Siemens eyes medical record market with $2 billion purchase of SMS

Banking on the future of electronic medical records, Siemens is investing $2.1 billion to purchase Shared Medical Systems, a provider of healthcare information systems and networking services. Under terms of the agreement, which already has the thumbs-up from the SMS board of directors, Siemens’ Medical Engineering division will pay $73 a share for all outstanding SMS common stock.

The deal, which is expected to close by the end of June, is a logical fit for Siemens. The German conglomerate is strong in imaging and modality technologies and has been working to add information technology capabilities to its healthcare portfolio in the past year as part of a larger effort to become more services-oriented. Siemens acquired Entex Information Services, a U.S.-based services firm that handles computer repair, network management, and other computer support functions, for $105 million earlier this year.

Siemens began courting SMS about the same time, not long after SMS turned down a $2 billion hostile takeover bid from Eclipsys. Siemens was attracted to SMS’ well-established healthcare IT market presence (especially in the U.S.), comprehensive product line (including a strong application service provider business), and $1.2 billion in annual revenue. More important, the Malvern, PA-based firm claims an installed base of more than 5000 healthcare customers in 20 countries, which will give Siemens more than just a foot in the healthcare IT door once the merger is finalized.

In addition to enhancing its strategy to become the market leader in integrated image and information management systems, Siemens expects the SMS acquisition to give it greater access to the burgeoning ASP market. The SMS Information Services Center, which handles the company’s ASP business, manages applications for more than 1000 healthcare providers, with connections to more than 400,000 customer workstations.

Siemens also expects the deal to help boost its healthcare services business, which accounts for 25% of its sales. By combining the company’s strong market presence in PACS and modalities with the SMS installed base of clinical and administrative information systems and ASP services, Siemens expects healthcare services to grow to 50% of its revenue.

This increase will likely come in part from new software products implemented on existing SMS installations, as well as through the integration of Siemens’ PACS with SMS clinical systems. SMS offers PACS capabilities as part of its Novius for Radiology package, but this has been a small part of its business to date.

“PACS is part of information technologies in healthcare, but the future in departmental applications is very limited,” said Rik Primo, director of Siemens’ IS/PACS division in Iselin, NJ. “We see it not just for enhancing productivity in radiology, but also for image distribution for all healthcare professionals. So PACS becomes the image data provider for the EMR, which is where we think healthcare has to go to improve efficiencies and deal with managed care and provide more for less cost.”

Announcement of the proposed merger pushed shares of SMS up 75% in one day to close May 1 at $70.81. This was good news for SMS stockholders, who were disappointed in the company’s latest financials. SMS reported net income of $2.7 million for the first quarter, compared with $18.3 million for the same quarter a year ago. Siemens AG stock rose five points to close May 2 at 168 euros on the Frankfurt exchange.