A new deal creates a healthcare software pick for my watch list

06/11/2010 1:25 pm EST

Focus: STOCKS

Jim Jubak

Founder and Editor, JubakPicks.com

A deal out of the United Kingdom this week has created an intriguing pure play in healthcare information technology. I’d like to let the dust settle a bit on the deal but I’m adding one party to Jim’s Watch List today.

Here’s what happened this week. (Pay close attention. It gets rather complicated.)

Misys, a United Kingdom software company, agreed to sell the majority of its majority stake in its Chicago-based Allscripts-Misys healthcare software subsidiary for $1.3 billion in cash. At the same time, the subsidiary Allscripts-Misys Healthcare Solutions, listed on the NASDAQ with ticker symbol MDRX, will buy U.S. healthcare software competitor Eclipsys (ECLP) in a $1.3 billion all-stock deal.

What’s the result?

The post-deal Allscripts—and the deal is expected to close in four to six months—will combine Allscripts’ current client base of 180,000 doctors office with Eclipsys’ customer group of 1,500 hospitals and 10,000 non-acute healthcare institutions (such as nursing homes) just in time, barely, to take advantage of the $30 billion in government incentive money available to healthcare providers who create electronic health records systems that pass the definition for “meaningful use.” Industry watchers say information software companies have a window of roughly 12 to 18 months to tap into the demand created by government funding.

Right now it looks like the winner in signing contracts with new clients is Epic Systems. The company has the most integrated platform for clinical records. But Epic Systems is still private.

For other players such as Cerner (CERN), the best opportunity lies in selling into their existing customer base. And that’s where the Allscripts/Eclipsys deal comes in. The combination creates a huge base of existing customers among doctors and healthcare institutions that want to build electronic healthcare record systems. Industry analysts say that Eclipsys hasn’t done a great job of marketing a first-class technology; Allscripts’ marketing skills should fix that problem.

The industry is likely to see a shakeout in 2012 when government incentive money runs out and most customers have made whatever purchases they’re going to make. But that leaves investors with a two year window of opportunity—if Wall Street anticipation of sales growth runs far enough of Wall Street anticipation of the end of the boom.

As of June 11, 2010 I’ll adding Allscripts-Misys to Jim’s Watch List.

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