Tuesday, March 04, 2008

Looking for Health(y) Returns

In the February 12th post, “Health Care Haven,” I suggested the health care sector is a good place to hide from the cold winds of recession. Finding the right long-play in the equity market is easier said than done, especially if an investor wants to focus on small companies.

Efficiency creation is a central theme running through the business models of most health care companies. Take for example, the unique business model of The Quantum Group (QGP: AMEX). The Quantum Group offers an innovative solution as provider of business support services in the state of Florida. Quantum’s Community Health System (CHS) functions as a financial and management intermediary between primary care physicians and Health Maintenance Organizations (HMOs) with Medicare plans. Quantum’s platform gives physicians greater exposure to HMO members and allows the physician to concentrate on patient care by simplifying the administrative function. The Company also provides management support services to physician practices under the brand name QMed.

QGP is the most recent stock covered in our CER Report series for sponsored research. We picked up on the automation technology theme in the Quantum investment thesis to look for other public companies. Quantum plans to implement automation technology throughout its physician network in the form of a practice management suite. Such a platform would include a patient portal for scheduling appointments, electronic medical record (EMR) capabilities and an accounting system among other applications. Quantum recently partnered with software solution provider Net.Orange based in Texas to work on its automation platform.

The federal government has issued mandate for full implementation of EMR by 2014, but the capital costs and complexity of EMR systems have been a deterrent to rapid adoption by physicians. Our thesis on Quantum is that its shared services platform could be a competitive alternative for provider groups without the financial resources or expertise to implement EMR by the 2014 deadline.

However, the market beyond Quantum’s stomping ground in Florida is large and fertile for penetration of automation solutions. The federal mandate to achieve availability of EMR by 2014 is likely to be key driver of future sales. According to the Center for Disease Control, the pace of EMR adoption remains “glacial.” Thus the greatest demand for healthcare information automation is yet to come.

We took a quick look at EMR offerings and found a highly populated field with varied product offerings. Given the diversity in healthcare providers along medical specialty and in-patient versus out-patient care delivery, that should not deter investors. We expect some consolidation. For example, General Electric (GE: NYSE) expanded its presence in the sector by acquiring IDX Systems in 2005. Physician Micro Systems, Inc. (private), which has an EMR solution for medium-size providers, might be a prime takeover target, if the company’s claims of profitability are true.

Most in the EMR field are small and privately-held. EMRWorld, an on-line industry resource, has ranked the top-ten for small, medium and large providers. GE’s Centricity solution ranks third in all categories. The application from Allscripts Healthcare Solutions, Inc. (MDRX: Nasdaq) runs second to the EpicCare product from Epic Systems Corp. in the large provider category. The top two spots in both the small and medium categories are all held by private vendors. Cerner (CERN: Nasdaq) and WebMd (WBMD: Nasdaq) also have EMR solutions for the large and medium sized customers, respectively, but apparently lack of features or interoperability issues relegate both to the number six rank. Computer Programs and Systems, Inc. (CPSI: Nasdaq) and Eclipsys Corp. (ECLP: Nasdaq) are two more of the public players that “also ran” but did not even make it to the top-ten in EMRWorld’s list.

Among the stocks mentioned here, CPSI is the closest to a pure-play on healthcare automation. It also has the highest Return on Equity (33.5%) and the second lowest Price/Earnings ratio (16.3 times). The dividend yield on CPSI is also an attractive 6.6%. MDRX is also a compelling value with a PE of 18.5 times. Eclipsys looks attractive with 18.3% Return on Equity and 8.6% net profit margin, but ECLP shares are pricier with a 29.5 times PE.

Look for our upcoming posts on our search for revenue management and wellness or patient care solutions.

View our reports on comments on QGP.

Neither the author of the
Small Cap Copy web log, Crystal Equity Research nor its affiliates have a beneficial interest in the companies mentioned herein. Crystal Equity Research has a Speculative Buy rating on QGP common stock and warrants.

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