THE HEDGEYE EDGE
Allscripts Healthcare is a legacy provider of Electronic Medical Record and Practice Management software and solutions to physician offices (ambulatory) and hospitals (inpatient). The market for ambulatory EHRs (50% of MDRX Sales) is highly fragmented, with over 400 different vendors claiming some stake to the market. The large number of vendors is the result of government subsidies issued to purchase software under the HITECH Act (2009), which mandated their purchase or face penalties longer term.
However, the stimulus spending has now ended and going forward, we believe market share will naturally accrue to the top vendors in the market. Our view is that Allscripts is NOT a top vendor.
Allscripts has a difficult past and questionable future. The company made a series of acquisitions in the 2005-2010 period and failed to integrate them properly. As HITECH requirements began, also called "Meaningful Use" attestation, in 2011 Allscripts was unable to keep up.
What resulted was a 30% drop in bookings in 2012, 50% drop in stock price, a board shakeup and ultimately a new CEO and management team. The new CEO, Paul Black, has made great strides to turn Allscripts around. Unfortunately, we believe the damage is already done and the most optimistic version of the turn-around story is reflected in the current stock price.
We have done a lot of work in the Health IT space as a derivative of our Best Idea Long call on athenahealth (ATHN), building proprietary tracking tools and analyzing large datasets to track share gain/loss over time. We also conduct a great deal of primary research, mainly in the form of speaking with those in charge of making purchasing decisions at large Health Systems and system users. The results of this research suggest that Allscripts will continue to be a share donor for the foreseeable future.
INTERMEDIATE TERM (TREND)
Based on our assessment of the market, we believe bookings growth will slow over the course of 2016, and expect the multiple to compress as a result. Historically, there has been a 0.85 correlation between bookings growth YoY and the change in forward multiple. This results in a stock price closer to $10 on a trend duration.
We expect our thesis to play out on both a trend and tail duration. Our key thesis points are as follows:
- MARKET SHARE DONOR
Data continues to show ambulatory and inpatient share losses. We expect this trend to continue as large health systems consolidate and value-based reimbursement drives the need for a single inpatient EHR. On the ambulatory side (~50% sales), Allscripts will continue to lose business (prospective and current) to peers athenahealth and eClinicalWorks, both of whom surpass Allscripts in interoperability and outsourcing capabilities. We will be receiving quarterly market share updates to monitor our thesis, and will continue to update our proprietary trackers.
- LIMITED ADDRESSABLE MARKET
While Allscripts reputation has markedly improved since the dark days of 2012-2013, the reality is that the damage is already done. Many Hospital Executives refuse to include Allscripts in RFPs and estimates of mind share vs. market share do not bode well for bookings growth. Based on industry ratings and anecdotes, the probability of Allscripts unseating the current acute care EMR vendor at any large IDN is low. We will continue to collect anecdotes from industry participants, including current Allscripts customers.
- ESTIMATES TOO HIGH
Current valuation appears to be supported by accelerating sales growth in 2018-2019 from low single digits to mid-teens. In order for this to occur, bookings would need to sustain +25% growth and backlog conversion would need to accelerate. With system sales in secular decline, new contract lengths ranging from 5-10 years and for the reasons outlined above, we find this unlikely.
LONG TERM (TAIL)
Allscripts has amassed a large install base, and currently ranks 3rd in Ambulatory EHR market share. Share losses at Allscripts will come at both ends:
- Competitive displacement from the likes of athenahealth and eClinicalWorks and
- Health system consolidation resulting in the rip and replace of the legacy system.
On the last point, the shift to value-based reimbursement will likely accelerate health system consolidation in the coming years. The vendors that survive will be the ones who invest in the usability and interoperability of their products, and whose incentives are aligned with that of the physician. Allscripts does not rank favorable in either of these categories.
While there will certainly be volatility along the way, on a tail duration we believe the stock can reach the $5-7 level.
Click here to watch a video of Healthcare analysts Tom Tobin and Andrew Freedman laying out their MDRX short thesis.