Will Rapidly Slowing Growth in Health Care IT Lead to Increase in Consolidation M&A Activity? A Wall Street Transcript Interview with Mohan Naidu, CFA, Lead Research Analyst in the Health Care Information Technology Sector for Stephens Inc.

Wall Street Transcript

67 WALL STREET, New York - May 20, 2014 - 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: Health Care - Affordable Care Act - Electronic Health Records Implementation - Healthcare IT Consolidation Trends - Data Analytics - Population Health Management

Companies include: Athenahealth, Inc. (ATHN), Cerner Corp. (CERN) and many others.

In the following excerpt from the Health Care IT Report, an expert analyst discusses the outlook for the sector for investors:

TWST: Let's start with a snapshot of your coverage universe.

Mr. Naidu: My background is in health care IT for almost 15 years now. I cover health care technology names that are in one way or the other helping physicians, clinicians and hospitals increase their productivity, like increasing the quality of the care that they are delivering or making the whole process easier for the patients, insurance companies, hospitals and physicians.

In that sector I'm still building out my list; I moved over to Stephens about a year ago. Right now I cover about eight names; the majority of them are electronic health record vendors that are targeting physicians or hospitals, and there are a couple of names that actually target both. Those make up the majority of the names that I'm covering right now, and I also cover some tangential names that are essentially best practices providers for hospitals, technology providers for hospitals, and there is at least one other company that I cover that does disease management, population health and general services that's catering to employers, payers and to some extent hospitals.

TWST: What would you say are the big themes or trends right now that are impacting the health care IT space and the companies' businesses, their products, their customers?

Mr. Naidu: I think the biggest thing is we're coming to a tail end of the stimulus benefit that most of these health care IT companies got. Back in 2009 with the HITECH Act, a lot of these electronic health record companies got a big boost. Essentially the government said any clinician, physician or hospital who buys these electronic health record products will get a huge incentive, and if they don't buy it by 2015, 2016, their reimbursement rate will go down.

It was kind of a carrot-and-a-stick approach, where they were incentivizing adoption of these electronic health records so that the hospitals and physicians are not storing the data in a manila folder somewhere, but instead are using computers and storing this data in a digital format so that that data can be used later on to figure out what works in a health care setting and what doesn't work, and how to improve the overall care process. So we're coming to the tail end of that.

We are now at a point where physicians and hospitals are pretty penetrated. If you look at the physician space, 88% of physicians have some kind of an electronic health record, and if you look at hospitals, nearly 95% have some kind of an electronic health record. The majority of the growth that you got from stimulus is over, so you're getting to where you have to fight for market share within the small greenfield opportunities; less than 15% of physicians have no EHR and less than 10% of hospitals have no EHR. So that's the market that everybody is going after, and you have to rely on your ability to take share from others.

If you look five, six years ago in the physician space, there used to be a couple dozen electronic health record companies that were spread across the U.S., and now there are more than 350 electronic health record companies, so there has been a massive outbreak of these electronic health record companies. But the market itself has gotten smaller and smaller, so the impact on growth for these companies has been dramatic. You are coming to a phase where the companies that used to grow 20%, 25% are coming down to low double-digit, even single-digit growth, unless you have a technology advantage where you are taking share or you are becoming the de facto leading provider in the physician space or in the hospital space.

TWST: How then will these companies grow in the future? Is it going to be organic, corporate M&A or technology acquisitions?

For more of this interview and many others visit the Wall Street Transcript - a unique service for investors and industry researchers - providing fresh commentary and insight through verbatim interviews with CEOs, portfolio managers and research analysts. This special issue is available by calling (212) 952-7433 or via The Wall Street Transcript Online.

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