Where Should An Investor Look In The Crowded Physician Space: Big Companies Like Cerner (CERN)? Private Companies Like Epic? Analyst Jamie Stockton Of Morgan Keegan Gives You Tips In This Exclusive Interview
July 5, 2011 - The Wall Street Transcript has just published Health Care IT Report offering a timely review of the Healthcare Information Services 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.
Jamie Stockton, CFA, joined Morgan Keegan & Co., Inc., in 2006. Prior to joining Morgan Keegan, Mr. Stockton was a Research Analyst at Greenwood & Associates. As a Senior Analyst, he currently follows the health care information technology industry for Morgan Keegan. Mr. Stockton received a B.S. in finance and a B.S. in accounting from the University of Arkansas. He holds the Chartered Financial Analyst designation and is a member of the CFA Institute.
TWST: When you look at the different segments or niches of health care IT, where is the most opportunity for investors right now and why? Which of your companies play in the segments where you see the best growth?
Mr. Stockton: I would say that the focus today is primarily on the electronic health record, EHR, names. There is a very large government program that has been well publicized, where the government is essentially giving the average hospital about $5 million of incentive payments, a physician practice gets about $50,000 of incentives per physician, if they invest in some very specific technology that helps them transition from paper-based medical records to electronic. That program essentially goes through 2013, or at least the majority of the incentive payments are available through 2013. And that is generating a pretty significant amount of demand for the EHR companies, which has driven an acceleration of their growth.To your question, "Where is the most opportunity?" I would say I feel like there are a couple of names in that group that are very timely. Allscripts is one. They have a very large footprint, 180,000-plus physicians, which is roughly a quarter of the physicians in the U.S. that are using their software today. Most of those doctors are using their billing software. Basically, every doctor in the U.S. is using some type of billing software because insurance reimbursement is so complex. And as those physicians contract with a software vendor to get these government EHR incentive payments, I think that you will see Allscripts be a major beneficiary because basically if you are a physician and your staff is already familiar with your billing software and that company has a solid product that can help get you these incentive payments from the government, that's probably the first place you're going to look.I think this footprint is largely going to drive very good results for Allscripts.
The other name I like in the EHR group, I would say, the most is athenahealth, ATHN. They have historically been very strong on the billing-software side. They have a SaaS or cloud-based solution. Aside from a physician practice just using their billing platform, all of the faxes and all the mail that is coming into the practice related to their reimbursement activities are essentially rerouted to one of athena's facilities. Either one of athena's people will input that information into their system manually, or athena builds a direct connection that allows the data to flow automatically into their system. Either way, they're taking a lot of labor off of the physician practice and creating a very clear ROI. Their billing solutions for small- and medium-sized practices have been one of the most popular for roughly a decade. And on top of that, the company has an EHR solution that actually improves physician productivity - very rare - and qualifies for the government incentives. athena is a higher-growth name. If you look at their footprint today, they have roughly 30,000 providers. So if you think about them relative to Allscripts, they are much smaller. They have a lot more room to grow within the physician space, and they are growing at a pretty healthy roughly 30% clip on the top line.
TWST: Which of the companies you cover do you believe does the best job of either staying on the leading edge of technology or bringing the right solutions to the marketplace? What would be some examples of some of the most innovative products you have seen come out of the companies you cover?
Mr. Stockton: I would say that athena stand outs. athena has a - it's kind of a buzzword - but they have a solution that's in the cloud entirely. It's a multitenant solution which basically means that all of their users are on the same version at the same time, which is somewhat of an issue for some of the more legacy vendors that have a lot of users that are on multiple versions of their software, and so it's a much slower process whenever they put out a new update to get all of their clients transition to that newer version of the software. The government program is helping some of those legacy vendors right now, because it's pushing some users that are on outdated versions of their software to upgrade to the one that's compliant with the governmental requirements. But if you're just talking about who is really on the cutting edge from a technology standpoint, I would say that it's athena. It's a much simpler architecture and much easier to manage their user footprint.
TWST: How would you describe the competitive landscape for this sector, especially when considering the high number of smaller private players? What are the best ways a company can differentiate in the marketplace?
Mr. Stockton: There are a lot of products out there in the physician space today. I think most of the ones that are incrementally getting selected are the more established vendors, but there are a lot of products in the physician space. I would say that the thing that is really differentiating physician software today is a recognizable brand, a name that physicians believe will actually be around five or 10 years from now.In the hospital space it is - especially among medium- and large-sized hospitals - it's pretty static. Cerner is doing very well. There is a private company called Epic that is doing very well. I would say that incrementally Allscripts, which got into that space primarily by acquiring Eclipsys last year, they are doing better in 2011 than they did in 2010. You've had some other vendors in that large hospital space like GE (GE) that has basically said we're going to stop going after new clients for now, try to repair some of the existing relationships that we have. McKesson (MCK) is - it's really just, at least from my standpoint - focusing on trying to get the existing customer footprint to where the government wants it to be, not really focusing on or not really putting a lot of effort into expanding its footprint that much. And it is a similar story for Siemens (SI), although it's a little better picture.On the low end in the hospital space, it's a little more competitive there. You're seeing some of the larger vendors try to go down market, although it's a problem for them because the price points are so different. You see someone like CPSI, whose entire system is $1 million or roughly thereabouts, and that's a price point that someone like Cerner would have a real hard time touching and not hurting themselves on the high end of the market. One incremental thing that you're seeing a little of in the small hospital space is a few more SaaS or cloud-based solutions. I don't see them gaining a ton of traction, but they are there more today than they were a year or two ago.
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