15% - 20% Top Line Growth For Select EMR Companies; An Exclusive Interview With Mr. Gene Mannheimer - Auriga USA LLC
June 28, 2012 - The Wall Street Transcript has just published Health Care IT Report offering a timely review of the sector. This Special Report contains expert industry commentary through in-depth interviews with public company CEOs, Equity Analysts and Money Managers. Please find an excerpt below.
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Gene Mannheimer joined Auriga USA, LLC, in September 2008 to cover the health care IT sector. His experience in health care IT spans 20 years, including 10 years as a Research Analyst following the health care IT and services sector. In 2007, he was named the number two stock picker in health care IT by Forbes/StarMine; and in 2004, was named the number one analyst in the software category by The Wall Street Journal's Best on the Street survey. Previously, Mr. Mannheimer was a Director at CDIB Ventures, a $150 million venture fund and U.S. investment arm of the China Development Industrial Bank. He was also a Senior Analyst at Jefferies Broadview, specializing in mergers and acquisitions of IT companies. Mr. Mannheimer holds a B.S. in economics from the Wharton School, a Bachelor of Applied Science in Systems Engineering from the University of Pennsylvania and an MBA in finance from the University of Southern California.
TWST: Who are your favorite companies in the space right now, and what is it that you like about them?
Mr. Mannheimer: It's a good question, because as we sort of started out saying, I think that multiples are fairly rich for a lot of the companies. For example, just in the last two months or so we have downgraded Allscripts to a "hold" and athena to a "sell." A lot of that had to do with the price of the stocks. In terms of what we like here, we are recommending Computer Programs And Systems (CPSI), and let's talk about that one for a minute.
They have a very interesting niche in the hospital market, but specifically the very small hospital that's less than 100 beds. You find these hospitals typically in the rural areas of the country, sometimes 100 miles from a major metropolitan area. What's nice about that market is it's underpenetrated, unlike the larger hospitals that have 90% penetration. In other words, most of the large hospitals are already using some EMR product, and it's essentially replacement market. At CPSI segment, it's about 50% penetrated. So there's a lot more inherent opportunity there in the market. CPSI is a leading company in that segment. So we have a "buy" on them, stock is at $55 and our target is $68.
We are also recommending Cerner, and they are probably the stalwart in the health care IT business. They are the largest pure play in health care IT. McKesson is bigger, but their health IT business is sort of buried within their larger distribution umbrella. But Cerner is the largest pure play in health IT, and they have a huge customer base and integrated offerings for both the hospital and physician office, and they're probably the most far ahead out of the U.S. So internationally, they've got the biggest footprint, and that's going to be where the next leg of growth is.
TWST: What about M and A activity? Is that something you're watching at all in the space?
Mr. Mannheimer: Absolutely. It is something I follow very closely, and let's just say that there is and will continue to be a lot of consolidation in the market. For example, there are over 400 different electronic medical record companies that are certified, in other words, given the stamp of approval by the government. That's just too many. When you drive on the highway, you don't see 400 different models of vehicles, do you? In the EMR space specifically, you are going to see a lot of those companies just disappear and others that are maybe stronger and have specific strengths will be acquired. We saw AdvancedMD, which is a privately held EMR company, get acquired by ADP (ADP) recently. We've seen Epocrates (EPOC) just announce that it was looking for a partner or a buyer of its electronic medical record product. So there are just too many EMR companies out there, and they've got to consolidate.
TWST: You mentioned valuation. Why are valuations so high right now?
Mr. Mannheimer: I tend to look at things relative to their growth rates. So every company is different, but some of the faster-growing EMR companies maybe are growing the top line about 15% to 20% and growing EPS in the mid-20s. We are starting to see valuations in excess of their sustainable earnings growth rates. That is one way I look at the group and say it's probably fairly valued here. Secondly, when I look to the M&A market, like you've alluded to at least, the multiples being paid for these EMR companies have not been extraordinary. They have been a small premium to what the public company's stock has been trading at, but I'm going to give you an exception to that. The exception is in the HIE arena, Health Information Exchange. That is an up-and-coming subsector of health care IT and what that is really is nothing more than the exchange of data across the health system between hospitals and physicians, between hospitals and other hospitals. So that's one of the next phases of growth and a requirement by the governmentCere under meaningful use stage two. So there are no publicly traded health HIEs right now, but rather they're all private for the most part. We saw Aetna (AET) buy Medicity. We saw UnitedHealth (UNH) buy Axolotl, and these were very rich multiples that were paid. I'm talking eight to 10 times revenue, but that's really the exception.
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