One potential winner from stimulus bucks
Allscripts, a health-care IT company, could win big from Obama's plan to create electronic medical records.
NEW YORK (Fortune) -- When Glen Tullman, the CEO of a health-care IT business called Allscripts, was watching the second presidential debate three months ago, something unexpected happened at the 50-minute mark. Both John McCain and Barack Obama told the audience that they wanted to digitize America's healthcare system. The first step: creating electronic medical records.
Tullman couldn't have asked for better publicity. The candidates had named Allscripts' biggest product on national TV, elevating the company's little-known industry to the visibility level of flag pins and Joe the Plumber. Tullman, who lives in Chicago, had advised Obama on the issue, but he hardly expected it to come up during the debate.
In the weeks leading up to the election, Obama kept promoting the idea of electronic health records. He announced that all records should go online by 2014, and that the government would spend $50 billion to make that happen.
On Jan. 15, House Democrats carved out $20 billion for healthcare IT in their proposed stimulus bill.
Allscripts' (MDRX) stock, which was trading around $5 in October, climbed to $9.50 by the end of the year. Market watchers heralded the company as an "Obama pick," and analysts hailed it with buy ratings.
"Imagine -- the most influential person in the world says everyone has to have your product in five years," says Tullman. "You can't paint a better picture."
Tullman is used to the benefits -- and pitfalls -- that come with great expectations. About 10 years ago, he joined Allscripts as CEO and divested the company's principal line of business, pharmaceutical benefits management, to focus on the hot new field of online prescriptions software.
The rest of the world was going digital, and it seemed as though doctors would, too; Allscripts went public in 1999 and its stock jumped from $16 to $86 in six months, eventually settling around $30.
But despite Allscripts' marketing efforts, e-prescriptions failed to catch on in the medical community. Doctors didn't want to disrupt the workflow in their offices, and administrators were concerned about privacy issues. Allscripts struggled to turn a profit, and its stock plummeted, hitting a low of about $2 in 2003.
Tullman attributes the drop to the dotcom bubble. "The difference between then and now -- we have real earnings now," he says.
Over the next few years, case studies emerged linking electronic prescriptions to increased efficiency and fewer medical errors; RAND researchers reported in 2005 that the adoption of electronic health records could yield industry-wide savings of $81 billion each year.
Allscripts created a whole suite of medical software -- programs that individual physicians could use to manage their practices, schedule patients, and transcribe health records online -- and more doctors embraced the idea of using computers rather than handwritten notes.
After a problematic software upgrade set the company back in 2007, Allscripts merged in 2008 with Misys, a practice-management software provider, and tripled its physician base. This fiscal year, Allscripts is expected by analysts to rack up about $76 million in profits from $700 million in revenues -- a 23% increase over last year's earnings.
While such bigger players as McKesson and Cerner focus on hospitals, Allscripts sells mainly to smaller practices. Of the 550,000 doctors who work outside of hospitals, about 100,000 use electronic health records; 60,000 of those doctors use Allscripts' software.
That leaves 80% of doctors up for grabs. "There's billions of dollars in market opportunity," says Lee Shapiro, the company's president.
The stimulus could be the company's key to breaking through to the remaining majority of physicians -- and to becoming a billion-dollar operation.
The bill proposes that $20 billion go towards healthcare IT, and allocates $2 billion for the initial investment. According to Tullman, that sum alone surpasses the total sales of electronic health record providers to doctors outside of hospitals.
But analysts are skeptical about whether that money will go directly to software makers such as Allscripts -- and how long it will take to get into their hands.
"The agencies have handed out small grants, but administering the distribution of several billion dollars is considerably different," says Bret Jones, a health care IT analyst at Leerink Swann. Jones, along with several other analysts, has downgraded Allscripts in recent weeks.
Tullman hopes that Obama will swiftly use the money to implement incentives and penalties. "The government has to make sure that they incentivize not only the acquisition, but the utilization of these systems," he says.
In order to receive grants, doctors would need to embrace information technology -- and, inevitably, embrace Allscripts' products.
Electronic health records can cost as much as $10,000 for small practices to implement. Grants or no grants, that cost could be prohibitive to doctors during the economic slowdown. In a December survey conducted by AHA Solutions, 57% of health care executives said that they were deferring the purchase of IT equipment.
Jones believes that hospital purchasers and independent practitioners will delay their purchases even more in anticipation of federal funding.
While Shapiro acknowledges the declines in capital expenditures, he says that hospitals will continue footing the bill. "There are strong business reasons for hospitals to connect to these businesses," he says. "That will continue despite the cutbacks."
Tullman believes that government-encouraged change will come more quickly than the analyst community thinks. "As the stimulus becomes more real, we're going to see an acceleration of sales in our industry," he says.
For now, Allscripts has the most valuable salesman in the country on its side. "JFK said he'd get a man on the moon in 10 years -- Barack said we'd have electronic health records in five," says Tullman. "He's the first president that truly understands this." 
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