THE HEDGEYE EDGE
Cerner Corporation (CERN) is the #2 EHR vendor in the U.S. and #1 Healthcare IT vendor in the world. While we don't believe this will change anytime soon, we also don't believe they are immune to the challenges of a saturated market with limited replacement opportunity. Simply put, Cerner is a nice house in the bad neighborhood, that is, the EHR industry.
In 2003, HIT adoption began with 5-15% penetration into the most basic EHR element, Computer Provider Order Entry Systems (CPOEs). In 2009 the HITECH Act provided $40 Billion of stimulus to the HIT industry which helped fuel Cerner’s stock from around $20 to its peak of about $75 in 2015. Over a decade later the industry is penetrated with over 90% of hospitals having an EHR system.
We expect shares of CERN to trade back to the $50 level or below as Cerner’s core market slows and likely declines.
INTERMEDIATE TERM (TREND)
The EHR replacement market is on its last legs as the McKesson Horizon sunset opportunity will be fully depleted by the end of 2016. McKesson has been a core driver representing a third of all replacement decisions over the last several years. Cerner does not have enough market opportunity left to sustain the same level of new business activity in 2017 and beyond, particularly within the large IDNs.
The remaining market opportunity will be difficult to convert as 90% of the remaining decisions will be made by single-hospital health systems, and of these, 47% are hospitals with fewer than 25 beds.
LONG TERM (TAIL)
The Affordable Care Act was a financial boon to hospitals, driving incremental volume from the +25 million newly insured and reducing bad debt expense, and by extension, positive for capital spending. The impact from the ACA began just as the EHR Incentive Stimulus program was ending at the end of 2014 and continued through most of 2015.
However, we are now on the downside of the ACA impact, and we expect a material deceleration and decline in healthcare consumption heading into 2017. This will put increased pressure on hospital budgets. As a result, we expect already cautious hospital CFOs to be more selective in IT investment, especially after spending millions of dollars on EHR implementations over the last 5-years.