Unveiling EMIS-X

EMIS has historically generated good organic growth from the development and roll-out of EMIS Web and the extension of its software beyond primary care. This has supported a high level of recurring revenues and strong operating margins and cash generation. Its track record from acquisitions has been more varied. Some, such as Rx Systems, have been successfully integrated and have contributed to revenue growth and profitability. Others, such as Ascribe, have struggled as NHS IT budgets have shrunk. Overall, in the last two years, growth has slowed and margins have trended down (see Exhibit 1).

Recognising that the business in its current form would struggle to generate growth at the historic higher levels, management has devised a growth strategy to combine its existing strong market position with innovative technology to widen its addressable market and improve operating efficiency. At the same time, it continues to develop its core software to meet the requirements of NHS Digital, in particular to ensure its GP software is selected for the new IT Futures framework.

The company outlined the areas from which it believes it can generate growth. This broadly falls into two areas: providing integrated care solutions to improve the operating efficiency of the NHS and EMIS, and the private sector. The table below summarises areas in which EMIS has or expects to develop technology, the current estimated size of the market and the company’s estimate of the market size in the medium term.

The company announced the development of a new platform, EMIS-X, on which it will ultimately build all of its software solutions. This will bring together an upgraded EMIS Web with the solutions it offers in community pharmacy, acute and Patient. The aim is develop the UK’s first integrated clinical platform serving all types of care. This will address the issue of a lack of interoperability between existing IT systems within the NHS and the fact that each citizen tends to have multiple records held by different care providers. This results in a high level of duplication, manual processing, potential clinical errors and inconvenience for both patients and clinicians.

The platform will have the following features:

Exhibit 3 shows conceptually how the platform will work.

The platform is designed to allow federated working for patient records and appointment booking. For example, a clinician will be able to access a patient’s record, which in turn will pull in all relevant information held in different care settings, for example, GP, A&E and mental health records. The information could be held across a variety of different software systems from different vendors, but will be accessible in one place, giving a full view of the patient’s medical history. It will be possible to select specific types of information from records, such as medication, providing more comfort to the patient that the clinician is only accessing the data necessary for that particular consultation. The patient ultimately has control over the sharing of this data and can say no to allowing access to all or particular records.

Over the last 12 months, EMIS has added 150 developers, and now has 450 across the UK and India. Over the next six months, the company expects to move half of its developers to the EMIS-X project. We understand that many of these developers are c involved in clearing the backlog of software bugs uncovered in the recent service level issue, but this is close to completion and hence they can be redirected to new projects.

The platform is being developed on a modular basis. As new functionality is developed, it will be accessible via an embedded browser within EMIS Web. Functionality will be added progressively until it reaches equivalence with EMIS Web; at that point, the system will move over to EMIS-X.

At the same time, the company will replicate all data to AWS, using a mirroring model to update the cloud-based data every time a change is made to the EMIS Web data that is currently hosted in EMIS’s datacentres. The company has not yet received formal permission from NHS Digital to shift to AWS, so has been shifting dummy data to the cloud to test the process. Once permission is received, the company will start replicating data on the cloud. Once the switch has been made to EMIS-X, the company will no longer need to use its own datacentres.

Within Primary Care, by far the largest customer is NHS Digital with EMIS Web used by 4,197 English GP practices (82% of the total number of practices it supports in the UK). The software is available to practices via the GP System of Choice framework, which is centrally funded by the NHS. The framework has been extended until the end of 2019 while the new framework, IT Futures, is developed. The procurement process has started and EMIS expects the formal bid process to start in Q119.

Clearly it is crucial that EMIS is selected as a vendor on the IT Futures framework agreement. The company communicates regularly with NHS Digital to discuss the technical requirements for the new framework. This includes increased flexibility, interoperability and modularity, to support the many emerging care pathways. The move to keep patients out of hospital as far as possible while reducing the pressure on primary care is likely to mean greater use of community care (eg district nurses, specialist clinics, pharmacists) and self-care.

The core capabilities to support GPs are largely already available in EMIS Web. Additional capabilities such as patient services (prescription ordering, telehealth, appointments), document management and data extraction and analysis represent opportunities for new EMIS products.

The company demonstrated several new services, some of which are not yet commercially available.

EMIS already has a strong position in the overall medicines management market, with the largest market share in community pharmacy (c 37%), the largest share of primary care prescribing (via its 56% market share of the UK GP market), and the number two position in hospital pharmacy (c 32%). Via Patient Access, it is the leader in online repeat prescription requests. Medicines accounted for £17bn of NHS spend in 2016/17 and represent an area for efficiency savings. At the same time, clinical safety needs to be improved to reduce prescribing errors.

The company sees the opportunity to provide an end-to-end medicines management service to serve several and sometimes competing aims: to improve patient outcomes, minimise the cost to the payer and maximise margins for wholesalers and pharmacies. It aims to join up:

This is likely to include supply chain optimisation and centralised fulfilment models, support for patients for medicine adherence/optimisation, new pharmacy services for Patient Group Directions,1 and data analytics including monitoring and utilisation analysis and intelligence-driven prescribing and supply.

The current version of the Patient Access app enables patients to view their GP records (if the GP practice gives permission), read clinical content, book appointments at their GP practice and order repeat prescriptions. The company has highlighted that it wants to increase the services available to patients via the app, to include those developed by EMIS as well as those offered by third parties. The video consultation and online triage services described above are examples of EMIS-developed services that are being added to the app. Other possible services include referrals to other NHS care professionals such as physiotherapists or information on private healthcare providers.

Patient generates revenues from three sources: software licensing, advertising and transaction fees when patients use the app to book appointments or order repeat prescriptions. It is targeting additional revenues from appointment booking revenue shares (for private sector services), listing fees and partner API licensing. The chart below shows the near-term launch roadmap for Patient.

The company believes the development of EMIS-X and Patient should support a step-up in revenue growth from the recent level of c 1% (FY16 and FY17) to mid to high single-digit percentage growth in the medium term. As the move to a single platform will result in consolidation around a single code base, it should ultimately reduce the ongoing costs of development and support, supporting a shift in operating margins from the current 21–22% level towards 30%.

Part of the step-up in revenue growth is expected to come from an expansion in sales to private sector customers, where EMIS sees double-digit revenue growth potential. The table below shows the split of revenues between NHS and related bodies and private sector customers from 2010–2017. In the medium term, the company is targeting a 50/50 split between NHS and private sector customers, from the current 70/30 split. Management noted it is considering acquisitions as part of this growth process.

The increased investment in development over the next two to three years will be self-funded. The company expects to be able to make productivity gains over this period and expects an element of customer funding. We forecasting that EMIS will grow its net cash balance from £4.2m at the end of FY18e to £23.5m by the end of FY20e, providing funds to support additional development costs over and above the level already included in our forecasts. The company also has access to a credit facility if needed but does not expect a significant increase in leverage and does not foresee any impact on its dividend policy.

We have performed a DCF analysis, based on our current forecasts for FY18–20e followed by growth at three different rates for FY21–27e, each achieving a different level of profitability. We use a WACC of 8.5% and a long-term growth rate of 2%. We assume capex/sales falls to 6% of sales from FY21e, as we assume the shift to the cloud more than offsets any increase in capitalised development costs. We have also factored in lease payments from FY19e, as the introduction of IFRS16 from FY19e removes operating lease costs from operating costs and spreads the cost across depreciation and interest charges.

Exhibit 6 below shows the upside possible if the company is able to achieve growth and operating margins in the targeted range.

Exhibit 7 below shows the sensitivity of the base case scenario to changes in the WACC or long-term growth rate.