The health information technology sector continued to improve in the third quarter, but the market is still waiting to see when federal funding will have an impact on profitability, analysts say.
While markets in general began to see a rebound in the third quarter, health IT stocks continued to outperform other sectors, according to a report by Healthcare Growth Partners. The Nasdaq trading board gained 16% overall, and IT stocks gained more than 40% through the third quarter.
Hospital information systems products continue to be the crux of the IT market, and the promise of funding through the American Recovery and Reinvestment Act of 2009 is driving those vendors' stock prices, said Christopher McCord, principal of Healthcare Growth Partners, an Elmhurst, Ill.-based healthcare IT consultancy.
This year has been tough for vendors, which have been affected by clients who are deferring IT spending until they know the government has clarified what it expects hospitals to implement, he said. Therefore, federal funding has not had an impact on vendor profitability yet, “but it's looming out there.”
Cerner Corp.'s stock price is a good example, he said. The company closed the year 2008 at a price of $38.45. By the third quarter of 2009 the electronic health-record developer was trading at $74.80. Shareholders see that the federal funding potentially could benefit the bigger vendors. “I think they're seeing the biggest run-up,” McCord said.
Cerner declined to comment before releasing its third-quarter financial results, which are expected later this month.
The third quarter also saw a renewed interest in merger activity, with the return of large merger and acquisition deals, although the level still isn't back to normal, McCord said. Capital is starting to flow back into the markets, but it hasn't reached into mergers yet. "I don't think lending has returned to levels they were before,” he said.
While only 43 transactions were announced in the quarter, compared to 48 deals in the second quarter, they valued a total of $14.4 billion. That's up significantly from $1.6 billion in the second quarter. Most of the value came from two large deals announced in the third quarter,
Dell's planned acquisition of Perot Systems Corp., and
Xerox Corp.'s deal for Affiliated Computer Services.
Vendors likely will continue to eye opportunities for merging through the end of the year, McCord said. Strategic acquisitions that support growth plans can be used to meet company and shareholder expectations, especially after the lighter spending year 2009 has been for hospitals. “We keep on expecting to see a wave of distressed deals.”
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