Don't Be Fooled by the athenaHealth Hype

A newly hyped stock named athenaHealth (ATHN) recently crossed my trading radar. Investors and analysts seem to have high hopes for its stock, which debut on the Nasdaq last September. Curious to whether this could be a secular growth story or just another dot-com dud, I performed an analysis.

Why Wall Street thinks Athena is hot

The $40 billion health care information technology market is in the process of transformation. To aid the quest for cost cutting, technology providers have been nudging hospitals and medical offices to switch towards electronic medical records [EMR] and real-time adjudication [RTA] of insurance claims. The goal is to upgrade our antiquated back office to the 21st Century.

athenaHealth’s products specialize in both EMR and claim processing. Their flagship product, athenaCollector, is an online claim processing system geared towards practitioner offices.

One of the biggest hassles for doctors is extracting payment from insurance companies. Roughly 30% of physician claims are rejected by insurers the first time around. The problem is the complexity of the national coding system used to file claims. Claims often get flagged and halted due to conflicts within the insurer’s rules database.

athenaHealth has its own processing database to insure that claims go through properly the first time. By taking such problems out of the hands of the physician, it will allow doctors to save time and resources wasted on bill collection. Athena’s revenue is taken from a 3% fee per transaction.

In addition to claims processing, the company is trying to grow in the area of EMR and practice management services (PMS). Its athenaClinicals product is a web-based EMR system.

The good news for athenaHealth

Several things I find appealing about this company:

1) It’s in a high growth secular field. Information technology for practitioners is expected to grow at 20%.

2) The product is offering has a compelling value proposition to doctors

3) 3) Most of the IT competitors in this industry such as Cerner and McKesson are focused on big contracts with hospitals. Athena has equipped itself for a guerilla marketing campaign aimed at individual practitioners.

4) athenaHealth has positioned itself to have a “good guy” image among doctors. Attempts by insurance companies to launch similar products such as UnitedHealth’s Ingenix have failed to catch on due to a lack of trust among doctors.

5) This product would be appealing to practitioners because it does not require an expensive in-house server set up like the Cerner Millennium package.

Business risks facing athenaHealth

I feel that a major challenge for the athenaClinicals EMR business is security. Could the current generation of doctors be convinced that it’s safe to have patient medical records zapped to a server miles away over the Internet? I know that even the most tech savvy doctors and lawyers are hesitant to place client documents on a computer connected to the Internet.

Already on the Q3 conference call, management noted that revenue from athenaClinicals was small and the investment into infrastructure has pulled down overall margin. I do not think this is a product that will take off.

Finally, I could see this type of service easily becoming a commodity. With so many players in this competitive field, a shift in the industry could easily allow another provider to dominate. If athenaHealth does not get bought by a larger company like GE Healthcare, it has a good chance to get crushed by a more well-known name in the field.

Valuation Risk

The story of athenaHealth overall seems not bad. However, the fly in the ointment is valuation.

Since my biggest question was, “What price do I buy this stock?” I built a full discounted cash flow model out to 2015. After running a range of scenarios of varying revenue growth and profit margins, I determined that most of the upside has already been factored into the stock.

According to the DCF model, unless revenue growth has a spectacular jump and profit margins significantly increase, very little upside is left in the stock. The 32 price range seems to fairly value the story as it stands, if not a bit too much. If growth at all stalls, this could easily become a $5 stock. Personally, I think the low 20s is more suitable.

Even by multiples this stock seems expensive. It trades at nearly 70 times expected earnings for 2008. Even the 2008 Price/Sales ratio of 8 is outrageously above the industry norm of about 2.

Furthermore is the looming threat of equity dilution. In January, management withheld a secondary offering of shares due to market conditions. I expect this to return once stability returns to the market and/or we get a small rally in ATHN.

Beware the Siren!

Many of the analysts sell a bullish story on athenaHealth. But keep in mind that the brokers covering this stock are the same guys who took it public and continue to do banking deals with them.

Maybe the story can last a quarter or two. If the stock gets short squeezed on an irrationally exuberant response to this Wednesday’s earnings, take it as a selling opportunity.

If you stick with athenaHealth for the long term, I am certain she will send your portfolio to the hospital!

athenaHealth DCF Model (excel doc)

Full Disclosure: At the time of this writing, Winston is short shares of athenaHealth.

Comments

[e8dkuhm:]

Interesting but clearly a guy with no real knowledge of this market and what's really happening out there. 80% of physicians are in small practices. Athena has a huge advantage in affordability of it's web-based platform and it's incredible word-of-mouth marketing campaign. Recurring revenue model and sustained 30% growth over at least the next 5 years. I'd read take the authors analysis with a big grain of salt. The biggest risk for this company, along with all the others that have been in this spot, is ability to implement all of it's new business and realize those new recurring revenues.

2008 Mar 03 08:43 AM

[e8dkuhm:]

Forgot...First, the "big players" in the field can't affort to replicate what athenahealth has (unless they invest $150m or so to build their own web-native, rules-based, integrated revenue cycle & EMR software, which would be wasted in the end since they would be lightyears behind in playing catch-up by the time they had the technology ready to deploy). If the big boys buy athenahealth (very possible), I certainly want to be holding shares of it! Secondly, what's this about security? Does the author use a bank? Has he looked at the financial services industry lately?? Docs ARE adopting web-based technologies and are as safe with a VPN connection to athenaNet as they are with a primitive client-server network connecting several offices. If I'm correct, the COO of athenahealth was the former CIO of Fidelity Investments. I think they might have this figured out.

2008 Mar 03 08:58 AM

[Winston Kotzan:]

Good points and I respect your disagreement. The company has a great story and great product. I would be long this stock, but my main reason for disliking it is valuation. Lots of tech companies sell a great product, but have crappy stocks due to all the good news being factored into the price too early. If management has a hiccup, it would not be good for Athena's share price.

Take INAP for example. I really liked the whole CDN field. All of those companies have good revenue growth. However, their stocks traded at high multiples and they really got crushed in a price war.

This was probably my gutsiest article so far because of the takeover possibility. But I think the dangers of owning outweigh a hopeful takeover.

2008 Mar 03 09:17 AM

[Winston Kotzan:]

On top of that, with a short ratio of 10 I must not be the only one who holds this opinion.

2008 Mar 03 09:18 AM

[Carlos Murias:]

ATHN-- Magnt on the call was joke -- Did not address any fundamental reasons to why I should believe their 30% growth rate over 5 years-- Magt was so concerned abt giveing investors ratings on their employees happiness--- This stock is a dog and it will get crushed to 5 dollars by the end of 08

2008 Mar 06 12:46 PM

[User 164109:]

Winston, I agree that there will continue to be a dip in the stock price as they will not see huge growth spurts. This model is recurring revenue, and you need your current customers to stay with you as well as continue to add new customers. This is not a "big deal" huge growth type of business. Slow and steady growth is what you will see and that is already built into the price. 30% is doable in this market size. There is no way that a Physician can do a great job billing and collecting their money for 3% of the transaction.

Your comments on outsourcing and security are way off the mark though. Outsourcing in a secure environment is here to stay and the market is going to change dramatically for the small practitioner in healthcare. Athena's biggest obstacle will be execution, as it is not just software, it's billing.... and collecting payments. It is labor intensive and thus harder to execute growth than with a true software company.

2008 Mar 15 02:15 PM

[Andrew Eriksen:]

I am a former Practice Executive that decided to start a company about 6 months ago called, Physicians World Online. We specialize in Revenue Cycle Management much like AthenaHealth but we have decided to take it a step further and offer free Electronic Medical Records for all of our clients. We started offering a standardized approach to EMR software but found that it just takes too much to make a doctor happy. Instead, we decided to allow them to choose the software they prefer and we then simply interface with it. I think that Athena is going to run into problems in the implementation aspect of their EMR solution as well as Physicians resistant to using a billing companies software.


To help differentiate ourselves from Athena, Physicians World Online now offers discounted medical supplies, website development, compounded drugs and legal/credentialing services. Http://PhysiciansWorld...


What happens if the client leaves Athena? This is the biggest problem about unique programs offered by billing companies.

I have personally seen with clients that they have had bad experiences with Athena's customer service in addition to the lack of support for their product. What they do have going for them is the need within healthcare for solutions to help practices make more revenue and reduce costs. They do not have much competition but our company is growing at 300% per month so just give us some time.....

Feb 03 07:43 PM

[bmock:]

Very interesting perspective. After working for and in the Healthcare industry for the past 20 years I have to say that companies like Athena and their main competitors (NextGen, Sage, Allscripts, and Greenway, eclinical) all have a niche in the provider market. The bigger players (SMS, Cerner, Epic, McKesson) all go after the Hosptial market.
With Bush and now Obama really wanting to move the healthcare industry to the 21st century and offering up to 64,000 per Dr to move to EMR/EHR and who meet specific documented critiria I see this industry exploding.

Mar 07 11:04 AM

[MTBC:]

Very interesting article. Many of these issues are even more relevant now with Obama's healthcare initiative. The industry really is set to explode - at the HIMMS Conference in Chicago this weekend, endless speakers made mention of the $34 billion in "outflow" that is going to pour into the remaking of healthcare.

What's really of interest to us though is that at MTBC, we provide virtually identical services to athenaHealth at a much more reasonable cost. Unlike athena, we're privately held, and offer our EMR to our medical billing clients for free. We cater to all specialists of all sizes and currently represent clients in 41 states. Plus, we've upgraded our EMR and have applied for 2008 CCHIT certification.

Physicians should know that there are options like MTBC out there. They can check out our website at mtbc.com to learn more.

Apr 06 04:50 PM

[Free EMR So...:]

I would agree that the new health care initiatives pose a great risk to most physicians. President Obama and the initiative set forth by CMS think that a financial incentive will somehow remove the burdensome process of finding and implementing the best EMR solution for an office. Most offices cannot afford an CIO or internal IT guru who can guide them through the selection and implementation process. Many groups are blindly selecting an EMR product because it is the most affordable product.

Physicians World Online started a site designed to provide physicians and administrators with the necessary information to make an informed decision. There are many free emr products out there but that does not mean that they are the best solution for your office. FreeEMRsolution.com is the website.

Jul 17 10:39 AM