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NextGen Healthcare Information Systems, a full subsidiary of Quality Systems (QSII - Analyst Report), recently revealed a noteworthy agreement with Medline Industries. As per their agreement, among other provisions, Medline’s sales team of over 1,100 reps will collaborate with NextGen Healthcare to jointly sell NextGen offerings to Medline’s clientele at over 100,000 addresses comprising hospitals, doctor’s practices and other arrangements.

Based in Mundelein, Illinois, Medline is America’s biggest privately owned producer and distributor of healthcare offerings. It distributes over 125,000 offerings to doctors’ offices, hospitals and other medical settings. 

Quality Systems runs a pure-play business model in an attractive industry with a large number of catalysts, which provoke frequent speculation about mergers and acquisitions. On the positive side, we observe the high proportion of recurring revenues. Of late, however, growth of its pipeline metric has seen a falling trend.

The company has made multiple acquisitions to bolster organic growth. Its acquisitions are expected to facilitate its entry in the small hospital segment. We are concerned about execution risk emanating from Quality Systems’ entry into the rural inpatient market.

Moreover, competition is intense from well regarded players such as Athenahealth (ATHN - Analyst Report), Allscripts Healthcare Solutions (MDRX - Analyst Report), Cerner Corporation (CERN - Analyst Report) and others. Price discounting is frequent, particularly at the lower end, and Software as a Service (SaaS) based model appears to have exacerbated pricing pressure.

Quality Systems has traditionally focused on providing solutions for physician practices. However, core ambulatory EHR providers such as Quality Systems will see opportunities for product sales shrink, as physician groups are increasingly absorbed into hospitals.

Currently, Quality Systems retains a Zacks Rank #3 (Hold), which supports its Neutral recommendation for the long term.

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