Cerner, Athenahealth Lead Push For Digital Records

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A new era in electronic medical records launched in 2009 by federal regulations sent shares of medical software makers soaring. Now, federal rules aim to make medical records even more effective through the Affordable Care Act.

But the effect on software makers has so far been murky. Many of the mandates under the Affordable Care Act won't be enforced until 2014. Medical software developers are seeing margins shrink now, however, as they invest in technology and marketing to try to capture bigger pieces of a market that is simultaneously advancing and consolidating.

As the industry's Q1 reports have trickled out, results in the medical software group have varied, and at least a few have invoked the ire of investors.

Accelrys ( ACCL ), one of biggest providers of software for medical research, announced Q1 earnings on April 30. The next day, shares plummeted 19%. They have since recovered only a small piece of that sell off.

Company executives announced a 19% increase in product development spending, a bid to keep up with the shifting industry. Spending on marketing jumped 45%. As a result, Accelrys came in under Wall Street's forecast.

"Over nearly four years, we've been hard at work, building a competitively differentiated comprehensive suite of offerings," CEO Scipio Carnecchia told analysts. "We remain convinced of the significant market opportunity available to us."

Such spending on new development isn't unique to Accelrys.Athenahealth ( ATHN ), one of the largest electronic medical records providers, reported its research spending spiked 67% in Q1. ForMedAssets ( MDAS ), product development spending jumped 22.8%, while customer acquisition and integration expenses skyrocketed, growing 543% from the year-earlier period. Those expenses are expected to "be incurred throughout the remainder of 2013 and well into 2014," said CEO John Bardis.

Athenahealth reported its highest per-share profit growth in eight quarters on May 2. But management offered light full-year guidance, saying it will have to up its investment in new technology for clients. The result: Shares dropped 9% the following day and the stock has shown no signs of a rebound.

"The health care act is absolutely affecting these companies," said Judy Hanover, analyst with IDC Health Insights.

The current struggles and investments being undertaken by medical software providers aren't necessarily bad for the industry, as long as investors can take a long view, observers say.

"We refer to them as foundational technologies for health care reform," Hanover said of the new electronic records technology that Athenahealth and others are building. "They'll be the base."

Picking Up The HiTech Pace

Medical software makers develop and sell software to a broad range of health care providers, from individual physician's practices to hospitals. The 12-stock Computer Software-Medical group was a top 20 player in the third quarter of 2011 among the 197 industries tracked by IBD. A third of its stocks still hold strong EPS ratings of 80 or higher. But first-quarter travails steepened the group's decline, sending it to a No. 153 ranking on Friday.

The group had been on a roll following the 2009 economic stimulus bill, which included the $27 billion Health Information Technology for Economic and Clinical Health, or HiTech, act. That act subsidized health care providers in a push to convert the industry from paper to electronic records.

As a result, medical information management providers likeAllscripts Healthcare Solutions ( MDRX ) boomed from late 2009 to late 2011. Sales growth at Allscripts reversed last year, and the company reported a 36% drop in Q4.

The Affordable Care Act signed by Obama in 2010 has taken up the charge from the stimulus and pushed its effects further. It mandates that most -- if not all -- providers move health records online by 2014.

It's not just the individual-patient electronic records industry that'll get a boost from Obama's health care reform. The bill more broadly will require a "value-based" Medicare and Medicaid payment system that tracks what providers charge for services. That and other types of records will be linked together to allow for more "meaningful" access, according to the American College of Emergency Physicians.

"So these companies were already benefiting from the stimulus incentive," Hanover said, "and PPACA (Patient Protection and Affordable Care Act) intensified hospitals' needs for optimized records and operational goals that have been created by health reform."

Cerner Is The Exception

Electronic records leaderCerner ( CERN ) registered slowdowns in both per-share profit and revenue growth from the year-earlier period. Shares took a quick hit, but rebounded quickly. In fact, Cerner's shares are trading up 25% so far this year, picking off new highs with solid support at their 10-week moving average.

Cerner in the first quarter topped per-share profit estimates, even though sales came in low, at $680 million versus the $708.5 million that analysts had been modeling. But analysts watching Cerner were more interested in "bookings," which are in part a measure of deferred revenue. Bookings were $802 million, above expectations. They were "meaningfully ahead of consensus estimates of $744 million," wrote Credit Suisse analyst Glen Santangelo, who rates Cerner stock as neutral, or hold.

So, despite slowing sales growth at Cerner, the future is bright, says Santangelo.

"At the risk of sounding like a broken record, Cerner reported better-than-expected bookings, solid operating metrics and strong cash flow," Santangelo wrote, adding that management remains "bullish on the long-term."

The Population Health Era

There are some worries about decelerating growth in electronic records, Santangelo says, although pending benefits from Obama's health care law, as well as an aging U.S. population, could hold investor interest.

Deteriorating health among the baby boomer generation is driving considerable consolidation within the health care industry. Large players are buying up smaller players, Cerner Vice President of Client Organization Zane Burke told analysts on a conference call in late April.

Health care providers increasingly want to control every level of care, which could help cut their costs. That consolidation is a positive for Cerner, Burke says.

Think of it this way: If a Cerner client buys a smaller health care provider that doesn't already use its technology, that smaller provider will undoubtedly be shifted to Cerner products.

"Health systems (are) buying hospitals, physician practices and other venues to control more of the continuum of care, as they position themselves for the population health era," said Burke. "All of these trends have been positive for Cerner and we expect them to continue."

About 60% of all health care providers are now using electronic health care records, according to research from IDC. That's a big jump from 2009, when just about 20% were using electronic records.

Industry leaders Cerner and Athenahealth could be considered outliers in some respects, because they're using Web-based and cloud technology well, says analyst Hanover.

"A lot of venders in the space are not making optimal use of those tools," Hanover said.



The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Investing , Investing Ideas

Referenced Stocks: ACCL , ATHN , CERN , MDAS , MDRX

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