Smart Money Analysis: Street drawn to health IT play Allscripts

By Lewis Krauskopf

NEW YORK (BestGrowthStock) – Glen Tullman, chief executive of Allscripts Healthcare Solutions Inc (MDRX.O: ), closed two mergers in two years to create an electronic records network of thousands of doctors, hospitals and nursing homes.

Now two top hedge funds managers, Andreas Halvorsen of Viking Global Investors and Dinakar Singh of TPG-Axon Capital Management, are betting Allscripts is in the best position to grab a share of an estimated $30 billion of incentives intended to bring the U.S. healthcare system into the digital age.

Halvorsen and Singh bought $160 million of Allscripts shares in the third quarter, making the company the largest new healthcare position in the quarterly “Smart Money” survey of 30 of the largest stock-picking hedge funds, conducted by Thomson Reuters.

Viking is now the company’s fifth-biggest shareholder, and TPG is eighth, according to Thomson Reuters. Neither firm would comment.

Tullman created a huge company for serving physician practices in 2008, when he merged Allscripts with the healthcare business of British IT company Misys Plc (MSY.L: ). Now he has engineered a $1.3 billion all-stock acquisition of rival health IT company Eclipsys, a deal that closed in September and delivered a substantial base of hospital customers.

Investors are betting that Tullman and Chicago-based Allscripts can convert on opportunities from the recent deals — sell an array of products to new customers and follow through on projected efficiencies, as well as capitalize on the stimulus funding.

“All of those things are happening at once, and there’s a fairly large execution risk and integration risk here,” Maxim Group analyst Anthony Vendetti said. “But there’s also a huge opportunity in front of them as well, which is being stimulated by the government incentives.”

Investors, Vendetti said, are “getting more comfortable with the story and the opportunity.”

ELECTRONIC HEALTH RECORD BOOM

A move to electronic from paper records carries the promise of decreased wasteful spending, better communication and fewer medical errors.

Components of records systems that will qualify for incentive payments include computerized order entries, patient summary records and lab test results.

Physicians generally can receive as much as $44,000 over five years — enough in some cases to buy entire electronic health record systems. Those who have systems in place at the beginning of next year should see checks start rolling in by around May.

Physicians who do not have the electronic systems in place in 2015 will face lower Medicare reimbursements.

According to estimates from the Congressional Budget Office in May 2009, the incentive funding is expected to increase the use of electronic records from 20 percent of physicians in 2009 to 85 percent by 2014.

Unlike the controversial U.S. healthcare overhaul bill passed this year, electronic record funding — part of the $789 billion stimulus package enacted in 2009 — is seen as more immune to political rancor.

“Healthcare IT is a pretty agreed-upon initiative whether it’s Democrats or Republicans,” said Jefferies & Co analyst Richard Close.

But a bigger hurdle for Allscripts, which Tullman has led since 1997, and other healthcare IT companies may be skepticism among physicians wary of the government’s commitment.

“It’s too early to predict what the result might be, but we’ve heard some rumors from vendors we certify that they are not yet seeing this rush to buy,” said Sue Reber, marketing director for the Certification Commission for Health Information Technology, which tests record systems to determine if they qualify for reimbursement.

MAKING ECLIPSYS WORK

Healthcare IT stocks soared after the stimulus package passed in early 2009, but their performance has been more lackluster this year, with Allscripts the laggard of the bunch.

Allscripts, whose shares have declined 13 percent this year, trades at 20 times estimated 2011 earnings, compared with 24 times for Cerner Corp (CERN.O: ) and 26 times for Quality Systems Inc (QSII.O: ), its two main rivals, according to Jamie Stockton, an analyst at Morgan Keegan & Co.

Allscripts, which has a market value of about $3.3 billion, also faces competition in health IT from McKesson Corp (MCK.N: ) and privately held Epic Systems Corp.

“There is a burden on Allscripts to prove that the Eclipsys transaction was justified,” Stockton said.

With Eclipsys in the fold, Allscripts says it has the largest network in healthcare with a client base of 180,000 physicians, 1,500 hospitals and 10,000 nursing homes, home-care agencies and other post-acute organizations.

With the Eclipsys hospital-based products and Allscripts’ traditional products that cater to physician practices, the company can offer a more complete record system.

“A lot of these hospitals are probably going to be making decisions for the surrounding physicians on what EMRs (electronic medical records) to use. And in that sense, I think Allscripts is very well positioned,” said JMP Securities analyst Constantine Davides.

Allscripts has also said it plans to wring $40 million of cost savings and other synergies from the Eclipsys deal by 2013.

The Misys deal gave Allscripts a chance to target up to 90,000 physicians who have Misys software for tasks such as scheduling and billing but do not yet have electronic health records, Maxim Group’s Vendetti added.

Morgan Keegan’s Stockton noted that while healthcare amounts to 17 percent of the U.S. gross domestic product, healthcare providers only drive 5 percent of IT spending.

“There is a huge disconnect between the IT investment that healthcare providers are making and their size within the economy,” Stockton said. “You would think that that gap would start to close.”

(Reporting by Lewis Krauskopf; Editing by Aaron Pressman and Steve Orlofsky)

Smart Money Analysis: Street drawn to health IT play Allscripts