Anticipated acquisition by iSOFT Group plc of Torex plc

Affected market: IT healthcare systems

No. ME/1306/03/, ME/1514/03

Anticipated acquisition by iSOFT Group plc of Torex plc. What follows are extracts regarding the parties, the transaction, jurisdiction, background, assessment, conclusion and decision.

The OFT's decision on reference under section 33 of the Enterprise Act 2002 given on 6 November 2003

PARTIES

iSOFT Group plc (iSOFT), a company founded within KPMG in 1994 as a specialist in innovative healthcare technology and bought out by its management team in 1998, provides software and systems to the healthcare applications market. From 1999 to 2002 iSOFT has acquired a number of businesses in the healthcare applications sector. In the year ended 30 April 2003, iSOFT's worldwide turnover was £91.5 million.
Torex plc (Torex) provides health care technology software and systems for healthcare providers to GPs, laboratories, hospitals and community care. It also provides the hardware, installation and support that customers require, and supplies computer systems and services to the retail sector. Torex entered the primary (GP) healthcare market in 1997 and has since acquired a number of further companies in this sector. It entered the secondary (hospital) healthcare market in 2000, going on to acquire a number of further companies in this sector. In March 2003, when Torex acquired the secondary healthcare business of InHealth Group SA, it also acquired the exclusive right to sell certain IBA Health Ltd (IBA) software products in the UK. (IBA is an Australian company active in IT solutions to the healthcare industry and in the UK its products are sold to a number of NHS trusts.) In the year ended 30 December 2002, Torex achieved worldwide turnover of £161.8 million with UK sales of £107m.

TRANSACTION

iSOFT proposes to acquire Torex and has offered Torex's shareholders new iSOFT shares representing approximately 44 per cent of the issued share capital of the enlarged company. This places an estimated value of £337.5 million on Torex.

This transaction was notified to the Office of Fair Trading on 1 August 2003 and the 40 day administrative target expired on 29 September 2003.

JURISDICTION

The OFT believes that it is or may be the case that arrangements are in progress or in contemplation which, if carried into effect, will result in the creation of a relevant merger situation pursuant to sections 33(1)(a) and 23 of the Enterprise Act 2002. As a result of this transaction iSOFT and Torex will cease to be distinct for the purposes of section 26 of the Act. The merger situation meets both the turnover test and share of supply test in section 23 of the Act. The parties overlap in the supply of software systems to the secondary healthcare sector and the share of supply test is met in respect of the supply of Electronic Patient Records and the supply of Laboratory Information Management Systems to National Health Service (NHS) hospitals in the UK.

BACKGROUND

Proposed changes to the procurement of IT Systems in England
 
Until now, hospitals and/or their Strategic Health Authorities have purchased IT systems on an individual basis as and when required with the effect that the NHS has many different installed legacy IT systems, creating interface and interoperability issues.

Following a detailed review of its IT needs, the Department of Health proposed a new IT regime (see note 1) to update IT systems in England. The National Programme for IT (NPfIT) will allow for cross-referencing of patients' records by creating a complete electronic medical record for each patient across all NHS providers in England. National projects will create a "national spine" of archived records and introduce an electronic (e-booking) system for appointments.
 
Five regions have been created in England, with a single Local Service Provider (LSP) to be appointed as project manager to oversee the implementation of the NPfIT in each region. Following a competitive tender, the DoH will shortly announce the appointment of the five LSPs and their preferred suppliers, who will be responsible for developing and managing the process of transition from legacy systems to the new systems. The appointment of LSPs will result in a fundamental change to the procurement process, significantly reducing the number of contracts available in England (but increasing their size) with the effect of increasing the buyer power of the LSPs (and thus the NHS).

ASSESSMENT

In terms of their legacy contracts to the UK public sector, iSOFT and Torex are clearly the two leading suppliers of IT software to the healthcare sector in the UK. In a bidding market, competition is for the market rather than in the market so that the competitive advantage acquired from the legacy base is unlikely to be strong, especially where a new procurement strategy is being introduced.

The NPfIT has created five LSP regions, and bidders for the five regions have pre-selected their preferred sub-contractors. Torex's products have not been selected (although in line with its claim that its strengths lie in this area it has been selected as a service provider providing support and installation services) (see note 2). Absent the merger, this means that Torex is likely to face significantly reduced opportunities to sell its products (or those of IBA) to hospital users in England. Expenditure elsewhere in the UK is significantly lower and may not justify the costs involved in updating Torex's existing portfolio of products.

The NPfIT is a high profile strategy, supported by government, which gives effect to a commitment to increase spending on updating IT healthcare systems in England. The increase in funding has attracted international LSP bids from well known and established global companies and has allowed for partnerships between the LSPs and US IT healthcare providers, Cerner and IDX, as well as iSOFT. The presence of these international competitors makes it likely that competition for future contracts will remain active. There is a reasonable prospect that international competitors with a UK base will bid for contracts in the regions with the likely effect of increased competition for contracts in Northern Ireland, Scotland and Wales.

CONCLUSION

iSOFT and Torex have been the two leading suppliers of IT software to the healthcare sector in the UK. While a strong legacy base may give the parties a large presence it is unlikely, in itself, to confer significant market power in view of the changes being brought about by the NPfIT. Such a fundamental change has altered the future competitive landscape with the effect that competitive constraints must be viewed under a new scenario.

For these reasons, the OFT does not believe that it is or may be the case that, if carried into effect, the creation of this relevant merger situation may be expected to result in a substantial lessening of competition within any market or markets in the United Kingdom for goods and services.

DECISION

This merger will therefore not be referred to the Competition Commission under section 33(1) of the Act.

NOTES

1. Outlined in the Department of Health's 'Delivering 21st Century IT Support for the NHS'.

2. Torex has requested that it is noted that in the primary care sector, Torex's IT software solutions for use by GPs in the primary sector have been accredited by LSPs under the NPfIT programme.

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