Philips makes $280 million cash bid for PACS service provider Stentor

July 18, 2005

Philips Medical Systems has long depended on Swedish IT specialist Sectra for its PACS and workstation products. But that relationship may be coming to an end. The medical imaging giant may soon have some homegrown products to sell.

Philips Medical Systems has long depended on Swedish IT specialist Sectra for its PACS and workstation products. But that relationship may be coming to an end. The medical imaging giant may soon have some homegrown products to sell.

The company's parent, Royal Philips Electronics, has struck a definitive agreement to buy PACS developer Stentor for $280 million in cash. All that remains is U.S. regulatory approval, which Philips executive Stan Smits said could be only weeks away.

"Then we can really start the joint integration," said Smits, head of Philips Healthcare IT.

If the deal goes through, Stentor will be integrated into Philips' healthcare IT business. Its current headquarters in Brisbane, CA, will become the nerve center for Philips PACS business. Stentor's iSite portfolio will become the Philips PACS platform.

iSite includes a Web-based image distribution technology called iSite Enterprise, which transmits images across the hospital and into physician offices and homes. Images are read on the iSite Radiology diagnostic reading station and stored online with Stentor's iVault archiving technology.

Stentor sales are based on a service model whereby the company provides the equipment and the customers pay a fee to view, distribute, and archive images. This is markedly different from the current Philips approach, which involves the rebranding and sale of products supplied by Sectra. These products, EasyAccess radiology PACS and ViewForum workstations, use a common Philips interface called Vequion.

In the weeks and months following the anticipated merger, engineers will begin harmonizing the current user interface with Philips' Vequion, according to Oran Muduroglu, president of Stentor.

"This will provide a continuous look and feel across all Philips IT," he said.

Philips has installed about 1600 radiology and cardiology PACS worldwide, according to Smits. The company has decided to adopt the Stentor model if the merger goes through. The relationship with Sectra would continue, but along a much different path.

"We will focus with Sectra on upgrading and maintaining the installed base, as well as completing projects and installations now going on," Smits said. "But for new installations, we would be moving over to what would be a Philips iSite platform."

Since 1997, Sectra has supplied Philips with software to process digital x-ray images.

"We have several project agreements with Philips that extend up to 10 years, and this cooperation will successively be terminated," said Sectra's president and CEO Jan-Olof Brüer. "We assess that the termination will impact on our sales and earnings in the current fiscal year. At this time, however, it is difficult to provide any reliable view of the financial effects, since this depends on how much time the termination will require."

Philips' transition to iSite for U.S. customers will take place over the course of this year, Smits said. The transition in the international market to iSite may take longer due to the need to translate iSite into various languages. It should still be complete within nine to 12 months, according to Smits.

Philips' IT strategy until now has been built around partnerships. Two years ago, Philips enlisted Epic Systems of Madison, WI, a provider of patient-centric, enterprise-wide healthcare information systems, to provide the basis for an electronic medical record. This EMR was adapted to include Philips' Sectra-based PACS technology.

The collaboration led to the development of a software engine that drives both Epic's and Philips' radiology information systems. Philips also rebranded Epic's healthcare IT systems under the product name Xtenity Enterprise, a portfolio of modules and applications such as billing; admissions, discharge, and transfer; and inpatient pharmacy. Smits expects few changes in regard to Epic if the deal with Stentor closes.

"We would, of course, make sure that we have a very good integration of the Philips' iSite platform into the Epic EMR infrastructure," Smits said.

Talks leading to the current effort to hook up with Stentor began late last year, he said. A major consideration was Stentor's commitment to customer satisfaction.

In the seven years since its founding, Stentor has installed about 200 PACS at customer sites in North America. The company is expected to achieve revenue of about $50 million this year. Philips' analysts believe Stentor is on track to achieve a 50% growth in sales next year amid a booming market for PACS and healthcare IT equipment. Access to Philips' extensive distribution channels and the package deals that Phillips routinely makes with customers could produce a much greater increase.