I grew up watching syndicated reruns of Star Trek. (Maybe you can relate.) So when I think of the rather primitive tools available to digitize medicine today, I can't help but think of how they compare with the tricorder from Star Trek.
The super-cool sci-fi device gave a crew member a thorough checkup without them having to report to sick bay on the ship. Fast forward to today, where the growing use of healthcare IT and electronic health records (EHRs) is nudging doctors and hospitals at least a little closer to the possibilities once envisioned by Gene Roddenberry.
As the Borg said, resistance is futile
The expansion of healthcare IT is tightly linked to the Economic Stimulus Act of 2009, and more recently, to the high-tech provisions of Obamacare. In fact, the government has handed out over $30 billion in taxpayer-funded grants to doctors who install and use digitized records. But incentives are capped at about $44,000 per doctor. Since these systems often cost at least $100,000 , or even $250,000 , when conversion and implementation are taken into account--some doctors are naturally balking.
This year, however, the government has phasers set to stun. In 2015, Medicare will begin withholding 1 % of the payments for those not using EHR systems. Next year, that jumps to 2%, and in 2017, 3%.
While today's EHR systems are far from perfect, with the government adding a big stick to the dangling carrot, resistance indeed looks futile. Meanwhile, two healthcare IT companies look poised to become hot commodities.
The first is Cerner Corporation (NASDAQ:CERN), a fast-growing mega cap with an excellent track record in the very crowded healthcare IT space. An under-the-radar stock is Omnicell Inc (NASDAQ:OMCL), a small cap that seems to be gaining traction in a much more highly focused niche market--automated medication management.
Cerner: a highly logical choice
The Kansas City-based company develops and builds its own software packages. That's a unique distinction, since many healthcare IT companies rely on acquisitions over the years, creating a disconnect between their products. By contrast, Cerner's EHR systems are extremely well integrated. In fact, Medical Economics, a respected magazine in healthcare, rated a Cerner product as the No. 1 EHR system in 2013.
Medical Economics did not choose an EHR winner last year, but Cerner was the only EHR to land in Black Book's top-five EHR lists for both large hospital and small hospitals. Cerner ranked No. 2 in small and rural hospitals, and No. 3 in hospitals with more than 300 beds.
Cerner further differentiates itself from other EHR providers by focusing on predictive analytics--something that should drive future demand for its products and services. As a consequence of Obamacare, providers are increasing being pushed to provide evidence of value for their services. This is an area where Cerner shines and should continue to gain market share, as it is a market leader in value-based payer reimbursement schemes.
The company has been able to produce consistent double-digit revenue growth over the last five years. Many of Cerner's clients are locked in with customized software/service packages, and the long-term relationships make these customers "sticky." It also allows Cerner scale to increase its profitability.
Although Cerner's Q1 2015 revenue fell short of expectations, that was offset by solid growth in bookings and backlog. Revenue rose 27% to $996 million from $785 million a year earlier, missing management's guided range of $1.05 to $1.1 billion. But strong new order trends and a rising backlog should offset that and provide for future growth. Bookings grew 32% to an all-time high of $1.2 billion. Backlog surged 41% to $13 billion.
Cerner recently acquired Siemens Health Services in a $1.3 billion deal, which should boost its overseas revenue by 50%, according to the company's CEO. With a steady stream of upsell opportunities to its loyal customer base, as well as new markets to penetrate, the company looks set for solid long-term growth.
Omnicell: The CEO "Makes it so."
Silicon Valley-based Omnicell fills an intriguing niche in healthcare IT--medication and supply automation.
CEO Randall Lipps launched the company in 1992, when his daughter was hospitalized. While visiting her, he noticed the inefficiency in how medication and supplies were managed and believed it prevented the staff from spending more time directly caring for patients. . Since then, his company has grown to $1.4 billion.
Over 3,000 hospitals and acute care centers in the United States now use Omnicell's products to dispense and track medication and surgical supplies. The products are also used in 6,000 pharmacies worldwide..Like Cerner's healthcare IT system, Omnicell's automated medication system has achieved top-tier recognition. The company has received the coveted top KLAS award (Best in KLAS) for the past five years.
Competition is on a steady decline in the medication management business, so the company keeps increasing its market share. Last year, Omnicell's revenues increased 16% to 440 million, while net income increased 27% to 30.5 million. Omnicell had a very strong start this year as well. In the first quarter," the company exceeded expectations in new orders, revenues and profit," according to the CEO.
Legal woes have weighed on this stock, but on May 28, 2015, the company announced voluntary dismissal of a shareholder lawsuit . According to Omnicell, with this dismissal, no pending class action lawsuits are currently outstanding.
With no debt to speak of, Omnicell has a debt-to-equity ratio of zero. Omnicell also recently acquired a producer of robotic medication dispensing systems, MACH4 Pharma Systems.
Meanwhile, are we any closer to a tricorder being designed for the real world?
You bet. A while back, U.S. chipmaker Qualcomm (NASDAQ:QCOM) started a $10 million multi-year competition challenging innovators ion to develop a portable, consumer-friendly device capable of diagnosing a comprehensive set of medical conditions. The winner will be announced later this year.
The road to universal implementation of healthcare IT systems is going to be bumpy. Doctors are naturally concerned about spending their valuable time on computers, rather than with patients. But with digital medicine continuing to change the way physicians approach healthcare, this sector looks set to keep thriving.
Cheryl Swanson owns shares of Qualcomm. The Motley Fool recommends Cerner and Qualcomm. The Motley Fool owns shares of Qualcomm. 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.