Analysts, CEO Talk Up MedicaLogic
Analysts, CEO Talk Up MedicaLogic
By Hal Plotkin
Silicon Valley Correspondent
MedicaLogic/Medscape Inc.’s {MDLI} founder and chief executive officer Dr. Mark Leavitt agrees with analysts who say his company’s beaten-down stock could generate very lucrative returns for longer-term investors.
“This is not something you do in three or six months,” Leavitt told CNBC.com in an exclusive interview last Friday. “We’re in a marathon, not a sprint. But this is a longer-term play with a much higher potential value than many others.”
Shares of MedicaLogic, which completed its merger with Medscape Inc. on May 22, have taken a drubbing in recent weeks. The predecessor company went public last December with shares initially priced at $17 each.
MedicaLogic/Medscape stock performance since IPO
Several securities analysts have recently initiated coverage of the sagging stock, setting 12-month price targets that range anywhere from $13 to $33.
Kevin Berg, for example, an analyst at FAC/Equities in New York, initiated coverage of the stock with a “buy” rating last week, setting a 12-month price target of $13.
“Our research indicates MedicaLogic/Medscape is one of the leading companies in the nascent e-health space,” Berg wrote. “In our view [the company] provides an exceptional product to a potentially high-growth market.”
“There will be opportunities to make money on the stock over the short term as it trades up and down,” says Daren Marhula, an analyst with U.S. Bancorp Piper Jaffray in Minneapolis. “But the real opportunity is over the long term.”
Marhula, who has been one of the strongest backers of MedicaLogic, has a “strong buy” rating on the stock, with a 12-month price target on the high end, at $33.
“I’m glad to see some others joining the party,” Marhula says. “MedicaLogic has one of the best products out there.”
MedicaLogic/Medscape, based in Hillsboro, Ore., was established 15 years ago with the goal of computerizing patient medical records. The company’s transformation into an Internet-based operation was boosted by a $35 million infusion last year from a group of investors that included George Soros’s Soros fund and Sequoia Capital, based in Menlo Park, Calif.
More than 12,000 physicians in the United States already store patient medical records using MedicaLogic’s proprietary electronic medical record (EMR) system, making it the most widely adopted EMR solution on the market.
Meanwhile, Medscape, which focuses on delivering high-quality current clinical information to physicians, already has about 350,000 registered physician users, according to the company.
In addition, MedicaLogic/Medscape has also completed the acquisition of Nashville, Tenn.-based Total eMed Inc., which offers an Internet-based clinical electronic-transcription service. The technology allows doctors to dictate medical records for transcription via the Internet and to download those transcriptions in printed form, often within 24 hours.
In addition to understandable concerns about profitability, it appears MedicaLogic/Medscape’s stock may also be suffering from the perception among at least some retail investors that the company is competing with the online e-health industry’s emerging 800-pound gorilla, Healtheon/WebMD Corp. {HLTH}.
Healtheon/WebMD 52-week stock performance
Most analysts, however, say that Healtheon/WebMD remains, at least for now, primarily focused on capturing a different slice of the market by automating back-office health-care operations, such as accounting, billing and insurance processing, as well as providing consumer-oriented health-care related information.
MedicaLogic/Medscape, by contrast, concentrates exclusively on addressing the clinical information needs of physicians, though the company also has an arm that makes those records available to patients in a secure, online format.
In general, online patient records fall into two categories: personal medical records (PMRs) and EMRs.
PMRs, which are a staple feature of many consumer-oriented health-care Web sites, are self-reports.
EMRs, on the other hand, are official medical records used by doctors and pharmacists. Once a patient has an online EMR, any physician with Internet access and the proper permission can immediately obtain the patient’s records, including X-rays, films, and tapes. Rapid access to complete medical records online offers many advantages for both patients and the medical-services industry, from saving lives to boosting productivity and cutting costs.
But the dream of developing EMRs into a profitable business has been problematic.
“EMRs have been the graveyard of numerous health-care initiatives over the years,” says Peter Boland, an industry analyst and founder of Berkeley, Calif.-based Boland Heathcare. “MedicaLogic is the first company to have a really good chance of building a business based on EMRs.”
Boland adds that MedicaLogic’s Medscape arm has an unparalleled reputation within the medical community. “Medscape is at the top of the class, as far as providing the authoritative information needed by clinicians,” he says. “In terms of bringing conference proceedings to clinicians, no one can even touch them on that.”
Leavitt says the company’s recent merger with Medscape puts his firm’s EMR product in front of the large numbers of physicians who routinely rely on Medscape’s online information resources.
In the few short months since the merger was completed, for example, there have been more than 4,000 downloads of MedicaLogic’s Web-based EMR, called Logician, from the Medscape home page, according to a recent report by Lehman Brothers.
Leavitt says those downloads provide evidence that his firm is on track to rapidly increase the number of physicians who use MedicaLogic’s EMR products and services.
“We’re going to see our numbers increase substantially when we make our next [quarterly] announcement on July 25,” Leavitt adds. “I think we’re at the beginning of an inflection point, and the Internet is creating that inflection point.”
Boland, however, isn’t convinced that there will be easy synergies between the two recently merged companies.
“For the most part, EMRs are not being sold from physician to physician,” Boland says. “Instead, it’s primarily sold to the leadership of each medical group, so the leaders have to be sold on the value of it. It’s a very expensive product that takes a large amount of training and implementation expertise. You don’t just drop it in.”
Boland adds that MedicaLogic/Medscape’s roster of about 12,000 physician users isn’t enough to give the company the critical mass it needs to build a profitable business, given the approximately 600,000 practicing physicians in the United States. But he says the company is within shooting distance of pulling away from any would-be competitors.
“The barriers to entry are formidable,” Boland says. “Just look at how long MedicaLogic has been working on this.”
Boland says the magic number is somewhere around 50,000. “If they can get to over 50,000 or so physician users, you’ll be talking about a virtually insurmountable barrier to entry for any others,” he says.
Leavitt says the company will reach that target. “We have the opportunity to do cross-selling to the 350,000 doctors who go online to get clinical information,” he says. “We know they are comfortable with the Internet because they’re already online. It gives us tremendous reach with enormous depth.”
Leavitt also says that no other company will be as well positioned, with as carefully vetted an EMR product, as MedicaLogic/Medscape once new chart-like hardware devices designed for medical settings become less expensive and more widely available.
“The right platforms will accelerate all this,” Leavitt says. “The Palm Pilot could continue to grow or it could be [devices that use Transmeta Corp.’s] Crusoe chip. But it won’t come together for companies that don’t have the track record or applications experience.”
MedicaLogic has been doing this longer than any of the companies in the space,” adds Richard Lee, an analyst with Wit Capital in San Francisco. “They have seen the issues and evolved with the market. Now it all comes down to physician and administrator adoption. And that’s definitely going to be trench warfare.”
Leavitt says the battle’s difficulty works in favor of his long-established company.
“Certainly, I’m frustrated, as many others are, at the slow pace [of physician adoption],” Leavitt says. “But if this was easy to do everyone would have done it already. It’s not so easy for someone to come in, start a dot-com, spend six months and just declare victory. We’ve learned a lot over the years about how to do this that would not be obvious to others.”
Leavitt adds that the genomics revolution provides additional evidence that the practice of medicine will be an increasingly information-intensive business.
“When you come down to it, genomics is all about information,” Leavitt says. “It’s simply unthinkable for physicians to try to manage all that on paper. They just won’t be able to do it.”
MedicaLogic/Medscape reported a first-quarter loss of $14.7 million on revenue of $5.6 million, as compared with a loss of $3.4 million on revenue of $2.9 million in the year-earlier quarter.
The wider losses during the most-recent quarter were associated with sharply higher spending on marketing and administration. MedicaLogic/Medscape posted a 50 percent increase in the number of physicians using its e-health services over the same period.
Berg notes that MedicaLogic/Medscape stock may come under some selling pressure when an insider lock-up period ends after the company reports second-quarter earnings later this month. But he says any further dips in the stock’s price would create an even better buying opportunity.
“You want to keep an eye on it to make sure they’re continuing to make progress,” Berg says. “But my main point was this is a good stock to just buy and hold.”
