Initiating Coverage of the HIT
Sector with an Overweight
We are initiating coverage of the Healthcare Information Technology (HIT)
industry with an Overweight position. Our positive view of the space is
predicated upon solid underlying fundamentals in the industry, as we expect
adoption rates of key HIT applications to accelerate in the near future.
We believe industry fundamentals are further supported by healthcare
providers' rising awareness of the benefits of HIT, increasing leadership by
the federal gov't to increase overall HIT adoption and growing expectations
by consumers that HIT should be in the delivery of healthcare.
Positive industry outlook has helped shares of most HIT vendors to perform
well over the last few years. We expect clinical systems to remain the
primary focus of HIT purchasers over financial/admin systems. In addition,
we expect a greater focus on ambulatory over acute-care settings.
We are initiating coverage with a Sector Outperformer rating on Cerner
Corp., Quality Systems, and Vital Images. We are initiating coverage with a
Sector Performer rating on Eclipsys Corp. and Allscripts Healthcare
Solutions.
All
Executive Summary
Effective February 22, we are initiating coverage of the Healthcare Information
Technology (HIT) industry with an Overweight rating. Our positive view of the
space is predicated upon solid underlying fundamentals in the industry, as we
expect adoption rates of key HIT applications to accelerate over the next few
years. See also our company launches on Cerner, Eclipsys, Allscripts Healthcare
Solutions, Quality Systems, and Vital Images, released today.
Industry fundamentals are supported, in our view, by increasing awareness by
healthcare providers of the benefit of HIT, increasing leadership by the federal
government to increase overall HIT adoption, as well as growing expectations by
employers and consumers that HIT should be integral to the delivery of
healthcare. We believe this positive outlook has helped shares of most HIT
vendors to perform well versus the broader U.S. Healthcare sector. From 2003
through 2006, the HIT sector has been one of the top performing sub-sectors in
healthcare, although so far in 2007 the group is lagging most of healthcare. See
Exhibit 1 for a comparison of price performance between the HIT space and
some other major sectors in healthcare.
At the same time, it is equally important to appreciate that this solid industry
backdrop has not resulted in even performance by all HIT vendors. This is
because the HIT industry is highly fragmented along a couple of different lines.
The industry is fragmented by types of applications offered. While some
companies offer a full suite of products, the vast majority of HIT vendors are
specialized in a limited number of product categories. Further fragmenting the
industry, there are a large number of players even within a single niche area, for
example EHR. Unlike other sectors in healthcare, such as PBMs, distributors, or
managed care, the universe of public companies in HIT does not compose a
significant share of its respective market. As a result, these companies cannot
necessarily be taken as a proxy for the market, and conversely, one cannot
simply apply overall market trends to the group. Given the fragmented nature of
the HIT industry, we believe it is important to identify which of its sub-sectors
are more likely to outperform relative to the others, and then consider valuation.
Below we provide our summary of recommendations. |
