A popular investment idea is the consolidation play. It happened in the pool supply business over the past decade as Pool Corp. (Nasdaq:POOL) bought up smaller distributors across the country. Brunswick (NYSE:BC) tried it in the boat business with mediocre results. The medical records field is the next industry ripe for consolidation.
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Estimates put the number of electronic medical records (EMR) systems sold today anywhere between 300 and 400, most provided by small privately-owned businesses. You can count on one hand the number of big companies competing in this highly fragmented industry. The elephant in the room is GE (NYSE:GE) whose healthcare division, which includes data management, delivered revenues of $16 billion and profits of $2.4 billion in 2009.
Smaller publicly-traded companies competing in this space include Allscripts-Misys Healthcare (Nasdaq:MDRX), Cerner Corp. (Nasdaq:CERN), Merge Healthcare (Nasdaq:MRGE), Quality Systems (Nasdaq:QSII), through its NextGen subsidiary, and MedAssets (Nasdaq:MDAS). The five have a combined market cap of $12.9 billion. After this, we get small in a hurry. There's no telling who'll be doing most of the buying but it makes sense that GE would be up for a deal if it were big enough.
Probably the biggest deal of the last two years was the 2008 merger of Allscripts with Misys, a British-based technology company, combining their two healthcare businesses. Misys paid $330 million for 54.5% of the merged company. Existing Allscripts shareholders received a special dividend of $5.23 a share for agreeing to take a back seat in the larger business. So far, shareholders have done all right. In 2009, its stock was up 104%. Year-to-date, however, it's down 2%, a good indication that the euphoria from the $45 billion stimulus boost for Healthcare IT in 2009 is over and earnings are once again the focus.
A more recent deal has Merge Healthcare acquiring Amicas Inc. for $248 million. This creates a stronger pure-play medical imaging and information software business with greater revenues and one fewer competitor to tangle with. Only announced March 5, it's too early to tell how the deal with play out. However, it does signal a continuing consolidation.
Where To Next
Consolidation in the EMR field is going to happen but with so many participants it likely will take years. Ritu Agarwal, Director of the Center for Health Information and Decision Systems at the University of Maryland believes "larger players will buy out smaller players so they can offer services across the board. Many of the smaller players will position themselves for acquisition."
A possible scenario could see the proliferation of applications to the point where the big companies must act in order to protect market share. In the meantime, look for some of the smaller private companies to merge with other small businesses possessing complimentary products and services.
Some suspect in five years time the list of companies selling EMR systems will have shrunk through mergers and redundancy to less than 100. The biggest revenue generators on this list will either be owned by one of the six mentioned earlier or in their cross hairs.
The Bottom Line
There are three ways to play this. You can buy GE stock hoping that the healthcare division opens its wallet and makes some acquisitions to complement its existing Centricity business. Even if it doesn't, you own a pretty stable large cap. The second play is to buy Cerner stock. It seems to have a good mix of customers between hospitals and physician offices and should continue to benefit from stimulus money through 2013. Lastly, you can buy Merge, the smallest of the six and hope they get taken out in the next couple of years. (To learn more, see A Checklist For Successful Medical Technology Investments.)
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