Healthcare Business News
Neal Patterson, Cerner Corp. CEO

Cerner: Siemens health IT unit positions company for move beyond EHRs

By John N. Frank and Darius Tahir
Posted: August 5, 2014 - 4:30 pm ET

(Story updated at 7:45 p.m. ET.)

Health technology and electronic health records powerhouse Cerner Corp. is spending $1.3 billion to purchase Siemens Health Services, the health information technology business of Germany's Siemens AG, Cerner announced Tuesday.

The newly combined company will have $4.5 billion in annual revenue and will invest $650 million annually in research and development, Kansas City, Mo.-based Cerner said. Its client base will include 18,000 facilities in the U.S. and Germany.

"We believe this is an all-win situation for the clients of both organizations and all of our associates and shareholders," said Neal Patterson, Cerner's CEO and co-founder.

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The deal also calls for Cerner and Siemens to form a strategic alliance to “bring new solutions to market that combine Cerner's health IT leadership and Siemens' strengths in medical devices and imaging,” the Cerner announcement said.

“The alliance we're creating will drive the next generation of innovations that embed information from the EMR inside advanced diagnostic and therapeutic technologies, benefitting our shared clients," Patterson said.

Each company plans to invest $50 million in the alliance which will have a three-year initial term and market worldwide, Cerner said.

During a call following announcement of the deal late Tuesday, Cerner executives said the acquisition would help position the firm for the “post-meaningful-use era.”

“Even though the pump was primed,” Patterson said of the government's $24 billion infusion into the EHR market, “the pump will continue to pump,” meaning that while health IT is now ubiquitous, spending will continue and evolve. Patterson pointed to the need for providers to adopt new revenue models where IT capabilities will come into play.

“What we see [as] the next side of healthcare is the layer above the EMR,” Patterson said. The company is evolving to meet that next level of need for population health management IT support, he said. It is also thinking about what lies beyond population health for healthcare's evolving IT needs.

“There are opportunities of being part of a larger part of healthcare spend,” Patterson said, and the Siemens deal addresses that. Siemens Health Services' strength in revenue-cycle management products, which comprise a significant portion of the division's revenues, could help Cerner evolve with the healthcare IT market's need for such offerings.

Cerner has grown its business organically, and Patterson has said he prefers that approach to buying new businesses, analysts noted on the call. Their next question: “Why Siemens now?”

“My personal enthusiasm for this wasn't real high,” Patterson admitted during the call. “I've been very critical of roll-ups.” But a day and night session of looking at possible pitfalls for the deal convinced him to move ahead with it, he said.

One inducement may have been Siemens' willingness to take less for the division than it had sought in the past. “Valuation expectations were more appropriate at this time,” said Cerner's Chief Financial Officer Marc Naughton.

Naughton said Cerner could have possibly captured about 25% of the Siemens client base over the next seven to 10 years, but the deal gives it access to that entire client universe.

Cerner recently reported net income of $129 million in the second quarter of 2014, up 14.2% from the year-ago period. Revenue was up 20% to $851.8 million, compared with the same quarter of 2013. Management struck a confident note during its quarterly earnings call, based on new business bookings that increased 15% from the year-ago period to an all-time second-quarter high of $1.08 billion.

The company is in the midst of building what's projected to be a $4.45 billion new campus for its native Kansas City corporate headquarters.

Earlier this summer, it entered into a bidding alliance with government contractors Leidos and Accenture Federal Services to make a play for the multibillion-dollar contract to build, install and configure a replacement EHR system for the Department of Defense health system.

Cerner plans to fund the Siemens deal with cash on hand and close the transaction in the first quarter of 2015, it said. The technology purchase should add 15 cents per share to Cerner's 2015 earnings and 25 cents per share to expected 2016 earnings, Cerner said.

Investors seemed to approve of the acquisition: Cerner's stock was up 1.88% in after-hours trading following the announcement.

Follow John N. Frank on Twitter: @MHJFrank

Follow Darius Tahir on Twitter: @dariustahir

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