Allscripts' push to diversify beyond a core business dominated by larger rivals is off to a slow start.
Despite a few acquisitions, a collaboration with Microsoft and a renamed division that peddles patient data, the electronic medical record company's latest financial results disappointed. Chicago-based Allscripts' operating loss expanded 25% to $26.6 million in the fourth quarter of 2018. Quarterly revenue, adjusted earnings per share and projected 2019 earnings all fell short of Wall Street expectations.
Allscripts stock tumbled 11% on the news Friday, inflicting more pain on shareholders who've watched the price drop nearly 40%—to $9.59 as of April 4—in the last five years.
Amid slowing growth in the electronic health records market, where Allscripts trails Epic Systems Corp. and Cerner, CEO Paul Black aims to create new revenue streams by turning the company's trove of patient information into cash. Black said Allscripts' electronic health records, along with the investments it's made, have enabled the development of "key platforms" like Veradigm. The company's recently renamed payer and life sciences division uses patient data from Allscripts products to create cost management tools for customers.
"We have positioned Allscripts with the most robust and diversified solutions portfolio in the industry," Black said in the company's earnings release.
But observers foresee significant financial and competitive challenges for Allscripts' diversification strategy.
"Getting a foothold in this space will require serious investment by Allscripts, including potentially an acquisition down the line," Morningstar analyst Anna Baran said in a recent report, adding that "competitors could easily move into growth markets such as population health with superior products."
Indeed, Cerner last year announced a $266 million deal with technology services provider Lumeris to create a cost management tool for health plans that can be used in conjunction with any electronic health record.
Citi analyst Stephanie Demko says Allscripts might have a leg up when it comes to monetizing data. Its small and midsize customers are likely more willing than the large medical centers running Cerner or Epic to trade the rights to valuable patient data for a price cut on technology.
And renaming its payer and life sciences division has already opened the door to new opportunities. Veradigm entered into a "long-term agreement" with Allscripts rival NextGen Healthcare this year to better share data between healthcare-provider clients, health plans, life insurance companies, laboratories and research organizations. The division is also working with Microsoft to bring new therapies to market and cut the cost of research and development by matching patients with clinical trials through electronic health record platforms.
The strategy isn't without risks. Given the highly sensitive nature of Allscripts' data, "security breaches or loss of software functionality could have significant adverse effects on the company's customer base and reputation," Morningstar's Baran writes.
Black told analysts on Allscripts' fourth-quarter earnings call that he's looking for more acquisitions. Allscripts bought San Francisco-based Practice Fusion—along with its 30,000 ambulatory practice clients—for $100 million last year. The acquisition raised some eyebrows since the company, once poised to go public, struggled to compete. But Allscripts "didn't buy it to expand their client base in (electronic health records)—they bought it so they would have a large swath of data they could monetize," Demko says.
INVESTIGATIVE DEMANDS
In 2017, Allscripts paid $185 million for McKesson's Enterprise Information Solutions, which included an electronic health records and revenue cycle management tool for the small-hospital market segment.
Both Enterprise Information Solutions and Practice Fusion received civil investigative demands from the government before being acquired, according to a recent Securities & Exchange Commission filing. The investigations are related to the certification of each company's software and, in Practice Fusion's case, compliance with the anti-kickback statute. Allscripts says in the filing it could be liable if investigations lead to claims or legal proceedings.
Another growth—and data—opportunity for Allscripts is its genomics and precision medicine business, 2bPrecise. Testing patients' DNA to learn about risk factors for hereditary conditions or potential drug-gene interactions is becoming attractive to medical providers impressed by the success of direct-to-consumer genetic testing companies like 23andMe, which is partnering with GlaxoSmithKline to facilitate new treatments.
One of the biggest challenges for Allscripts could simply be winning back the trust of investors after lackluster fourth-quarter earnings.
"They have a strong CEO, they're working on managing down their debt," says Argus Research analyst Jasper Hellweg, who rates the stock a "hold." "What we would like to see, ideally, is stronger margins, rising cash flows and a cleaner growth story before we would be comfortable recommending the company to people."
"Allscripts' data payday is coming in slow" originally appeared in Crain's Chicago Business.
