As Medical Records Finally Go Digital, This Company Profits

Getting medical records quickly and accurately today is more important than ever...

Because of the coronavirus, many U.S. hospitals and clinics are overrun with patients. New York City had to build new, temporary hospitals to deal with a surge in patients. To ensure the best care and most accurate patient history, hospitals need the most efficient way to access patient charts.

Medical records were already in the process of going digital... but this adds even more urgency. There has been a sharp increase in electronic health records ("EHR"). These are digital versions of patients' charts. They're available instantly to anyone that has authorization, meaning they can be easily shared and updated by doctors, pharmacies, and clinics.

Doctors use their EHR systems to quickly look up medical information and double-check things like potential drug interactions or how long it would take to get an appointment with a specialist. More doctors are willing to answer quick e-mail questions through the systems to follow up on issues discussed in appointments.

And today's company is a major player in this industry...

Cerner (Nasdaq: CERN) and privately held Epic Systems dominate the EHR market...

Each controls about 25% of the EHR market, while third-place competitor Meditech has a 17% share (and shrinking).

As the biggest players, both of these companies have huge advantages over the smaller companies – even while competing with each other.

One defining characteristic of this market is the massive investment to set up your system. A large hospital group can spend hundreds of millions of dollars installing its EHR.

That's an advantage to the big players. Hospitals want to know that their software provider will be in business for decades, providing them with updates and service. You don't get that reliability from the latest hot startup.

Second, having lots of customers attracts more customers who want interoperability and employee familiarity. The trend among hospitals has been consolidation, with big hospital groups buying smaller ones and creating big conglomerates. Having systems that can work together means big savings.

All this means that when a hospital invests in a system, it stays with it.

Cerner boasts a "churn" rate near zero. And 90% of Cerner's sales come from recurring or "highly visible" revenue. So even if Cerner didn't make any new sales this year, nearly all of the company's revenues would still come through the door just so hospitals and doctor's offices could keep running.

Part of that is ideally customer satisfaction, but the truth is that Cerner's customers can't switch to a competitor without paying a huge cost and upending their entire businesses. That leads to stability in sales.

But Cerner doesn't just store medical records. The suite of Cerner products handles the billing, insurance, scheduling, and patient flow through hospitals and more.

For instance, Cerner Millennium is its health record system. CareAware works with connected medical devices. You can use Cerner products piece-by-piece, but once you are in the system, it makes sense to buy the whole thing.

Financially speaking, Cerner is a profitable juggernaut. In the last 12 months, sales grew 6.1%. Cerner earns a 75% gross margin on sales. Of its $5.7 billion in sales, $4.3 billion counts as gross profit. Cerner earned $841 million in free cash flow.

At the same time, it has about $1.2 billion in debt offset by $542 million in cash. For a $22 billion company to have around $600 million in net debt qualifies it as having a fortress balance sheet.

And expansions in medical technology are going to be a tailwind for Cerner...

More people have had their DNA sequenced and are putting that data to work. As this becomes more prevalent, more data-based, personalized medical services will become available, and we'll need to store those big genome files.

Telemedicine will allow remote consultation with health professionals. Connected devices like phones, wearables, and implants will feed more data to doctors. Voice recognition has improved and will help professionals record information without sitting at their keyboards all day.

And Cerner's "Population Health" technology analyzes individual patient data in the context of the broader population to gain insight into the best care and treatment options. Cerner projects the Population Health business could grow from $300 million today to $900 million by 2023.

Hospitals are going to continue to invest in EHR systems. It just makes their operations easier and more efficient. And there's a very good chance they'll turn to Cerner.