The health care reform overhang is ending, making 2010 a safer time for investors to look at health care names. But is it already too late to find attractive pricing among the sector's large-cap players?
Jamie Stockton, a health care analyst at Morgan Keegan, noted that there will be $45 billion in government incentives to hospitals and physician practices to make the change to electronic records between 2011 and 2016. While that will be a profit-driver for IT players like Cerner, the biggest demand period may not occur in 2010. Morgan Keegan is forecasting 20%-30% of the demand to come in 2010, while the biggest portion of software sales to hospitals and physicians will occur in 2011, of approximately 40%. Many of these IT players, including Cerner, have had flat top-line growth in 2009. Growth should come in 2010 -- Morgan Keegan is targeting 15% for Cerner -- but at close to $86, Cerner is not nearly as attractive as it once was, especially when taking into account that 2011 may be the real big demand year for Cerner. Still, Cerner may see demand pick up sooner than other IT companies, due to its focus on the large hospital market. Cerner's 1,200 hospitals are among the largest in the market and are expected to move more quickly on electronic records due to the time it will take them to implement the technology and train staff. In the final analysis, however, the large hospital advantage doesn't translate into a long-term advantage for Cerner versus other IT players. Morgan Keegan's Stockton noted that of the $45 billion that the government expects to dole out for the electronic records initiative, the larger portion of $25 billion is slated for the physician practices. Allscripts is 85% physician-based, while AthenaHealth is exclusively focused on the physician market. -- Reported by Eric Rosenbaum in New York.