Article on HLTH:
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For years, Internet entrepreneurs have been drooling over the $1.3 trillion U.S. health-care industry and the 30 billion transactions a year that keep it humming. But so far, they've barely nibbled at the potentially enormous feast. At a time when school kids trade Pok‚mon cards over the Internet, most drug prescriptions are still filled the old-fashioned way, with sick people carrying little pieces of paper adorned with illegible scrawls from their doctor's offices to drugstores. In fact, 95% of all medical records are still kept on paper, according to Raymond James analyst James Kumpel.
Over the next couple of years, Internet-based systems should at last begin to take over a significant piece of the action. The company that analysts expect to handle the lion's share of online medical transactions, at least in the early years of the so-called e-health revolution, is Healtheon/WebMD (HLTH).
After a recent, dizzying succession of mergers and acquisitions, the Atlanta-based company now has all of the pieces it needs to build an end-to-end network linking patients, doctors, hospitals, pharmacies and insurance companies. "The company touches each constituency in the health-care sector to an extent unrivaled by any competitor, in our view," wrote Robertson Stephens analyst Sheryl Skolnick in a Feb. 14 report on Healtheon/WebMD's latest acquisitions. "It's just a matter of putting them together," adds Kumpel, who is optimistic the company will succeed in integrating its acquisitions into an all-purpose medical service on the Internet. Healtheon, which was recently trading in the $50s, is Kumpel's top pick in the e-health group, with a price target that he recently boosted to $100.
Several companies in the hunt
A number of other companies have sprung up in recent years with Internet-based medical-record handling systems that are undeniably superior to the paper-based procedures they would like to replace. Whether they will be adopted or not, and if so, when, are other questions.
Hillsboro, Ore.-based MedicaLogic (MDLI) is the leader in putting patients' medical records online. Data Critical (DCCA) is the leading independent vendor of wireless patient-monitoring systems. Allscripts (MDRX) sells a wireless prescription-issuing device that a doctor can use to select a drug, ascertain that the patient's insurance plan covers it and transmit a prescription to a pharmacy, all in the same 20-30 seconds it would take to grab a pen and scrawl a prescription on a piece of paper.
These and other Internet-based transaction-processing systems are just what the health-care industry needs these days. A transaction can be processed much more cheaply online than on paper, a big plus at a time of unrelenting pressure to cut health-care costs. Online medical records offer the prospect of easier access for patients, something that could eventually be mandated by Congress. Prescriptions and other records transmitted over the Internet are also less prone to error than notes scrawled by hand, and could therefore help reduce the 120,000 deaths said to occur each year from medical errors.
The sheer size and fragmented nature of the health-care industry, along with the inertia of many doctors, has slowed the spread of online medical transactions. But that is about to change, analysts say.
"We are just now at the beginning of a new wave of investment in Internet medical records and expect the market to grow very rapidly," asserted U.S. Bancorp Piper Jaffray's Daren C. Marhula in a recent report. "We believe the field of Internet medical records will grow rapidly over the next three to five years, presenting a compelling investment area."
Marhula's top three e-health picks are MedicaLogic, Data Critical and Cerner (CERN), a leading vendor of clinical software and owner of 20% of CareInsite (CARI), an online medical-network company that Healtheon/WebMD now plans to acquire.
Key software already in use, but ?
MedicaLogic's Logician network software is arguably the most revolutionary e-health product now on the market. It allows doctors to gain access over the Internet to patients' medical records. The system was recently selected for use in the ambulatory clinics run by three large hospitals in New York that account for nearly 25% of the health-care business in the New York City-area alone, the company said.
MedicaLogic's Logician network software is arguably the most revolutionary e-health product now on the market.
"Use of the Logician product represents an important step toward integrating outpatient as well as in-patient information across the entire integrated delivery system," said Curt Cole, director of information services for the Cornell Physician Organization of Weill Medical College. "This will allow us to provide even higher-quality care, reduce costs and guarantee regulatory compliance."
That sounds promising. But don't expect to see Logician turning up in a doctor's office near you anytime soon, analysts caution.
"Electronic medical records are still a ways away," Kumpel says. "Until you can get broad adoption though entire regions, they're effectively redundant," he adds, explaining that most physicians already use physician practice-management software. When doctor's offices start creating parallel, electronic databases accessible over the Internet, questions will arise about possible discrepancies between the two, Kumpel says. Concerns about hackers invading medical files will also have to be laid to rest before such records start to move online en masse.
Skolnick is somewhat more upbeat about MedicaLogic's near-term prospects. "We are concerned about the slow ramp-up," she wrote in a Feb. 22 report. The company's product now reaches 50% more health-care clinicians than a year ago, though the number of users still totals just 7,800. But the company's Feb. 22 announcement of a $1.2 billion, three-way deal to merge with Medscape (MSCP), a consumer health-information site, and acquire privately held Total eMed, a Web-based transcription service, will get MedicaLogic's foot in the door of many more doctors' offices. Medscape is used by 250,000 physicians, noted Skolnick. "Cross-selling opportunities could be significant if MDLI is able to leverage this audience," she said.
In the wake of its recent spate of acquisitions, Healtheon/WebMD is much closer to reaching critical mass for wide-scale use of online medical transactions. The original parent of the company, Healtheon, was co-founded in 1996 by Jim Clark, who earlier in his career launched Silicon Graphics (SGI) and Netscape. In its early days, Healtheon provided online medical data to physicians and hospitals and by 1998 was taking in just $10 million per quarter in revenue.
The sheer size and fragmented nature of the health-care industry, along with the technophobic inertia of many doctors, has slowed the spread of online medical transactions.
Mergers, Murdoch sparked Healtheon
Things began to change rapidly in late 1999. In November, Healtheon merged with the leading consumer health site, WebMD, and two doctors' software companies, MEDE America and Medcast. The combined entity offered some service or other to 280,000 physicians, 11,000 dentists, 1,100 hospitals, 46,000 pharmacies and several million consumers. A few weeks later, Rupert Murdoch's News Corp. (NWS) announced a $1 billion deal to acquire 10.8% of Healtheon/WebMD and market the company through its international media properties.
So far this year, Healtheon/WebMD has agreed to pay $2.5 billion for Quintiles Transnational's (QTRN) health insurance claims-processing business and $300 million for Kinetra, a joint venture of Electronic Data Systems (EDS) and drugmaker Eli Lilly (LLY). The company also announced a partnership with IDX Systems (IDXC), whose computer software is used by about a quarter of U.S. doctors. And in the biggest deal yet, the company announced its intention to buy Medical Manager (MMGR) and its CareInsite unit. That combination will bundle Healtheon's Internet health-care information business with Medical Manager's physician practice management system, used by 120,000 doctors, and CareInsite's online network linking doctors and pharmacies. With the acquisition of Medical Manager, Healtheon/WebMD will reach 400,000 physicians, 4,000 hospitals, 50,000 pharmacies and 900 payers, and will handle 2 billion transactions.
Transferring all of those transactions to the Internet is "not going to be an easy step," cautions Marhula.
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"They've done a number of smart transactions for which they paid a fortune in stock. But I do think it gives them a competitive advantage versus anyone else in the space right now," adds Chris Russ, an analyst at First Union Securities, who rates the stock a "buy" with a $60 price target. "They are by far the leading company in the B2B-connectivity side in health care."
The stock was recently trading at just below $60, which is about 30 times projected revenue of just under $300 million this year. But that figure doesn't include revenue from Medical Manager, which will be about $300 million this year, Kumpel says.
With that deal taken into account, "Healtheon will have an incredible ramp up in their revenue base in 2001," Kumpel says. "It's probably going to go up to about $1 billion or so."
To pay for all the acquisitions, the company will write off about $1 billion in goodwill each quarter for the next three years, Kumpel added. But he expects the company to turn cash flow positive by early 2003 and to generate earnings by the end of that year. That prospect is promising enough that the stock should nearly double from its current levels to $100 within the next 12 months, Kumpel believes.
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