagnosed with Crohn's disease, a rare disorder that causes periodic inflammation of the digestive tract and often results in complications beyond the gastrointestinal tract. Because of the episodic nature of Crohn's disease, Margolis would become all too familiar with the bureaucracy of the healthcare industry and the plethora of forms to complete and regulations to decipher. After graduating with a degree in business administration/management information systems in 1982 and becoming a certified public accountant, Margolis focused his career on the healthcare field. Initially he went to work at Andersen Consulting as an information technology consultant, followed by stints at several health maintenance organizations (HMOs). His last stop was with a Southern California HMO, PacifiCare. Along the way, Margolis continued to battle his disease and endure the dangerous inefficiencies of the healthcare system.

While undergoing a pair of operations in the mid-1990s he was mistakenly given a drug to which he was allergic, despite having noted the problem on numerous forms. Debilitating panic attacks ensued, and it became clear to him that such paperwork misconnections could lead to even more dire consequences. In 1997, events conspired that allowed Margolis to begin to do something to address the systemic problems of the healthcare industry that he knew all too well. First, his disease had gone into remission, and second, PacifiCare was undergoing a merger, leaving his career in a state of uncertainty. Thus, in 1997 he launched Margolis Health Enterprises and struck out on his own to provide technology consulting to healthcare organizations.

Relying on his own funds at first, Margolis set up shop in his den at his home in Newport Beach, California. Here he worked with an executive assistant until his wife and two daughters insisted that he relocate the business. He leased a 300-square-foot neighborhood office, which he furnished with a card table and folding chairs before bringing in some secondhand furniture. After working for 15 years in the healthcare field, Margolis was well connected and soon landed enough clients to warrant the hiring of additional staff, and furniture. They made the best of the cramped quarters, but they would soon outgrow the space and needed to find more appropriate accommodations because of new business Margolis brought in. A former colleague of his, now the CEO of San Diego's CNN Managed Care, awarded the fledgling company a $1 million contract to install a new technology infrastructure. Moreover, CNN had other problems that needed addressing and essentially asked Margolis to supply it with as much IT talent as he could find. A short time later, another former Margolis colleague in charge of a dental HMO, became a client. All told, in the first year the company did more than $3 million in business.

CROGHAN MERGER: 1997

In October 1997 Margolis beefed up the company to handle the increased workload by merging with Denver-based Croghan & Associates, Inc., doing business as System One. Its founder, a systems engineer named Raymond Croghan, had been instrumental in the 1980s in building Applied Communications, Inc. into a global supplier of Electronic Funds Transfer (EFT) software to financial institutions. After selling the business in 1991, he launched Croghan & Associates to apply the technology developed for EFT to the healthcare industry. Two years later the business was bought by Banc One Corporation and renamed System One. In 1995 it expanded by acquiring the Health Care Processing System division of DHI Computing Service. Both System One and Margolis Health Enterprises were acquired by a holding company, M.C. Health Holdings, Inc. In March 1998, M.C. Health would take the name TriZetto Group Inc.

TriZetto experienced rapid growth in 1998, as sales increased to $11.4 million. To fuel that expansion, the company raised $8.5 million in private funding, received from the likes of such venture capital firms as Delphi Ventures, Fidelity Ventures, HLM/UH Fund, and KFS Management Inc. In 1999 TriZetto used the money to make a series of acquisitions. A pair of Texas companies, Creative Business Solutions and HealthWeb Systems, were purchased in February. The addition of HealthWeb was especially important because it provided TriZetto with a comprehensive, self-service Internet solution to offer to clients, capable of allowing providers, payers, employers, and members to exchange information and conduct business 24 hours a day. A month later Health-Web's capabilities were bolstered with the acquisition of Management and Technology Solutions and its MTSNet portal product that helped doctors' offices to communicate with hospitals and HMO offices, as well as with other physicians.

In the summer of 1999, TriZetto prepared to go public in order to raise more cash for further expansion. Underwritten by Bear, Stearns & Co. Inc.; Donaldson, Lufkin & Jenrette; Adams, Harkness & Hill, Inc.; and Wit Capital Corporation, the initial public offering (IPO) of stock was completed in October, raising about $37.5 million. Nearly $7 million of that amount, and another $17 million in common stock, were used to make two further acquisitions before 1999 came to a close. The purchase of Albany, New York-based Novalis Corporation added to TriZetto's ability to provide software hosting services, and Finserv Health Care Systems, Inc., another Albany firm, brought supply reimbursement-management software capabilities.

COMPANY PERSPECTIVES

TriZetto is distinctly focused on accelerating payers' ability to lead the healthcare industry's transformation by providing premier information technology solutions to enhance our customers' revenue growth, drive their administrative efficiency and improve the cost and quality of care for their members.

After recording revenues of $33 million in 1999, TriZetto continued its strong growth in 2000. The company also gained a good bit of national attention, albeit not in the most desirable way. In March 2000 TriZetto announced that it would be acquiring (for accounting purposes, at least) the much larger and more established IMS Health Inc., a Westport, Connecticut-based market-research firm serving the pharmaceutical and healthcare industries. Founded in 1954, IMS did $1.4 billion in business in 1999 and recorded nearly $260 million in net income, compared to TriZetto's net loss of $8.4 million. IMS also had a market capitalization of $6.6 billion, while TriZetto was worth less than $1.5 billion. TriZetto, however, had the allure of the Internet in its favor, resulting in a 545 percent increase in the price of its stock since the IPO, and IMS, a stodgy "Old Economy" issue, had sputtered in the past year, losing a fourth of its value. By joining forces with TriZetto, IMS hoped to move its business onto the Internet. TriZetto, in turn, would gain size as well as a valuable IMS subsidiary, Erisco Managed Care Technologies, developer of software for healthcare companies.

The plan was that the combined assets were to be housed under TriZetto Group, and once the deal was completed, three separate stocks would be issued. One was essentially a "pure" Internet play that combined the old TriZetto and IMS's Internet assets; a second tracked the core IMS business; and a third was to be issued for an IMS spinoff, the Strategic Technologies division, provider of support services for pharmaceutical sales forces. The idea behind the structure of the deal was to "unbundle" the company's assets and maximize their value, a worthy goal to be sure, and a design that held a certain appeal for accountants. It did not, however, find much favor with shareholders of either TriZetto or IMS, or Wall Street in general. IMS was something of a blue chip stock, known for steady returns, and its shareholders, who had likely held the stock for a number of years, looked askance at the Internet newcomers, with some wags calling TriZetto "Try Zero." TriZetto stockholders, on the other hand, had purchased their shares only recently and were far more interested in the rapid ascent of an Internet offering, this at the height of the Internet rally, than becoming the holder of a dinosaur like IMS.

Condemnation of the deal was swift and harsh, with IMS's management team taking the brunt of the criticism. David Risinger of Merrill Lynch told Barron's, "I have never seen a more ridiculous proposed merger in my history on Wall Street." Herb Diamant, president of Diamant Investment Corp., a holder of IMS shares, expressed his dismay to the Wall Street Journal: "To entertain an offer to take a terrific model and sell it to an Internet company that is barely related is the most bizarre thing I've seen in my career."

IMS MERGER SCRAPPED: 2000

The management of IMS lost credibility with investors and the value of IMS stock plunged. The pressure was such that in May 2000 the deal was scrapped in favor of a strategic alliance, which included the sale of Erisco to TriZetto for $228.4 million in stock. Disgruntled IMS shareholders believed TriZetto got the better of the deal, but were relieved that at least the merger of the two companies had been thwarted.

While the aborted IMS merger may have marred the standing of IMS's management team, the same could not be said for Margolis and TriZetto. The company picked up a highly valuable asset from the Erisco acquisition: Facets administrative software, used by most managed health plans. Later in 2000 TriZetto Acquired Resource Information Management Systems, Inc. (RIMS), picking up QuicLink, the top automated claims-processing system used by benefits administrators. As a result of the Erisco and RIMS acquisitions, TriZetto gained a customer base of 100 million health plan members, or roughly 40 percent of the insured population in the United States.

Sales increased to $89 million in 2000 and TriZetto carried momentum into the following year. Prospects appeared bright, given that healthcare companies were more than ever looking to outsource their IT operations. The company also continued to add to its capabilities. In April it acquired Infotrust Company, building on the base of customers picked up from Erisco and RIMS by adding the many healthcare payers that used Infotrust's software to obtain physician profiling, quality reporting, patient care management, and clinical auditing. Infotrust also offered such outsourcing capabilities as enrollment, claims administration, premium billing, collections, and member and provider services.

For the year 2001, revenues improved 145 percent over the previous year to $218 million. Sales increased to $265.2 million in 2002, all achieved through the growth of existing operations. Over the course of the previous five years, TriZetto achieved an impressive growth rate of 8,561 percent.

KEY DATES

1997:: Company is founded.
1998:: TriZetto name is adopted.
1999:: Initial public offering of stock is completed.
2000:: Merger with IMS Health, Inc. is scuttled.
2004:: Company records first full-year profit.

The focus remained on internal growth in 2003. Although sales did not maintain the pace of previous years, they increased a healthy 9 percent to $290 million. During the year, TriZetto introduced expansion of the Facets administrative system, as well as a new software application, NetworXModeler, which allowed users to determine the financial implications of changes to provider contracts. More product offerings followed in 2004. The company introduced CareAdvance Enterprise, software that streamlined disease and population management. Directlink, unveiled in November, connected payers and their customers' systems in a secure environment.

Sales dipped to $274.6 million in 2004, but for the first full year in its history, TriZetto achieved profitability, posting net income of $8.5 million. The company turned another profit of $22 million in 2005 on revenues of $292.2 million. In addition to further software enhancements, TriZetto completed its first acquisition in four years in 2005, picking up CareKey Inc., developer of advanced care management software. There was every reason to expect TriZetto to experience continued growth for years to come.

Ed Dinger

PRINCIPAL SUBSIDIARIES

Creative Business Solutions, Inc.; Finserve Health Care Systems, Inc.; HealthWeb, Inc.; Infotrust Company; Margolis Health Enterprises, Inc.; Novalis Corporation.