3 Healthcare Information Service Companies Worth Watching

Madhukar is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

The global market for healthcare information services is growing with improving economies around the world. The key growth driver is the rising need to capture and store patient records in electronic form. With the upcoming patent expiry of multiple major drugs, pharma companies are extensively going for clinical trials of their pipeline drugs, which is also driving demand for record maintenance.

However, this expiry is creating issues for health information service companies which advertise for these drugs. In this article, I have chosen three companies with strategies to adapt to the changing and growing healthcare information service market. Let’s see whether their strategies turn out to be beneficial for these companies. 

Appreciable growth from new technology

Medidata Solutions (NASDAQ: MDSO) has developed a cloud technology, software-as-a-service, or SaaS, which it integrated with electronic data capture, or EDC, services. This technology helps increase the efficiency of pharma companies’ clinical trials of their drugs. The trial is a part of research and development activities and amounts to 80% of the total cost of developing a new drug.

Thus, pharmaceutical companies outsource these trials to reduce cost and increase speed of data collection. Medidata, through its SaaS technology, reduces the paperwork of these companies and stores the data in electronic format. The company has witnessed customer growth of 25%, year-over-year, reaching to total of 358 in the first quarter of 2013. Moreover, it is estimated that the total addressable market for the trials is 2,000 companies due to increasing drug rejection.

The company has a high customer retention ratio of around 99.9%; this is the key factor for growth in the company’s backlog in its application service segment. Under this segment, it provides customers a license to use its cloud-based software solution. The backlog of application services has increased 46% year-over-year to $156 million as on March 31, 2013.

Application services grew 32% to $50.7 million in the first-quarter of 2013. It is expected that revenue will rise from $218.3 million last year to around $273 million this year and $333 million in 2014. 

Rip-and-replace opens new growth prospects

Cerner (NASDAQ: CERN) provides electronic medical record, or EMR, which is a system designed to capture and represent the patient database. EMR will replace traditional hospital records. Replacing paper files with electronic ones is known as rip-and-replace. The system will integrate hospitals’ records from laboratory, radiology, and pharmacy departments, which will increase efficiency and eliminate manual actions.

According to a survey by the American Hospital Association, or AHA, 90% of the hospitals in the U.S. have selected their EMR vendors. Further, AHA states that within 18 months, 14% of these hospitals, numbering 468, will change their vendor in order to opt for a better vendor. This change in vendor will create a $5 billion rip-and-replace opportunity until 2014. It is expected that Cerner can add around 20% additional contract backlogs within a year and a half.

Cerner’s support, maintenance, and service segment’s revenue is growing due to a healthier mix of licensed software. It has developed innovative software for healthcare systems and applications by investing around $2 billion in the last five years. These software programs are high in demand as hospitals in the international market transition to EMRs.

This segment reported an increase of 15.5%, year-over-year, amounting to $466.55 million in the first-quarter of this year. The year-over-year growth in this segment is around $63 million, and the services alone contribute around $48 million. Further, this segment’s revenue is expected to increase 14.3%, amounting to $1.95 billion this year. 

Launch of new drugs offsetting losses

WebMD Health's (NASDAQ: WBMD) pharmaceutical advertising witnessed a decline of 9.4% in the last year. This decline was due to expiration of patents and delay in approval for new drugs. In 2012, around $34 billion worth of U.S. drugs lost patent protection, which includes drugs like Lexapro, Seroquel, Plavix, and Singulair. As a result of the patent loss, the company reported a fall of 7% year-over-year in the first quarter of 2013.

It is expected that 35% of the advertisement displayed by WebMD are from those drugs which are losing patents in the coming 18 months. This will result in revenue downfall. However, this loss should be offset after the approval of new pipeline drugs, including Xeljanz, Invokana, Eliquis, and Tecfidera.

On the other hand, the company witnessed total revenue growth of 5% year-over-year, amounting to $112.8 million in the first quarter of 2013. The key driver of this revenue was its public portal, which contributes around 82% of the total revenue. This portal grew 6%, year-over-year to $93.4 million in the first quarter of the current year. The public portal of the company includes WebMD.com, rxlist.com, emedicine.com, and emedicinehealth.com.

Its portal offers a diversified portfolio of health information, which includes diagnosing illnesses, treatment, and wellness advice. This growth in the revenue is due to modifying contract structure and prices. With this modification, its customers can now buy a part of the advertisement program, rather than the whole, which will increase revenue for the company. The total revenue in the current year is expected to be around $481.5 million, followed by $511.7 million next year.

 Bottom line

Medidata should benefit from its cloud technology which collects data for clinical trials. Further, higher retention rates should boost its revenue. 

Cerner has developed EMR to record hospital records in electronic form. This system is in high demand, opening opportunities for the company.

WebMD witnessed a decline in its revenue due to patent expirations, however, it is expected that new product lines will offset the decline.

I recommend a buy for Medidata and Cerner and a hold for WebMD.

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Madhukar Dubey has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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