Proxymed (PILL)

I have been long Proxymed for a couple of months and still recommend going long this stock, despite the bath I have already taken (long at $6). I think the stock is a potential double or more in the next two years.

Proxymed´s Business:

Proxymed essentially is a third-party electronic clearinghouse for healthcare claims. As such, they act as somewhat of a middleman between payers (insurance companies, Medicare etc.) and healthcare providers (doctors, hospitals etc.) providing each with various transaction services to make healthcare payment processing more efficient and effective. The different types of services offered by Proxymed is not all that relevant to the analysis, the more important point is that healthcare is one of the most transaction-oriented industries in the country, (it generates over 35 billion financial and clinical transactions each year), and as the second largest independent medical claims clearinghouse in the industry, Proxymed has the experience and relationships to offer some very valuable and profitable services to the industry. Notwithstanding this fact, Proxymed is currently a complete mess, offering way too many services and lacking any real focused product position. In short, the company is in desperate need of some sort of strategic makeover.

So why buy this "dog" stock now?

The qualitative reasons for owning this stock are:

• A new management team has recently been put in place to drive change at the company. The new CEO,  John G. Lettko, arrived in May of 2005. He appears to have a strong track record and I believe he will soon unveil a sound strategic plan for getting Proxymed back in shape and growing again. Before joining ProxyMed, he served as CEO and Chairman of the Board for Viewpointe Archive Services. To get a sense as to what he accomplished at Viewpointe, it pays to read this IBM case study: http://www-306.ibm.com/software/success/cssdb.nsf/CS/LEOD-5J2S8X?OpenDocument&Site=cmondemand. One quick takeout from the case study:

"Despite the introduction in recent years of online bill paying services, bank customers have remained loyal to personalized checks, writing approximately 50 billion each year. Because the public’s enthusiasm for writing checks hasn’t slowed, banks have been forced to consider new ways of reducing their check processing costs. “From the banking perspective, checks require a lot of time and manual effort—which makes them expensive,” says John G. Lettko, Viewpointe’s Chief Executive Officer. Viewpointe’s image archiving solution had the potential to significantly improve the status quo of check processing, but the company understood that new technology and methods undergo intense scrutiny in the risk-averse financial services industry—making it crucial to alleviate the fears of potential customers by reducing their level of risk."

Doesn´t the "paper" mess the banks have faced seem awefully similar to the "paper" mess faced in healthcare? My prediction: expect Letko to leverage his success in implementing one of the largest check imaging service deployments for banks, to devising and deploying a  unique solution for Proxymed that will greatly improve healthcare transaction processing. It may not be something earth shattering, but the beauty will be in the execution and the ramp up. Once Letko´s new strategy starts to show results, expect PILL´s stock to move up quickly.

• I believe that Proxymed´s stock price is currently being artificially pressured downwards by selling on the part of one hedge fund. It appears that the selling pressure here is coming from the liquidation of shares owned by PVC Funding partners. In August, PVC distributed over 1 million shares of PILL to its members. I don´t know how long the selling will go on, since this is alot of shares and I assume that almost all the members will dump their shares. This situation is similar to a spin-off, where the price of the spin-off is artificially held downward by old shareholders selling the stock in the spin-off. I´ve made money in the past (e.g. KDE), when it became apparent that there was one large shareholder dumping shares, despite a seemingly low valuation. Once PVC members are done selling, PILL´s stock should head upwards, assuming of course that the new strategic vision for the company makes sense and begins to revive the business.


• Recent Acquistion activity in the Proxymed´s Industry gives good sense of the potential value of Proxymed´s business and especially the attractiveness of PILL´s industry. Specifically, GE Healthcare recently announced the acquisition of IDXC for about $1.2 billion. Briefly: "IDX Systems Corporation (“IDX” or the “Company”) is a leading provider of software, services and technologies for healthcare organizations. Our mission is to use information technology to maximize value in the delivery of healthcare by improving the quality of patient access and service, enhancing medical outcomes and reducing the cost of care. We believe that a transformation in healthcare is occurring, driven by information technology. We envision ourselves as a key driver of this transformation with software solutions that bring the stakeholders of patient care into an integrated process, simplifying patient access, streamlining the revenue cycle and improving patient care. Our solutions are designed to enable healthcare providers to save money, time and lives."

  Simply put, IDXC is in a similar business as PILL. IDXC was bought for about 2.2X sales. Therefore, if PILL´s revenues stabilize (I exclude the lab revenues here, since I think that business should be divested and is in any case essentially worthless) the company would be worth at minimum about $5.65. That´s the downside. However, if PILL´s revenues start growing again, the company could be worth $10+ (my target is $12).

Holding Period

I plan to hold this stock as long as a new strategic plan is being implemented. The downside seems limited as the stock is a well-known dog, and the upside seems quite good. I would sell the stock if and when it became apparent that PILL is beyond any repair. But I believe that is a doubtful situation since, as mentioned above, PILL is involved in an attractive industry. If Letko bailed, I would to.