VitalWorks hawks nonradiological assets to Cerner for $100 million

November 22, 2004

Just shy of a year ago, Amicas and VitalWorks hooked up in a merger that the two companies described as a new beginning, one that went well beyond the acquisition of Amicas’ PACS as a complement to VitalWorks’ radiology information and billing systems. The goal was to create an integrated set of scalable technologies under the “Vision” moniker that would meet the needs of radiology clients ranging from imaging centers to large hospitals.

Just shy of a year ago, Amicas and VitalWorks hooked up in a merger that the two companies described as a new beginning, one that went well beyond the acquisition of Amicas' PACS as a complement to VitalWorks' radiology information and billing systems. The goal was to create an integrated set of scalable technologies under the "Vision" moniker that would meet the needs of radiology clients ranging from imaging centers to large hospitals.

Approaching this RSNA meeting, company executives must have a sense of déjà vu, as the company is once again reshaping itself, sharpening its focus even more on radiology. On Nov. 16, VitalWorks announced the signing of a definitive agreement to sell its medical division - essentially everything that is not radiological - to Cerner for $100 million in cash. The deal should be complete in 45 to 60 days. After the dust settles, Amicas PACS operations and VitalWorks radiology division will be consolidated into a single image and information management business with a familiar name, Amicas. The leader of this division will be familiar as well: Hamid Tabatabaie served as CEO of Amicas before its merger with VitalWorks.

This concentration on PACS and RIS will put the company in a strong position in the radiology IT field, according to Dr. Stephen N. Kahane, VitalWorks president and CEO.

"We will be one of the largest pure-play radiology IT companies in the market," he said in a teleconference following announcement of the deal. "Our vision of leveraging our resources into a truly world-class image and information technology company, dedicated to the growing diagnostic imaging market, is now well in focus and well financed."

VitalWork's substantial pot of cash from this transaction, if completed, will dwindle fast, however, just with what Kahane already has in mind. To facilitate a smooth transition, he plans to sign an amendment to the Amicas merger agreement that calls for the immediate expiration of any further earnout contingencies and provides up to $14.5 million of additional consideration to former shareholders of Amicas and Amicas management. Payments will be made over the next 12 to 14 months, with certain payments being contingent upon continued employment of certain members of the management team.

After paying taxes and transaction fees, Kahane plans to pay off the company debt, which stands at about $24 million. With the $15 million the firm currently has in hand, that will put VitalWorks in the black, with between $64 million and $68 million. The company may use the cash to buy firms offering complementary products or services, Kahane said. It may also use the capital to finance partnerships to take advantage of growth opportunities.

The company is already on track for future gains, reporting record orders in radiology in the last quarter with record levels of backlog and deferred revenue for the radiology division. This was the third in three consecutive quarters of growth, as the firm put together $9.5 million in the first quarter, $10 million in the second, and $10.8 million in the third.

Many of VitalWorks' clients are imaging centers and radiology groups, which take advantage of the company's RIS, PACS, document management, report generation, and business/financial management solutions, according to Kahane. A key selling point is the scalability of the Vision portfolio.

"Even the smallest imaging centers need to concern themselves with this scalability due to the fact that imaging data are increasing steadily," he said. "Therefore, we build products to take advantage of scalability."

This has also helped VitalWorks win contracts from hospitals, small and large. These clients choose VitalWorks because they are looking for a Web-based third-party vendor with friendly PACS, Kahane said.

"A hospital's current investments in any HIS/RIS, along with its more complex workflow, requires flexibility far beyond a proprietary and hard-wire PACS," he said. "Our hospital and acute care customers value our fully integrated PACS, which is HIS/RIS neutral."

Demand for these systems is expected to go up. The company's research, backed by independent analyses, indicates a dramatic underpenetration of image and information management systems in both the ambulatory and acute care settings. Kahane estimates that fewer than 20% of the company's overall target markets have thus far been penetrated. The opportunity is even greater among imaging centers and small hospitals, which sport just single-digit penetration.

This is expected to change. Over the next two years, 40% or more of the nation's hospitals may be in the market to buy PACS, according to Kahane. With the consolidation, VitalWorks remains in charge of the two key elements needed to capitalize on these opportunities: PACS and RIS.

"This provides us with the flexibility not only to continue R&D and expand our distribution infrastructure, but to add complementary services and solutions directly or through strategic partnerships and acquisitions," he said.