New Survey Gives J.P. Morgan Confidence To Go Overweight Athenahealth, Allscripts & Advisory Board

• While shares of The Advisory Board Company ABCO and athenahealth, Inc ATHN have risen 6 percent YTD, Allscripts Healthcare Solutions Inc MDRX shares are up 15 percent.
• JP Morgan’s Michael Newshel assumed coverage of Advisory Board, Athenahealth and Allscripts with Overweight ratings and price targets of $64, $170 and $17, respectively.
• Hospital CIO Survey indicates that HIT investment would continue, since priorities were shifting beyond EHRs, Newshel mentioned.

Analyst Michael Newshel said, “Our latest hospital CIO survey indicates there will be no slowdown in HIT investments even as the electronic health records (EHR) adoption cycle matures.”

Newshel pointed out that priorities were shifting away from “checking the boxes to qualify for government EHR incentives” towards population health, data analytics and enterprise management products and services “that can extract value from the digitization of medical records and help providers manage the daunting clinical and financial challenges of shifting toward value based reimbursement.”

The survey respondents projected a y/y increase of 2.4 percent on an average in their total IT budgets in 2016. Merely 14 percent of the respondents projected a decline. The survey further indicated that 78 percent of the CIOs expect the percentage of capex being invested into IT to remain the same or increase in three years from now.

The reason for this was identified as a shift in priorities beyond EHRs to areas such as population health and accountable care organizations, or ACOs, physician access and revenue cycle management. Expectations for EHR replacement remained stable at 11 percent of the respondents.

Value-based reimbursement is expected to rise from 5 percent of revenues at the surveyed hospitals to 25 percent in 3 years. “Finally, a number of startups are viewed as strong competitors to traditional EHR vendors for population health,” Newshel wrote.

Advisory Board: Top-Pick

Advisory Board’s research business touches most of the US hospitals, which provides a robust foundation for the company’s subscription-based software products, “both in the development stage by soliciting feedback on what the market needs and when it comes to sales,” Newshel said.

“Its collection of single-point solutions (which sit in the analytic space above the EHR) typically have clear ROI benefits for its hospital clients, and it keeps a steady pipeline of new products in development that should drive increased revenue per member over time,” the JP Morgan report noted.

Athenahealth: Robust Momentum In 2015

Athenahealth’s momentum has been robust through 2015, “with accelerating doc adds and also better-than-expected margins driving strong earnings beats,” Newshel metioned.

The company has potential to gain further market share and achieve sustainable revenue growth of 20 percent, “given the high ratings from industry participants on athena’s core EHR and billing products, its superior rates of Stage 2 attestations compared to the industry, and also positive early feedback on its population health offerings,” the JP Morgan report stated.

The acute market is a new avenue for growth for the company, and any signs of an early traction in this market would be “key to the story in 2016.”

Allscripts: Turnaround Progressing Well

Allscripts is generating “significant and sustainable” margin expansion in 2015, and should be able to achieve the projected EBITDA and EPS growth of 22 percent and 49 percent, respectively, despite flattish revenues. Thus, its turnaround story is progressing well, Newshel commented.

Revenue growth should resume in 2016 in the high-single digits, backed by strong bookings growth in 2015 and continued margin expansion.

“Although we don't think Allscripts is positioned as well as Cerner, Epic or athenahealth and its long-term growth trajectory has more uncertainty, we think it can still get some wins in the replacement market and grow via additional and more subscription-based sales into its existing client base,” the analyst elaborated.