·CompuGroup (“COP”) is the leading European software and service provider in eHealth market
·COP operates in 4 segments: Ambulatory Information Systems (“AIS”), Pharmacy Information Systems (“PIS”), Hospital Information Systems (“HIS”), and Health Connectivity Services (“HCS”)
·AIS – focused on practice management software and electronic medical records for office-based physicians, dentists, medical care centers and physician’s networks. The customers are usually primary care providers working in ambulatory care, providing health services on an outpatient basis to those who visit a healthcare facility and depart after treatment on the same day. For these providers, producers and services are packaged into an end-to-end solution that covers all clinical, administrative and financial functions needed to operate a modern care facility as well as secure internet and intranet solutions through which a secure exchange of medical data is guaranteed. The integrated software solution creates efficient structures for the customers to manage, analyze and use medical data, organize business operations and generate invoices, including extensive administrative support and workflow functionality
·PIS – focused on integrated clinical, administrative and financial software applications for retail pharmacies. The software and related services provide accurate information and decision support to manage the complete drug supply chain from procurement and shipping of drugs through efficient management and control of inventory all the way to planning, execution and controlling of the retailing function. Safe and cost-efficient dispensing to patients in ensured through advanced drug safety and control functions as well as decision support tools for generic substitution and cost optimization strategies
·HIS – focused on clinical and administrative solutions for the inpatient sector, where health services are provided over a prolonged period of time (from days to years) through highly specialized, secondary care institutions. The customers range from acute hospitals to rehabilitation centers and social services, including multi-site hospital networks and regional care organizations. The software and related services facilitate patient administration, resource and personnel management, medical documentation and billing programs in addition to a number of clinical applications aimed at various specialized departments and laboratories
·HCS – focused on customers within the healthcare sector that are outside the healthcare providers in the other three segments. Important customer groups in segment are pharma companies, health insurance companies, other healthcare IT companies and consumers. The HCS solutions enable pharma companies to provide information to healthcare providers through software interfaces
·The market does not understand the business quality and long-term earnings power of COP
·COP is a high-quality business as 1) their software products are a small component of their customers costs, but have high utility as they are critical to customers operations, 2) COP operates in consolidated industry structures across their markets and products and their products have high switching costs, 3) software maintenance and other recurring revenues are approximately 70% of total revenue
·The German healthcare market is undergoing a digital transformation after “the eHealth Law” was recently written into German law, which results in the mandatory national rollout and use of Telematics Infrastructure and electronic health cards. COP is the first and dominant supplier providing all necessary components to doctors, dentists and hospitals to participate in the Telematics Infrastructure. The Telematics Infrastructure is a long-term growth opportunity for COP as they will have the ability to sell new eGK-compliant online access products, which includes eServices, ePrescriptions, eLabOrder, physician networks, online clinical pathways, hosting services, etc, to all existing customers in Germany. We estimate that COP will have approximately 20k indirect and 60k direct eGK providers, which will generate incremental revenue of approximately +€70MM (€70/month per provider x 80k providers) at a +30% margin. The 60k direct eGK providers should allow them to generate incremental sales of €2,000 per provider from additional products (currently about €1,000 per provider) at a 50% margin, which produces incremental EBITDA of +€60MM and cash EPS of approximately €1/share. This €3,000 revenue per provider in Germany compares to UK, Netherlands, Scandinavian markets that have roughly €4,000 per provider. We also think that COP has latent pricing power in Germany as the company hasn’t taken normal pricing increases across its products for several years in anticipation of (and incentive for) the Telematics Infrastructure roll out.
·COP has approximately 38k doctors in France (roughly 40% market share) and is currently making about €750 per provider. France’s IT system is built around the Carte Vitale health insurance card, which is a simple system that we think eventually will be upgraded to UK/Netherlands/Scandinavian standards and drive €2,000 incremental revenue per provider at a 40% EBITDA margin. This incremental upside is not included in our earnings estimate.
·We think COP will have earnings power of €3.50 in a few years, which when combined with France development opportunity worth €7.50 per share and excess cash of €15 per share, results in estimated intrinsic value of €80 per share looking 3 years out.
·Health care is a highly regulated industry in Europe and there is a possibility of regulatory action that could change COP’s business and profitability.
·The company has been very acquisitive in the past, which could pose integration risks as well as earnings dilution from overpaying for acquisitions.
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