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IT Inroads In Health Care - Michael Cherny - Deutsche Bank Securities Inc.

June 29, 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.

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Michael Cherny, Vice President, is a Research Analyst on the health care services and technology team at Deutsche Bank Securities Inc. Mr. Cherny joined the bank in 2006 and is responsible for six companies within the health care services and technology universe. He also initiated co-coverage of the health IT sector in 2008 and primary coverage in 2009. Previously, he was an Analyst in the health care corporate and investment banking group at Banc of America Securities LLC, with a particular focus on life sciences and health care services companies. Mr. Cherny graduated from the Goizueta Business School at Emory University in 2004 with a bachelor's degree in business administration.

TWST: How would you describe the competitive landscape for companies in this sector, and which of the companies you cover has done a good job at differentiating itself?

Mr. Cherny: It's a very strong, competitive market with numerous players. There are many more players, particularly on the private side, in the physician market, especially servicing the smaller physician groups. The hospital market has fewer players, but it is fairly competitive in that market as well, with Cerner being the biggest public player there. We continue to view that there will be a flight to best-in-breed EHR vendors over the course of the stimulus, particularly as the requirements for stages two and three of meaningful use get stricter and the bars raised further in order to achieve meaningful use. We view both Cerner and Allscripts as well positioned to benefit from that trend, given their vast resources and their continued focus on technology improvements through their R&D spend. One other company that has done a very good job in terms of penetrating the physician market is athenahealth, and they have come to market with a much different approach through their software as a service business. Additionally, the way they have come to market is they lead with their athenaCollector product, which is their revenue-cycle management product, which helps improve cash collections by improving the billing services for their physician customers. And they have built up their electronic health record, or athenaClinicals product, to supplement the athenaCollector product. The success on that front has been very rapid, with significant improvements in what they call double-barrel sales where they are selling both athenaCollector and athenaClinicals in one combined deal.

TWST: From a technological perspective, which other companies do you believe have introduced particularly innovative solutions over the last couple of years?

Mr. Cherny: athena is by far the company we view as the best innovator within the EHR space, and they are a fairly new entrant to the electronic health record market. But their growth there remains robust. This is evidenced by the double-barrel deals I mentioned before, which as of the last quarter, 69% of new deals were of a double-barrel nature. And they actually have a third product solution, the athenaCommunicator product, which is also gaining traction in the market, with 25% of what are called triple-barrel deals in last quarter.

TWST: What type of M&A activity do you anticipate in this sector over the next two or so years?

Mr. Cherny: M&A has been very prominent in this space, as you mentioned, both with larger deals and mergers of equals, such as Allscripts-Eclipsys, as well as plenty of bolt-on acquisitions. Most of the companies have been acquisitive to some degree. Quality Systems (QSII), for example, has made three or four small acquisitions, including a company most recently called IntraNexus. We would expect the M&A landscape here to continue to be robust as - given the large breadth of companies in the space - all you have to do is go to HIMSS and see the multiple thousands of companies presenting at that conference. It is very clear that consolidation in the space should remain ripe.

TWST: For your "hold"-rated stocks, what are your hesitations with them? What are the changes you will be looking for in order to consider upgrades?

Mr. Cherny: Most of them are valuation based, particularly a company like Cerner. Cerner is incredibly well positioned in the hospital market. They have a long runway of ability to cross-sell into their existing customer base. They continue to build out their service suites so they can sustain long-term growth beyond the period of stimulus funding. But with the stock trading close to 30 times forward estimates, we think that the risk/reward profile is fairly balanced. One company that we did recently downgrade was MedAssets (MDAS), and that was based primarily on operational challenges the company has faced. They are not directly exposed to stimulus-rate funding, because they're not an electronic health record company.

TWST: What do you like about your two "buy" -rated stocks, and what differentiates them from the rest of the group?

Mr. Cherny: We view Allscripts as in the best position to gain incremental market share because of their broad product suite, which allows them to sell into all different areas in the market. So they are the company that has specific products to sell into all customer areas, from the large hospital group all the way down to the small physician practices. We think that the combination with Eclipsys, as well as previously when they made the acquisition of Misys (MSY), has further built up that product suite. Additionally, following the merger with Eclipsys, the company has significant opportunities both on the cost and revenue sides to generate synergy capture, which should help drive upside to consensus estimates. Historically, when Allscripts has done acquisitions, they have been very effective at overachieving on cost-related synergies, and we would not expect that to be any different here. On the revenue side, as I mentioned earlier, the company has already done a very strong job of cross-selling into the legacy customer bases, particularly selling Allscripts ambulatory products into the legacy Eclipsys hospital base. And we would expect the reverse to happen going forward as well. athenahealth, the other "buy"-rated stock, is the high-growth company in this space. They have the software-enabled service, software as a service model, which is very differentiated from everyone else. They lead with cash collections. They lead with improving the financial stability of their physician-based customers. But they are also helping those customers achieve meaningful use, which is crucial in this time period. The one thing with athena that we continue to look for, which is one of the big potential bear arguments for the stock, is their ability to sell into the enterprise market, a large area of the physician market. They've recently revamped their selling efforts there, and we would expect them to announce new deal wins following these ramped efforts in at least the medium term.

The remainder of this 55 page Health Care IT Report can be immediately viewed by purchasing online.

The Wall Street Transcript is a unique service for investors and industry researchers - providing fresh commentary and insight through verbatim interviews with CEOs and research analysts. This Health Care IT Report is available by calling (212) 952-7433 or via The Wall Street Transcript Online.

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