If You Can’t Beat Em, Buy Em

PACSman: I looked at the breaking news of Nuance Communications, Inc. buying yet another competitor today, Philips Speech Recognition, for $96.1M, and had to shake my head. This makes the fifth (5th) speech recognition company Nuance has bought in just under three years. The purchases started with Nuance’s Dictaphone acquisition back in February 2006 for $357M followed by Focus Informatics, a Web-based speech recognition editing service provider’s purchase in March 2007 for $58M; then Commissure’s purchase for an undisclosed amount in October 2007, Vocada, a voice-driven test results management company who was also a partner of Commissure’s back in 2005, who was purchased by Nuance in November 2007, and now Philips for $96M. Ever heard of the Sherman Anti-Trust Act guys? Must be if you can’t beat ‘em it’s easier to buy ‘em- or sue them- whatever works. Nuance also has a great track record of doing the latter as well. Nuance has failed in an attempt to purchase Canadian software provider Zi Corporation for $40.4M this past August, so they followed up 10 days later by filing a lawsuit against them. Nuance also filed patent infringement against another potential acquisition target, Vlingo, in June 2008 for infringement of their speech-to-text technology. Mere coincidence? You tell me…

Nuance isn’t just gobbling up companies in the speech recognition area but others as well, notably, eScription, a medical transcription software company is April 2008 (for $363M), among others. Is it any wonder that the company showed a net loss of $14M on $602M in sales in FY ’07? Maybe if they stopped buying competing companies and started selling their own products they would be in the black instead of the red…

A September 4, 2008 report on iStockAnalyst (http://www.istockanalyst.com) by Ketul S. starts out “The acquisition machine which fueled growth at Nuance might be slowing down due to the high debt that Nuance has accumulated in the last two years.” Oh really? Sure could have fooled me from what I’m seeing, although the analysis of the company was right on target.

There was an excellent response to the post by a gentleman named Walter Tetschner whose blog site is called gethuman (http://blog.gethuman.com). I love what he says:
The basic business model that they are pursing does not make any sense at all. The basic Nuance market approach is to acquire companies in order to enter a market segment and then acquire competitors to obtain market share leadership in that market segment. The individual markets in which Nuance has chosen to compete are highly competitive and are subject to rapid technology changes. Nuance states that achieving Technological Superiority is an essential requirement in order to compete effectively: Yet this is virtually impossible for Nuance to accomplish on a sustained basis. True R&D at Nuance is non-existent. The money that Nuance shows that they spend on R&D is mostly just integration of products/technology that they acquire. The R&D people that they acquire leave Nuance shortly after the acquisition occurs. Meanwhile, innovative companies continue to invest in R&D and quickly field products that are superior to what Nuance has. In order to compete, Nuance responds by either acquiring these innovative companies at grossly inflated prices or attempting to drive them out of business by suing them for patent infringement. This is a vicious cycle in which Nuance ultimately loses. Nuance gains technological superiority for a very brief period and quickly loses it. The high acquisition price that is paid and the legal costs of suing competitors is much higher than the cost of the R&D to advance the technology. When you include the acquisition costs and the stock dilution, it becomes apparent why Nuance needs to resort to pro-forma (non-GAAP) financial reporting to show a profit. Nuance also identifies having Broad Distribution Channels as an essential requirement in order to compete effectively: Yet – Nuance is clearly alienating their channel partners by regularly competing with them. Nuance is on a path to reducing the broad distribution channel that they had at one time. Nuance is a house-of-cards that will crash.

I have seen properly designed RIS’s that incorporate bar coding of normal reports along with digital dictation and transcriptionists who can turn a report around in a timely fashion that can effectively compete with SR technology, yet SR definitely has its place in radiology and in healthcare in general. The question is will Henry Ford’s approach to the Model T – “You can have it in any color you want as long as it’s black” be the same approach the radiology marketplace has with VR – “You can have any VR solution you want as long as it’s from Nuance.” Only time will tell…..

Ms PACS: Okay, PACSman - how many years have you been in the business – 20 plus? And how many companies in healthcare do you know expand via acquisition? Look no further than the big three in radiology.

So what’s your beef about Nuance growing its business by acquiring all of the speech recognition technology it can front cash for? Guess what – they also own decision support tools like the critical test result solution (Veriphy) it got when it swooped up from Vocada.

Now that it has gobbled up all of the local competitors, it is going to try its luck in Europe. Lets see what they can do with their new European language-solutions. Maybe they’ll learn to how speak “Fur-e-nch.”

I would be more worried about why Philips dumped the business unit. Philips explained that the PSRS’ SpeechMagic platform is "not a strategic fit for Philips’ healthcare business" because it “tend(s) to focus more on improving document creation and information management, as part of a hospital’s administrative process." Whatever that means. It's interesting that Microsoft just announced this week that they were incorporating the Philips SR product into Amalga – yet they compete with Nuance in the EMR world. Why would Philips sell off its VR division if they were going to get this new contract with Microsoft? Maybe Philips got out while the getting was good. Even so, Nuance seems to have a few more tricks up its sleeve with its broader portfolio of products in hand – Dragon Naturally Speaking, Dictaphone’s speech recognition and a slew of radiology products.

It sounds like the Nuance executives hope to redirect the $2 billion Europe spends annually on manual processing of clinical information toward its digital solutions. Plus, European governments are now investing heavily in healthcare IT. Apparently, the U.K. alone sunk $24 billion into its national IT healthcare program. Lets hope for Nuance’s sake, the limies will sink some more in.

So, PACSman, since your broker has yet to convince you to buy stock in the new ‘conquistador’ of voice recognition, its no skin off your nose if they do what every other company would like to do – buy out the rest. Anyhow, wait and see – they still need to come up with the deferred payment of $64.5 million in cash due Philips by September 21, 2009.