A.D.A.M., Inc.: Making Money on Healthcare Content

Two years ago A.D.A.M. Inc. (Nasdaq:ADAM) was a company that created and licensed doctor-reviewed health-care content on everything from canker sores to cancer. It reached a lot of readers on consumer and health provider websites, but tended not to excite investors.

Even the company’s name — the acronym stands for Animated Dissection of Anatomy for Medicine — conjured up something that was more academic than it was focused on making money.

But that all changed late in 2006 when Atlanta, Ga.-based A.D.A.M. acquired Online Benefits Inc., a company that served a more lucrative sector of the health-care industry providing online employee and human resources benefit management solutions to small- and medium-sized businesses. A.D.A.M. merged its extensive medical content with Online Benefits’ health management technologies and, just like that, more than doubled its annual revenues while transforming its business from basic content to what it now calls “health information services and benefits technology solutions.”

Most companies can only dream of pulling off such a major transformation with a single deal: A.D.A.M.’s revenues grew to $27.9 million in 2007, from $16.5 million in 2006 and $10.1 million in 2005.

Roth Capital Partners analyst Tim Brown, who initiated coverage of the company with a “buy” rating in February, noted in a research report that the most important value of the acquisition was not the additional revenues it brought in, but that it provided ADAM “with a distribution platform that allows it to roll out a uniquely positioned, fully integrated health and benefits management solution to the SME (small and medium employer) market.” Roth has a $10 price target on the company’s stock, which closed Monday at 7.28.

The joining of those two distinct businesses, Roth says, comes at a time when consumer directed health plans (CDHPs) are becoming more popular. CDHPs are high-deductable health plans designed to help control health-care costs by giving consumers incentive to seek lower-cost health-care services, resulting in increased demand for medical information.

While A.D.A.M.’s more recent financial results have shown more tempered growth — revenues in the first quarter ended March 31 grew 8.8% to $7.1 million, and net income grew 17.4% to $547,000 — the company maintains it has just started to build this new health benefits technology solutions business. The need from consumers to take more control of health-care decisions and the better subsequent solutions that employers will need to offer is what the company is counting on to help drive demand. A.D.A.M. is targeting companies with between 500 and 5,000 workers, a sector where employee enrollment in health-care plans is only about 50%.

“We are at the early stages of what I believe to be a tremendously growth-oriented mode,” CEO Kevin Noland told investors and analysts during a conference call after first-quarter results were released a week ago. Noland stressed that the company’s transformation from a pure content provider to a content and information technology provider put it in the unique position of serving these two previously distinct markets.

“Our playing field has increased exponentially,” he said.

If his outlook is accurate, then the company’s stock has a way to go. Even after rallying 5.4% on May 13 after the release of first-quarter earnings, A.D.A.M.’s current stock price of $7.28 is down from $8.80 at the start of the year and below a 52-week high of $9.62.

Wall Street is only slowly starting to pay attention to A.D.A.M. but two analysts who track the company agree it is a strong growth opportunity. On average, they expect A.D.A.M.’s revenues to grow to $30.9 million in 2008, from $27.9 million last year. One analyst with published forecasts for 2009 projects revenues that year will rise to $36 million.

The net income consensus of the two analysts shows a slight decline in 2008 with forecasted earnings of $0.31 per share versus $0.38 a year ago. The one analyst currently publishing 2009 forecasts projects net income will shoot up to $0.49 per share next year.

Eliminating debt, which is a focus in 2008, will be a major milestone for the company, but even after debt is out of the way, some risks to A.D.A.M.’s business model will remain. More competitors could emerge, for instance, or the health-care landscape could change in a way that reduces interest in CDHPs.

But considering that A.D.A.M. is still just beginning to penetrate this new market that it helped created by merging technology and content, that risk appears minimal. It doesn’t require much imagination on the part of the average consumer to appreciate the need for better employer health-care plans.

Disclosure: none