‘Uphill battle’ predicted for Outcome Health after settlement with investors

Jan. 29--Outcome Health has settled allegations of fraud leveled by its investors, but with some of the fallout from legal troubles unresolved, challenges remain for the Chicago company.

There is still an internal investigation facing the company, which places screens in doctor's offices that run educational content about health topics and advertisements from drug companies. Some of the clients that pulled back in recent months have not yet come back, and two tax credit agreements with the state remain suspended.

Founded in 2006 as ContextMedia, Outcome Health had not raised outside money until last year, when it secured $487.5 million in funding from big-name investors and rose to a valuation of about $5.5 billion.

In November, those investors -- including units of Goldman Sachs and Google and a fund co-founded by Illinois gubernatorial candidate J.B. Pritzker -- sued the company, then-CEO Rishi Shah and then-President Shradha Agarwal, alleging Outcome Health misled advertisers and investors about the company's performance.

On Friday, Outcome Health said it had settled lawsuits from the investors. As part of the settlement, Shah and Agarwal stepped down from day-to-day management of the company to become chairman and vice chair, repectively, of the board of directors. The newly expanded board, which also will include three new independent directors and two investor representatives, will search for a new CEO.

Outcome Health spokesman John Eddy did not make anyone from the company available Monday for comment, nor did he answer questions about what Shah's and Agarwal's new roles will entail. Spokesmen from Google parent Alphabet and Goldman Sachs declined to comment, and a spokesman for Pritzker Group did not respond to a request for comment.

Outcome said Friday that Shah and Agarwal would join investors and lenders in putting another $159 million into the business, $77 million of which will be used to pay down debt.

That $159 million is part of $225 million in funding raised from the investors last year that was set aside for Shah and Agarwal, according to a source familiar with the settlement. A Delaware Chancery Court judge in November barred Shah and Agarwal from tapping the $225 million after the investors filed a lawsuit against Gravitas, an Outcome Holdings subsidiary that held the funds. A Friday court filing indicates the funds could be distributed in connection with the settlement.

Rebuilding won't come easy for Outcome Health, said Waverly Deutsch, a clinical professor of entrepreneurship at the University of Chicago's Booth School of Business.

"The investors, by suing, indicated they believed this was a systematic fraudulent problem, and that immediately sent that message to the market," Deutsch said. "Now what the investors have to do is rebuild the reputation of the company."

The settlement, however, only dealt with allegations from investors.

In October, Outcome Health hired former U.S. Attorney Dan Webb, now of law firm Winston & Strawn, to conduct an internal investigation into whether any employees misled advertising clients. That investigation is ongoing.

Investors also filed court documents last year indicating they received subpoenas from the Justice Department. The settlement did not address any federal inquiries concerning the company.

Other fallout from Outcome Health's troubles remains unresolved as well. In recent months, pharmaceutical advertisers have pulled tens of millions of dollars in ads from the company, and hospitals have backed away. More than one-third of Outcome Health's 535 employees took a voluntary buyout in late November, and it called off a headquarters move. Earlier this month, Illinois suspended two tax credit agreements with the company.

Downers Grove-based Advocate Health Care and west suburban hospital system Edward-Elmhurst Health said in November that they were pausing plans to expand their use of Outcome Health's technology. Nothing at either hospital system has changed.

Advocate, Illinois' largest hospital system, had about 500 of the Outcome Health devices, mainly in outpatient settings, when it paused rollout in November. Advocate spokeswoman Lisa Lesniak said Monday that Advocate continues to monitor the situation with Outcome Health.

Edward-Elmhurst Health spokesman Keith Hartenberger said in an email Monday that the hospital system will "be talking soon to Outcome Health."

Additionally, two Illinois tax credit agreements with the company are still suspended, said Jacquelyn Reineke, a spokeswoman for the Illinois Department of Commerce and Economic Opportunity.

The suspension of both agreements -- Outcome Health has received $1.3 million from one of the pacts -- is tied to court filings indicating a federal investigation may be underway.

Outcome Health can rebuild, said Deutsch, from Booth. The company has assets in its screens and money in the bank. Though it has lost customers, many remain. And the fact that Shah and Agarwal remain involved with the company indicates investors felt somewhat comfortable with them, she said. The settlement lets Outcome Health move forward, but it won't be easy.

"There's an uphill battle for the company at this point," Deutsch said.

amarotti@chicagotribune.com

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