Nuance Communications (Burlington, Massachusetts) yesterday unveiled its plan to acquire Dictaphone (Stratford, Connecticut), a major provider of dictation and speech recognition solutions for healthcare, for $357 million in cash.

Nuance said the planned purchase accelerates its strategy to automate manual transcription in healthcare, in what it estimates as an annual $10 billion market in the U.S., $15 billion worldwide. The acquisition expands Nuance's product portfolio, market reach and revenue streams within this growing sector, it said.

"This is a significant transaction for us, the largest we've ever done," Matt Revis, director of product management for Nuance, told Medical Device Daily. "It really gives us a leading position [in voice transcription] in the healthcare market."

Revis described Nuance's current overall presence in the hospital market as "moderate," but he called healthcare "our fastest-growing vertical" and said that the acquisition of Dictaphone will move the percentage of business in healthcare to the "substantial" category.

Dictaphone, which will be the surviving corporation of the merger and continue as a wholly owned subsidiary of Nuance, reports an installed base of dictation and transcription software systems serving more than 4,000 hospital and outpatient facilities and about 400,000 physicians.

Revis noted, however, that voice transcription has only a 10% to 20% penetration of its potential market and so offers huge growth opportunities.

He said that given the amount that healthcare spends on manual transcription, voice transcription promises a paradigm shift offering large cost savings./p>

"Our objective is to be able to save $5 billion a year in manual transcription costs and with other solutions," he said.

Paul Ricci, CEO and chairman of Nuance, said, "Improvements in speech technology and pressures on the healthcare industry create a compelling opportunity for our companies to transform manual transcription through speech-enabled solutions. The combined resources, experience and talents of Nuance and Dictaphone will help accelerate the adoption of speech recognition to eliminate most manual transcription for healthcare in North America this decade."

Nuance predicts the acquisition to add between $80 million and $85 million in revenue in FY06 and between $180 million and $200 million in FY07, and it is expected to generate cost "synergies" between $20 million and $25 million annually.

On a non-GAAP basis, the acquisition is expected to be accretive to earnings, excluding amortization, acquisition-related costs and stock-based compensation, by about 2 cents to 3 cents a share in FY06 and 6 cents to 9 cents a share in FY07.

Nuance has obtained a commitment for a new senior secured credit facility from UBS Investment Bank, Credit Suisse, Citigroup and Bank of America to finance the transaction. The facility comprises a $355 million term loan and a $75 million revolving credit facility.

"We are pleased that the strong cash flows we expect to generate from the synergies of the recent Nuance merger, as well as those from Dictaphone, allowed us to obtain an attractive financing package without issuing additional equity," Ricci said.

The acquisition has been approved by both companies' boards of directors and is expected to close by March 31, subject to customary conditions.

"We share with Nuance the strong belief that speech recognition is not only at an inflection point in healthcare, it is also becoming an essential component of the industry's drive toward cost reduction and clinical automation," said Rob Schwager, chairman and CEO of Dictaphone. "By combining Dictaphone's software application skills, understanding of physician documentation needs and workflows, and substantial market presence with Nuance's deep expertise and innovation in speech recognition technologies, the combined company is extremely well-positioned to lead the market."

Revis said that both Nuance and Dictaphone put significant amounts of money back into R&D to discover other technologies with cost-saving applications – "for Nuance, particularly in healthcare, of late."

Overall, he said that voice transcription enables taking voice notes immediately to text or by providing easily edited text.

Nuance referenced studies by the Gartner Group, which has said that self-edit or "once-and-done" speech-based transcription will achieve mainstream market acceptance in two to five years. Gartner predicts that care delivery organizations that implement speech-to-text supplementation of transcriptions will save up to 30% or more on transcriptions, and in radiology and pathology departments, the savings could be in excess of 50%.

In other dealmaking activity, Medicity (Salt Lake City), a provider of clinical connectivity and web-based electronic health records (EHRs) for healthcare organizations and connected communities, reported the acquisition of the iServices Group of Park City Solutions (also Salt Lake City). Terms were not disclosed.

The new Medicity bills itself as the largest vendor-neutral integration partner in the industry, delivering solutions that provide connectivity, web-based portal solutions, EHRs, and community wide indexing solutions for hospitals, payers and large physician groups. It reports serving more than 1,200 healthcare organizations.

Medicity has focused on large-scale clients and managing complex integration problems in the healthcare market space. Park City Solutions focuses on the portal needs of hospitals.

All Park City Solutions iServices Group employees will continue employment with Medicity.

Medicity will be led by Kipp Lassetter, MD, as CEO and chairman. It has additional offices in Chicago, Cleveland and Chapel Hill, North Carolina. Medicity Iserves the healthcare industry with web-based portal solutions, EHRs and communitywide indexing solutions for hospitals, payers and large physician groups.