Defense Department Deal Ignites Bidding War

It didn't take Allscripts (NASDAQ: MDRX  ) long to forge its own alliance to compete against electronic health records giant Epic and IBM (NYSE: IBM  ) for a Defense Department modernization contract that could prove worth $11 billion.

Last month, Epic, the largest provider of electronic health records software, and computer and security Goliath IBM announced they were teaming up to compete for a contract to replace the Government's current disjointed records sharing system.

Allscripts responded this week by reporting that it is linking up with Computer Sciences (NYSE: CSC  ) and Hewlett-Packard (NYSE: HPQ  ) to make its own proposal for the DoD payday.

Source: Secretary of Defense Flickr

Tapping a big unmet need
In the wake of reports suggesting poor service at the Veteran's Affairs office, it's probably not shocking to learn that the DoD is eager to start from scratch with an all new medical records system that can better communicate across its network of 412 medical clinics and 65 military hospitals.

The project is likely to be massive given that the military provides medical care to more than 10 million servicemen and women.

As a result, the proposed $11 billion value of the contract stands to be a game-changer for the companies making the winning bid. To put the sheer size of it in context, Accenture estimates that the total EHR market will be worth just $10 billion next year.

Or looking at the contract's size another way, consider that Allscripts, which controls between 9% and 10% market share in the EHR market, posted sales of just $1.2 billion in 2013.

Department of Defense Flickr

Getting their ducks in a row
Epic and IBM were the first to announce that they would compete for the business and those two companies certainly bring a lot to the bargaining table.

Epic's customers include 250 of the largest hospitals in the United States, and in addition to being the nation's largest EHR company, it's also a top five player overseas too.

IBM also has solid ties to Washington through its federal health care business, which will spearhead the proposal. IBM already provides hardware, software, and security to a slate of Federal agencies.

In order to trump Epic and IBM's advantages, Allscripts is also linking up with a team that carries significant sway among the military's top brass.

Virginia based Computer Sciences, the company that will be coordinating the team's effort and whose Chief Medical Officer is a Navy physician, has a long history of inking deals with the DoD. The company gets a third of its revenue from government contracts and $2.4 billion of the $4.1 billion in sales notched by its North American Public Sector, or NPS, business unit came from the DoD in the past 12 months.

Hewlett-Packard, which will provide the hardware behind the trio's bid, is also experienced in winning government contracts. Hewlett already works with the Department of Health and Human Services and Veteran's Affairs, and its products and services are used to handle more than 2.8 billion health care transactions a year.

Source: Secretary of Defense Flickr

For its part, Allscripts will provide the EHR software and while it's not as big a player as Epic, it still boasts an impressive customer base that stretches across more than 1,500 hospitals and 180,000 doctors.

Fool-worthy final thoughts
While Epic is the largest EHR provider, it markets a closed system that doesn't play well with systems developed by other companies like Allscripts. That means Allscripts will likely be touting its open architecture design that allows it to share information across platforms built by Epic, Cerner, and others.

Whether that advantage is enough to give it an edge in winning the contract remains to be seen, but Allscripts could definitely use a win.

The company has been struggling to maintain its market share as Epic's foothold strengthens and new competition enters the market from small players like athenahealth.

Last quarter, those pressures were responsible for Allscripts sales dipping to $345 million last quarter, down a little year-over-year from $348 million. Although the contract would be a windfall for the company, I'm content to remain a spectator on this one, at least until it becomes clearer which bidder has the advantage.

An even bigger investment opportunity?
Allscripts has a huge opportunity with this contract, but it's already been well publicized. The best investors consistently reap gigantic profits by recognizing true potential earlier and more accurately than anyone else. Let me cut right to the chase. There is a product in development that will revolutionize not how we treat a common chronic illness, but potentially the entire health industry. Analysts are already licking their chops at the sales potential. In order to outsmart Wall Street and realize multi-bagger returns you will need The Motley Fool’s new free report on the dream-team responsible for this game-changing blockbuster. CLICK HERE NOW.

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Todd Campbell

Todd has been helping buy side portfolio managers as an independent researcher for over a decade. In 2003, Todd founded E.B. Capital Markets, LLC, a research firm providing action oriented ideas to professional investors. Todd has provided insight to a variety of publications, including SmartMoney, Barron's, and CNN/fn.

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