Siemens targets EMR market with $2 billion SMS acquisition

Merger may unravel some strategic partnerships

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 in the past year has been working to add information technology capabilities to its healthcare portfolio 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 another billion-dollar takeover bid from Eclipsys, an SMS competitor in the HIS and EMR markets. Eclipsys subsequently filed a lawsuit against SMS but withdrew the suit after agreeing to merge with Healthvision and Neoforma instead.

Siemens was attracted to SMS’s well-established healthcare IT market presence (especially in the U.S.), its comprehensive product line (including a strong application service provider business), and its $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 much greater access to the burgeoning ASP market. The SMS Information Services Center, which handles the company’s ASP business, currently 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 currently accounts for 25% of its sales. By combining its own 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 the 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, deal with managed care, and provide more for less cost.”

The May 1 announcement of the proposed merger pushed shares of SMS up 75% to close at $70.81 that day; a week later, the stock was still hovering in the $70 range. This was good news for SMS stockholders, who had reason to be disappointed in the company’s latest financials. SMS reported net income of $2.7 million on revenue of $240.6 million for the first quarter, compared to net income of $18.3 million on revenue of $287.1 million for the same quarter a year ago.

The news was less encouraging for partners of SMS and Siemens. Siemens has had a nonexclusive relationship with IDX Systems for the past year that leveraged the companies’ successful PACS/RIS integration efforts at the Cleveland Clinic and included some copromotional efforts. That relationship was still in place when the Siemens/SMS deal was announced, although IDX highlighted a new integration project with Fuji Medical at the recent HIMSS meeting and Siemens was already negotiating with SMS at that point.

There are also questions about the future of the relationship SMS has with ALI Technologies. SMS used to partner with Olicon Imaging Systems for diagnostic workstations; Olicon was acquired by ALI last year, and SMS promoted ALI’s PACS products at the RSNA meeting last November. At press time, ALI was not commenting on the Siemens/SMS deal.