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Morningstar | No-Moat Allscripts Facing Mounting Competitive Pressures in Healthcare IT Space

Allscripts' strategy of pursuing high-growth areas of healthcare IT and gaining market share through acquisitions is shaping the firm to be a material player in a highly competitive and consolidating industry. However, lackluster performance from its core products lead us to believe that the firm needs innovation and careful execution to hold its own against vendors like wide-moat Cerner and privately owned Epic Systems. We believe this dynamic will keep the firm from developing any significant long-term competitive advantages and economic moat.We believe that the firm's investments in nascent growth areas of HCIT, such as population health, patient engagement, life sciences, and payer markets, and the post-acute space, which includes behavioral health and home health, will diversify Allscripts’ portfolio and help offset the effects of a maturing electronic health record (EHR) market. Its 49% stake in leading post-acute provider Netsmart was a tactical allocation of capital, with Netsmart revenue growing 84% in 2017 as it gained traction in an underserved market. Our main concern with the firm’s strategy has been its core products, which make up about 2/3 of revenue. They are not up to par with Cerner’s or Epic’s in quality or scalability, and we’ve seen relatively flat revenue there. Although Allscripts' investments in high-growth areas are important to the firm's bottom line, we would like to see more innovation in its core products of EHR and revenue cycle management as these mission-critical functions are crucial for client retention. On a positive note, Allscripts recently launched a new cloud-based EHR, Avenel. Although in the very early stages, we believe Avenel could be an indication of the potential improvement within the core product portfolio that will be key to maintaining share and a satisfied client base. The acquisitions of McKesson's EIS (2017) and Practice Fusion (2018) contributed meaningful market share and opened the door to cross-selling opportunities, but we'd like to underscore that productive research and development and successful execution in sales and marketing will be key to maintaining those fragile market share gains.