Opportunities Abound in Healthcare Information Technology: Two Promising Stock Picks

Includes: MDAS, MDSO
by: Daniel Long

One result of the recent healthcare and stimulus bills is “The Health Information Technology for Economic and Clinical Health Act”. HITECH is just one of several recent initiatives designed to bring our outdated medical information system up to date in time for an inevitable influx of baby boomers. This has been a centerpiece of the current administration with respect to paying for some of the stimulus.

As President Barack Obama said in February 9, 2009:

We have the most inefficient health care system imaginable. We're still using paper. Nurses can't read the prescriptions that doctors have written out. Why wouldn't we want to put that on an electronic medical record that will reduce error rates, reduce our long-term costs of health care, and create jobs right now?"

HITECH specifically will provide $19 billion over the next four years. Much of it will go to healthcare providers in the form of grants, loans and incentive payments for updating their information flow. There are conditions tied to the money, however. Doctors will have to see improved error rates and cost savings within predetermined time and monetary constraints, or they will have to give it back. If things go well, just one doctor could get as much as $44,000.

Another $2 billion will be available to the Office of the National Coordinator for Health Information Technology (ONC) which was established in 2004. The ONC is responsible for, among other things, establishing national standards for the exchange of health information.

Meanwhile, the job outlook looks pretty good if you're in the Healthcare Information Technology (HIT) business. According to the U.S. Bureau of Labor Statistics, healthcare and social services are expected to add over 4 million jobs by 2018, more than any other service providing industry. Many of the jobs will be in medical information technology services, which is expected to see more than a 50% growth rate.

All of this translates to expected growth for healthcare information services stocks as well, which must be why we see an average P/E of 48 for these issues, closer to their technology roots than their healthcare ones. Things could change on the valuation front in the short term, however, as a report from Stanford University just released shows that HIT does not improve patient care. The study may end up being mute in the long run, however, as systems may be infantile, more widespread use may be needed and more training may be required.

The companies that have the best chance of delivering on the quality improvement front will likely garner the majority of the payments available. Many of them will be going after the money from different angles, so it will be important to keep an eye on what comes out of the ONC to see which ones are positioned for the most growth. Several big names are involved that will probably soak up the majority of the stimulus, including General Electric (NYSE:GE), Siemens (SI), Google (NASDAQ:GOOG) and Microsoft (NASDAQ:MSFT). Whats leftover for HIT stocks, however, may be significant, especially for an industry that has just a $21 billion total market cap.

Here are a couple of stocks that seem to be getting a great start right out of the gate.

MedAssets, Inc. (NASDAQ:MDAS)

MedAssets is focused on helping healthcare providers control costs and increase regulatory compliance, key elements in the success of the programs. The company's revenue cycle and spend management solutions are now used by 4,000 hospitals and 75,000 other healthcare providers thanks to a recent acquisition. In November, 2010, MedAssets completed an $850 million purchase of the Dallas based Broadlane Group which originally served 1,100 hospitals and 50,000 other providers on it's own. The acquisition added to MedAssets' total customers, but will also bring cost savings from approximately 25,400 duplicate clients. The company says that these cost savings will be $20 million in 2011, and that overall the deal will add 8-10 cents to the 2011 non-gaap EPS.

Currently, of the five publicly traded Healthcare Information Services stocks with market caps over a $1 billion, MedAssets has the lowest price to book value at 2.48. It also has the lowest forward P/E at 17 while the others are in the mid 20's. Broadlane will be included for the first time on the annual report set for February 24th and the company has said it expects a loss for 2010 due to the acquisition costs. 2011 estimates still seem to support a forward P/E of 17 or even lower. Before the acquisition, MedAssets was on track to report a second strait year of 45-50% earnings growth.

Medidata Solutions, Inc. (NASDAQ:MDSO)

Like the similarly sized Merge Healthcare (NASDAQ:MRGE), that we also like in this space, Medidata Solutions (MDSO) has seen consistent earnings growth quarter after quarter, and year after year. Medidata specializes in providing technology solutions to organizations engaging in clinical trials and other clinical development of drugs and medical devices. Clinical research is a big part of HITECH as the Electronic Health Record (EHR) being rolled out is able to connect up with other systems. This is important because clinical research and trials often include individuals from abroad.

MDSO has beat analyst estimates by large margins over the past year since the company turned profitable in 2009. That year, the company earned 25 cents per share and is on track to earn close to that much just for the last quarter of 2010. This dramatic and surprising growth means that the forward P/E of 20 may be a little high.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.