Allscripts: Turnaround Prescription

02/21/2014 8:00 am EST

Focus: STOCKS

George Putnam

Editor, The Turnaround Letter

Our latest featured turnaround idea is a company that provides electronic health record systems and other information technology products to doctors, hospitals, and other healthcare providers, observes George Putnam, editor of The Turnaround Letter.

After a large acquisition, made in 2010, didn't work out as planned, Allscripts Healthcare Solutions (MDRX) put itself up for sale in early 2012. This created concern among its clients, and potential clients, and eventually led to the replacement of its long-time CEO in December 2012.

New CEO Paul Black spent 12 years helping build competitor Cerner into a powerhouse in the healthcare technology field, and before that, he was at IBM.

He immediately took the “For Sale” sign off of Allscripts and has spent the last year focused on rebuilding the company's business.

The new CEO's efforts appear to be paying off. In the latest quarter, both new bookings and backlog were up significantly. In addition, the business is shifting to a more sustainable model.

Allscripts is diversifying away from its reliance on medical records systems; 40% of its recent bookings were for its population health management solutions.

Moreover, the company is shifting many of its products from an upfront sales model to a subscription model. This will hurt short-term results, but it will lead to steadier recurring revenue over time.

Broad trends in the healthcare industry bode well for Allscripts. There is considerable regulatory and economic pressure to improve access to records and to make better use of technology to increase overall efficiency. Both of these are areas in which Allscripts is strong.

Also, big data is coming to the healthcare sector. Professionals across the industry are beginning to recognize both the availability and usefulness of massive amounts of health-related data.

Allscripts currently offers products to help the industry make use of that data, and it is working on new offerings as well. Over the first nine months of 2013, the company devoted a robust 15% of its revenue to research and development.

Allscripts has also been at work on its balance sheet. During 2013, it completed a $1 billion debt refinancing that lowered interest costs, pushed out maturities, and enhanced liquidity.

Allscripts has another thing we like to see in a turnaround: a significant shareholder who is not afraid to shake things up if the rebound falters. HealthCor Management, a hedge fund group focused on healthcare, owns about 6% of the outstanding stock.

HealthCor played a role in the 2012 management change, and they are likely to get active again if the stock does not perform well.

We like both the internal and external trends at Allscripts, as new management refocuses the business to take advantage of growing opportunities in the healthcare technology sector.

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