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WIKI ANALYSIS
Libertyville, Illinois-based Allscripts Healthcare Solutions, Inc. (MDRX) is a leading provider of clinical software and information solutions for physicians. The company has three business segments: Prepackaged Medications, Software & Related Services (SRS), and Information Services. The Prepackaged Medications segment (19% of 2006 revenue) comprises the Allscripts Direct business that offers point-of-care medication management solutions for physicians and other healthcare providers. The SRS segment (76%) includes primarily the TouchWorks software business. TouchWorks software is an Electronic Health Record (EHR) that enhances physician productivity by automating common physician activities like prescribing, dictating, capturing charges, ordering labs and viewing results, providing patient education, and documenting clinical encounters. The SRS segment also consists of Advanced Imaging Concepts (AIC), an electronic document imaging and scanning solutions business and A4 Health Systems, acquired in March 2006, a provider of small practice management software solutions. The company acquired advanced Imaging Concepts in August 2003. The Information Services segment (5% of 2006 revenues) consists primarily of the Physicians Interactive (PI) business and the operations of RxCentric Inc., which was acquired by MDRX in August 2003. Physicians Interactive uses interactive education sessions to provide product information to the physicians, thus, linking them to pharmaceutical companies, managed care, and medical suppliers.
The positive thesis for Allscripts Healthcare is based on the success of its fast-growing SRS business segment. Sales in its SRS segment grew 42.7% in 2003, 55.9% in 2004, 48% in 2005, and 46% in 2006 (excluding A4 revenue), and up 32% for the first nine months of 2007. Driving this growth is the company's TouchWorks division, which is being helped by government support and legislation encouraging the adoption of electronic health records by physicians. The current Administration s support was indicated in the January 27, 2005 "Improving Care and Saving Lives Through Healthcare IT" press release issued by the White House:
At the end of the 1990s, most American industries were spending approximately $8,000 per worker for IT, but the healthcare industry was investing only approximately $1,000 per worker.
The United States has always been innovative with medical care, but continues to face major hurdles in our health information systems as we move into the 21st century.
Despite spending over $1.6 trillion on health care as a Nation, there are still serious concerns about high costs, avoidable medical errors, administrative inefficiencies, and poor coordination - all of which are closely connected to the failure to incorporate health information technology into our health care system.
Current health information systems use an outdated, paper-based system: The innovation that has made our medical care the world's best has not been applied to our health information systems. America's medical professionals are the best and brightest in the world, and set the standard for the world.
A patient's vital medical information is scattered, and full records are often unavailable at the time of care, and especially during emergency care.
Patients lack access to useful, credible health information to choose the best treatment for their needs, and manage their own wellness.
Physicians are not able to keep vast amounts of information about drugs, interactions, and guidelines easily at hand to select the best treatments for their patients. Medical orders and prescriptions are typically handwritten and are too often misunderstood.
America's doctors should have a high-quality, health information system to best serve their patients.
The political environment continues to improve. The federally-sponsored Certification Commission for Healthcare Information Technology (CCHIT) has approved both TouchWorks and A4's HealthMatics electronic health records. The two products become two of twenty certified EHR products by the commission in 2006. The commission certification provides a consistent benchmark for EHR products and become a strong marketing tool. The certification, as expressed by HHS Secretary John Leavitt, could become a Medicare prerequisite to obtaining federal contracts. Changes in HHS regulations are also favorable to HCIT companies. Before, hospitals could not provide IT for physicians, but exceptions now allow hospitals to pay up to 85% of the ambulatory EHR system costs. While providing benefits to the hospital attempting to capture physician markets and streamline healthcare reporting, the regulation changes substantially reduce the IT cost burden to physicians.
Overall, we believe the growth outlook is favorable, despite financial barriers, as acceptance of technology to improve healthcare is increasing and the Allscripts market is only about 40% penetrated. The company believes the large physician practice groups (25 or more physicians) are about 40% penetrated, while medium size groups (10-25) are about 20% penetrated, and small groups (less than 10) are only 10% penetrated. We believe penetration could be further enhanced by the January 2007 consortium launch of the National ePrescribing Patient Safety Initiative (NEPSI), with free ePrescribing software being offered by Allscripts. The availability of the free software, largely paid for by the consortium (hence not really affecting 2007 estimates), will help overcome the hurdles that have slowed physician acceptance and adoption of technology. The company expects full year NEPSI 2007 costs of $2 million-$3 million.
Allscripts signed a 10-year partnership, renegotiated early in 2006, in 2001 with IDX Systems, a dominant market player, to integrate Touchworks with IDX's practice management systems. IDX granted Allscripts the exclusive right to market, sell, license, and distribute ambulatory point-of-care and clinical application products to IDX customers and their affiliates. The renegotiation, prompted by GE acquiring IDX, frees GE/IDX to offer its own practice management and EHR offerings without restriction. The amended agreement also allows MDRX to market its own practice management and EHR solutions to non-IDX customers, removing a prior prohibition. Given the success the company has enjoyed of late selling its solutions to non-IDX customers, we believe this amendment is neutral to our outlook. In addition, GE and IDX will continue to market MDRX's Touchworks to current customers. As Touchworks is the only current fully-integrated solution within IDX's practice management software, we do not believe this, in the near-term, will affect the success rate of IDX customer wins, especially as new IDX clients will receive free MDRX interfaces. Importantly, MDRX will also continue to market the combined MDRX/IDX solution to existing IDX customers, and royalty payments to GE will be reduced 50% immediately (phasing out entirely over time, with an assumed timeline of 18 months).
In conjunction with the announced alliance amendment, in March 2006 the company acquired A4 Health Systems, a provider of practice management software solutions, and the leader in the small practice (1-9 physicians) space. The amended GE/IDX alliance offers market expansion opportunities for MDRX beyond the IDX customer base as MDRX will now be able to offer a fully integrated practice management and EHR solution. A4 had revenue of $75 million and net income of $8.3 million in 2005, with an organic 20% growth rate. A4's revenue mix was 75% ambulatory and 25% acute care. Given the March 2006 closing, A4 contributed $8 million to 1Q06 revenues, $23.4 million in 2Q06, $23.8 million in 3Q06 and $23.3 million in 4Q06. A4 contributed a total of $78.5 million in 2006 revenues. A4 also offers a hospital care management systems solution named Canopy that expands cross-selling opportunities. We view this acquisition positively given the market expansion possibilities into small and mid-sized physician practice management groups. The MDRX addressable market expands to $10 billion from $5 billion with the addition of the A4 practice management offerings.
To expand and enhance its hospital and care facilities electronic linking solutions, in January 2008, MDRX acquired Extended Care Information Network (ECIN) for an all-cash payment of approximately $90 million. ECIN, an 80-employee company, generated an estimated $19 million in revenues in 2007 with approximately 38% EBITDA margin. ECIN is a leading provider of hospital care management and discharge planning software with a client base of 400 hospitals and nearly 5,000 post-acute care facilities that range from nursing homes to residential-based rehabilitation. Along with Allscripts existing Canopy care management solution, the acquisition gives the company one of the largest installed bases of care management clients in the nation, with nearly 700 combined hospitals, as well as one of the largest networks of post-acute care facilities. Combining ECIN, the companies existing emergency department information systems (EDIS), and Canopy, a new Hospital Solutions Group was formed and will be directed by Jeff Surges, Chief Executive Officer of ECIN.
A robust marketplace, the IDX alliance, and other deals are helping drive SRS segment growth. SRS posted fourth quarter 2005 revenue growth of 28% year-over-year and in the first quarter 2006, SRS revenues grew 98% (excluding the A4 revenues, 42%). In second quarter 2006, SRS revenues (ex A4) grew 45%. In the third quarter 2006, SRS revenues climbed 200% (up 56% excluding A4 contribution). In fourth quarter 2006, SRS revenues increased 168% (up 40% excluding A4). In first quarter 2007, total SRS revenues grew 81%. In second quarter 2007, total SRS revenues increased 17% and increased 19% in Q307. Management is targeting annualized growth in SRS of 25%-30%, while expecting total company annualized revenue growth of 20%-25% in 2008.
In the first quarter 2006, SRS bookings were $27.1 million (A4 contributing $5 million for the month of March), up 82% year-over year from $14.9 million. Excluding the A4 bookings, organic software bookings growth was 48%. In the second quarter, SRS bookings were up 68% to $22.4 million, with A4 contributing $17.8 million to bookings. In the third quarter 2006, SRS bookings were $35.7 million, up 116%. Excluding A4 bookings of $13.9 million, SRS bookings rose 33% to $21.8 million. In the fourth quarter 2006, total SRS bookings were $61.4 million, up 111%. Excluding A4 bookings of $18.2 million, organic SRS bookings rose 48% to $43.2 million. In first quarter 2007, total bookings were roughly $34.5 million, with total SRS bookings contributing $29.2 million (a 7.7% increase), and the PI business contributing $5.3 million (a 30% increase). The lower-than-expected bookings level was due to a few large contracts slipping into Q207. In second quarter 2007, total bookings were roughly $54 million, with total SRS bookings contributing $52 million (a 30% increase), and the PI business contributing only $2 million (a 29% decrease) due to more-than-expected time taken in the sales cycle. In third quarter 2007, total bookings were $65 million, including a large deal with Columbia University Medical that won't begin implementation until 2008. SRS bookings were $63.2 million, up 77% and 22% sequentially, while PI bookings were $1.8 million. Although fourth quarter clinical bookings ($144.4 million for the 9 months to date in 2007) will need to hit $86 million in Q407, up 36% sequentially, the company nonetheless reiterated 2007 clinical software bookings of over $230 million, suggesting the pipeline remains strong for both EHR as well as practice management offerings. As well, typically 35-40% of the company's annual bookings occur in the fourth quarter. While sometimes lumpy, the level of bookings is important because it gives insights into the company's potential realized revenues in the coming year, although larger enterprise deals make it more difficult to translate the bookings into revenue. For instance, the large Columbia University Medical deal could take 18-24 months to implement, spreading revenues recognized over a longer time frame.
In the first quarter 2006, the company reported total company backlog of $158.4 million ($58 million related to A4), 74% from the Q405 level. Second quarter 2006 backlog increased to $168 million. Third quarter 2006 backlog increased to $174 million. In the fourth quarter 2006, backlog increased to $213 million. First quarter 2007 backlog decreased sequentially to $211.6 million, related to the softer-than-expected first quarter bookings as some of the bookings slippage was larger enterprise opportunities. Second quarter 2007 backlog increased to $222.5 million. Third quarter 2007 backlog increased to $246.7 million with License and service fees related to the clinical software businesses of $133.4 million. Software subscriptions that will be recognized over the next 3-5 years were $33.6 million. Software support and maintenance fees that are expected to be recognized over the next year were $59.4 million, and Physician's Interactive made up the balance of $20.2 million.
To continue to grow the business at a rapid pace, particularly if large enterprise deals management expects are actually contracted, the company has invested in aggressive hiring of late. As of third quarter 2007, the company had 1,062 employees, up from 1,036 net employees at the end of the second quarter and up from 967 at the end of 2006. The company ended the second quarter with 37 reps in TouchWorks (not including two hired from a competitor after the Q2 close), and 48 in HealthMatics. Management indicated that it will continue to hire in forthcoming quarters. The hiring need could also mean the company is straining to meet its implementation targets, especially since the company has not met its revenue expectations in the first three quarters of 2007. As well, MDRX has not met earnings targets for the nine months to date in 2007 either.
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