The CGM Group

CompuGroup Medical AG Group (CGM) develops and sells efficiency- and quality-enhancing software as well as information technology services exclusively for the healthcare sector. The company plays a leading role in the development of global e-health solutions and enjoys market leadership in Germany as well as in other key European countries. CGM’s software products and related services are designed to support all medical and organizational activities in doctors’ offices, medical laboratories, pharmacies, hospitals and other provider organizations. Its information services for health insurance companies and pharmaceutical producers contribute towards safer and more efficient healthcare. The company’s services are based on a unique customer base of doctors, dentists, hospitals and pharmacies, as well as other service providers in healthcare. With headquarters in Germany (Koblenz), the company has a wide and global reach with offices in 19 countries and customers in 34 countries worldwide. Approximately 4,000 highly qualified employees support customers with innovative solutions for the steady growing demands of the healthcare system.

  • The CGM Group consists of many companies in several countries; all controlled directly or indirectly by the parent legal entity CompuGroup Medical AG. For a complete list of Group companies and other equity investments, see Section A of the notes to the Consolidated Financial Statements. The subsidiaries in each country serve as a platform for our local employees who perform the tasks of sales and marketing, service and support, research and development as well as general administration close to customers and markets. Independent of the legal entities, the Group is managed as “one company” with reporting lines and decision powers defined by operating segments and not by legal structure.

  • CGM serves a broad range of healthcare providers, from general practitioners, community clinics and pharmacies, to hospitals and medical laboratories. In addition, we offer products and services to facilitate networking between various healthcare participants, targeted specifically at pharmaceutical companies, healthcare payers, healthcare providers and also patients. Our offer is built around a portfolio of reliable and user friendly software applications, complemented by a broad range of value-added services to facilitate networking within the complete healthcare universe. Our solutions are tailored to specific user communities, each with a unique set of requirements and success factors. The following six business segments contain our complete portfolio of products, solutions and services:

    Ambulatory Information Systems is focused on practice management software and electronic medical records for office-based physicians, dentists, medical care centers and physician’s networks. The customers are usually primary care providers working in ambulatory care, providing health services on an outpatient basis to those who visit a healthcare facility and depart after treatment on the same day. For these providers, products and services are packaged into an end-to-end solution that covers all clinical, administrative and financial functions needed to operate a modern care facility. The integrated software solution creates efficient structures for the customers to manage, analyze and use medical data, organize business operations and generate invoices, including extensive administrative support and workflow functionality.

    Pharmacy Information Systems is focused on integrated clinical, administrative and financial software applications for retail pharmacies. The software and related services provide accurate information and decision support to manage the complete drug supply chain from procurement and shipping of drugs through efficient management and control of inventory all the way to planning, execution and controlling of the retailing function. Safe and cost-efficient dispensing to patients is ensured through advanced drug safety and control functions as well as decision support tools for generic substitution and cost optimization strategies. We also offer in-store and online merchandising programs supported by paper-based and screen-based communication and advertising solutions.

    Hospital Information Systems is focused on clinical and administrative solutions for the inpatient sector, where health services are provided over a prolonged period of time (from days to years) through highly specialized, secondary care institutions. The customers range from acute hospitals to rehabilitation centers and social services, including multi-site hospital networks and regional care organizations. The software and related services facilitate patient administration, resource and personnel management, medical documentation and billing programs in addition to a number of clinical applications aimed at various specialized departments and laboratories. As a full service provider, CGM pursues an integrated care approach and provides customized solutions for practically all aspects of administration, planning and care delivery in secondary care institutions.

    Communication & Data is targeted at pharmaceutical companies, enabling them to provide information to healthcare providers through software interfaces. In addition, CGM collects and mediates anonymous clinical data for market studies, clinical trials etc.

    Workflow & Decision Support is targeted at healthcare payers (health insurers, managed care companies and public sector organizations) by providing an information channel to healthcare providers via software interfaces. Information, best practices and clinical guidelines are integrated in the workflow of the doctors to optimize decision-making and thereby assist them in delivering the highest quality and most cost efficient care. Other service examples from this segment are clinical decision support systems as well as drugs and therapy databases for healthcare providers.

    Internet Service Provider is targeted at healthcare providers (physicians, dentists, pharmacists and hospitals), providing secure Internet and intranet solutions, through which a secure exchange of medical data is guaranteed.

    The business segments described above form the basis of our IFRS reporting segments (IFRS: International Financial Reporting Standards).

  • The business of CompuGroup Medical AG encompasses the business areas Health Provider Services (HPS) and Health Connectivity Services (HCS) and from this the three reporting segments HPS I, HPS II and HCS.

    Health Provider Services I (HPS I)

    For the out-patient (ambulatory) sector: Our integrated software and workflow solutions create efficient structures for physician and dental practices, medical care centers, physician networks and pharmacies. The HPS I segment consists of the following two business segments:

    • Ambulatory Information Systems (AIS)
    • Pharmacy Information Systems (PCS)

    Health Provider Services II (HPS II)

    For the in-patient (stationary) sector: We provide customized IT solutions for the acute care, rehabilitation and social care market. The HPS II segment consists of the following business segment:

    • Hospital Information Systems (HIS)

    Health Connectivity Services (HCS)

    Products and services to facilitate networking in the healthcare sector, in particular between care providers, pharmaceutical producers and health insurance companies. The HCS segment consists of the following three business segments:

    • Communication & Data (C&D)
    • Workflow & Decision Support (W&D)
    • Internet Service Provider (ISP)

    The internal reporting also covers revenue information according to the following geographical Regions:

    • Central Europe (CER): Germany, Luxemburg
    • Central Eastern Europe (CEE): Austria, Switzerland, Poland, Czech Republic, Slovakia, Turkey
    • North Europe (NER): Norway, Sweden, Denmark, The Netherlands, Belgium, United Kingdom
    • South Europe (SER): Italy, France
    • United States and Canada (USC): United States, Canada
    • Other: South Africa, Malaysia. Other
  • CGM’s business model is built for long-term sustainability and profitability. Software maintenance and other recurring revenue is the primary source of income. The managed service type contracts that CGM offers reflects the ongoing nature of the value we deliver to our clients. For a fixed and predictable annual cost, the client is offered high-quality products backed by premiere service and readily available and competent support. For our investors, the choice of a service-oriented business model provides CGM with high quality and visibility of future earnings

    Based on these principles, the market characteristics and corresponding business model differ significantly between the business segments. Ambulatory and Pharmacy Information Systems target smaller, office based providers where the customer, buyer, decision maker and daily user of the software often is one and the same person. Sales and decision cycles are short, and installation and delivery of solutions is usually completed over the course of a few days. Software maintenance and other recurring revenue is the primary source of income and over the last few years the proportion of recurring revenue has been stable around 80%. Other revenue is up-front (one-time) charges coming from license sales, training/consulting and other sales such as 3rd party licenses, associated hardware and equipment etc.

    Hospital Information Systems is a project oriented business where the buyer, decision maker and daily user typically are not the same person. In this segment, the customer is usually a hospital administration (IT or procurement department), the administration of a hospital chain or other operator of hospital networks, a regional care organization or regional public sector organization. In Europe, hospitals and care institutions are predominantly owned and operated by the public sector and thus subject to public tendering regulations with long lead times and long decision cycles. Installation and delivery of solutions can range from a few months to multi-year delivery projects. Compared to Ambulatory and Pharmacy Information Systems, the volume of consulting and other professional services is significantly higher and software maintenance and other recurring revenue currently constitute around 45% of revenue.

    The business model in Communication & Data is based on co-operation agreements (typically with 6-12 months duration), ad-hoc advertising (on-going) and project revenue for collection and mediation of clinical data. Revenue in Workflow & Decision Support is based on project sales (license and professional services), software maintenance and support, and performance-based revenue (cost and quality of care based). The Internet Service Provider business model is based on subscriptions which make up virtually all revenue in this segment.

    External factors influencing the business

    The healthcare market is in general a large and growing market, with a resilient profile relative to business cycles. In terms of size and growth, the world spends about USD 6.5 trillion on healthcare every year. In 2012, healthcare spending consumed 17.2 percent of the GDP of the United States, the largest share of any country in the world. In the European Union, the average was 9 percent with The Netherlands, Germany and France being the top three each spending about 12 percent of GDP. Furthermore, healthcare providers are being asked to offer ever-more sophisticated and expensive treatments for an aging population. In many parts of the world, costs related to healthcare are currently rising at four to five times the rate of growth in wages and inflation. Even during economic downturns, people will still require medical aid and medicine to overcome illness. Therefore, a business in the healthcare sector is often considered to be defensive because the products and services are essential. Having a consistent demand for goods and services makes this sector less sensitive to business cycle fluctuations.

  • Compared with the previous year, the composition of the Group has changed through a number of acquisitions as listed below. In addition, certain subsidiaries have been merged and/or changed name but this does not materially change the Group and is not discussed in this management report. For more information about such internal mergers and company name changes, as well as smaller acquisitions, see Section A of the notes to the Consolidated Financial Statements.

    Acquisition of control in Ärztenachrichtendienst Verlags-AG, Germany

    As of 1 January 2013 the 100 percent subsidiary of CGM AG, CompuGroup Medical Deutschland AG, acquired control in Dr. Ralle Medienholding GmbH (formerly Perikles 20134 Vermögensverwaltung GmbH). This is a holding company with the purpose of managing its acquired shareholdings. Dr. Ralle Medienholding was initially acquired with the intention to divest completely within a limited time period. This plan was changed during the reporting period to a new plan in which the shareholdings of Dr. Ralle Medienholding will be split into two separate companies: “InterM”, which will continue to belong to CGM, and Ärztenachrichtendienst Verlags-AG, which will be sold. The shares in “ÄND” fulfill the criteria of IFRS 5 to be classified as “Assets of disposal group classified as held for sale”. The acquired assets of ÄND make up a total of EUR 0.4 million and the acquired liabilities summarize to EUR 0.2 million. These values are posted in the Group balance sheet as assets respectively liabilities of disposal group classified as held for sale. These assets and liabilities are not included in the Company Acquisitions tables in the notes to the Consolidated Financial Statements.

    Consolidation of “InterM” began 1 January 2013 and the company contributes revenue of EUR 1.2 million and EBITDA of EUR 0.7 million in the reporting period.

    Acquisition Studiofarma Srl and Qualità in Farmacia Srl, Italy

    In July 2013 the 100 percent subsidiary of CGM AG, CGM Italia SpA, acquired the majority of the shares of the Italian market leader for pharmacy software, Studiofarma Srl, Brescia, and its largest distributor, Qualità in Farmacia Srl, Novara. Consolidation began 1 August 2013 and the companies contribute revenue of EUR 7.3 million and EBITDA of EUR 0.4 million in the reporting period.

    Acquisition of the Imagine Group, France

    As of 16 December 2013 CGM AG signed a contract to acquire 100 percent of the Imagine Group in France, with closing date on the 16 January 2014.A pre-payment in the amount of EUR 18.0 million for the purchase price was made already at the singing date in December.

    The Imagine Group consists of the companies Imagine Editions SAS and Imagine Assistance SARL, both located in Soulac Sur Mer (France). The companies offer the software “HelloDoc” which targets primary care physicians and dentists. The product is currently used by about 20,000 doctors. With this acquisition, CompuGroup doubles the market share in France to now approximately 40 percent of computerized practices. The Imagine Group realized revenue of approximately EUR 7.7 million and EBITDA of approximately EUR 0.9 million in 2013. Consolidation of the Imagine Group will begin 1 January 2014.

  • The unchanged strategic aim of CGM is to continue to expand its position as the leading international provider of IT solutions for the healthcare system. The key elements of its corporate strategy can be summarized as follows:

    • Continue to grow the customer base of doctors, dentist, pharmacists and hospitals through acquisition and organic growth
    • Organic growth by adding new products and services to existing customers and through additional revenue streams from pharmaceutical companies, healthcare payers and other participants in healthcare
    • Continued leadership in technology and innovation.
  • The internal management system of CGM is based on a set of key performance Indicators (KPIs). The KPIs used to manage our performance are derived from three primary objectives:

    1. Growth
    2. Return on Capital
    3. Sustainability

    In any fundamental value calculation, growth is a primary driver of monetary value. In addition, and also because of the inherent economic benefit, growth drives pricing multiples in the stock market. For our customers, growth means we can invest more into our products and services with technology investments spread over a larger revenue base. In summary, growth is crucial to all stakeholders of CGM: customers, employees and shareowners.

    In addition to organic growth, CGM uses acquisitions as a means to grow the business and therefore needs a system to ensure the efficient use of capital. Return on Capital (ROC) simultaneously captures improved income statement profitability and balance sheet efficiency and focuses management on controllable drivers of fundamental intrinsic value. This measure is also in harmony with the information we get from a more comprehensive net-present-value analysis. ROC rewards efficient use of capital in the daily management of the business and is a useful metric for comparing profitability across segments and business units based on the amount of capital they use.

    The long-term viability and sustainability of the company is recognized as another fundamental value for all stakeholders in CGM. The business is based on long-term customer relationships with software maintenance and recurring service fees as the primary source of income. Any relevant way to measure and ensure the size and development of the customer base and the size of the portfolio of recurring revenue is considered. We also recognize the importance of our employees as unique knowledge workers, carriers of experience and continuity in customer relations and therefore look for specific ways to measure and stimulate employee engagement as part of our sustainability objective. Our ability to make technology innovations and develop strategic partnerships also counts towards securing the long-term prospects of our business.

    A comprehensive set of financial and non-financial key performance indicators are derived from the three primary objectives described above. In 2013, we used the following financial KPIs to manage our performance. Unless otherwise stated, all financial numbers are reported and audited IFRS figures:

    Sales revenue / revenue growth. This measure gives the highest level insight into our ability to fulfill our primary growth objective. The absolute size of CGM is internally defined by the sales to third parties (“revenue”), and growth is defined as the year-on-year revenue growth calculated as current year sales revenue relative to the same period 12 months ago, expressed as a percentage.

    Recurring revenue / recurring revenue growth. Our recurring revenue includes all software maintenance contracts plus subscriptions for services such as Internet access (ISP), EDI and transaction processing, business process outsourcing, data center hosting, hardware rental etc. The principal source of recurring revenue is software maintenance which customers pay to get software updates and enhancements as well as access to a hotline support service.

    (EUR ‘000) 2013 2012 Source
    Software maintenance and other recurring revenue 300,613 284,702 Note 19
    Hardware rental (non-IFRS) 5,623 5,537 Internal accounts
    Recurring revenue 306,236 290,239  
    Growth (in %) 5.5%    

    Organic growth. Organic growth is defined as the year-on-year growth in revenue excluding all revenue from acquisitions with first time consolidation within the last 12 months. Organic growth is an important component of our overall growth strategy and is also an important measure of our ability to add value to our acquisitions.

    (EUR ‘000) 2013 2012 2011 Source
    Group sales revenue 459,555 450,582 397,329 Income statement
    Lauer-Fischer 01.01 – 30.06   -27,090   Internal accounts
    Microbais 01.01 – 31-12   -10,506   Internal accounts
    Effepieffe 01.01 – 31.12   -1,509   Internal accounts
    Studiofarma/QF 01.08 - 31.12 -7,319     Company Acquisitions
    InterM (ÄND) 01.01. – 31.12 -1,170     Company Acquisitions
    Other acquisitions 2013 -1,218     Company Acquisitions
    Group organic revenue 449,848 411,477 397,329  
    Organic growth (in %) -0.2% 3.6%    

    EBITDA / EBITDA margin. Earnings before interest, taxes, depreciation and amortization (EBITDA) is a good indicator of our raw cash generating ability, before consideration of expenditures related to taxation, investments and financing. It is particularly relevant when comparing segments and business units since both capital procurement, larger investments (in particular company acquisitions) and taxation are Group level responsibilities that are not subject to the direct influence of the business units. Correspondingly, the EBITDA margin defined as the EBITDA relative to sales revenue expressed as a percentage is a good indicator of operating profitability.

    Cash Net Income. Cash Net Income is defined as the reported consolidated net income plus amortization and goodwill impairment less amortization of self-developed software. This measure is used to estimate the total cash liquidity generated after all expenditures to maintain the current business and sustain the organic growth have been paid, including all reported taxes and financial income and expenses.

    (EUR ‘000) 2013 2012 Source
    Consolidated net income 21,718 30,423 Income statement
    Amortization without amortization of self-developed software 28,912 28,644 Change in Intangible and Tangible Assets
    Goodwill impairment 954 1,020 Change in Intangible and Tangible Assets
    Cash Net Income 51,663 60,087  

    Leverage. Debt financing and leverage represents an important measure at the corporate level to optimize the cost of capital in the Group. Leverage is defined as the ratio of net debt to EBITDA, where net debt is calculated as current and non-current liabilities to banks and credit institutions minus cash and cash equivalents.

    Return on Capital. Return on Capital is defined as after-tax operating income over invested capital expressed as a percentage. After-tax operating income is calculated as reported earnings before interest and taxes (EBIT) reduced by the German nominal tax rate (30%). Invested capital is defined as total assets less current liabilities plus current liabilities to banks less cash and cash equivalents calculated at the beginning of the year. This definition of invested capital excludes the working capital provided through trade payables and other short term liabilities on which no interest or other return must be paid. Furthermore, the timing difference assumes that investments made during the course of a year will generally not start generating earnings before the next year. All figures are taken as year-end values.

    (EUR ‘000) 2013 2012 2011 Source
    Earnings before interest and tax (EBIT) 56,828 64,028   Income statement
    After-tax operating income 39,780 44,909   EBIT x (1 – 30%)
    Invested Capital   505,403 500,195 a – b + c – d
    a. Assets   651,284 640,714 Statement of financial position
    b. Current liabilities   173,508 152,286 Statement of financial position
    c. Current liabilities to banks   46,580 35,746 Statement of financial position
    d. Cash and cash equivalents   18,953 23,979 Statement of financial position
    Return on Capital (%) 7.9% 9.0%   After-tax operating income
    Invested Capital(t-1)

    CGM‘s access to a large and growing customer base, the reputation we hold among our customers and our ability to serve them through highly qualified and motivated employees are critical non-financial success factors which drive all our primary objectives. In 2013, we used the following non-financial KPIs to manage our performance:

    Customer base. The customer base represents an important measure to asses our size and relative importance in the healthcare sector. The customer base is defined as the number of healthcare professionals (doctors, dentists, pharmacists) using CGM software and services and is counted in the CRM systems used by our sales and customer service departments.

    A comprehensive planning and performance management system has been introduced to include the financial and non-financial performance indicators listed above. A group-wide planning and reporting software has been customized for CGM to bring the financial reporting and performance management information out to line management. The most important KPIs are closely monitored and distributed to the managers together with a financial reporting package which includes budget targets. The cycle of review and discussion with management is typically monthly with a world-wide physical management group meeting in the Koblenz headquarter followed by one-on-one discussion between the segment managers and the CEO and his staff. In case of negative deviations, a deeper and more detailed analysis is performed to identify root-causes and initiate corrective measures.

  • Software development in CGM is generally organized centrally and can be broken down into the four main areas specified below:

    • Development of individual components of the existing Ambulatory Information Systems and Pharmacy Information Systems, development activity that occurs both centrally and locally.
    • Development of platform products, which are independent products that are plugged into the physician or dentist information systems via interfaces. Examples include electronic archiving systems or systems for managing appointments and optimizing organizational procedures.
    • Development of a new generation of Ambulatory Information Systems as well as the development of a new international Hospital Information System, both based on a shared data model and technology platform (‘G3’). The separation of business logic from user interface makes it possible to implement core functions through one-off development and maintenance work, these functions being subsequently deployed in different products and their individual product user interfaces.
    • Development of innovative software solutions for use in Software Assisted Medicine (SAM).

    Individual components are increasingly being adapted by central teams of developers across the sector. Training sessions by external instructors ensure that the teams remain up to date with technological developments. Group companies are continually working to provide customers with state-of-the-art software solutions and services. To ensure the quality of the products on offer, our development teams work with the latest tools in compliance with internationally recognized standards.

    Future generations of software developed by CompuGroup Medical will be distinguished by having an individualized front-end solution uniquely adapted to the individual CGM product lines, while back-end modules are developed for all main product lines across platforms. This can be described as a “building block principle”. In the medium term, this means, especially for the back-end area, that those development activities will become as centralized as possible. In contrast, developing and updating the front-end area will remain the responsibility of the subsidiaries close to markets and customers.

    Capitalized in-house services

    In accordance with the provisions of IAS 38, the development work for capitalized in-house services (approximately 280,000 hours) is capitalized as an asset, which had a EUR 9.4 million effect on CompuGroup Medicalʼs EBITDA in 2013. The amortization of capitalized in-house services from prior periods was EUR 3.6 million in 2013. The vast majority of this development work stemmed from the new development project G3.HIS (new development of a Hospital Information System) which involves several Group companies. The larger item in terms of development hours has generated costs in the current year. This mainly involves software maintenance by adapting/constantly improving software products to new and/or amended legal or contractual requirements, work which cannot be recognized in assets. Depending on the area of expertise and/or current regulations, updates are generally required each quarter. The share of capitalized in-house services relative to total software development and maintenance costs was 11% in the reporting period. The average number of employees working in software development during 2013 was 1,239.