Monday, September 17, 2007

The Big Chill

Frequent flyers of every persuasion (pilots, flight attendants, road warriors and leisure travelers) all know North American air traffic control’s rule of thumb. If O’Hare sneezes, the rest of domestic air travel catches a cold. It doesn’t matter whether there are blizzards, tornados or thunderstorms in the Midwest. If traffic stops at O’Hare, there will be flight delays from coast to coast.

It’s an old, old story. Man plans. God laughs.

Air traffic’s vulnerability to the vicissitudes of one airspace are nothing when compared to the power Alan Greenspan wields over financial markets or the effect that a bad day on Wall Street can have on certain types of stocks. Technology stocks took a nosedive in April, 2000 once it became obvious that a lot of companies could not produce the kinds of numbers that would satisfy their venture capitalists. As a result, many IPOs got put on hold and there was a lot of talk in the media about a long-overdue “market correction.”

A long overdue “market correction” is finally starting to happen in medical transcription circles. For some people, July 25th may go down in MT history as “Black Tuesday” -- the day MedQuist took a torpedo on Wall Street. However, the catalyst which provoked this chain of events is best understood when seen in its proper historical perspective.

July 25th is a day of historical horrors. On July 25, 1956, the Andrea Doria (flagship of the Italian Line) was rammed by the Swedish American Line’s Stockholm in the dense fog off Nantucket in a maritime tragedy which took 52 lives and sent one of Italy’s most beautiful ocean liners to the bottom of the Atlantic. Although the Leonardo da Vinci was designed and launched as a replacement for the sunken Andrea Doria, by the time the new flagship entered service, jet travel had started to eat into the profitable transatlantic trade. The Italian Line never really recovered from its loss and eventually redirected its efforts toward the cruise industry.

On July 25, 2000, an Air France Concorde crashed after an engine failed while taking off from Charles de Gaulle airport, just outside of Paris. With the supersonic planes owned by Air France and British Airways nearing 30 years of age, travel analysts commenting on the tragedy speculated that, although Air France had planned to retire the Concorde in 2007, the end might come sooner.

That same day, CBS Marketwatch’s Deborah McGarry reported that “MedQuist Inc. shares sank 40 percent Tuesday after the transcription and management services company received numerous downgrades in light of lower-than-expected earnings in the second quarter. The company attributed the earnings miss to slower growth and difficulty keeping existing customers in its core hospital transcription business.” According to McGarry’s news report, Credit Suisse First Boston analyst Stephen DeNelsky sliced MedQuist's stock rating from “strong buy” to “buy.” Donaldson Lufkin & Jenrette downgraded the stock from “top pick” to “market perform.” Goldman Sachs lowered the stock's rating rom “recommended list” to “market outperform.” Merrill Lynch cut its near-term rating from “buy” to “neutral.” USB Warburg lowered its 2000 and 2001 earnings estimates from $1.37 and $1.67 a share to $1.21 and $1.53 a share, respectively, and lowered the long-term price target from $51 to $23. USB also lowered their rating from “strong buy” to “hold.”

MedQuist’s predicament as a megacorporation holds a curious parallel to the growing pains of Continental Airlines. During the heyday of airline deregulation, Texas Air Corp. acquired Continental, New York Air, Denver-based Frontier Airlines and PeoplExpress. Different fleets. Different route structures. Different corporate cultures. Within several years, Newark
airport became Continental’s fortress hub and it moved into a spanking new terminal. Meanwhile, its Denver hub shrank under the onslaught of United’s competition and service reached an all-time low until the airline signed a joint marketing agreement with SAS. With the help of Scandinavian Airline Systems’ employee training expertise, Continental’s service underwent a Cinderella-like transformation. In 2000, Continental offers some of the best service to be found in America’s skies while United is taking a beating with increased flight delays and poor service.

In recent years, as MedQuist embarked on a course of corporate mergers and acquisitions aimed at amassing market share, most of the stock market’s assumptions have been based on an extremely ambitious business plan. A year ago MedQuist was going full steam ahead with plans to roll out a new price hike. Earlier this year, shareholders were asked to vote on a stock split. All seemed well until July 25th, when financial analysts suddenly transformed MedQuist from the king of the hill into a wounded giant.

To day traders and other high-risk speculators playing the market, the message was clear. Stay away from medical transcription. But for those involved in the medical transcription industry from a professional, entrepreneurial or venture capital standpoint, the downgrading of MedQuist’s stock was more sobering news. In the past five years, many business opportunity experts have listed medical transcription as one of the growing cottage industries where big profits could be made.

As we all know, this has led to an anschluss of people with MBA degrees who know nothing about medical transcription but are convinced that they can apply standard business models to an industry/profession that they barely understand. Since the overwhelming majority of medical transcription services are privately held, there has been a paucity of solid data on which venture capitalists can base their projections. The numbers upon which they based many of their business plans and growth projections were inspired by the largest and most visible publicly-held medical transcription service: MedQuist.

One of the Medical Transcription Industry Alliance’s projects for year 2000 has been the commission and publication of the first industry-wide survey of medical transcription firms to find out more about how this industry really does operate. The purpose behind MTIA’s survey is twofold: To gain a better understanding of its membership and to have some solid numbers with which to answer the frequent queries it receives from venture capitalists and business media about the growth and market potential of the medical transcription industry.

Anyone who has followed the fortunes of Silicon Valley startups can tell you that stocks rise and fall with the white knuckle excitement of riding a roller coaster. Eventually, things settle down and most people go about their business. But lately, a lot of technology and companies have experienced serious setbacks. Especially when a lot of hot air has escaped from the marketing balloons which kept them flying high in the public’s eye.

The key to understanding MedQuist’s devaluation lies in the statement that the company “had difficulty keeping existing customers in its core hospital transcription business.” When a contract comes up for renewal, a large institution doesn’t shift gears unless a new competitor seriously underbids the current vendor – or the level of service has deteriorated so badly that the two parties are separating because of irreconcilable differences. According to McGarry’s report “USB said in a research note that MedQuist blamed longer new sales cycles with customers, hospitals' weak financial positions and hospitals delaying IT/sourcing decisions for the weaker quarter.”

Ask around the industry and you may encounter a lot of Medical Records Directors and hospital administrators who perceive a dangerous lack of competition now that MedQuist has devoured most of the nation’s large transcription services. Hospitals that were waiting for their contracts with an unsatisfactory vendor to expire have occasionally found themselves confronting a new bidding cycle in which the biggest and most aggressive contender is the one that absorbed their previous vendor!

These people may have no desire to outsource their work to India any more than they want to get back in bed with a service provider (albeit one with a new corporate identity) whose work they found unacceptable in the past. With so many new faces appearing on the horizon, no wonder they’re delaying their outsourcing decisions!

Last, but certainly not least of the challenges facing MedQuist is the issue of size and equipment. In the course of acquiring several large national transcription services (each with its own corporate culture), MedQuist acquired large groups of accounts being serviced by different types of hardware. Some of that equipment is old and needs to be replaced with new technology.

How quickly can a brontosaurus turn on a dime? Especially when growing numbers of young and hungry velociraptors (a bird-like carnivorous dinosaur whose name means“speedyraider”) armed with cutting edge technology are merrily picking at the old girl’s wounds? Charles Darwin called it survival of the fittest.

How long will MedQuist’s stock remain devalued? Time alone will tell. Rest assured that the time and momentum lost as MedQuist struggles to achieve better earnings per share offers a valuable window of opportunity to its newer competitors (some of whom may be using state-of-the-art ASP technology).

In the meantime, I’m willing to bet that Black Tuesday has put a nasty chill on the expectations so many eople may have had about striking it rich by investing in medical transcription. And, to quote Martha Stewart: “That’s a good thing.”

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