Allscripts Healthcare (NASDAQ:MDRX) provides software and clinical information services to physicians and hospitals. The company is involved in what's known as the electronic medical records business, or EMR. Specifically, MDRX makes software that allows physicians to manage patient records. In addition, the firm's software allows hospitals to access patients' records electronically as needed, including in emergency medical situations.
The software also facilitates communication between doctors and pharmaceutical companies and helps physicians manage the ongoing treatment of patients with chronic diseases.
Allscripts Healthcare benefits from a large base of existing customers. As one of the first movers in the EMR industry, MDRX was among the first to start signing up doctors offices and hospitals to use its software. These physicians are already comfortable using MDRX systems, and they understand how the systems work. Therefore, they are likely to keep buying MDRX product updates as opposed to switching providers and learning a new system.
In addition, we like MDRX's strategy of modular software architecture. This means customers can use parts of MDRX software alongside their existing software -- they don't have to buy the system as a package. This opens up the opportunity for customers using other software to test out Allscripts' products, thereby driving new customer growth.
Healthcare costs have been rising rapidly in recent years. In fact, the costs associated with hospital stays, outpatient care, and pharmaceuticals are all growing much faster than inflation. One of the reasons for this: the U.S. healthcare system has some striking inefficiencies. The government estimates that the U.S. healthcare system wastes as much as $300 billion per year in unnecessary costs and excessive red tape.
Two years ago, President Bush highlighted one of the most glaring problems -- the industry's failure to use technology to automate and streamline basic services and bookkeeping. For example, while there have certainly been quantum leaps in the quality and scope of drugs available to consumers over the past century, most prescriptions are still filled the same way they were 100 years ago.
Prescriptions are written on small pads and are physically transferred to a pharmacy in order to be filled. Paper copies of those prescriptions are then held at the pharmacy and in patients' physical records at their doctor's office.
While this might seem a small point, estimates by the Rand Corporation suggest the healthcare industry could save more than $160 billion annually by eliminating paper records and instead keeping records in digital form. This would also enable faraway hospitals to access patient information quickly and easily. Prescriptions could also be filled electronically, with doctors transmitting prescriptions and authorizations for refills directly to pharmacies. Electronic prescriptions also offer better safety and accuracy by eliminating the confusion sometimes caused by handwritten prescriptions. Furthermore, insurance requests and Medicare documents can also be automatically filled out and transmitted.
To realize these efficiencies, the government and insurance companies are pushing EMR technology, and hospitals and physicians' offices are starting to make the shift. But that shift is still in the early stages -- MDRX should enjoy years of growth ahead as the healthcare system embraces information technology as a means of cutting costs and improving safety.
Valuation and Outlook
MDRX trades at a little over 21 times 2007 earnings estimates. That represents a considerable discount to the company's +30% annualized long-term growth rate. It's unusual for a company in the healthcare industry to trade at a discount to its growth rate -- typically, the stable demand for healthcare warrants a premium valuation. It's not hard to imagine MDRX trading at 30 times next year's earnings -- roughly $32 -- over the next year or so.
With the government actively pushing this technology, EMR spending may actually accelerate in coming years. Therefore, Allscripts' anticipated +30% growth rate could prove to be conservative. As a result, shares of MDRX could continue to deliver market-beating gains for years to come.
MDRX 1-yr chart:
Disclosure: Author has no position in MDRX