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Industry Analysis: Healthcare Information Services
Our Healthcare Information Services industry consists of a set of corporations that provide data, products, and services to customers ranging from hospitals and physician practices to pharmaceutical and biotech companies to private individuals. Although the customer base is contextually quite broad, the companies in our group tend to be focused. For instance, those targeting hospitals and physician practices can be viewed as software companies, offering information systems that work to automate the clinical side of healthcare. Those serving pharmaceutical and biotech companies are best thought of as market research and consulting firms, whose products and services characterize trends in the drug business. Finally, those providing health-related information to private individuals do so via a set of Internet portals supported by healthcare industry sponsorship and advertising.
Barriers to entry are generally moderate, given the specialized nature of the group’s products and services. However, the competitive landscape varies. Vendors of clinical information systems (CIS) compete with one another and, at times, with the giants of the high-tech industry. Meanwhile, market research and consulting firms usually have established long-term client relationships and maintain strong ties with data suppliers, reducing the day-to-day competitive threat. Providers of health-related information to individuals operate under well known and trusted brand names, promoting customer loyalty. By and large, industry players are nicely profitable on an operating basis. Moderate earnings growth is the norm.
Computer Information Systems: CIS vendors have many of the salient features of software companies. For example, profit margins are usually good and investments in R&D are heavy. However, they differ in that their systems are increasingly contracted on a subscription basis, being delivered over three years, or longer. It turns out that healthcare providers’ revenue is largely tied to reimbursement rates from third parties—Medicare, Medicaid, and private health plans—with adjustments usually favoring the payers. The inherent uncertainty regarding reimbursement rates helps explain why hospitals and physician practices allocate a relatively small portion of their capital budgets to information systems, which have been traditionally used to track costs to justify reimbursement.
CIS are now incorporated in public health policy as a means to reduce costs, putting pressure on providers to increase their rate of investment in the systems (despite the associated incentives). By contracting on a subscription basis, providers move to conform with public policy without taking on the risk associated with a large upfront expenditure. For their part, CIS vendors receive a recurring revenue stream, providing a degree of stability to their top and bottom lines.
Market Research and Consulting: The market research and consulting firms have wide profit margins, reflecting their established position, and generate a high return on invested capital. Accordingly, cash flow is usually well in excess of funding needs, supporting acquisition programs (niche competitors) and allowing for extensive share-repurchase programs. Products and services are primarily sold on an annual subscription basis, providing year-to-year stability. The known revenue stream allows for the hedging of foreign currency risk, which can be meaningful at times given the global nature of their operations.
The consolidation of the pharmaceutical industry is an important factor affecting the market research and consulting firms operating in the Healthcare Information Services group. Indeed, market researchers often reposition their products and services and realign their cost structures in response to changes in Big Pharma’s SG&A spending.
Internet Portals: Ad spending accounts for an important portion of the Portals’ revenue stream, but it is relatively unaffected by deteriorating economic prospects. Notably, much of the advertising is placed by Big Pharma, which has found the Web sites lucrative, given the captive audience. Moreover, the outlay is a relatively small portion of the drug industry’s overall ad budget. Nonetheless, like all advertisers, Big Pharma’s interest will wax and wane based on the Portal’s success at attracting individuals to the sites. Therein lies the importance of a Web site’s brand. Finally, we note that there is some seasonality in this business, with the winter months being the stronger.
The purchase price of any investment often determines its success or failure. Discipline in this regard is particularly important in selecting stocks from the Healthcare Information Services Industry, since many are routinely accorded high relative valuations. Still, the fundamentals underpinning this group’s growth are favorable, helping to support investors’ general enthusiasm. Indeed, developed nations’ populations are aging, suggesting increasing demand on healthcare systems and, thus, for products and services that work to provide a degree of efficiency in healthcare delivery and to keep interested parties informed (businesses and individuals). On the other hand, healthcare costs and quality guidelines are increasingly being set in political forums, which, by their nature, tend to produce uncertain outcomes. Accordingly, investors making commitments to this group should carefully evaluate how government actions may affect (positively or negatively) a specific company’s future prospects.