Quality Systems Flies; Analysts Cite Results, Possible Acquisition
By VITA REED
Summer’s over, but Irvine-based Quality Systems Inc. continues to sizzle on Wall Street.
Quality’s stock price, which has steadily climbed for most of the year, is surging again and reached nearly 50 at recent check with a market value of $270 million.
One possible reason for the runup, according to analysts: speculation that Quality, which makes software for doctors and dentists, may be an acquisition target.
Louis Silverman, Quality’s chief executive, declined an interview for this story. Quality hasn’t set an exact date but plans to report its third-quarter financial results by the end of this month or in early November.
Those who follow the company are talking.
“There’s two primary reasons for the stock runup,in the past 60 days, it’s up about 40%,” said Gene Mannheimer, an analyst at Roth Capital Partners LLC of Newport Beach. “One is acquisition rumors. At least half a dozen people have heard some rumors relating to Quality Systems being bought out.”
WebMD Corp. of Elmwood Park, N.J., one of Quality’s rivals, has been cited as a possible suitor for the company.
Risa Fisher, a WebMD spokeswoman, declined to address any acquisition speculation.
WebMD may not be in a buying mood right now. Company officials last week said they didn’t expect to meet third- or fourth-quarter expectations due to weakness in WebMD’s physician services segment, where it competes with Quality.
But Mannheimer isn’t dismissing the acquisition theory.
“Quality Systems … is in our view, one of the three top electronic medical records products,” Mannheimer said. “So, whether or not it’s WebMD or somebody else, Quality Systems (is) an acquisition candidate and that’s partly what’s been driving the runup.”
Another reason for the runup, according to Mannheimer, is expectations of good results for the quarter ended Sept. 30.
Also, rival Epic Systems Corp. of Madison, Wis., is “preoccupied” with an extensive medical records project it’s doing for Oakland-based Kaiser Permanente, Mannheimer said.
Roth, which makes a market in Quality’s stock, is keeping a “neutral” recommendation on the shares because Mannheimer said he feels the company is fairly valued and its stock should be priced between 40 and 45.
Sean Wieland, healthcare services analyst for W.R. Hambrecht & Co.’s Boston office, said he isn’t so sure about a possible Quality buy.
“I have heard acquisition rumors, but that was at a price that was significantly below where the stock is today,” Wieland said. “I don’t believe that is necessarily in the cards anymore.”
Still, Wieland said he is bullish on the company.
“On a macro level, they are serving a need in healthcare and they have, by most accounts, one of the best pieces of software on the market today,” he said.
The electronic medical records market “is only about 5% penetrated, so the potential is huge.”
“They seemingly have the right product in the right market,” Wieland said.
Electronic medical records software and computers have gotten better and become more usable by doctors, according to Wieland.
“Anyone can go in and install a wireless network today. Just three years ago, that was like rocket science,” he said.
Quality’s strengths are its products, management team and its “stellar earnings growth and revenue growth across the company,investors are willing to pay up for that,” Wieland said.
Quality has two divisions.
NextGen Healthcare Information Systems Inc., based in suburban Philadelphia, installs and services electronic medical records and practice management software.
Irvine-based QSI, the other unit, does the same for dental practices.
NextGen makes up some 70% of Quality’s revenue, with QSI making up the rest. For the quarter ended June 30, Quality counted $16.3 million in sales, which were up 33% from a year earlier.
Quality’s clients pay fees for ongoing service and product updates. They account for 40% of the company’s revenue.
Earlier this year, Hambrecht’s Wieland said that doctors are going to adopt electronic medical records “as a result of an increased focus on patient safety in the ambulatory setting, rising malpractice premiums and improvements in reimbursements.”
Those issues, more than federal regulations requiring electronic claims submissions, were leading physicians to buy electronic record and practice management software, Wieland wrote.
Besides WebMD and Epic, Quality’s rivals include Britain’s Misys PLC and IDX Corp. of South Burlington, Vt.
Quality also faces off with VitalWorks Inc. of Ridgefield, Conn., on the medical side and PracticeWorks Inc. of Atlanta on the dental side.
Quality has had to overcome some challenges, among those the notorious reluctance of physicians to adopt computer technology.
“The medical practitioners are increasingly getting comfortable with the notion that medical record products are, in fact, advantageous for them. That’s a market that’s very under-penetrated,” Chief Executive Silverman said in an interview earlier this year.
Less than 10% of doctors use electronic medical records, according to Silverman.
In a May interview, Roth’s Mannheimer said he saw the physician practice management/electronic medical record software segment consolidating down to three to five companies with no one player with more than 50% of the market.
