Cerner (CERN) And Allscripts (MDRX) Overpriced As Healthcare IT Stock Prices Rise To Risky Levels According To Morningstar: An Exclusive Wall Street Transcript Interview Excerpt

67 WALL STREET, New York - November 27, 2011 - The Wall Street Transcript has just published its Health Care IT Report offering a timely review of the sector to serious investors and industry executives. This special feature contains expert industry commentary through in-depth interviews with public company CEOs, Equity Analysts and Money Managers. The full issue is available by calling (212) 952-7433 or via The Wall Street Transcript Online.

Topics covered: Electronic Health Records Implementation - P/E Multiple Expansion for Health Care IT - Analytics for Evidence-Based Care Protocols - Health Care IT Consolidation - EHR Bookings Growth Rate

Companies include: Advisory Board (ABCO); Allscripts (MDRX); Allscripts Healthcare Solutions, Inc. (MDRX_); CPSI (CPSI); Cerner (CERN); Cigna (CI); Emdeon (EM); Epocrates (EPOC); GE (GE); HMS Holdings (HMSY); Healthways (HWAY); IBM (IBM); McKesson (MCK); MedAssets (MDAS); Microsoft (MSFT); Omnicell (OMCL); Oracle (ORCL); Quality Systems (QSII); SXC Health Solutions Corp. (SXCI); Siemens (SI); athena (ATHN); eHealth (EHTH).

Two highly experienced Healthcare IT stock analysts from Morningstar discuss their outlook for the sector for investors.

Patrick Dunn is a Stock Analyst and the Manager of Operations for Morningstar, Inc., equity research. Before his current position, Mr. Dunn was a Senior Analyst covering variable annuity investments. He joined the Morningstar Development Program in July 2006 after graduating magna cum laude from the University of Notre Dame.

Rafael Garcia is a Stock Analyst covering software firms. Before joining Morningstar, Inc., in November 2006, he spent six years as a Software Engineer at MicroStrategy, Inc. Mr. Garcia holds an MBA from the University of Maryland and a bachelor's degree in computer science from the Monterrey Institute of Technology and Higher Education in Mexico.

TWST: You are both Morningstar's Analysts on the health IT sector. How do you split coverage?

Mr. Dunn: I don't know that there is necessarily a formula that we are using in terms of dividing the coverage, except Rafael may take those that are more heavily ingrained on the tech portion. I have a smaller coverage list than a typical analyst because I have a lot of project-management duties.

Mr. Garcia: To give you an idea, I cover Cerner (CERN), Allscripts (MDRX). Patrick covers athenahealth (ATHN), MedAssets (MDAS), eHealth (EHTH) and HMS Holdings (HMSY).

TWST: Although your coverage lists are somewhat different, you basically collaborate on the sector for Morningstar.

Mr. Garcia: Yes. That's right.

TWST: For several years, the sector was focused around meaningful use and the impact of the stimulus money. Now that we are in the implementation phase, what is happening with the sector?

Mr. Dunn: The idea that people need to attest to meaningful use in FY 2011 is incorrect. In fact, there are a number of good reasons why a lot of hospitals and physicians wouldn't want to attest this year. Perhaps chief among those reasons is that health care providers attesting to meaningful use in FY 2011 are currently expected to meet stage II requirements by FY 2013. This is problematic because much of the second stage's requirements remain unsettled.

TWST: Other than implementation, what are the important themes in the space right now?

Mr. Garcia: I think that health IT is an industry that still has a lot of growth ahead of us. It makes a lot of sense to digitize the health care system. However, over the last few years, a lot of investors have had very lofty expectations in terms of the growth potential of the industry, how fast it was going to ramp up. The way we see it is that it still has a lot of growth ahead. We are still in the early innings of this industry. Nonetheless, now we are seeing some companies growing at different rates, depending on where they are positioned in the market. I think that besides growth, something we keep an eye on is the regulatory framework. The meaningful use rule is one of the key drivers of the industry, so that's something that we certainly keep an eye on because any changes to meaningful use rules can significantly affect the rate of adoption of health care IT.

TWST: What about trends in the product offerings? Are we seeing movement away from providing individual pieces of the health IT to offering full systems?

Mr. Garcia: Different companies have different products. If you look at a health care IT provider like Cerner (CERN), their strategy is to provide an end-to-end solution. That's primarily geared toward hospitals that have large footprints. You can deploy the basic platform and add on different modules like oncology or surgery or a number of different modules that can add functionality. There are companies like athenahealth (ATHN) that have traditionally focused on particular parts of the health care IT model. Here we have to take a look at individual companies to see how their solutions fit and what is it that they provide.

Mr. Dunn: Part of that has to do with what we are seeing in terms of the adoption process, which more and more is driven by larger hospital networks that look for comprehensive, full-scale systems. Niche offerings are going to appeal to small physicians' offices, but oftentimes if hospitals are going to take the step of adopting a new HIT platform, they really want it to be compatible with all their systems, which favors platforms with a variety of modules.

TWST: Are certain segments growing faster than others?

Mr. Garcia: The way we look at health care IT is that it's actually made of four different components. One is the electronic health care records, the other one is revenue cycle management, the other one is the traditional practice management systems and finally is e-prescribing. When we think about health care IT, we really think about those four different components, and each of those is growing at different rates. If you think about electronic health care records, that's what's driving the adoption we were talking about. If you think about practice management, that's a solution that has been around for quite some time and it has a different growth profile.

Mr. Dunn: The real growth driver for the most part is electronic health care records, and oftentimes these other ancillary IT services are being tapped on to health care record technology as add-ons.

TWST: You also mentioned that any changes to meaningful use would impact the sector. Does it look as if we're going to have changes to meaningful use?

Mr. Garcia: That's hard to guess because when you look at the whole process of defining meaningful use, you have the government on one side, which should always lead for higher standards, and you have the providers on the other side trying to grow at a more gradual pace, so more hospitals can qualify for meaningful use, and therefore bring in more clients into their own platforms. You have the hospitals themselves who want to push for lower standards so they can more easily qualify for those spots. So I think there's a lot of horse trading behind the scenes and it's hard to read.

Mr. Dunn: One place where you're likely to see some changes is the timing regarding meaningful use, specifically around the requirement for stage II meaningful use attestation no later than FY 2013 for FY 2011 compliers.

TWST: Who in your coverage do you like right now and why?

Mr. Garcia: I have had a different view of the industry from the beginning. I have been covering this space for four and a half years, and I have been fairly skeptical of the long-term growth of the industry throughout that time. I really like the fundamental idea of health IT, and I think it makes a lot of sense to digitize the health care system. But looking at the companies from a valuation point of view, they have traded at very rich multiples over the last five or six years. So I don't have any strong "buys" at this time. In fact, we rate Cerner (CERN) right now with the equivalent of a "sell." Allscripts (MDRX) I think is fairly valued at this point. So right now I don't have any health care IT companies that attract us from an investment point of view.

Mr. Dunn: My list is fairly similar. Nearly all of my list is the equivalent of "hold." In reviewing my valuations, it seems that the prices have built in the assumption that all these hospitals are going to scramble to meet meaningful use standards based on the earliest possible deadlines. I think that's an incorrect assumption. Over the short term, when these deadlines start to roll through and it's clear that the numbers don't meet expectations, prices may fall and open up an opportunity.

TWST: Going back to your comments on Cerner and Allscripts, to reiterate, your hesitation is based on valuation, not on company specifics?

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