CompuGroup Medical (CGM) returned to the Laboratory Information Systems (LIS) acquisition trail last month, bringing US lab management software vendor Medicus into its corporate portfolio. The deal solidifies CGM’s position as the largest LIS software provider to physician office labs and reference labs in the US.
While on the face of it this is a decent situation for CGM, the acquisition will deliver little revenue upside. It will also have little impact on the wider battle playing out between LISs implemented as part of a broader EHR rollout (EHR-LIS), and deals around independent best of breed (BoB)-LIS vendors.
The Signify View
Medicus is an established brand in physician office labs and reference labs in the US, with an installed base of around 4,000 labs across the country. No company has a bigger footprint in small and medium-sized labs, and CGM sees the deal as an opportunity to sell its technology and revenue cycle management solutions and services to these labs. It claims these solutions and services will help the labs in what it describes as a ‘difficult’ US market (more on that later).
But CGM-Medicus growth potential in this market is constrained. Physician office labs and reference labs are little more than ancillary players compared to hospital labs (the drivers of diagnostic testing). LIS vendors selling into these labs cannot command anything like the fees vendors can charge hospital labs. Consequently, CGM will not generate big revenues from 4,000 or so relatively small labs, which account for just 8% of total test volume in the US.
EHR-LIS v BoB-LIS: a Tale of Two Regions
CGM’s Medicus acquisition takes place against a backdrop of a steady encroachment of EHR-LIS implementations at the expense of BoB-LIS in the US.
We describe this trend in this Insight published last May, where we note how EHR giants Epic and Oracle Cerner are aggressively winning over cost-conscious hospitals in the US. There are clear advantages to providers in adopting EHR-LIS. EHR vendors can effectively offer LIS software as a loss leader if it means they can sell profitable EHR solutions to the provider as well. This approach also simplifies the hospital IT supply chain, and as a result hospitals are increasingly consolidating their IT procurement around a single vendor.
This is most pronounced in the US, where Epic and Oracle Cerner are cornering the market, and where BoB vendors are being squeezed out. CliniSys is one such vendor which has seen its US market share eroded in this way. Overall, the proportion of the market comprised of BoB-LIS vendors is shrinking (see graph below), and will shrink further. BoB vendors which offer something novel, or which have the resources to invest in product R&D, might survive, but it is otherwise the US is a hostile place for most BoB vendors.
We argue in the aforementioned Insight that total dominance of EHR-LIS implementations is no foregone conclusion in other markets. Compared with BoB-LIS, EHR-LIS implementations can suffer from a loss of workflow and lab type specialisation. While the US is a difficult market for the reasons we state earlier, the prospects for BoB-LIS are much brighter in Western Europe (in particular the UK, the Netherlands and the Nordics). Furthermore, demand for well-equipped labs, and greater accessibility and interoperability of data has intensified over the last two years, and will drive accelerated investment in most regions (outside the US) in the medium-term. Finally, Covid underscored the continued need for top-tier workflows to remain within the healthcare lab. This is another reason why we believe BoB-LIS will fend off some competition from EHR-LIS.
Given the above, the CGM acquisition is good news for Medicus, and might just be its perfect exit route from a hostile US market.
In contrast to Epic and Oracle Cerner’s thunderous invasions into EHR-LIS in the US, CGM’s recent acquisitive forays into LIS are more measured. The Medicus deal creates barely a ripple on the EHR v BoB battlefield. CGM’s December 2020 purchase of SchuyLab – which like Medicus is focused on physician office labs and reference labs – and its February 2022 acquisition of anatomical pathology LIS provider AP Easy, have had little influence on wider trends. But despite this, CGM’s LIS portfolio – which includes LABDAQ, considered the leading LIS in the US, and MOLIS – is undeniably healthy.
Despite our muted view of the Medicus deal and CGM’s ability to influence the EHR-LIS v BoB-LIS battle, there are market opportunities for its LIS portfolio companies. For example, in the US demand exists for point-of-care testing services, given the preference for individuals there, for cost purposes, to visit a lab, rather than a physician, to be tested. But even here demand has cooled from the post-Covid peak, when LIS vendors also witnessed rising demand for integrations, and when vendors who had structured pricing around annual testing volumes also benefitted.
Given the above, in our aforementioned Insight we propose a number of different ways LIS vendors could grow and prevent customer attrition. One is to acquire the competition (as Dedalus has done); another is to diversify their portfolios into wider lab software (there are many opportunities here, with the most common being genetics-based LIS software or ‘patient engagement’ add-ons); a third is to ally with another product sector; or finally to diversify out of healthcare. In CGM’s case, we cannot see it acquiring another large LIS vendor in the same way that Dedalus has.
A more viable route for CGM might be a pivot to targeting hospital labs. That would be quite some statement of intent, and would pit CGM against Epic and Oracle Cerner. But, again, it is hard to envisage this happening at this juncture. Any acquisition would need to be sufficiently integrated to compete, and this would take time to develop and scale.
Growth by Acquisition
While several EHR vendors, including Epic and Intersystems, have chosen to develop LIS capability in house, CGM’s strategy of acquisition is more common. Oracle Cerner and Dedalus have both acquired LIS companies on a scale far larger and more ambitious than that of CGM. Dedalus has bought more than 20 different companies (mostly hospital and pathology labs) in a relatively short period. This is a potentially quick path to growth, but is risky. Problems in integrating the acquired companies’ products can upset customers, who might leave established vendors.
Unless CGM’s plan is to move into traditional laboratory information management systems (LIMS) across multiple industries – as CliniSys did with its acquisition of Horizon Lab Systems and ApolloLIMS – the Medicus deal should be viewed simply as another small milestone in its LIS portfolio evolution. It is not a game changing development which will hasten the dominance of EHR-LIS implementations over BoB-LIS.
Despite this, in the wider scheme of things, CGM is evolving nicely. It is developing a great all-encompassing portfolio across the hospital and outpatient care markets, and is ambitious enough to be doing so on a global scale. In terms of its strategy, there are parallels with Dedalus, with an array of discrete solutions covering different applications and geographies. If CGM can, over time, bring this together into a more coherent, joined up portfolio, it will be in a strong position.