GP and pharmacy systems provider EMIS Group is branching out into the ophthalmology software market with the acquisition of diabetic retinopathy screening provider Digital Healthcare Limited.
EMIS paid £3.1m in cash, or 0.9x revenue of £3.4m, to acquire Cambridge-based Digital Healthcare from its venture capital majority owners, a consortium comprising Alliance Trust Equity Partners, YFM Private Equity, Beringea and Elaia Partners. EMIS’ non-exec chairman Mike O’Leary was, until recently, chairman of Digital Healthcare, so the two companies should know each other well.
Digital Healthcare's main activity is providing software and services to manage and support retinal screening programmes. It has a presence in the US via its Retasure service, which is apparently used by nearly 900 physicians in 19 US states. But it is principally focused on England and Wales where it claims a market share in excess of 75%, with 60 screening programme deployments, over 2m registered patients and over 42m retinal images managed.
CE Chris Spencer expects there to be immediate opportunities to provide hosted services and a full end-to-end managed diabetic retinopathy screening service into the UK healthcare market. This should ensure growth via cross-selling into their respective customer bases.
Our concern is more around the poor profitability. Digital Healthcare made a PBT margin of just 2.9% in its most recent year ended 30 September, 2012. This is way off EMIS’ 26% operating margin (see here). All 35 employees are expected to remain with the business. Nonetheless, EMIS said the acquisition would be earnings enhancing in its first full year of ownership. It is unclear how EMIS intends to achieve such a sharp improvement in profitability without significant cost cutting at the acquired business.