WILMINGTON, DE – Last month’s bankruptcy filing by one of the nation’s largest medical transcription providers could touch off a bidding war for the company’s assets.

Spheris, a Franklin, Tenn.-based provider of document services for roughly 500 hospitals and health systems, confirmed a long-standing rumor by filing for Chapter 11 bankruptcy protection on Feb. 3 in Wilmington, Del. At the same time, the company announced plans to sell its U.S. and Canadian businesses to MedQuist, a Mount Laurel, N.J.-based provider of medical transcription services, under Section 363 of the United States Bankruptcy Code for roughly $75 million in cash. That deal, if concluded, could make MedQuist the largest provider of medical transcription services in the country.

According to officials, MedQuist will act as a “stalking horse” bidder in an upcoming auction of Spheris assets and set the initial bid for Spheris’ domestic assets, subject to court approval. Another part of the deal would have CBay, Inc., acquire the stock of Spheris India Private Ltd. through the auction. MedQuist and CBay are portfolio companies of CBay Systems Holdings, Inc.

MedQuist may have some competition at the auction, however. According to the Nashville Business Journal, Webmedx, Inc., based in Brentwood, Tenn., and described as the fourth largest provider of medical transcription services in the country, and Atlanta-based Transcend Services, Inc., described as the third largest, may join the bidding.

“In such a changing market as the clinic documentation market, it would not surprise me if other parties were interested in some or all of Spheris’ business due to synergies and concentrations in market strength,” Wedmedx Senior Vice President Chris Cashwell told the newspaper. Transcend President Susan McGrogan, meanwhile, told the paper her company could make a bid as well.

MedQuist officials say the deal, if completed, would provide Spheris’ customers with access to an industry-leading technology platform. It would also place MedQuist at the forefront of a $12 billion to $15 billion industry that’s poised to grow as the nation’s aging population drives demand for healthcare services.

“MedQuist is a natural partner for Spheris,” said Peter Masanotti, MedQuist’s CEO. “We share a common belief that superior quality in clinical documentation is an essential component of efficient healthcare operations and quality medical outcomes. Spheris’ customers can look forward to capitalizing on MedQuist’s extensive suite of services and technologies along with the strength of our combined experience, knowledge and culture of best-in-class service.”

MedQuist’s offerings include the DocQment Enterprise Platform, the healthcare information platform which servesas the foundation for its transcription software and includes workflow management, core measures reporting, structured documentation, data analytics and key customer reporting. Other tools include SpeechQ real-time interactive speech recognition for radiology and general medicine, DocQvoice for capturing dictation, and computer-assisted coding and abstracting.

Once considered a rising star in the healthcare document management field with a considerable presence at the Health Information and Management Systems Society’s annual conference and exhibition, Spheris had fallen on hard times lately. Net revenue for the company had reached as high as $52.3 million in early 2007 before falling to $40 million last year, shortly before the company voluntarily removed its registration with the U.S. Securities and Exchange Commission. CEO Dan Kohl then resigned after only 13 months on the job, and the company announced plans for a debt restructuring.

Spheris officials said the company had only $4 million in unrestricted cash earlier this week, and had secured a $15 million credit line to fund day-to-day operations during the bankruptcy. Officials also reported the company has more than 200 creditors and “thousands” of parties-in-interest to the case.