One of the stock market's best-performing industry groups this year comes as something of a surprise as federal lawmakers fight to launch the era of TrumpCare.
[ibd-display-video id=2018004 width=50 float=left]The 18 stocks in the Computer Software-Medical group posted a collective gain of 33% for the year through Thursday. For the past four weeks, the group has ranked in the top 10 among 197 industry groups tracked by IBD , even as its customers - hospitals in particular - face a huge amount of uncertainty and financial risk, with the future of Medicaid up in the air.
Some companies have reported that the GOP's drawn-out push to repeal ObamaCare, which could reach its climactic stage in coming weeks, has acted as a drag on efforts to win new technology contracts. But the uncertainty hasn't obscured investors' focus on two health care megatrends: the rising dependence on technology and analytics to deliver better, more cost-efficient care and the shift from legacy systems to the cloud.
IBD's TAKE:Research has shown that up to 50% of a winning stock's performance owes to the strength of its industry group and its sector at the time of its breakout.
Leading stocks in the Computer Software-Medical group fall into two categories. Medidata Solutions ( MDSO ) and Veeva Systems ( VEEV ) provide cloud-based solutions to the life sciences industry. Both stocks are excelling, with Medidata up 57% and Veeva up 49% since Dec. 30, even as they go head-to-head in simplifying data management for clinical trials, with their success coming partly at the expense of Oracle ( ORCL ).
Other leading medical software names include Athenahealth ( ATHN ) and Cerner ( CERN ), which both provide tools to help hospitals and medical practices manage electronic records of patients and provide an array of other services, from handling billing and claims to population health management - turning all those records into actionable advice for doctors to help their patients achieve the best, lowest-cost outcome.
OptumInsight, a unit of UnitedHealth (UNH), and IBM (IBM) Watson Health also are leading competitors in patient population health management.
Cerner's shares have climbed (up 39% year-to-date) on better-than-expected results and a huge contract win from the Department of Veterans Affairs. Athenahealth punched out a 32% gain this year through Thursday, despite a first-quarter earnings stumble. Investors jumped on board anyway after activist hedge fund Elliott Management took a stake and analysts highlighted a range of possible buyers, including Apple, IBM and UnitedHealth.
The recent advance has left Medidata extended from its most recent breakout in April and a quick touchback to 10-week support in mid-June. Veeva is five weeks into a 16% deep consolidation and testing support at its 10-week moving average . Cerner slipped below its 50-day moving average in light trade on Friday, as it finished the fifth week of a flat base with a 69.38 buy point.
The year started with investors bearish toward technology providers like Cerner and Athenahealth, Piper Jaffray analyst Sean Wieland told IBD, amid uncertainty regarding the impact of the Trump Administration, combined with Tom Price leading Health and Human Services "and an era of waning demand on meaningful use."
The Obama administration's "meaningful use" payments intended to speed the adoption of electronic health records, as well as the use of those records to improve clinical processes. But those payments ended last year.
Better Tools Enable Value-Based Pay
The next logical step is transitioning government-financed health care from paying providers per service they render to paying for value - the quality and cost-effectiveness of the care they deliver.
The 2015 Medicare Access and CHIP Reauthorization Act (MACRA), passed by a GOP Congress and voted for by Price, outlined the path to value-based reimbursements. But the American Medical Association and other groups have appealed to the Trump administration to adjust MACRA rules as part of its deregulation push, saying that "fair and accurate measurement of physicians' performance will not be possible until better tools become available."
Some concerns about a softening in health care information technology spending are apparently being realized. BofA/Merrill analyst Steven Valiquette said in a May 15 research note that he expects total IT in the sector to be down 3% this year, though that was an upgrade from his earlier projection of a 6% drop.
Athenahealth CEO Jonathan Bush said at a May 23 JPMorgan investor conference that the company is winning "75% of the deals where we meet a practice and they make a decision." The problem is that there's more reluctance to make a decision, Bush says, amid the prospects of a new national health care law and potential rule change.
To help nudge customers off the fence, the company began offering a cost guarantee, pledging that customers would see at least $1.20 in cost reductions for each $1 paid to Athenahealth.
The strategy appears to be working.
"Some of our Q1 deals had said "no" in Q4. We came back with the guarantee, and they bought," Bush said.
Could Apple Keep The Doctor Away?
Still, the "national breath-holding" over TrumpCare, along with a surprising double-whammy from a decline in visits per doctor and a decline in payment per visit - perhaps a reaction to high deductibles - resulted in a Q1 earnings miss and led Athenahealth to lower guidance for the full year.
Yet a few weeks later, Elliott Management's filing revealing a 9.2% stake in Athenahealth, which the hedge fund dubbed an undervalued, disruptive technology play, lit a fire under the stock. Citi analyst Garen Sarafian threw another log on the fire when he suggested that an Athenahealth acquisition by Apple (AAPL) could make sense.
Sarafian says that Athenahealth could help Apple solve the health sector's patient data "interoperability crisis," while making the iPhone, with its 1 billion users, central for disseminating clinical data, lab results and prescriptions.
Wieland thinks it unlikely that Apple would dive into such a regulated, fragmented market. "I believe that the device manufacturers are going to remain separate from the service providers."
By contrast, Cerner's first-quarter earnings report easily topped analysts' measured expectations. The company said it's on pace to record strong double-digit growth in revenue cycle management - speeding payments for doctors - and population health management.
"We continue to believe information technology is the single biggest lever to drive cost down and quality up," Cerner President Zane Burke told analysts on the April 23 earnings call.
The company explained at its May 24 annual meeting that it drove 850,000 interventions last year to change treatment of sepsis stemming from an infection, improving outcomes and shortening length of stays and time in the ICU, by identifying the condition early.
Leerink analyst David Larsen on June 19 wrote that his firm's industry checks showed Cerner and privately-held Epic "are winning the vast majority of share." Larsen downgraded Allscripts (MDRX), citing the risk of customer attrition.
Medidata Defends Ground Against Veeva
Cerner's momentum among private customers comes as its government business is also striking pay dirt. The VA tapped Cerner to provide its next-generation electronic health records system, facilitating the exchange of data between military hospitals and civilian health care providers where veterans also receive care.
That contract, which doesn't yet have a dollar value attached to it, comes as Cerner is already leading the Defense Department's 10-year, $4.3 billion electronic records overhaul.
While better care and cost savings are the drivers behind electronic health records, Medidata and Veeva products are in demand from the life sciences industry because the companies can help move cures from their pharmaceutical and biotech customers more quickly to market.
The cloud-based software companies aim to displace the legacy, on-premise systems that are still prevalent in the life sciences industry, but which make it especially painful to run clinical trials around the globe while complying with FDA and other international regulations.
Veeva first made a splash with its customer relationship management software for global drug sales reps, which simplified their communication with physicians in a compliant way. It has since found success providing cloud-based content management for drug trials and tracking quality control processes for drug manufacturing.
This year, Veeva has taken aim directly at Medidata's bread and butter of clinical data management, giving it a full suite of software for managing clinical trials. Given Veeva's track record of taking aim at markets and bowling over the competition, Medidata shares were under a cloud after Veeva's fall 2016 announcement.
But now that cloud appears to be lifting, because Medidata is thriving and proving that its market strength is sustainable, says Piper Jaffray's Wieland, noting that Oracle has been "a net donor of market share."
Medidata CEO Tarek Sherif said on the April 16 Q1 earnings call that company scored a milestone early in the second quarter, with 18 of the top 25 pharma companies now using the Medidata Clinical Cloud, with Teva Pharmaceutical (TEVA) being the recent addition.
"Veeva is going to do well," Wieland said. But given the breadth of Medidata's market leadership, the cost of switching software providers and the growing scope of the company's offerings, which have been aided by recent acquisitions, the outlook also looks strong for Medidata, he says, and analysts are projecting revenue growth in the high teens in the next couple of years.
Meanwhile, Veeva, which has been seeing 30%-plus quarterly revenue growth, continues to expand its addressable market. The company announced in May that a top-5 consumer-packaged goods company was beginning a trial of its Vault software, which analysts have said has potential to expand into other regulated markets besides the life sciences industry. The number of customers with more than one Veeva Vault application rose 70% year over year, which about is the best testament a software company could hope for.