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.
), 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
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
), one of the largest electronic medical records providers,
reported its research spending spiked 67% in Q1. ForMedAssets (
), 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
"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
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
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 (
) boomed from late 2009 to late 2011. Sales growth at Allscripts
reversed last year, and the company reported a 36% drop in
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
Cerner Is The Exception
Electronic records leaderCerner (
) 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
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
"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
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.