Nuance strikes deal to acquire Dictaphone

February 20, 2006

Voice recognition technology has been around for more than a decade, yet it has hardly made a dent in medical transcription. VR has penetrated less than 10% of the potential market, capturing only about 900 installations out of some 4200 hospitals and 5000 imaging clinics in the U.S. that transcribe medical reports. But executives at Nuance are betting that will change.

Voice recognition technology has been around for more than a decade, yet it has hardly made a dent in medical transcription. VR has penetrated less than 10% of the potential market, capturing only about 900 installations out of some 4200 hospitals and 5000 imaging clinics in the U.S. that transcribe medical reports. But executives at Nuance are betting that will change.

The company announced Feb. 8 a $357 million deal to acquire Dictaphone, the acknowledged leader in medical VR technology. Nuance, which makes the voice recognition engine that drives Dictaphone products, expects VR products to move into the mainstream over the next decade, cutting billions of dollars in costs now paid for manual transcription.

"It is our goal by the end of this decade to replace most manual transcription in healthcare with speech-enabled automated solutions, giving care providers and medical transcription services the ability to reduce transcription costs by over $5 billion a year," said Paul Ricci, chairman and CEO of Nuance.

Ricci claims U.S. medical providers spend about $10 billion annually to transcribe spoken reports. Dictaphone will provide the means for directly accessing this market. About half the VR systems installed at medical institutions in the U.S. were made by Dictaphone, according to the company.

The boards of both publicly held Nuance and privately held Dictaphone have approved the proposed deal, which is expected to close March 31, pending regulatory approvals and due diligence. If it does, Dictaphone will operate as a wholly owned subsidiary of Nuance, which will finance the deal with a $355 million term loan and $75 million in revolving credit from UBS Investment Bank, Credit Suisse, Citigroup, and Bank of America.

Nuance expects the acquisition to add as much as $85 million in revenue in fiscal year 2006 and from $180 to $200 million in fiscal year 2007. The transaction is expected to generate cost synergies of $20 to $25 million per year.

"These synergies will be realized through the elimination of redundant G&A (general and administrative) expenses and consolidation of sites and facilities," Ricci said.

Nuance earned approximately $75.6 million during the first fiscal quarter of 2006 (ended Dec. 31, 2005), a 25% increase over revenues of $60.6 million during the same period a year earlier. The company recognized a net loss of $4.9 million in the quarter compared with net income of $3.1 million in the year-earlier period.

VR was first welcomed in medical departments such as radiology, cardiology, and pathology that have specialized vocabularies that make the task of voice recognition easier. It is also beginning to show up as a kind of low-end, voice-driven electronic medical record for digitally charting patient data across a number of departments. Dictaphone addresses all of these markets, while continuing to sell products for manual transcription.

Nuance first broached the subject of a merger with Dictaphone about a year ago, after seeing increasing acceptance of VR products in healthcare accounts, Ricci said. The deal announced Feb. 8 was negotiated over the last several weeks as part of a formal process initiated by Dictaphone that included other bidders.

Dictaphone markets its PowerScribe Workstation, software that translates spoken dictation into typed radiology and pathology reports. Its EXSpeech product manages reporting workflow across medical specialties and hospital departments, as well as offsite clinics. Dictaphone also offers an outsourcing model for institutions that prefer to use so-called correctionists who compare the spoken reports to the VR-typed text. The service, called iChart, offers Internet access to the company's speech recognition and dictation software. VR-driven reports are edited by correctionist services under contract to Dictaphone.

Several companies are battling for shares in this developing market. Among them are Dictaphone, Agfa Healthcare, and MedQuist, a subsidiary of Philips. Others include ProVox Technologies, Vianeta, eScription, Dolbey, and Crescendo.

Nuance supplies the speech engine, Dragon NaturallySpeaking, that serves as the cornerstone for Dictaphone VR products. Dragon NaturallySpeaking also powers other VR products, including Agfa's TalkStation.

Mastering the use of these products takes some time, as operators must learn how to navigate the software. Radiologists also must "train" the machines to recognize spoken words correctly, although this can be accomplished, in a matter of minutes, according to vendors. Doing so can bring extraordinary savings in time and money.

Dictaphone's PowerScribe cut turnaround time by two-thirds and cost by $7000 per week at radiology departments in two hospitals run by Mercy Health System of Pennsylvania. The VR system saves $300,000 annually at Sarasota Memorial Healthcare System, an 828-bed regional medical center in Florida.

These kinds of savings will be more common in the future, according to Ricci.

"The industry is coping with increasing amounts of patient data, a drive toward electronic medical records, and more government mandates for investment in better healthcare systems and processes," he said. "With these trends converging, analysts predict that speech-based automation will be an essential component of healthcare delivery and is moving from its position as a niche technology to a mainstream solution."