Mediware Information Systems, Inc.
www.mediware.com
Below the radar Mediware Information Systems, Inc. (Nasdaq:MEDW) has increased revenues and earnings per share for three consecutive years and shows no sign of faltering. This debt -free health info tech is an overlooked bargain judged by its extremely low comparative P/E and Enterprise Value ratios plus strong $37.4 million cash position. Led by performance -oriented CEO T. Kelly Mann and chaired by savvy Wall Street star Larry Auriana, Mediware is bringing life and cost saving technology solutions to healthcare providers at a crucial moment when medicine must be transformed. The right markets at the right time with the right people and products. A$30 stock!
By Arnaldo Arroyo with Robert J. Flaherty
Recent Price: $14.19 Balance Sheet as of March 31, 2012
Market Capitalization: $116.7 million Total Assets: $90.3 million
52-Week Range: $15.50 - 8.25 Cash: $37.4 million
2011-2008 Range: $15.00-3.06 Long-Term Debt: None
Shares Outstanding: 8.2 million Shareholders' Equity: $61.5 million
Float: 3.8 million Book Value Per Share: $7.89
Avg. Daily Share Vol. (3m): 8,139
Buy Recommendation
Most investors have never heard of this stealth emerging growth stock or appreciate its performance. Stop and look. Below the radar Mediware Information Systems, Inc. (Nasdaq:MEDW) has increased revenues and earnings per share for three consecutive years and shows no sign of halting. In addition this debt-free health info tech has a strong $37.4 million cash and cash equivalent so it has the financial resources to execute management's strategy.
Led by performance -oriented CEO President T. Kelly Mann and chaired by savvy Wall Street star Larry Auriana, Mediware is bringing life and cost saving technology solutions to healthcare providers at a crucial moment when medicine is being transformed. Demands from hospitals, other care providers and insurers for saving lives by reducing preventable medical errors, cutting costs, coordinated care, shared information and fewer tests have gone global. No matter what happens in the next U.S. presidential election demands to continue making delivery of healthcare broader, more efficient and safer will continue to expand.
For the third quarter of the 2012 fiscal year, which ended March 31, 2012, Mediware reported total revenue of $16.9 million, an increase of 22% from the $13.8 million reported in the third quarter of fiscal 2011. In the comparable periods, earnings amounted to $1.9 million, or $0.22 cents a share, compared to $1.4 million, or $0.17 cents a share.
Security analyst Jonathan Braatz, a partner at Kansas City Capital Associates, has followed this stock for many years. He believes the upward trend in Mediware's earnings and revenue will continue getting stronger throughout 2012 and 2013. For year-end 2012, he anticipates earnings of $0.83 per share and revenue of $65 million. For 2013, he forecasts earnings of $0.89 per share and revenue of $71 million.
In an era when managements increase shares outstanding by enormous amounts, dilute the interests of existing shareholders and are overly short term in outlook, Mediware has been refreshingly old fashioned. Mediware has shares outstanding of only 8.2 million and float of only 3.8 million shares. More importantly, both figures are only modestly above 7.8 million and 7.2 million shares outstanding and the float of 3.1 million and 2.7 million shares in our previous 2010 and 2001 special situation reports.
The low float should discourage any unfriendly takeover. This means any serious acquirer will have to pay up to obtain this prize. The low float also blocks large institutions from buying a lot more shares which partly explains why Mediware stock is selling at a bargain price. Mediware's P/E of 16.3 compares to P/Es of 70, 41 and 32 for some of its more visible rivals. This is opportunity knocking for patient investors! It means as Mediware operates and increases its size and value over time its P/E could expand spectacularly. Likewise if Mediware does marry up with a larger company down the road it can hold out for a large premium. The Enterprise Value /EBITDA ratio of 6.2 for Mediware compares to ratios for some of its rivals of 30, 20 and 15.
The goal of a Flaherty Special Situation is a gain of 50% to 100% over two years. We believe patient investors can achieve the 100% gain. Constantly improving Mediware should continue to increase in value as a standalone operator and acquirer. Then someday -don't know when- Mediware itself could be acquired at a handsome premium by one of the larger players in bringing efficiency to healthcare. Good operating management with a performance of profitable growth, shrewd financial leadership, liquid finances, no long-term debt and market niches which will only grow as world population ages and health needs continue to increase must ultimately be rewarded by recognition in the stock market. This looks like an easy double -or $30 a share - for patient investors.
Current developments and overview
With the recent acquisition of two new products, Mediware's earnings and revenue are projected by analysts to continue increasing throughout fiscal 2012 and 2013. At the end of the third quarter ended March 31, the company had working capital of $31 million and zero debt. Mediware's software solutions and services help hospitals and other care providers become more efficient, cut waste, reduce mistakes and, above all, save lives. The recent acquisitions of adult stem cell technology and chemotherapy management software will boost Mediware's potential. In addition, the company will be likely continue to benefit from the $19.2 billion U.S. Stimulus program that was initiated to make patient medical records electronic.
Preventable medical errors injure or kill hundreds of thousands of Americans each year. According to studies by the Institute of Medicine, hospital errors alone rank from 8th to 5th as a leading cause of death and more recent critics have put it as high as 1st. The office of the Inspector General of the U.S. Department of Health and Human Services found that one in seven Medicare patients are injured during hospital stays and those adverse events during the course of care contribute to the deaths of l80, 000 Medicare patients every year. One of the most common cause or errors is the medical system itself, not the individuals functioning within the system.
Mistakes can occur anywhere in the treatment transmission chain. As a result, electronic medical records are now a top priority in the effort to contain healthcare costs and ensure the nation's continuing leadership in medical technology and practices. Also coordinated health care and shared information are musts in having fewer tests and improved patient outcomes. All hospitals need to implement computerized drug ordering systems which one study found would reduce medication errors by 86%. This is why the health information sector is booming and why Mediware has such a great opportunity for future growth.
With state-of-the-art technology designed to help prevent medical errors and improve patient safety and reduce healthcare costs, Mediware Information Systems is strategically positioned to continue reaping the benefits from the increasing growth of investment in the hospital information technology space as well as alternative care solutions. The company's core information technology offerings include important blood and biologics management solutions, medication management solutions and performance management solutions. Its customers include hospitals, blood centers, behavioral health facilities and home infusion providers, specialty pharmacy providers and billing for home infusion.
Broadening its acquisition strategy, Mediware has expanded from blood management into the adult stem cell business with the recent acquisition of Transtem LLC, a St. Louis-based developer of software for managing the collection and transplantation of adult stem cells for cellular therapy and medical research. To expand sales in Europe, where Mediware already has a foothold, the company has also recently acquired Cyto Management System, a Holland-based technology for tracking chemotherapy patients and medication.
In mid-summer, Mediware is slated to roll out its smartphone app to manage blood donor recruitment. The app was previewed in May at the 2012 Association of Donor Recruitment Professionals Annual Conference in St. Louis. The app will be available for Apple and Android devices and will enable users to quickly access Mediware's online donor relationship management tools to find drives, self-schedule donation appointments, and interact with their blood center using their smartphone.
T. Kelly Mann, Mediware's president and CEO, attributes the recent increases in revenue to meeting a series of milestones in its agreement with the U.S. Department of Defense to provide blood bank and blood center management programs. Last year, the DOD selected the company's blood transfusion management software, HCLL™ Transfusion, to manage transfusion medicine at 68 military health sites around the world. This award follows the selection of the company's LifeTrak® and InSight software systems which are used to manage and track blood donor records and blood product inventories.
"Beyond the initial agreements, there are a number of opportunities to expand our involvement with the DOD," says Mann. "We've already secured additional service agreements to assist with the ongoing deployment and expect to enter into additional service and support agreements related to the sustainment of the deployed solutions. If we are able to win them, I expect the benefits, particularly with the service and support contracts, to largely impact Mediware starting in fiscal 2013."
Mediware's successful reorganization and unfolding acquisition strategy is why Kansas City Capital Associates security analyst Jonathan Braatz believes that shares of Mediware are currently undervalued. "Kelly Mann has done a very good job of reorganizing the company through a combination of organic revenue growth and acquisitions and the substantial buildup of cash," Braatz says. "If you look at those things together, then the stock looks attractive. There are a number of opportunities to capitalize and create organic growth and continue to make selective and good acquisitions."
Besides being in the right place at the right time with a top notch CEO, Mediware will also continue to benefit from having the financially savvy Lawrence Auriana as chairman. Mediware was one of his venture capital investments back around l980 before Larry and his partner Hans Utsch took over the then tiny Kaufmann Fund in l986. That fund was acquired in 2001 which is why now Auriana is the Co-Portfolio Manager of three Federated Kaufmann Funds. This vantage point gives him the perspective and understanding of what it takes to make an emerging growth company successful. Good products, good management and superior financial backing spell success. That is a superior environment in which management can grow an emerging growth company.
The acquisition of Cyto Management System (CMS) cost Mediware $2.2 million and should help it to leverage its strong relationships with customers and core capabilities throughout the UK and Europe. Currently, CMS software has been deployed in Belgium and the Netherlands, enabling medical professionals and organizations with a comprehensive way to manage cancer treatments. The technology allows them to report the outcome of therapies, control costs, track patients and manage personalized healthcare plans. Mediware will continue to market the software through its network of European distribution partners under its own brand and has opened a regional office in Holland. Mediware plans to sell the software in the UK and Ireland, where many providers already are using the company's JAC drug management systems.
"In a couple of weeks since the acquisition, we have already been selected vendor-of-choice for two new sales in the Netherlands," says Mann. "Over the last couple of years, we have seen increasing demand from UK customers for this type of solution. We have done significant diligence on the opportunity in a competitive landscape. As a result of these efforts, we're confident the CMS software with the advantage of our large JAC customer base will become a leader in the UK market." Mediware's JAC pharmacy stock control software is used by more than 50% of National Health Service trusts in the United Kingdom.
What's more important is that the multilingual capabilities of the CMS software will enable Mediware to expand its geographical reach by marketing the product in the native language of most European countries.
The Transtem acquisition promises to position Mediware as the software leader in the adult stem cell business. Mann says that in 2009 more than 60,000 adult stem cell transplantations were performed globally in the treatment of cancer and certain blood diseases. There are more than 3,600 stem cell clinical trials now in progress. He believes the technology can be extended to others using stem cells and similar substances, including blood banks, cell therapy labs, transplant centers and research facilities.
Over the past several years, adult stem cell research - which has largely avoided the controversy surrounding embryonic stem cell research, which requires the destruction of early human life to acquire the cells - has been growing at an accelerated pace. Indeed, the applications of adult stem cell therapy are potentially unlimited. This therapy has given hope to those suffering from spinal cord injuries, Parkinson's disease, multiple sclerosis, diabetes, lupus, Crohn's disease, ocular degeneration, blindness, heart disease, leukemia, non-Hodgkin's lymphoma, aplastic anemia and sickle cell anemia.
"The use of stem cells in regenerative medicine and cancer treatment is an emerging market, and we believe this acquisition along with our blood and biologics expertise and large customer base positions us very well for our success in this market," says Mann. "Only after a few months, we've already signed two new Transtem customers. The pipeline for this product includes a number of other deals that can be closed in the near term."
Mann notes that Jonathan Wofford, founder and president of Transtem, and his team have been doing a very good job of growing the company. In fact, Wofford has a strong background in cellular technology. He has more than nine years of experience in the field of cellular therapies and has worked with prestigious organizations such as the St. Louis Cord Blood Bank at Cardinal Glennon Children's Medical Center. In 2005 he was recognized by the Center for International Blood and Marrow Transplant Research for outstanding clinical research related to the use of umbilical cord blood for adult transplant recipients and in 2008 spoke before members of Congress on the need for a national cord blood inventory and in support for the reauthorization of funding for the National Marrow Donor Program.
Taking a broader view security analyst Jonathan Braatz concludes, "Making these acquisitions and using the base of what Mediware has already established enhances the growth opportunities of the companies they're acquiring."
Business
Mediware Information Systems engages in the design, development and marketing of software solutions targeting specific processes within healthcare institutions. Systems consist of proprietary application software and third-party licensed software and hardware. Mediware licenses, implements and supports clinical and performance management solutions. These solutions are primarily designed to create an automated closed loop clinical system for the management of medication and blood in hospitals, blood centers, long-term care and behavioral health facilities and alternative care such as home infusion and military uses. As medicine is being transformed, Mediware continues to look for new opportunities to expand its services.
Mediware's systems are installed in more than 1,700 hospitals and health facilities worldwide, primarily in the U.S., U.K., Canada, Ireland, South Africa, and most recently in the Netherlands and Belgium.
Chemotherapy Management Solution:
Mediware recentlyclosed its $2.2 million acquisition of Cyto Management System from Cobbler ICT Services BV. The CMS software, which is currently deployed in Holland and Belgium, provides healthcare organizations a comprehensive chemotherapy management solution to track patients, manage highly individualized medication-based treatment plans, and help control costs and report outcomes associated with cancer therapies.
Adult Stem Cell Solution:
In January, the companyacquired substantially all the assets of St. Louis-based Transtem, LLC, a provider of software that manages the collection and transplantation of adult stem cells in cellular-based therapies and medical research.
The Transtem solution stands out because of its comprehensive ability to support the collection and processing needs of cell therapy labs and cord blood banks, as well as the clinical needs of transplant centers and research facilities. The product's potential is attributed to the fact that the software was designed by active cell therapy professionals.
Blood Center Solutions: In July 2008, following the acquisition of Integrated Marketing Solutions (IMS), Mediware launched its Blood Center Technologies (BCT) business unit to provide a customer focused team to drive growth in the blood donor market. Through BCT the company provides software tools and services to large, complex blood centers for donor targeting, donor recruitment, donation management, unit testing, blood component manufacturing, inventory control, sales and distribution.
This is accomplished through a combination of the company's core donor management system, the FDA 510(k) cleared LifeTrak® software for clinical operations, and the IMS products that deliver CRM like capabilities to enhance donor recruitment and retention. Operating together these products and capabilities infuse the robust clinical capabilities blood centers need with new, modern and effective CRM technologies that improve the effectiveness of coordinated blood drive campaigns while still meeting the strict FDA regulations for safe blood management.
Blood Bank Solutions: Mediware's blood bank software solutions enable the total management of blood and biologic materials, from ordering and inventory, to testing, storage, preparation and transfusion.
The company's flagship blood transfusion product is the HCLL™ transfusion software. Mediware also provides its hospital customers its complementary HCLL™ donor software module for use in hospital-based donor centers. The HCLL software (HCLL Transfusion and HCLL Donor) addresses blood donor recruitment, blood processing and transfusion activities for hospitals and medical centers. These systems are designed to be user intuitive, scalable, and support product management, resource management, quality control, testing, transfusion and follow-on reporting related to FDA audits. They include advanced data mining and data management intelligence capabilities, which can be utilized by facilities of all sizes, including small hospitals, large medical centers, multi-facility enterprises and central transfusion services.
Mediware is also looking to new products and markets to continue growth in blood management. In early fiscal year 2008, the company introduced its BloodSafe™ suite of products. The BloodSafe suite includes hardware and software which enable healthcare facilities to securely store, monitor, distribute and track blood products from locations removed from the hospital's physical blood bank. Components of the BloodSafe suite include blood tracking and monitoring software, computer controlled refrigerators and handheld point of care tools to verify accurate patient identification and document transfusion activities. BloodSafe can also be integrated with Mediware's HCLL software or it can operate on a stand-alone basis.
In June 2008, Mediware introduced BiologiCare, its first generation bone, tissue and cellular product tracking software. The software leverages the HCLL software platform and Mediware's blood banking expertise to address the important needs of hospitals as they begin to manage bone, tissue, cord blood stem cells and other biologic products. BiologiCare is designed specifically to track and manage transplantable materials in hospitals, surgery centers and other healthcare facilities. The products enable users to document donors, tissue vendors and tissue recipients and to comply with current regulations regarding transplantable materials. BiologiCare can also be integrated with Mediware's HCLL software or operate on a stand-alone basis.
Medication Management Solutions:
Mediware's flagship medication management software product for larger and medium sized hospitals and healthcare institutions is WORx, a core pharmacy information system designed to manage inpatient and outpatient pharmacy operations. WORx software has features and functions designed to help improve patient safety and manage pharmacy operations effectively. The product's market acceptance encompasses multi-facility healthcare systems, university hospitals and large state behavioral health institutions.
The acquisition of substantially all of the Hann's On Software (HOS) assets expanded Mediware's product offerings by adding a pharmacy solution that meets the needs of small and medium size hospital facilities. The company currently plans to continue offering the WORx product line to larger acute care hospitals and state behavioral health facilities, while offering the HOS product line to the small and medium size hospital markets.
The HOS acquisition added approximately 320 facilities sites to Mediware's medication management customer base.
In fiscal 2004, the company introduced MediCOE™ and MediMAR®. These products are fully integrated with the WORx software and provide a complete closed loop drug therapy management system with a physician order entry module (MediCOE) and nurse point of care administration and bedside documentation module (MediMAR).
The MediCOE software provides clinicians an efficient, effective method to enter medication orders and manage drug therapy. Orders entered in the MediCOE software undergo a prospective evaluation based on the patient's current medical profile to identify potential adverse outcomes. Potential problems can be identified by the clinician at order entry and can be corrected or explained at the point of care.
The MediMAR software, on the other hand, serves as an electronic medication administration and bedside documentation record. It produces a dynamic and complete representation of the patient's medication profile, including clinician orders, medication list, allergies, notes and clinical alerts to increase patient safety. The MediMAR software uses bar code, wireless, handheld, and other technologies to allow caregivers efficient and accurate methods to document patient medication administration and provide nurses additional safety measures at the point of care.
To expand the company's capabilities and address a new industry mandate, Mediware introduced MediREC in March 2007. This medication management product assists in achieving compliance with a Joint Commission on Accreditation of Healthcare Organizations mandate, which requires hospitals to document all of a patient's home medications when a patient is admitted or enters the emergency room, and to reconcile that list with the medications prescribed in the hospital. That process must be repeated each time the patient is transferred within the hospital and again when the patient is discharged.
Management and Key Personnel
Lawrence Auriana, 68, has been chairman of Mediware since 1986 and a director since 1983. He has been a Wall Street analyst, money manager and venture capitalist for many years. In 1986, he and his partner Hans Utsch took control of the then tiny The Kaufmann Fund, which was acquired in 2001 and is now part of Federated Investors. Today, he is Co-Portfolio Manager of The Federated Kaufmann Fund and he is also Co-Portfolio Manager of Federated Kaufmann Small Cap Fund and Federated Kaufmann Large Cap Fund. He received a B.A. degree from Fordham University, studied at New York University Graduate School of Business and is a senior member of The New York Society of Securities Analysts. For decades he has been a star member of our Flaherty Favorites of the Famous "If You Could Love Only One..." panel of money managers whose combined long-term portfolio performance compared to similar annual panels has been unmatched anywhere on the planet.
T. Kelly Mann, 53, has been president, chief executive officer and a director since joining Mediware in September 2007. Mann has over 27 years of healthcare, technology and management experience. Prior to joining Mediware, he served as the senior vice president of marketing for 3M Corporation's Health Information Systems, Inc. Earlier Mann served as the division's national sales and marketing director from 2003 to 2007 and from 2001 to 2003, he was the division's Six Sigma Master Black Belt, where he focused on improving business unit efficiencies. His vision-driven management style and profound understanding of healthcare issues resulted in rapid promotions through these and other roles in sales, marketing, product management and operational management while at 3M Corporation. His strategic insights during his tenure at 3M were instrumental in growing 3M's Health Information Systems client base to more than 4,000 healthcare organizations worldwide.
Robert Watkins, 53, chief financial officer, joined the company in 2008 as corporate controller. Watkins was promoted to vice president and corporate controller in 2011 and to CFO in 2012. Prior to joining Mediware, he served in a number of financial management positions, most recently as corporate controller for Titan Machinery, a $1 billion provider of agricultural and construction equipment. During his tenure at Titan, he supported the organization through an IPO, follow-on offering and many acquisitions. Watkins' prior experience also includes corporate controller positions at National Agriservices, Magnum Logistics and AFS Financial, where he also served as chief financial officer from 1989 to 1999. Watkins is a current member of the AICPA and Financial Executives International.
Robert C. Weber, 41, chief legal officer, senior vice president and general counsel, joined Mediware in January 2004. Prior to joining Mediware, he was corporate counsel of Epic Systems, a private medical records software company, from 2002 to 2004. Weber served with domestic and international law firms, most recently in the Chicago office of Skadden, Arps, Slate, Meagher & Flom from 2000 to 2002, where he specialized in asset and stock sale agreements and private equity investments. He also worked at Jenner & Block from 1996 to 2000. He earned his B.A. degree with distinction at the University of Wisconsin and a J.D. degree at the University of Wisconsin School of Law, where he graduated Cum Laude.
Finances
Fiscal 2012 marked Mediware's third consecutive year of earnings and revenue growth. Mediware reported total revenue of $16.9 million for the third quarter of the 2012 fiscal year, which ended March 31, 2012. This represents a 22% increase over the $13.8 million reported in the comparable quarter in fiscal 2011. Quarterly fully diluted earnings per share were $0.22, a 29% increase from the $0.17 in the year ago quarter.
In the third quarter, operating income increased to $2.3 million, a five percent increase over the same period last year. In addition, cash and cash equivalents increased to $37.4 million, an increase of almost 25% from $30.0 million reported on June 30, 2011. That is $4.55 in cash per share. Long term debt remains at zero. So Mediware has the liquidity to make attractive acquisitions or handle unexpected events.
The low float which blocks large institutions from buying a lot more shares partly explains why Mediware is selling at bargain prices. Its P/E of 16.3 compares to P/Es of 70, 41 and 32 for some of its competitors. This is also opportunity knocking for patient investors! It means as Mediware operates and increases its size, value and float over time its P/E could expand spectacularly. Likewise if Mediware does marry up with a larger company somewhere down the road, the company can hold out for a large premium. The Enterprise Value /EBITDA ratio of 6.2 for Mediware compares to ratios for some of its rivals of 30, 20 and 15.
Competition
The booming market for healthcare information systems is extremely competitive. Among Mediware's giant competitors are Siemens AG, GE Healthcare and McKesson Corporation. Others focused on streamlining healthcare include Allscripts Healthcare Solutions, Cerner Corporation, Haemonetics Corporation, Quality Systems, SCC Soft Computer and SXC Health Solutions. Each provides products that compete or partner with certain of Mediware's offerings. All of these competitors have greater financial, technical, product development, sales and marketing resources and as such could be a potential acquirer some years down the road. So could one of many other players in healthcare IP.
Risks
Mediware is battling for market share in a highly competitive environment against companies with far greater resources. Mediware not only has to develop superior information technology software, but it also has to convince prospective buyers that it has a better product and will do a good servicing job Hospitals are Mediware's prime customers. While the U.S. economy continues to recover at a snail's pace, governments have cut back assistance to hospitals for treating uninsured patients so this core Mediware customer has not been growing although acquisitions have created growth in related areas. Overseas military blood revenues may decline as U.S military activity winds down. Besides broadening into home health care, Mediware's acquisitions of Transtem's adult stem cell technology and Cyto Management's chemotherapy management software offer the promise of new growth. In the event that these new products are not widely accepted in the marketplace, Mediware's future revenues could fall short of the mark. Of course, our aging population and demands for better care delivered more efficiency and cheaply will continue to bring unprecedented opportunity for alert managements. With over $37 million in cash, management has the resources to acquire other companies to help further growth. Mediware couldn't be in a better spot to prosper.
CONTACT INFORMATION
Mediware Information Systems, Inc.
11711 West 79th Street
Lenexa, KS 66214
Phone: (913) 307-1000
Fax: (913) 307-1111
Investor Relations
John Van Blaricum
Phone: (913) 307-1017
