9/18/2015 Cerner, Athenahealth And Veeva Chase Cloud-Based EHR - NASDAQ.com Cerner, Athenahealth And Veeva Chase Cloud­Based EHR

By Investor's Business Daily, January 23, 2015, 04:55:00 PM EDT

A new wrinkle in federal rules this year aims to urge more hospitals and other medical providers into the 21st century.

Those expectations have helped lift a handful of companies in IBD's Computer Software­Medical group, a group at the intersection of health care and Internet technology ­­ and key suppliers to the health industry's conversion from paper to digital electronic records.Cerner ( CERN ),Athenahealth ( ATHN ) andVeeva Systems ( VEEV ) are at the head of that list. All three have seen benefits from the American Recovery and Reinvestment Act of 2009, also known as the stimulus bill. All have also seen their share of recent ups and downs.

The initial bill set aside $19 billion to help health care providers convert their patient records systems from paper to digital, or electronic health records. As of Dec. 1, the Centers for Medicare and Medicaid Services Pinterest reported the program had paid more than $25.7 billion to participants, including hospitals, doctors and insurance companies, meeting "meaningful use" requirements. Tumblr Email Print Beginning this year, the government will ratchet up the pressure by trimming reimbursements to medical Gmail

providers not yet converted to EHR systems, or converts that are falling short of the meaningful­use Favorites benchmarks set out by the stimulus bill. More... (293)

Nearly 80% of physicians and hospitals are already using EHRs or plan to start soon, according to data from AddThis the federal government and industry research groups. That's up from the paltry 17% of doctors and 9% of hospitals equipped with EHRs in 2008, according to the U.S. Department of Health and Human Services.

An increasing number of new conversions are using software­as­a­service (SaaS) type implementations, driving a growing portion of the health industry to cloud­based products.

As a result, the global cloud computing market segment within the health care industry is expected to reach $6.7 billion in 2018, rising from $1.8 billion in 2011, according to research firm Transparency Market Research.

It's a major industry shift that suggests fertile ground is still ahead.

"Health care is littered with decades­old technology," Piper Jaffray analyst Sean Wieland told IBD. "There's a significant replacement cycle to come."

Rising To The Cloud

Companies that provide EHR services are generally alike in that they digitize the medical world. All are also making acquisitions to expand their technological capabilities and client base. But that's largely where the similarities end.

The largest, measured by market capitalization and revenue, is Cerner. Founded in 1979, it got its start selling medical lab software to hospitals. Today, the Missouri business supplies its clinical and revenue management software to 14,000 large health organizations worldwide, including 3,000 major hospitals and 4,900 large physician groups.

No. 2 Athenahealth is known as a leader in cloud services. It provides Web­based billing and EHR functions to 59,000 health care providers, mainly doctor's practices. This month, the Massachusetts­based company expanded into the hospital inpatient segment with the purchase of RazorInsights, a cloud­based EHR and billing system for hospitals.

Third in line is Veeva Systems, a California­based newcomer that went public in October 2013. It sells its cloud­ based software programs to pharmaceutical companies and biotech organizations. Veeva says it now serves 59,000 providers in the biotech and life sciences industries.

While each firm is focused on health care, all three companies also belong to the broader cloud computing industry segment, right along with firms including leading customer relationship management software businessesSalesforce ( CRM ) and employee services providerWorkday ( WDAY ).

Fed Fueled Sell­Off

With investors excited about the potential of the cloud/SaaS sector, IBD's Computer Software Medical group http://www.nasdaq.com/article/cerner-athenahealth-and-veeva-chase-cloud-based-ehr-cm436129 1/3 9/18/2015 Cerner, Athenahealth And Veeva Chase Cloud-Based EHR - NASDAQ.com rallied for five years to a high in early March of 2014. The SaaS group then turned ­­ along with a broad swathe of the software sector. Athenahealth tumbled 53% from March to May. Veeva tanked 57%. Cerner was hurt least, dropping 23%.

Analysts attributed the sell­off to worries about the end of a federal stimulus program and investor overexuberance about cloud firms.

The sell­off in cloud stocks followed Federal Reserve Chair Janet Yellen's March 19 comments that year indicating that the central bank's stimulus program could end as early as last fall, Stifel analyst Tom Roderick told IBD. "It started in late February and picked up steam as the Fed had some commentary about interest rates inevitably rising. That seemed to take a lot of risk appetite off the table from institutional investors," Roderick said.

And investors had gotten absolutely giddy early last year about all things cloud. "If you had cloud in your pitch book, your stock was going up, whether you were health care or non­health care related. The fundamentals were not driving the (stocks') move either up or down, it was just the buzz around the cloud," added Piper Jaffray's Wieland. "It was momentum buying, then it hit a peak, and then it was momentum selling."

Solid fundamentals revived the stocks, analysts said.

"Throughout that whole time, Athenahealth was reporting 30% growth in its core business and Cerner was reporting beat­and­raise quarters," said Wieland. "Everything was thrown out in the sell­off, but Cerner and Athenahealth had fundamentals that were good, so people started to gravitate (back) towards those names."

As for Veeva, Roderick said: "Their Q2 results were extraordinary, you could see it in the growth margins and the cash flows. They put up fantastic results, but the market didn't have a lot of patience for stocks that were high multiples at that time."

Clearing The Merger Hurdles

Challenges for all the companies remain.

While the federal stimulus funding was the initial catalyst for EHR installation and growth, companies must now prove "meaningful use" in order to get full payment for delivering medical care.

For example, Wieland gave the theoretical case of a physician using Athenahealth who gets paid an incentive fee for each of their patients who gets a flu shot, but some of those patients get flu shots at a chain drugstore rather than at the doctor's office. Putting IT systems in place to collect and analyze that kind of "population health management" data is the next level of investment that is driving today's electronic health technology spending, Wieland said.

Cerner, already the largest player in the group, will nearly double in size after it completes its $1.3 billion acquisition of the Germany­based Siemens health IT business unit, which it announced in August. The deal is expected to close Feb. 2.

The single biggest challenge post­merger "is not doing any harm" to Cerner's core operations as it digests the $4.5 billion Siemens unit and its far­flung network of clients, products, workers and research initiatives, FBR Capital Markets analyst Steven Halper told IBD. "You don't want to take resources away from Cerner and move them over to Siemens, because that will erode the deliverables from Cerner," Halper said. A second feat will be to hold onto Siemens' existing customer base as well as to sell those clients additional health care IT products, Halper said.

Cerner is also vying for a major contract with the U.S. Department of Defense to replace and standardize its EHR systems, which now support nearly 10 million active duty service members, retirees and dependents.

Another applicant for the military's $11 billion EHR contract is PricewaterhouseCoopers, which has teamed withGoogle (GOOGL) and others in its bid.

Athenahealth's Jan. 14 announcement that it would acquire RazorInsights moved the company into providing cloud­based electronic health record services to small and rural hospitals, expanding their traditional focus on physicians' practices.

"That marketplace (small, rural hospitals) is not as easy as you might think, because they are not very sophisticated buyers of IT, and because their existing vendors are pretty sticky," said Halper.

The Next Disruption?

Veeva Systems is dependent on Salesforce.com's cloud­based Force.com suite of tools. But Salesforce.com http://www.nasdaq.com/article/cerner-athenahealth-and-veeva-chase-cloud-based-ehr-cm436129 2/3 9/18/2015 Cerner, Athenahealth And Veeva Chase Cloud-Based EHR - NASDAQ.com does not compete in the drug manufacturing segment where Veeva thrives. Veeva's cloud­based CRM tools for the life sciences industry now provide 85% of the company's revenue, according to a November report by J.P. Morgan analyst Sterling Auty.

Veeva has, Auty said, been snatching market share from Siebel's customer relationship management system ­ which is owned byOracle (ORCL) ­­ and from Cegedim, a global technology and services company specializing in health care that's owned byIMS Health (IMS).

Analysts are pinning great expectations on Veeva's three­year­old cloud­based document management system, called Vault. That offering simplifies the production and sharing of regulated materials, both internally and with external partners. The system now has 230 customers, including 33 of the 50 largest global pharmaceutical firms, according to Auty.

The Vault system "is at an inflection point now, where they are starting to land multimillion­dollar deals with large pharma firms," said Roderick, the Stifel analyst. "The document management story ... is ripe for disruption in the same way that customer relationship management was 8 to 10 years ago."

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ, Inc.

This article appears in: Investing , Investing Ideas

Referenced Stocks: CERN , ATHN , VEEV , CRM , WDAY

http://www.nasdaq.com/article/cerner-athenahealth-and-veeva-chase-cloud-based-ehr-cm436129 3/3