Transcript Health Care Information Technology & Medical Devices

Healthcare IT & Services
Lots of Value and Good Fundamentals
Industry Rating: Overweight
Steven P. Halper
Partner, Equity Research
Phone: 212-271-3807
E-Mail: [email protected]
1
Healthcare IT and Services



Industry Overview
– Macro Orientation
– Healthcare (products and services) is a growth industry
Demand Trends by Sector
– Pharmaceutical Services
– Provider and Payer Software Services
Stock Selection
– Outperform: ABC, ADVP, AGP, CERN, CNTE, IDXC,
IMPC, MCK, NDC, OCR, PHCC, PILL and PPDI
– Peer Perform: ACDO, AHS, CAH, CVD, ESRX, HLTH,
MEDQ, PRXL, PSTI, RX and TZIX
2
Industry Overview
 Pharmaceutical Services
 Utilization beginning to pick up again and net price increases
remain solid
 Forward buying opportunities still exist despite increasing
use of inventory management agreements
 Number of new product launches lowest in 19 years
 Prefer drug distribution stocks over PBMs and CROs
 Hospital industry enjoying solid performance.
 IT expenditures still growing
 Expect another good year for reimbursement trends
 Medicare inpatient rates increase in line with expectations;
Higher utilization of healthcare resources
 Patient Safety and efforts to reduce medical errors represent
additional long-term growth drivers
 U.K. NHS upside for 2004 and beyond
3
Relative Price Performance:
HCIT & Services Index vs. S&P 500
125
115
S&P 500
105
95
85
HCIT & Services
Index
4
3
6/
0
9/
3
7/
0
8/
3
8/
0
7/
3
8/
0
6/
3
9/
0
5/
4/
9/
0
3
03
3/
10
/
3
8/
0
2/
3
9/
0
1/
0/
02
12
/1
0/
02
11
/1
1/
02
10
/1
9/
11
/
02
75
Healthcare IT & Services
Investment Framework
5
Pharmaceutical Services
 Current Environment:
 Why are Big Pharma co’s cast as the villains?
 Prescriptions filled growing in the 2-3% range Y/Y
 Price increases averaging 5-6%, net of generics
 Long Term Growth Drivers:
 New product development is more important than ever
 Use technology and outsourcing solutions to bring products to market
faster and create efficiencies
 Fewer buy side margin opportunities may lead to better sell side margins
 Political Environment:
 Medicare drug benefit limping along
 Continue to expect headline risk on drug pricing, rebates and AWP
6
70,000
60,000
50,000
40,000
30,000
Number of Prescriptions Filled (in thousands)
2001-2003 Weekly Prescriptions Filled
New Rx
Total Rx
20,000
Aug-03
Jul-03
Jun-03
May-03
Apr-03
Mar-03
Feb-03
Jan-03
Dec-02
Nov-02
Oct-02
Sep-02
Aug-02
Aug-03
Jul-03
Jun-03
May-03
Apr-03
Mar-03
Feb-03
Jan-03
Dec-02
Nov-02
Oct-02
Sep-02
Aug-02
Jul-02
Jun-02
May-02
Apr-02
Mar-02
Feb-02
Jan-02
Dec-01
Nov-01
Oct-01
Sep-01
Aug-01
Jul-01
Jun-01
May-01
Apr-01
Mar-01
Feb-01
Jan-01
7
Jul-02
New Rx
Total Rx
Jun-02
May-02
Apr-02
Mar-02
Feb-02
Jan-02
Dec-01
Nov-01
Oct-01
Sep-01
Aug-01
Jul-01
Jun-01
May-01
Apr-01
Mar-01
Feb-01
Jan-01
2001-2003 Percent Change in Weekly Prescription Volume
15%
10%
5%
0%
-5%
1999-2003 Average Retail Pharmacy Same Store Sales
Growth
Average of CVS, Walgreen, Eckerd, Longs, Rite Aid, and Duane Reade pharmacy comps
25
20
% growth
15
10
5
8
ug
-0
3
A
pr
-0
3
A
ec
-0
2
D
ug
-0
2
A
pr
-0
2
A
D
ec
-0
1
ug
-0
1
A
pr
-0
1
A
ec
-0
0
D
ug
-0
0
A
pr
-0
0
A
ec
-9
9
D
A
ug
-9
9
0
Pharmaceutical Services: Distribution







U.S. drug distribution industry now dominated by three
large participants (ABC, CAH and MCK).
Industry characterized by large revenues, low margins
and very high barriers to entry.
Retail prescription sales beginning to improve again.
Independent drug stores showing a re-birth.
Generic margin opportunity over-rated as many large
chains buy generics directly.
Fewer buyside margin opportunities available but impact
varies by distributor
Specialty distribution still experiencing good growth
Stocks are very inexpensive. Investor perception is still
negative. ABC is our favorite stock.
9
Pharmaceutical Services: Market Intelligence





IMS Health is the dominant provider of information and
data services to the pharmaceutical industry. NDCHealth
has about 10% market share in U.S.
Industry characterized by high margins for efficient
providers. Securing access to data and ability to aggregate
into meaningful information is not an easy task.
Virtually all U.S. drug manufacturers rely on IMS data to
track sales effectiveness. Outside of U.S., there exists more
local competitors.
Despite dominant participant, new competitors always try
to enter the U.S. market.
An industry with good long-term fundamentals but the
near term remains tough due to big pharma’s
unwillingness to invest in new products and services.
10
Pharmaceutical Services: PBMs






As third-party payers look to reduce overall drug costs,
pharmacy benefit managers are the primary vehicle.
Market participants include Caremark (merging with
ADVP), Express Scripts and Merck-Medco.
While most commercially-insured individuals are already
covered, the potential to gain/lose market share always
exists. Medicare drug benefit represents new growth
potential depending on vehicle to administer benefit.
Significant headline risk (subpoenas and DOJ
investigations) remains but valuations over time, will
ultimately reflect good growth prospects.
PBMs exploring other growth initiatives including
specialty distribution, mail order and market intelligence.
Negative psychology toward Caremark
11
Pharmaceutical Services: CROs







Current CRO market is about $5 billion; expect revenue
growth of about 10% near term
Fundamentals improving but no longer a 30% growth
industry
“CROs” do more than just run clinical trials
Information technology to play an important role in the
drug discovery and clinical development processes
Those CROs taking advantage of IT are likely to gain
market share while maintaining or improving margins
Long-term growth drivers in place given bulge in new
molecules; This scenario is several years away
New bookings growth and cancellation rates can be
unpredictable, which limits valuation over the long term.
12
Provider and Payer Software Services
 Current Environment:
Hospital utilization of IT continues to expand
Consolidation among vendors has subsided
Physician and Internet opportunities are more limited
 Long Term Growth Drivers:
Continuous focus on cost control
Patient Safety
Eventually hospital capacity will increase
U.K. NHS contract awards likely in Q4/Q1
 Political Environment:
Hospital profitability determined by Medicare reimbursement,
which changes every year
Federal and state mandates to use information technology to reduce
medical errors and increase patient safety
13
HIMSS Survey Data Results
(2003 and prior Survey Data
available at www.himss.org)
Source for all survey results include previous years Annual HIMSS Leadership Survey Sponsored by IBM and Dell
Computer Corporation and the 13th Annual HIMSS Leadership Survey Sponsored by Superior Consultant Company,
Inc.
14
Top 5 IT Priorities 2003 vs. 2002





Survey Finding
Reduce Medical Errors/
Promote Patient Safety
(52% vs. 46%)
Upgrade security on IT
Systems to meet HIPAA
regulations (47% vs. 60%)
Implement privacy
modifications for HIPAA
(46% vs. NM)
Upgrade Inpatient Clinical
Systems (38% vs. 42%)
Upgrade network
infrastructure (34% vs.
37%)




15
TWP Opinion
Continued recognition that
CPOE has potential to
improve patient safety
Much HIPAA work has
already been completed on
security issues but
numerous privacy issues
still remain
Hospitals may be focused
on other issues rather than
clinical systems
improvements
Infrastructure getting better
Significant Barriers for IT (2003 vs 2002)
Survey Finding





Lack of adequate financial
support (23% vs. 27%)
Vendors’ inability to
effectively deliver (19% vs.
18%)
Difficulty in proving IT
quantifiable benefits/ ROI
(13% vs. 13%)
Lack of staffing resources
(12% vs. 4%)
Difficulty achieving enduser acceptance (10% vs.
15%)





16
TWP Opinion
Hospital execs are finally
figuring it out
A common complaint for
large complex software
installations
Hospitals are more
sophisticated about understanding workflows
Surprising result especially
given the overall tech
meltdown
A very positive trend
Growth Driver:
Use of a Computer-based Patient Record
We have a fully operational CPR system in place:
1998 : 2%of respondents
1999 : 11%
TWP Opinion:
2000 : 12%
After all these years, CPR is making
progress, yet still very under penetrated
2001 : 13%
2002 : 13%
2003: 19%
-- installations in progress increased in 2003
(37% vs. 32% in 2002)
17
Anticipated Changes in IT Budgets
1998 & 1999: 71-73% of respondents indicated
budgets were definitely or probably increasing
2000: weighted average was 67% - representing a tough
trend
2001: 68% of respondents indicated budgets were
definitely or probably increasing
2002: 67% of respondents indicated budgets were
definitely or probably increasing
2003: 68% of respondents indicated budgets were
definitely or probably increasing
TWP Opinion: Steady budgets confirm our belief that this is still
a growth industry
18
Medicaid Managed Care
 Current Environment:
Medicaid HMOs are still not considered mainstream by investors. Too
many investors associate Medicaid with Medicare; Growth predicated
on membership growth, not rate increases.
 Long Term Growth Drivers:
More states will look to managed care as a solution to expanding
Medicaid population and expenditures; Studies indicate that managed
care plans help states save money.
 Political Environment:
Must be monitored on a state by state basis; Recent Federal tax package
includes $20 billion for the states over the next 2 years, with $10 billion
targeted directly at Medicaid programs.
19
Which Stocks Should We Own?
(Outperform rated stocks)
Pharmaceutical Services:
AmerisourceBergen (ABC)
AdvancePCS (ADVP)
McKesson Corp. (MCK)
Pharmaceutical Product and Development (PPDI)
Omnicare (OCR)
Priority Healthcare (PHCC)
Provider and Payer Software and Services:
Cerner Corp. (CERN)
IDX Systems (IDXC)
IMPAC Medical (IMPC)
NDCHealth (NDC)
ProxyMed (PILL)
Other: Amerigroup (AGP)
Centene Corporation (CNTE)
20
Pharmaceutical Services:
AmerisourceBergen (ABC)
Rated: Outperform
– Our favorite drug distribution stock
– Fears of guidance reduction are overblown; ABC still has
synergy capture from Bergen consolidation; not as
dependent on buyside margins as CAH
– ABC focuses primarily on independent drug stores and
regional chains; largest provider to mail order segment;
We are not overly concerned with the potential loss of
ADVP business with Caremark merger. Dominant
provider in hospital pharmacy segment as well.
– Similar to other distributors, ABC focused on building
ancillary businesses. Focus includes: Automation,
specialty pharmacy and packaging
> Expectations are low enough which creates an interesting
investment opportunity; Our favorite stock among the
big three distributors
21
Pharmaceutical Services:
McKesson (MCK)
Rated: Outperform
– Distribution operating margins still posting positive
trends; Revenue growth surprisingly strong;
– Expectations are still achievable even with slowing
pharmacy retail trends. Top customers include RiteAid,
WalMart and Omnicare.
– Recent channel checks indicate good acceptance of
Horizon Expert Orders within existing customer base.
MCK is uniquely positioned within hospital business
given its automation, IT and outsourcing focus.
– Specialty pharmacy operations under appreciated by
investors.
> Much like ABC, expectations are low enough which
creates an interesting investment opportunity;
22
Pharmaceutical Services:
Priority Healthcare (PHCC)
Rated: Outperform
– Broad-based, all product specialty distributor;
Organic growth slowing to about 20% given
weakness in Hep C and Fertility markets. New
product flow has been strong. Under appreciated
alternate-site healthcare distribution operations.
– All product strategy may encounter increased
competition from PBMs and main-line distributors.
– Potentially a great acquisition target.
– Wal-Mart outsourcing contract represents new
growth opportunity which cannot be duplicated by
another industry participant.
> As growth continues and Wal-Mart begins to
contribute, multiple expansion is likely
23
Provider Software:
Cerner Corp. (CERN)
Rated: Outperform
– Premier provider of clinical apps to hospital
industry; diversifying revenue stream
– Q1 bookings disappointment represents first
glitch in almost four years; Strong recovery in Q2
– Recovery like to be quicker this time around as
around as the company does not require major
investments in sales force, client service and R&D
areas
– Industry trends remain positive. Big potential
from UK NHS project.
> Shares are no longer that in expensive based on
2004 EPS estimate; Still worth owning as next EPS
revision is upward.
24
Provider Software:
IDX Systems (IDXC)
Rated: Outperform
– Premier provider of practice management systems
to large physician groups and inpatient clinical
applications.
– Much more diversified by customer focus and
product offering than most investors believe.
– Has added new products (radiology and PACS)
and more realistic about growth in CareCast.
– Recently divested struggling medical transcription
operations;
– Participating in UK NHS procurement project
> Shares trade at 21X 2004 EPS estimates, but next
EPS revision is probably upward.
25
Medicaid Managed Care:
Centene Corp. (CNTE)
rated Outperform
– Operates Medicaid managed care plans in WI, IN and
TX; Acquired NJ plan; Wisconsin characterized as
stable growth and Indiana viewed as strong growth;
Texas beginning to live up to expectations
– Beginning rate negotiations in WI and IN.
– Should continue to grow by acquisitions; uses
decentralized branding strategy while back office
operations are centralized.
> Shares are now more reasonably valued relative to
other managed care stocks. Strong chance of upside
surprise to estimates; Overtime, Medicaid should be
viewed as a growth industry and shares should trade
at premium to managed care group
26
Stocks Not That Compelling
– Covance (CVD; rated PP): Well balanced development
company. Repositioning itself as a lab-focused organization.
Must jump start central lab bookings or 2004 estimates are in
jeopardy.
– WebMD (HLTH; rated PP): Envoy has yet to post meaningful
revenue growth. Shares are very expensive on an Enterprise
value to EBITDA basis. We need to see better top line growth.
Recent search warrants do not help the cause.
– Parexel (PRXL; rated PP): Very dependent on clinical
development business but valuation remains too high. Suspect
use of non-recurring charges.
– Per Se Technologies (PSTI; rated PP): Core physician services
business still growing in low single digit range. Using cash to
pursue Lloyd’s litigation. Balance sheet is leveraged.
– TriZetto (TZIX; rated PP): New sales are lumpy; shares appear
expensive on PE basis.
27
Healthcare IT & Services
Lots of Value and Good Fundamentals
Industry Rating: Overweight
Steven P. Halper
Partner, Equity Research
Phone: 212-271-3807
E-Mail: [email protected]
28