M*Modal Files for Chapter 11

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Despite being ranked the number two clinical documentation and speech solutions provider in the world, M*Modal in mid-March filed for Chapter 11 bankruptcy protection, citing a decline in sales and mounting debt.

The Franklin, TN–based company said it expects to continue normal operations despite the filing in a U.S. bankruptcy court in New York. "Throughout this process, we are not changing our operational execution or strategy," said Duncan James, M*Modal's CEO, in a statement. "We intend to emerge with a strong financial footing so we can continue growing our market share and delivering innovative solutions to our customers.

"We intend to use the court process to significantly strengthen M*Modal's balance sheet and improve the company's financial flexibility by reducing our debt burden and establishing a capital structure that supports our investment in the future," James said in the statement.

M*Modal collectively listed liabilities of $852 million and assets of about $626 million, according to court papers. The company has roughly 9,900 employees in six countries, and its healthcare clients include approximately 3,800 hospitals, clinics, and medical practices.

Surprisingly, the Chapter 11 filing comes at a time when the medical transcription industry is seeing a huge uptick. According to the Healthcare Information and Management Systems Society, speech recognition adoption by healthcare providers was 22 percent in 2009. By June 2013, more than 47 percent of healthcare providers were using the technology.

Additionally, financial analyst firm Moody's last year estimated medical transcription to be an $18 billion market, with approximately a third of the market, or $6 billion, outsourced.

In that industry, M*Modal placed second behind Nuance Communications. But still, M*Modal has been a troubled company.

Since its founding in 1970 as Transcriptions Ltd., M*Modal has gone through several acquisitions and mergers, culminating with its 2012 leveraged buyout by One Equity Partners, the private investment arm of JPMorgan Chase, for $1.1 billion.

In 2013, the company also made some top-level executive changes. James was named CEO and a member of the company's board of directors, replacing long-term head Vern Davenport, who reportedly chose to leave the company.

Despite the recent cash infusion and C-level seat shuffling, M*Modal's earnings staggered. The company reportedly generated approximately $411 million in revenue in 2013, a decrease from about $453 million in 2012.

Still, M*Modal released new products and made some powerful alliances. In 2013, the company teamed up with 3M Health Information Systems to offer cloud-based speech understanding, computer-assisted coding, clinical documentation improvement, quality metrics, and analytics. Other big partnerships forged in 2013 alone included GE Healthcare, Allscripts, and Optum.

"I don't think [M*Modal's Chapter 11 filing] signals jeopardy in the area of using speech recognition technology for applications in healthcare, in physician recording," says Dan Miller, founder and senior analyst at Opus Research. "As a matter of fact, I think it still remains a big opportunity area. The marketplace is sorting itself out."

Miller says the medical transcription area is in transition right now, with "so many of these opportunity areas being redefined by improved speech recognition."

Nuance was aggressive in the market, and M*Modal seemed very strong as well, Miller says. "There has been a battle there."

He maintains, however, that the medical transcription field is also "an area of great risk right now," because of all of the turmoil caused by new government regulations and the retooling of healthcare in general.

But Boston attorney Warren Agin, of Swiggart & Agin, a firm that specializes in business law, isn't sounding the death knell for M*Modal just yet. It appears the goal of M*Modal's Chapter 11 filing is simply to reorganize the debt underlying its business, he says.

"A lot of these Chapter 11 cases will obtain court authority to continue to allow them to make their regular payments to vendors, continue to pay employees, continue to do ordinary business, and continue to work with their business partners and customers productively," Agin says.

Agin does warn, however, that vendors might want to be careful if they provide services to M*Modal, especially when done on credit.

Does M*Modal's misfortune mean Nuance's gain? It remains to be seen.

"M*Modal is clearly doing this to leave some financial pressures behind and address the competitive issue," Miller says. "Nuance will just keep plugging along."

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