CEO SUMMARY: Misys Healthcare Systems of London, England, has sold its diagnostic LIS systems to Vista Equity Partners of San Francisco, California, for $381.5 million. The deal raises several questions, particularly for those labs currently running Misys laboratory information systems (LIS). Will the new owner make the substantial investment required to upgrade the LIS and to add a molecular diagnostics module?
THERE’S ANOTHER SHAKEUP in the LIS (laboratory information system) marketplace. On July 24, Misys Healthcare Systems of London, England, announced the sale of its diagnostics information system business and its enterprise clinical records division. Divesting this unit raises a number of questions particularly for those labs that run the Misys LIS system and want to know what to expect from the new owner in terms of service and upgrades.
Among the products to be sold is Misys’ LIS products, along with its pharmacy, radiology, and inpatient hospital management systems. Vista Equity Partners of San Francisco, a private equity firm, bought this unit for $381.5 million.
Misys’ enterprise clinical records system is known as Misys CPR. That business division will be sold to QuadraMed, Inc., of Reston, Virginia, for $33 million.
“It’s interesting that an equity investment firm bought the diagnostic information system business,” commented Bruce A. Friedman, M.D., “because this is a challenging area of clinical software in terms of development, sales, and service. Lab professionals use their LISs non-stop and are demanding customers.” Friedman is an Active Emeritus Professor, Department of Pathology at the University of Michigan in Ann Arbor. He is an expert on lab information systems and writes the blog www.labsoftnews.com.
Was Investment Adequate?
For Friedman, the sale of the Misys Diagnostics Information Business raises a number of key points. “For example, did Misys invest adequately in R&D of their product such that the LIS software has kept pace with the competition?” he asked. “Its installed base of LIS users has great value for the new equity investor because the switching costs of installing another LIS is steep. So, those customers are likely to remain for a while to determine how the company will proceed. As a result, the new buyers can extract some continuing revenue from the annual system support fees.
“But the software has fallen behind, in terms of how it compares with other LIS products,” observed Friedman. “It is likely that the installed base of LIS users has been hunkering down with the current system—hoping for an upgrade.
“From what I know about the Misys system, it appears to be missing a state-of-the-art molecular diagnostics module,” Friedman said. “Given how quickly labs have adopted to molecular testing, every LIS needs the ability to manage complex molecular test data effectively.
“In fact, this issue raises another question: How much will the new owner invest to upgrade this LIS product?” asked Friedman. “To be fully competitive—and to retain the installed base of hospital and laboratory customers—the new owner needs to invest to bring their LIS up to the functionality of competing systems.
“The investment required to upgrade the LIS product is likely to be significant,” he noted. “At the same time, the buyers will need to reassure their installed base that there is an appropriate and wise guiding hand for this software firm.
Focusing on Diagnostics
“I believe the LIS business and the clinical lab industry have a rosy future because the future of healthcare will be diagnostic-centric,” Friedman explained. “Also, I believe the future of in vitro diagnostics (IVD) is bright, with two of the largest corporations in the world ready to invest a combined $23 billion in the IVD industry.” That’s the approximate total that Siemens and General Electric (with its now-defunct agreement to buy the diagnostics business of Abbott Laboratories) have done with the deals they’ve announced since the fall of 2003 when GE bought Amersham for $9.5 billion. The pace of IVD purchases has picked up considerably in recent months. (See pages 3-6.)
“So that raises yet another question: Can the Misys LIS capitalize on this rosy future of diagnostic-centric healthcare?” Friedman asked. “I’m not sure, because, for the new buyers, their challenge will be to move the installed base of laboratory customers, using upgraded LIS and other software products, to a new performance level that supports the ability of these labs to take advantage of the opportunities of a diagnostic-centric healthcare system. In my opinion, that would require, as a ballpark guess, an investment of at least $100 million.”
Calls to Vista Equity Partners were not returned. In a statement issued when the deal was announced, Robert F. Smith, Vista’s Managing Principal, said, “We are long-term investors in technology-enabled companies that provide leadership in their markets. We are committed to the healthcare market….We look forward to working with this leadership team to continue to grow our presence in the acute care space. Vista plans to operate the Diagnostic Systems organization as a cohesive, self-sustaining business that continues to provide market leading product development, marketing, sales, service. and support for current and future customers.”
For fiscal year ending May 31, 2006, Misys reported revenues of $160 million and operating profit of $46.6 million.
The CPR business that Misys will sell to QuadraMed consists of products that collect and share hospital data. For the latest fiscal year ending on May 31, 2007, CPR generated revenue of $30.8 million and a before-tax loss of $8.5 million.
THE DARK REPORT observes that Smith’s statements are likely reassuring to those lab directors running Misys systems. But as Friedman said, these customers are interested in functionality. If a laboratory information system does not keep pace with those systems its competitors offer, then soon the lab itself will be out of business. As molecular test volumes increase, labs need systems that manage the complex information generated by these tests.