British Firm Acquires Sunquest Info Systems

Healthcare software companies undergoing further consolidation

CEO SUMMARY: Sunquest Information Systems was recently acquired by Misys Plc, a software company based in the United Kingdom. The transaction is another example of consolidation within the healthcare software sector. It also demonstrates that software products developed in the United States are seen to have good potential in overseas markets, particularly Europe.

PERSISTENT RUMORS THAT Sunquest Information Systems, Inc. was up for sale finally proved true with the announcement on June 25, 2001 that Sunquest would be acquired by Misys PLC, based in Worcestershire, England.

The British company paid approximately $404 million to acquire all outstanding shares of Sunquest. Sunquest is now a division of Misys and will continue to operate from its headquarters in Tucson, Arizona.

The acquisition is the latest example of consolidation within the healthcare software sector. Only 14 months ago, Shared Medical Systems, Inc. (SMS) was purchased by Siemens Corporation, the huge German-based multinational.

For American laboratories using Sunquest products, there will be no change in the company’s announced business strategy and product mix. “Post-merger, it will be the same Sunquest,” stated Mark Emkjer, President of Sunquest. “All our business initiatives and product development efforts remain the same.

“What does change at Sunquest is our access to a deeper pool of capital and talent, along with opportunities to make our existing products work more effectively with Misys’ Medic™ software, used in physicians’ offices throughout the United States,” noted Emkjer.

Long-standing rumors of Sunquest’s sale began in August 2000 when it was disclosed that Deutsche Bank Alex Browne had been retained by Sunquest to explore various business options. Emkjer said two factors shaped Sunquest’s interest in looking for the right corporate partner.

Consolidation Process

“The first factor is consolidation in our industry,” he stated. “I believe that consolidation will continue until the field is dominated by two or three very large firms. Of course, there will always be a number of smaller healthcare software firms and start-ups that incorporate new technology, but the growing size of integrated health systems requires the business sophistication and a broad array of software products that are provided by large software companies. Our goal was to position Sunquest to be one of these market leaders.

“The second factor was the financial structure of Sunquest. Many laboratorians remember our public offering in 1996,” said Emkjer. “At that time, one major shareholder retained an 80% stake in Sunquest. With only 20% of our shares in public hands, there were an insufficient number of shares to support investor interest.

Cash Flow Doubles

“Between 1996 and 2000, Sunquest doubled its cash flow and retained 98% of its clients. Despite this strong performance, the stock price had remained virtually flat,” he explained. “Sunquest’s owners wanted to realize the increased value of the company and partner with a company that could help it grow to the next level.”

Emkjer’s enthusiasm about the merger and future prospects for Sunquest included some intriguing perspectives on the changing clinical laboratory marketplace. He believes that diagnostics will play a growing role in the near future. “I see our diagnostix.com product as the link between inpatient and outpatient clinical information,” he noted. “Sunquest has made diagnostics a priority because it sees early signs that laboratory test results will play increasingly greater roles in guiding therapy.

“Of course, consumerism is also causing patients to become more active in their own healthcare, as well as that of their family members,” he said. “Sunquest must be ready to respond with information services that enhance the patient’s working relationship with his physician and other types of providers.”

Full Internet Capability

Emkjer noted that Sunquest is building Internet capability into its full menu of products. “We want to offer our products so that any client can either purchase the software and maintain it in the traditional manner or work with us on an ASP model, whether hosted remotely by us or maintained on-site by the client.

“Currently we have 25 sites using our Clinical Event Manager,” he continued. “We’re working to make the lab results complementary with pharmacy. In fact, we installed our first lab-based ASP-model of the Clinical Event Manager about three months ago.

“Wireless PDAs will play a role in this,” added Emkjer, “but we see lots of watchful-waiting at this stage. There is much interest in wireless connections to our Clinical Event Manager as clients prepare to move to wireless technology.”

Emkjer also expects point-of-care testing (POCT) to undergo far-reaching changes in the next few years. “Among our clients, we see steadily-increasing use of POCT. If you follow these trends out into the future, it becomes easy to see the importance of capturing POCT data into the LIS.”

THE DARK REPORT believes that current trends in the laboratory marketplace will motivate diagnostic vendors to become more involved in man- aging the laboratory test data generated by their instruments. When asked if Sunquest was having talks with various diagnostic vendors on this topic, Emkjer carefully framed his answer.

Diagnostic Vendor Talks

“Conversations with diagnostic vendors have occurred,” he responded. “It would be fair to characterize these discussions as very exploratory. Some visionaries within these companies see the downstream potential of information management services. But the concept of somehow merging lab information functions currently handled by LIS with diagnostic instruments is still futuristic, at best.”

THE DARK REPORT identifies three important insights from the Misys-Sunquest transaction. First, consolidation among healthcare software and LIS vendors continues. Expect to see other acquisitions, at least one or two important deals each year.

Second, the American healthcare market continues to be “where the action is” because of two elements. One, spending on healthcare in the United States is growing at a much faster pace than in any other country. For that reason, the profit potential of this market attracts European companies. Two, American technology continues to be cutting edge. That also attracts European companies, many of which are struggling to develop their own state-of-the-art products.

Third, fundamental differences between healthcare systems of developed countries are steadily diminishing. This means advanced technology will be accepted and used with little customization from one country to the next. This situation encourages healthcare companies to acquire businesses in almost any country around the world.

In this context, the Misys-Sunquest merger, along with last year’s Seimens-SMS merger, represent examples of the steadily-approaching globalization of healthcare.

Lab Consolidation Starting In England

LABORATORY CONSOLIDATION and regionalization is now underway among hospitals in Great Britain.

Even before the merger with Misys, Sunquest Information Systems was actively selling its products in the British Isles. According to Sunquest President Mark Emkjer, widespread consolidation of hospital laboratories is only now starting to occur in Great Britain.

“It’s interesting to see this trend unfold in England,” said Emkjer. “Like the provinces in Canada did during the 1990s, the British Healthcare Authority is developing projects that regionalize and consolidate laboratory testing among clusters of hospitals.

“Sunquest is participating in a number of ‘tenders’ (requests for proposals) involving these laboratory consolidation projects,” he explained. “The term they use is ‘pathology modernization.” Although the healthcare model is much like how the individual Canadian provinces proceeded with lab consolidation, the operational models being studied involve the lab consolidation projects in the United States, most of which happened in the second half of the 1990s.

“Having experienced the consolidation trend already in the United States and Canada, Sunquest is certainly able to bring relevant experience and expertise to these British laboratory consolidation projects,” added Emkjer.

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