Shared Medical Systems Corporation

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Shared Medical Systems Corporation

51 Valley Stream Parkway
Malvern, Pennsylvania 19355
U.S.A.
(610) 219-6300
Fax: (610) 251-3124

Public Company
Founded: 1968
Employees: 4,370
Sales: $550.29 million
Stock Exchanges: NASDAQ
SICs: 7373 Computer Integrated Systems Design; 7374
Data Processing & Preparation

Shared Medical Systems Corporation (SMS) is a leading provider of computer-based information processing systems and associated services to the healthcare industry in North America and Europe. The company provides various data processing and management services to hospitals, clinics, physician groups, and miscellaneous healthcare corporations. SMS helped to pioneer the industry during the 1970s and was still enjoying heady gains in the mid-1990s.

SMS was formed in 1968 by three International Business Machines (IBM) salesmen, led by James Macaleer. Macaleer, a chemical engineering graduate of Princeton University, had worked his way up through the IBM Corporation as a salesman, and by the late 1960s he was serving as a medical marketing manager. He recognized a need for hospitals to automate their proliferating financial and patient-care information, and late in 1968 Macaleer and two fellow IBM salesmen left their jobs to launch SMS. Their goal was to sell systems that would solve some of the data management problems faced by the hospital market.

Macaleer and his associates started out selling computer systems to hospitals in the Delaware Valley. They encountered difficulties because the hospital personnel didn’t know how to operate the complex machines and didn’t have the skills to create or even use the software they needed. The partners altered their strategy and began offering only financial management systems to prospective clients. Their service was not unique; by the late 1960s, other companies were providing similar systems and services on a regional basis throughout the country. SMS differentiated itself from the pack, however, by offering its service on a national basis. They planned to eventually provide centralized data processing to a national network of hospitals.

Shared Medical’s national expansion occurred quickly. The company’s big break came when it landed an account with American Medicorp, a regional hospital corporation based in Bala Cynwyd, on the outskirts of Philadelphia. American Medicorp soon began buying other hospitals to add to its chain, expanding across the nation during the early and mid-1970s. As American Medicorp expanded it took SMS along with it, allowing the company to set up satellite terminals in its new hospitals.

SMS’s satellite terminals were connected to a central mainframe system. Hospitals could connect to their centralized service on a time-share basis, avoiding the expense and trouble of purchasing and maintaining a separate mainframe system within the hospital. The arrangement was particularly advantageous for smaller hospitals or those on a tight budget that couldn’t afford their own mainframe systems. During the mid-1970s SMS expanded from financial management services into the clinical areas of hospitals and eventually was offering a range of patient-care and financial management data administration services.

SMS gradually accumulated a substantial base of customers that allowed it to generate healthy profits from its investments in hardware and personnel. Besides a strong customer base, SMS benefitted from a savvy management team and fluid financing that allowed it to keep up with rapid growth in demand. Indeed, throughout much of the 1970s SMS sustained a revenue growth rate of approximately 20 percent annually. The company’s strongest growth occurred following its initial public offering in 1976, when SMS was generating roughly $40 million in annual revenue. For several years SMS posted sales and profit gains averaging 20 percent to 25 percent annually. Revenues leapt to $131 million in 1981 and then to a $312 million by 1985. Earnings similarly soared from $6.8 million in 1977 to $16.6 million in 1981, and then to a $41.7 million in 1985.

SMS achieved this aggressive growth by parlaying its early American Medicorp coup into a nationwide network comprising hundreds of hospitals that were tapping into its time-share mainframe services. Several other companies followed SMS (and a few other pioneers) into the market, including IBM, which eventually became one of Shared Medical’s major competitors by snatching up 35 percent of the hospital information systems market by the late 1980s. Nevertheless, SMS, with an elite sales force and heavy spending on research and development, managed to sustain its early industry lead and even to widen the gap over most of its competitors during the late 1970s and early 1980s. The company also began expanding internationally with offices in Europe and Japan. Going into the mid-1980s the company’s market value was approaching a healthy $1.5 billion.

SMS entered the mid-1980s as the leader in the hospital information services industry. After posting increasing profits for more than a decade, however, the company began to come under heavy criticism for lackluster performance. Part of the problem was that the $2 billion industry was becoming increasingly crowded: by 1987 about 80 companies were vying for market share, and the market wasn’t growing very quickly. Some companies had already fallen by the wayside, including the once-powerful BBO & Co., an Atlanta-based information services provider that had been one of SMS’s main rivals. Losing money in its overseas operations, in 1986 SMS decided to close its unprofitable Japanese operations and was forced to take a $20 million write-off related to the maneuver.

According to critics, increasing competition in the marketplace was exacerbated at SMS by internal problems, including a failure to keep up with changing technology. The information services market had rapidly been shifting toward smaller platforms since the widespread acceptance of personal computers began in the early 1980s. System providers like IBM were increasingly installing personal computers and minicomputers as part of turnkey systems, rather than terminals connected to central mainframes. SMS had been slow to adapt to emerging market trends, according to some industry insiders, and had failed to keep pace with new software and service needs. In 1986, for example, SMS introduced its Independence system, a $3 million IBM mainframe-based system for financial and patient-care data that offered both in-house and shared-processing options. Although the system was advanced, orders were fewer than expected.

To make matters worse, it was estimated that less than half of the country’s hospitals were big enough to warrant the type of large-scale computerization provided by SMS. And because of tightening budgets and newer, less expensive computer alternatives, that number was declining. Managers at Shared Medical countered criticism, citing market leadership and an intense effort to gear its products for new systems as evidence of its long-term potential, but declining sales and profits cast doubt on their claims. SMS’s revenues increased 20 percent to $374 million 1986, but earnings fell from $42 million a year earlier to $32 million. In 1987, moreover, sales inched up only four percent, and net income effectively stagnated before dropping in both 1988 and 1989 to a low of $23 million. The company’s stock price dropped by about 75 percent.

Analysts blamed the slide on mismanagement. “This is a very stubborn company,” said analyst James Meyer. “It does what it thinks it should be doing, rather than listening to its customers.” Adding fuel to critics’ fire during the mid-1980s were two shareholder suits filed against SMS claiming that executives in the company had released misleading financial information that artificially inflated the company’s stock price. They alleged that three executives had sold off large chunks of stock before releasing surprising information that indicated that SMS was experiencing significant financial, product, management, and marketing problems. SMS agreed late in 1988 to settle the two suits for about $5 million in cash, although it never admitted to any wrongdoing. The Securities and Exchange Commission filed another suit containing similar allegations late in 1991.

Despite the lawsuits and other problems, SMS continued to post profits throughout the late 1980s and to position itself for long-term growth. The company’s performance during the early 1990s, in fact, belied claims that it was headed for a fall. Shared Medical’s net income dropped to a several-year low of $22.6 million in 1990, but that figure rose to $25 million in 1991 as sales grew 9 percent to a record $438 million. SMS’s stock price also began to recover, reflecting increased confidence on the part of investors in the company’s potential. Sales surged again in 1992 before topping out in 1993 at more than $500 million. Earnings climbed back to a healthy $31 million.

The reasons for SMS’s comeback were both internal and external. In 1989 the company introduced its successful Invision system, its next-generation information system for users of IBM and DEC computers, which offered both in-house and remote computing capability. Within a few years of Invision’s introduction more than 80 new hospitals had signed up for the service and another 190 had upgraded from the Independence system. SMS and its Invision system benefitted during the early 1990s from an important industry trend: a return to remote data processing. After experimenting with on-site computing in the mid-1980s, healthcare organizations were coming to the realization that shared, off-site computing was generally more efficient. By 1993, in fact, about 80 percent of all hospitals were using shared systems, which meant more recurring revenues and greater profit opportunities for companies like SMS.

In addition to its success with Invision, SMS benefitted from gains in its professional services group and its international division, which posted a revenue increase of 40 percent in 1992, to $53 million. Furthermore, SMS was launching a number of new initiatives that were expected to generate substantial profits in the near future. For example, its strategic alliance program, launched in 1993, involved customers as investors in applications development. The program focused on hospital records automation, a growing market segment that SMS planned to lead by the mid-1990s. SMS was also making advancements in on-line medical record document imaging and diagnostic imaging products.

Besides improving its product and service offerings, SMS reorganized in an effort to eliminate underperforming operations and to improve overall profit margins. It closed its Canadian subsidiary in 1991, for example, as well as its physicians’ practice management business. Those and other actions helped SMS to boost sales a solid ten percent in 1994 to $550 million, about $35 million of which was netted as income. About 92 percent of that revenue was attributable to service and system fees, while only eight percent came from the sale of hardware. Also in 1994, SMS announced its intent to acquire GTE Health Systems from its parent, GTE Information Services. The acquisition would bring a popular healthcare information system— the MedSeries 4—to SMS, and add 300 accounts to its customer base, further cementing the company’s position as the leader in the healthcare information processing industry.