Health IT shares still seen as overvalued

A monitor in the control room displays data in the cardiac catherization area of Tulane University Hospital in New Orleans February 14, 2006.

CHICAGO (Reuters) - The Shares of health information technology companies are still over valued amid lingering optimism the government's proposed $20 billion investment into health IT will soon set off a growth spurt in the sector.

Enthusiasm for sector has diminished in recent weeks as Washington debates the $900 billion economic stimulus package. The stimulus includes a $20 billion investment in health IT, aimed at helping hospitals and physician's offices ditch paper records and implement electronic health records and electronic prescriptions.

But it will take 12 months to 24 months before the investment even begins to pay dividends, observers say.

As an investment, "we think this is a very long-term play -- at least five years," said Deutsche Bank analyst Ross Muken.

The shares of companies such as Cerner Corp (CERN.O), Eclipsys Corp ECLP.O, Global Med Technologies Inc GLOB.OB, Quality Systems Inc (QSII.O) and Allscripts-Misys Healthcare Solutions Inc (MDRX.O) -- all involved in some aspect of managing medical information -- are considered to be "pure plays" in health IT. The group rallied in late November on signs President Obama would make good on promises to invest in technology to improve the efficiency of the healthcare system.

The shares have since reversed course, with Cerner shares pulling back about 14 percent from their recent highs and Quality Systems retracing about 17 percent. Eclipsys shares shed 39 percent from their recent highs.

"People were getting way ahead of themselves ... values don't reflect the recessionary environment and depressed hospital spending," said Leerink Swann analyst Bret Jones.

"I'd say this sector is still 15 to 20 percent overvalued and I'd sell into rallies for now," he said. "I wouldn't (buy) until there's more of a pullback and we see the fine print of the (government's stimulus) program. It could be a tremendous opportunity."

Large diversified players are also poised to benefit from a conversion to electronic medical records. They include giants such as General Electric Co (GE.N) Siemens AG (SIEGn.DE) and McKesson Corp (MCK.N).

The industry has had its sights set on converting to electronic medical records for decades, but implementation has been scuttled by the lack of electronic standards so different systems to "talk" to each other, as well as concerns over privacy.

"The sophistication of electronic medical records (technology) has greatly improved over the last few years. The capability they have in improving communication and enhancing patient safety is very real," said Dr. Nathan Levitan, president of University Hospitals Case Medical Center's Ireland Cancer Center in Cleveland.

Levitan oversaw implementation of his hospital's e-prescription plan and is helping to roll out electronic medical records there using Eclipsys software.

Building a nationwide system has its challenges, since so many private practice physicians still use paper records, he said.

"But I have no doubt that this will happen. I just don't know what it will cost or what the time frame might be," Levitan added.

What is needed is a common secure electronic system and that will take time to build, observers say.

And some see a risk that money alone will not be enough to establish a workable and widely used system.

"The smartest technologists don't know the right answer. Sometimes the best thing is to have a bunch of different vendors trying to figure it out all at once and in the end the invisible hand of capitalism comes up with the answer. It's a pretty efficient hand," said Clayton Christensen, a professor at the Harvard Business School. "You can't accelerate that process with a big chunk of money."

(Editing by Andre Grenon)