Allscripts still lags amid healthcare technology rise

By Jin Wu

Allscripts Healthcare Solutions Inc. (NASDAQ: MDRX), the Chicago-based healthcare information technology provider, is getting divided ratings from analysts.

There are currently 28 analysts that Bloomberg tracks covering Allscripts. Of those 28, 11 have a buy rating, 16 have a hold rating, and one has a sell rating.

Since the fourth quarter of 2012, Allscripts has been posting losses in net income while the whole healthcare technology industry is growing steadily, boosted by federal subsidies that encourage hospitals and doctors to digitize medical records. In the third quarter that ended September 30, Allscripts lost $25.8 million.

Allscripts hasn’t posted a profit since the fourth quarter of 2012, and the analysts estimate it will report a loss of $7.9 million for the fourth quarter of 2014. (Allscripts Healthcare Solutions Inc., Jin Wu/Medill)
Allscripts hasn’t posted a profit since the fourth quarter of 2012, and the analysts estimate it will report a loss of $7.9 million for the fourth quarter of 2014. (Allscripts Healthcare Solutions Inc., Jin Wu/Medill)

“With numbers like this, investors should question why they are paying a premium PE multiple,” said Piper Jaffray analyst Sean W. Wieland in his latest research note. Wieland is the only one that insists on giving Allscripts an underperform rating. Although the company isn’t profitable, it reports adjusted profits that enable the stock, now selling around $12, to claim a price-earnings ratio of 42, twice that of the Standard & Poor’s 500 stocks.

On an adjusted basis, Allscripts did generate profits in the past five quarters and analysts continue to estimate on both GAAP and non-GAAP bases. (Allscripts Healthcare Solutions Inc., Jin Wu/Medill)
On an adjusted basis, Allscripts did generate profits in the past five quarters and analysts continue to estimate on both GAAP and non-GAAP bases. (Allscripts Healthcare Solutions Inc., Jin Wu/Medill)

According to the Office of the National Coordinator for Health Information Technology, until December 2014, the vast majority of U.S. hospitals participated in the Medicare and Medicaid EHR Incentive program and started using electronic health records certified as meeting the latest federal standards, signaling strong program participation in 2015.

In Illinois, 99 percent of the non-federal acute care hospitals and 67 percent of healthcare professionals received CMS EHR Incentive Program payments.

Nevertheless, Allscripts keeps struggling in this burgeoning industry.

Eugene Mannheimer, senior analyst at Topeka Capital Markets Inc. gave this explanation: “It is a growing industry, but there is a deviation between the winners and the losers. Not everyone is benefiting equally,” he said. “Allscripts’ competitors are so much stronger, such as Epic and Cerner. These companies are really winning the majority of new businesses in the market. And Allscripts, unfortunately, is among the losing end of the market share.”

Steven Halper, senior vice president at FBR Capital Markets & Co., agreed. “The company’s performance has struggled over the years because of the quality of the product, and the quality of the services they provided to the hospitals,” he said. The reason behind its underperformance, in his words, is just because “someone else offers better solutions.”

Since 2000 Allscripts has acquired or merged with nine companies, and four of these consolidations happened in the past five years.

“The history of Allscripts is really about a combination of different acquisitions over the years,” said Halper. “However, the problem is that these acquisitions were not well integrated. It’s really hard to get synergy in software because there is no synergy from the development standpoint unless you rewrite the whole thing. So when the company grew over time, it … [turned into] acquisitions in order to expand, but the flip side is that it is very difficult to integrate them.”

Concetta Di Franco, public relations specialist at Allscripts, declined to comment on analysts’ opinions. But she emphasized the strength that Allscripts has: a large and quite stable physician base. “Our open, integrated portfolio of healthcare information technology solutions for hospitals, physician practices, and extended care organizations connects 180,000 physicians and 2,500 hospitals, which translates to the second largest market share in the physician space,” she responded in an email.

As of December 2014, 179 health IT vendors supply certified EHR products to 4,623 hospitals participating in the EHR Incentive Programs. MEDITECH, Epic Systems, and Cerner, which are Allscripts’ strong competitors, comprise over 53 percent of the market share of primary certified EHRs for participating hospitals. (HealthIT.gov, Jin Wu/Medill)

 

As of December 2014, 760 health IT vendors supply certified electronic healthcare records products to 479,820 health care professionals participating in the EHR Incentive Programs and/or Health Information Technology’s regional extension program. Epic Systems, Allscripts, eClinicalWorks, NextGen Healthcare, and GE Healthcare comprise over 50 percent of the market share of primary certified EHRs for participating professionals. (HealthIT.gov, Jin Wu/Medill)

Although the majority of the analysts are dubious about Allscripts’ performance, some analysts still hold hope for the future of the company.

Nicholas Jansen, senior research associate at Raymond James, said ups and downs are understandable in a “turnaround story like Allscripts.”

“As a whole, I think Allscripts did a great job stabilizing the customer base over the last 12 months,” he said. “Once the customer base is stabilized, the company would be able to leverage sales in new software upgrades, new product platforms such as population health. The dbMotion asset acquisition is a great example.”

The newly acquired asset, dbMotion, which enables system integration in population health management, became a key player in Allscripts’ future growth.

“We believed Allscripts’ acquisition of dbMotion in 2013 gave the company key assets to address the new drive for population health capabilities,” Given Weiss, analyst at J.P. Morgan, wrote in his latest research note, “and we view this as a key area for growth.”

Jansen agreed that acquiring dbMotion was a wise move: “Allscripts should make sure they have very good products such as dbMotion which should be able to make them to successfully move more into things that are growing such as population health and it is advantageous that they have a large base to begin with. Overall, I think Allscripts is still strategically on track for some of the longer term targets it has thrown out there and that should translate into more meaningful cash generation.”

Ryan Daniels, analyst at William Blair & Co., also expressed confidence in Allscripts’ long-term success in his research note, based on a “comprehensive product offering” and “a large installed base.”

Although Allscripts is struggling with drawing in more new clients, the stickiness among the current customers became a silver lining.

“Most part of the client base is loyal because of a financial and resource constraint. They don’t want to incur additional expenses to put in something brand new,” said Mannheimer. “That’s why Allscripts is able to continue to cultivate and cross-sell within its clients base. So to me, the future of Allscripts is to sell the company to a very strategic acquirer or a private equity financial investor that is interested in buying Allscripts’ customer footprint.”

“However, I don’t know whether buyers will be willing to pay a premium from current prices,” Mannheimer added.

In 2013, Allscripts established a three-year growth project, planning to reach a 5 to 8 percent revenue Compound Annual Growth Rate (CAGR) and 18 to 22 percent adjusted Earnings before Interest, Taxes, Depreciation and Amortization (EBITDA) growth in 2016, which “the bulls insisted was overly conservative, but now looks to be aggressive,” Wieland wrote.

Based on Allscripts’ current performance, Wieland didn’t feel positive toward the company’s capability to reach the goal. “2014 will likely be a low single digit growth. We estimate about 2 percent, which means the company must grow revenues 7 percent in each of the next two years to meet the 5 percent CAGR goal, and 11 percent to hit the 8 percent CAGR goal,” he added.

Wieland is not the only one worrying about it. Jansen expressed the same concern. He said there might be some tweaks to the outlook since the consensus of investors is already below the three-year plan target.

Allscripts’ stock closed at $12.78 Wednesday, 35.1 percent below its 52-week-high and 16.1 percent above its 52-week-low.

Despite a long slide of the stock price, most recently of five consecutive quarters of losses, Allscripts’ stock is still valued more highly than the S&P 500 Price-Earnings Ratio. (Yahoo Finance)
Despite a long slide of the stock price, Allscripts’ stock is still valued more highly than the S&P 500 Price-Earnings Ratio. (Yahoo Finance)

The company is scheduled to release its fourth-quarter and full year financial reports on February 26, after the market closes. Many analysts are expecting to see if the company will update its three-year plan target during the conference call.

Photo at top: As an early entrant into the healthcare technology industry to provide electronic medical records system, Allscripts still struggles to make profits. (Jin Wu/Medill)