Thisisthe19

th
AnnualSohn InvestmentConference.
ThefirsttimeI spokeherewasin2002.Itisamazinghowthisgreateventhasgrown,andI
amhonoredtobehere.
1
2
Acoupleweeksago,wewroteinourquarterlyletterthatwebelievethatanarrowgroup
ofcoolkidstockshavedisconnectedfromtraditionalvaluationsandformedabubble.This
gotalotofcriticism.Halfthecriticsthoughtweweretalkingourbook,eventhoughwe
didntnamenames.Theotherhalfwereupsetthatwedidnttellthemwhichstockswe
wereshort.
Sincewecantseemtopleaseanybody,Ivedecidedtovalidatebothcriticisms.
Today,Imgoingtoillustratethebubblebasketdoingadeepdiveintooneofthe
companies,whilenotdisclosingtheothers.
Thiscompanyisanexcellentcompanywithanexcellentproduct,runbyawellmeaning
andhonest,thoughoccasionallypromotionalCEO.Theworldmaybeabetterplaceifit
succeeds,andeventhoughweareshort,Iaminnowayrootingforittofail.
Itsmainproblemisthatitisntpositionedtosucceedthewaythebullshope,asthe
assumptionsthebullsaremakingarenotplausible.Thestockissimplyatthewrongprice.
Itscaughtupinabubbleandcouldeasilyfall80%ormorefromitsrecentpeak.
Letmeintroduceyoutoathenahealth.
3
Ithinkathenadeservesasmallercapitalization,andImnotjustreferringtohowitfailsto
capitalizethefirstletterofitsname.Letsstartwithwhatdoesathenado?
AthenaprovidessoftwareandservicesprimarilytowhatiscalledtheAmbulatory
healthcaremarket,whichconsistsmostlyofnonhospitalbasedphysicianpractices.
Itsservicesincludebill collectionandclaimsprocessing,electronichealthrecords,patient
communication,andcarecoordination.
_____________
Source:athenahealth websiteathttp://landing.athenahealth.com/g/improvecare
4
AthenaClinicals isaserviceenabledbysoftwarethatmanagespatientheathrecords
electronically.
AthenaCollector ispracticemanagementsoftwarecombinedwithoutsourcedrevenue
cyclemanagement,orRCM,whereathenastreamlinesapracticescollectionprocess.
Thesetwo productsgeneratethevastmajorityofathenasrevenues,butthereisalso
athenaCoordinator andathenaCommunicator,whichenablecarecoordinationamong
providers andcommunicationwithpatients.
Fortheseservicesathenachargesbased onapercentageofcollections,usuallybetween4
and7percent.
_____________
Source:athenahealth websiteathttps://www.athenahealth.com/enterprisesolutions/integratedhealthcare
solutions.php
5
Athenais alsotryingtoentertheinpatientorhospitalmarket,throughanewservicecalled
EnterpriseCoordinator.
Thisofferssmallhospitalsarangeofcarecoordinationfunctionsincludingpatient
admissions,insuranceprecertification,referralmanagement,postcarefollowup,and
preventativecareoutreach.
Athenajustannounceditsfirsttwotrialcustomerslastmonth.Thisisverymuchaworkin
progress,anditisunclearwhetherathenawillsucceedinthissegment.
_____________
Source:athenahealth presentationonJanuary15,2014atJ.P.Morgan32ndAnnualHealthcareConference
(http://investors.athenahealth.com/events.cfm)
6
Letsgettothemosteyecatchingthingaboutallthebubblestocks thestockchart.This
oneisfromthe2007IPOthroughtheendofFebruary.Youcanseethatthiswasanice
stockthatwasdoingwelluntilNovemberof2012,whenitwentballisticandmorethan
tripled,from$60to$204,injust16months.
_____________
Source:BloombergL.P.
7
Whathasbeendriving thisexceptionalshareperformance?Thechartsuggestsenormous
financialprogresstojustifytheexplosivereratingoftheshares.
_____________
Source:http://www.dreamstime.com/royaltyfreestockimagestrongbusinessmanconcept
image26018596
8
Youdexpectresultsinexcessofthetargetsof30%annualrevenuegrowth,and
improvinggrossandoperatingmargins.Butyoudbewrong.
_____________
Source:athenahealth 5thAnnualInvestorSummitonDecember6,2012
(http://investors.athenahealth.com/events.cfm)
9
Athenamisseditsorganicrevenuegrowthtargetfor2013,andanalystshavecutrevenue
expectationsforboth2014and2015.
_____________
Source:Revenueestimatesforfiscalyears2013,2014,and2015arehistoricalBloombergconsensus
estimatesfornotedtimeperiodsasretrievedfromBloomberginMay2014.RevenueestimatesfromApril
2013(for2013,2014,and2015)havebeenadjustedbyGreenlightfortheimpactofacquisitionswhose
resultswereincorporatedintoathenahealths guidanceinMay2013.Actualresultsforfiscalyear2013are
fromathenahealths Form10K.
10
Andwhathappenedtotheintendedmarginleverage?Thebluelineisthehistoricalmargin
andforwardlookinganalystestimatesasofearly2013.Theredlineiswhatthecompany
deliveredin2013andshowsthenowloweredanalystestimatesfromhere.
Asisfashionablewithbubblestocksthesedays,marginsthatincludestockcompensation
asanexpenseareverylowandarenowexpectedtoremainthereforatleastthenext
coupleofyears.
_____________
Source:AdjustedEBITmarginestimatesfor2013,2014,and2015arehistoricalBloombergconsensus
estimatesfornotedtimeperiodsasretrievedfromBloomberginMay2014whichwerethenadjustedfor
Greenlightsestimateofstockbasedcompensationin2013,2014,and2015.ActualEBITmarginsfor2010,
2011,2012,and2013areGreenlightscalculationsbasedonathenahealths Form10Kforeachrespective
period.
11
Earningsestimateshavefollowedthesamepath.Itsnoteworthythatin2009,whenthe
stockwaslessthan$50,analyststhoughtthecompanywouldbeearningmorethan$3.00
persharebynow.2015estimateshavealsofallendramatically.
_____________
Source:AdjustedandGAAPEPSestimatesarehistoricalBloombergconsensusestimatesfornotedtime
periodsasretrievedfromBloomberginMay2014.
12
Notthatitseemstomatter
_____________
Source:Oppenheimer&Co.Inc.reportdatedDecember11,2013.Cartoonfrom
http://www.jantoo.com/cartoon/12260615
13
So,athenamisseditstopandbottomlineestimates,andthestockalmostquintupledin
thethreeyearsthroughearlyMarchofthisyear.Whatmight explainthemove?
14
Thisistheathenahealths CEO,JonathanBushyes,heispartofthatBushfamily.
Letsseeifhecanexplaintheexcitement.
[videoclip]
_____________
Source:Compilationcomprisedofexcerptsfromthefollowing:1)HealthDatapalooza onJune3,2013
(https://www.youtube.com/watch?v=Ka_gTyVRjSE);2)athenahealth 6thAnnualInvestorSummiton
December12,2013(http://investors.athenahealth.com/events.cfm);3)EHRtv interviewwithAnnandEric
FishmanonOctober27,2010(http://www.ehrtv.com/athenahealthjonathanbushnov2010/);4)FOXNews
NetworkonMarch27,2012(http://video.foxbusiness.com/v/1532985902001/athenahealthceoonhealth
carelawcloudcomputing/#sp=showclips);and5)CableNewsNetworkonApril20,2011
(http://money.cnn.com/video/news/2011/04/18/n_athena_cloud.cnnmoney/).
15
Ofcourse,sellside analystsarehappytofuel thefire.Hereisone,usingprettymuchevery
hotbuzzwordhecanthinkof.
Actually,athenaisnoneofthosethings,butitsagreatwaytopromotethestock.
_____________
Source:PiperJaffray &Co.reportdatedOctober21,2013.
16
Andthentheresthisguy
[videoclip]
_____________
Source:CNBConJanuary10,2013(http://video.cnbc.com/gallery/?play=1&video=3000140380)
17
Sure,Jim.AndAlGoreinventedtheinternet...
18
Therearemanystocksthatcantbevaluedasamultipleofprofitsorcashflowsbecause
theyhavelittleornone.Soanalystsareleftwithrelativevaluations.
Hereishowathenaseemsreasonablenexttoitspeers.Buttheimplicationisthatitspeers
areproperlyvalued.
_____________
Source:BloombergconsensusestimatesfornotedtimeperiodsasretrievedfromBloomberginMay2014.
19
Itsallamatterofperspective.Dependingonwhichstockyouarethinkingabout,allthese
stocksseemreasonablecomparedtotheothers.
Thisiswhathappensinabubble.
20
Asstocksriseinthefaceofdeterioratingfundamentals,sharesdisconnectfrom
conventionalvaluations.
JonathanBushunderstandsbubbledynamicsperfectly.
[videoclip]
_____________
Source:TheIndusEntrepreneurs,TiECON East,onMay22,2009
(https://www.youtube.com/watch?v=mJpE27wL4RA)
21
I believewheninvestorsattempttovaluethedisconnectedstocksusingconventional
methods,theytypicallycantcomeclosetocurrentvalues.
However,onApril23
rd
,MorganStanleyissueda22pagereportaboutathenathatputmy
theorytothetest.Init,theanalystusesadiscountedcashflowtoarriveatvaluesthat
arguablyjustifythecurrentshareprice.And,Iwillstipulatethatthe DCFmodelusesa
properandstandardtechnique.Itevenincorporatesnoncashstockcompasanexpenseso
thatlongtermdilutionistakenintoaccount.
_____________
Source:MorganStanley&Co.reportdatedApril23,2014
22
By tryingtobridgethegapbetweenthebubblepricesandconventionalvaluations,the
reportdoesagreatservicetothoseofuswhocantfathomthepricesofbubblestocks.
ItanswersthequestionofWhatdoyouhavetobelievewillhappeninordertojustifythe
stockprice?
_____________
Source:http://www.flickr.com/photos/playingwithlight/2399114248/
23
TheDCFshowstherevenue buildupbyproductcategory.
Theexistingbusinesswillgrowfrom$743millionthisyeartoabout$5.7billionin2030.
Ontopofthat,thehospitalserviceofferingthatathenajustlaunchedwilladdanother$1.2
billion.
Thisisexpectedtobefollowedbyanasofyetundevelopedhospitalcollectionsservice
thatMorganStanleyishopingthecompanywilllaunchin2017,andapatientrecords
softwareofferingexpectedin2018.Togetherthesewillgrowtobea$3.1billionbusiness
by2030.
Ifallgoesaccordingtoforecast,revenueswillcompoundat18%forthenext15yearsand
athenawillbecomea$10billionrevenuecompany.
_____________
Source:MorganStanley&Co.estimatesasprovidedtoGreenlightinApril2014.
24
According toMorganStanley,athenaisworth$192pershareinabasecaseDCF.Thisis
brokendowninto$120forAmbulatoryand$72forInpatient.
_____________
Source:MorganStanley&Co.reportdatedApril23,2014
25
LetstestMorganStanleysassumptions.Todayathenaserves37,000doctors andearns
$16,000perdoctor.In2030,MorganStanleyestimatesathenawillhave86,000doctors
andget$63,000perdoctor.
Webelievethattheseassumptionsarequiteaggressiveandlikelytoprovetoooptimistic.
Forthemoment,letsassumeMorganStanleyisrightaboutthenumberofdoctorsand
challengeonlytherevenueperdoctor.
_____________
Source:MorganStanley&Co.estimatesasprovidedtoGreenlightinApril2014.
26
MorganStanleysaystheaveragedoctorcurrentlycollects$636,000annually,onthewayto$1.3
millionin2030.
Currently,athenasdoctorscollectonly$370,000ofwhichathenakeepsabout4.4%or$16,000.
Athenasdoctorsgetmuchlessthanthenationalaveragebecauseathenahasaconcentrationin
lowearningprimarycarephysicians.
Evenifathenaweretowinhigherbillingphysicians,athenawouldadjustitsbillingratedownward
becauseitpricesitsbusinesstoearnacertainamountperphysician,andusesaslidingscaleso
higherbillingdoctorspayalowerpercentage.
Withoutexplainingwhyorhow,MorganStanleyassumesthattheaverageathenadoctorwillcatch
uptothenationalaverage,andthatathenawontofferslidingscalediscountstohigherbilling
doctors.Thisappearstobeamodellingerror.
MorganStanleyassumesathenawillrecognize$63,000inrevenuesperdoctorby2030from
$16,000today.
WethinkitismorereasonabletoassumethatrevenueperdoctorgrowswithAmbulatory
spending.Onthatbasis,Athena'srevenueperdoctorwouldstillmorethandoubleto$36,600in
2030.
_____________
Source:athenahealths collectionperdoctorandrevenuesperdoctorarebaseduponMorganStanley&Co.estimatesas
providedtoGreenlightinApril2014.Inflationadjustedrevenuesperdoctorandindustryaveragecollectionsperdoctor
areGreenlightcalculationsbasedonCMSestimates.
27
IfwecutMorganStanleysrevenueperdoctorassumption from$63,000to$36,600,it
reducestheDCFvalueby$44.ThisreducesMorganStanleysbasecaseDCFvaluefor
athenasAmbulatorybusinessfrom$120to$76pershare.
_____________
Source:MorganStanley&Co.estimatesasprovidedtoGreenlightinApril2014andGreenlightcalculated
adjustmentstoMorganStanley&Co.estimates.GreenlightsadjustmentstoMorganStanleysmethods,
factors,andcalculationswereinthesolediscretionofGreenlight.
28
Now,letstalkaboutMorganStanleysEBITbeforestockbasedcompensationmargin
assumption. MorganStanley'sreportgoesfor22pagesdetailingitsanalysisofthe
addressablemarket,andathena'srevenueopportunity.
Andthenwithoutawordofexplanationitplugsina30%EBITmarginassumptionin2030.
MorganStanleyspredictedneartermEBITrampfromabout10%todayto13%attheend
ofthedecadeispossible. 30%marginsarenot.Anditisthisassumptionthatdrivesthe
bulkoftheDCFderivedvalue.
_____________
Source:MorganStanley&Co.estimatesasprovidedtoGreenlightinApril2014.
29
Totestthemarginquestionwehavetoaskwhether thebusinesshasalotofoperating
leveragesothatincrementalrevenuescanflowthroughtothebottomlinewithfew
incrementalexpenses.
Historically,softwarebusinesseshavesometimesbeenabletodothatbecausedeveloping
softwarehasafixedinvestment,andincrementallicenseescancomewithlowmarginal
costs.
A servicebusiness,bydefinition,doesnthavethatleverage.
Andathenaisaservicebusiness.JustlistentotheCEO.
[videoclip]
_____________
Source:TheHealthCareBloginterviewwithMatthewHoltonFebruary21,2011atHIMSS2011
(http://thehealthcareblog.com/blog/2011/02/24/jonathanbushhimss11/)
30
JonathanBushlikestocompareathenatoAmazon.
Andhebelievesthatbecauseathenascustomersaccessthesoftwarethroughawebbased
portal,athenaisacloudcompanyjustlikeamazon.
Whenastoreaddsawebsite,itdoesnotmagicallybecomeacloudbasedretailer.
Likewise,whenmybankallowsmetocheckmyaccountbalanceonline,itdoesnot
suddenlybecomeacloudbasedfinancialinstitution.
_____________
Source:http://www.cartoonstock.com/cartoonview.asp?catref=mlyn2008
31
Hisuseofthewordcloudissomewhatnebulous.
Herehedescribessomeoftheservicesbehindthesoftware:
[videoclip]
_____________
Source:Compilationcomprisedofexcerptsfromthefollowing:1)FoxNewsNetworkonJuly24,2009
(http://media2.foxnews.com/072409/072409_business_athena_B1200.flv);2)InternationalBusinessForum
2
nd
AnnualDigitalHealthcareSummitonApril14,2011(https://www.youtube.com/watch?v=UxF84LO6dRQ);
3)MITEmTech onOctober9,2013(http://www2.technologyreview.com/emtech/13/video/day1/);4)
VentureAtlanta2012onOctober18,2012(https://www.youtube.com/watch?v=S_RDCp0jKY);5)EHRtv
interviewwithAnnandEricFishmanatHIMSSonFebruary21,2012(http://www.ehrtv.com/himss2012
athenahealthjonathanbush/);6)EHRtv interviewwithAnnandEricFishmanonOctober27,2010
(http://www.ehrtv.com/athenahealthjonathanbushnov2010/);7)TheFuquaSchoolofBusiness,
November5,2013(https://www.youtube.com/watch?v=SwuQ2QFs73s);and8)HealthCareBloginterview
withMatthewHoltatHIMSS2011onFebruary21,2011
(http://thehealthcareblog.com/blog/2011/02/24/jonathanbushhimss11/)
32
Whenotherindustriestakemundaneornotsomundanetasksoffacompanyshands,we
callthatbusiness processoutsourcingorBPO.
Whenthecompanygetsbetteratitbecauseithasmorecustomers,moredata,andaweb
basedinterface,it doesntmakethemafusionofSaaS,mobile,social,and
crowdsourcing.
It makesthemamoreefficient BPO.
Beforeeverybodygotlostintheclouds,athenawasgroupedwithotherfinancialand
transactionprocessingcompanies.Thesearegoodbusinesses,buttheydontmerittriple
digitP/Es.
Currently,BPOcompaniesmostlyhavehighteensP/Es.
_____________
Source:KPMGCorporateFinance,February28,2011
33
Webelievethemostdirectcompsfor athenaareAccretiveHealth, MedAssets,andTenet
HospitalsConiferdivision.Thesebusinesseshave, onaverage,a10%operatingmargin
beforestockbasedcompensation.
TheCEOofAccretiveHealth acompanyfocusedpurelyonoutsourcedhospitalRCM
statedthatthecompanystargetoperatingmarginswereinthemidteensshortly,before
thecompanyranintoregulatorytrouble.
_____________
Source:ServiceproviderspresentedforcomparisonwereselectedbyGreenlightinitssolediscretion.
GreenlightestimatesbasedupontheaverageofthethreemostrecentlyfiledForms10Kforeachservice
provider.Initssolediscretion,Greenlightmadeadjustmentstoreportedsegmentresultsforstockbased
compensationandtoallocatecorporateexpensestosegments,amongotheradjustments.
34
So, nowletsgobacktoMorganStanleysmarginestimates.
ThelowoperatingleveragemakestheEBITrampto13%bytheendofthedecade
plausible.But,theproposedrampto30%bytheendof2030isnot.
Bytheway,intheMorganStanleybearcasethatyieldsan$82valuation,theyassume
EBITmarginrampstoonly 27.5%.Thatiswhatpassesforconservatismduringabubble.
_____________
Source:MorganStanley&Co.estimatesasprovidedtoGreenlightinApril2014andGreenlightcalculated
adjustmentstoMorganStanley&Co.estimates.GreenlightsadjustmentstoMorganStanleysmethods,
factors,andcalculationswereinthesolediscretionofGreenlight.
35
Ifwechangetherevenueperdoctorto$36,600andassumeapeakmarginof15%,rather
thanMorganStanleys30%,thisreducesMorganStanleysbasecaseDCFvalueforthe
Ambulatorybusinessbyanadditional$33.
OuradjustedDCFvaluefortheestablishedambulatorybusinessistherefore$43per
share. Thisrepresentsagood,optimisticvalueforathena'sestablishedbusiness.
_____________
Source:MorganStanley&Co.estimatesasprovidedtoGreenlightinApril2014andGreenlightcalculated
adjustmentstoMorganStanley&Co.estimates.GreenlightsadjustmentstoMorganStanleysmethods,
factors,andcalculationswereinthesolediscretionofGreenlight.
36
Sowhatabouttheinpatientorhospitalmarket?
HereareMorganStanleysassumptions.
Asyoucansee,thehospitalsegmentisforecasttogrowfromzerotomorethan40%of
athenasrevenues...
Howlikelyisthat?
_____________
Source:MorganStanley&Co.estimatesasprovidedtoGreenlightinApril2014.
37
Insteadofwaitinguntil ithas afull suiteofsoftwaretoofferhospitals,athenahas
developedanewBPOofferingcalledEnterpriseCoordinator,inwhichitwilltakeovera
hospitalsadmissions,referrals,prebillings,andpatientcommunicationfunctions.
Athenasfirstalphacustomersforthisnewservicearelongtimeathenaclients,Steward
HealthCareandGriffinHospital.
WhenaskedontheAprilearningscallaboutathenahavingtocutitsalreadynegative
marginpricingstructureforthisnewoffering,JonathanBush washisevercandidself.
_____________
Source:athenahealth FirstQuarter2014EarningsConferenceCall,April18,2014
38
Andwhataboutthefutureproducts?
MorganStanleysInpatientforecastassumesathenalaunchesanewrevenuecycle
managementservicein2017thatwillreach$2.5billionofrevenuesby2030.
_____________
Source:MorganStanley&Co.estimatesasprovidedtoGreenlightinApril2014.
39
That$2.5billionimpliesthatathenawins6%ofthehospitalindustry. Thisis200%ofthe
currentmarketbecauselessthan3%ofhospitalsoutsourcetheirrevenuecollectiontoday.
Hospitalsdontoutsourcebecausetheyhavecustomizedcontractswithlargerpayersso
thereislittlebenefitfromthestandardizationofcollectionmethodsthatoutsourcersoffer.
MorganStanleyassumesthathospitalswillembraceoutsourcing,andthatathenawill
launchaviableservicethatwinssignificantmarketshareat30%EBITmargins.
_____________
Source:RCMinpatientmarketpenetrationrepresentsafuture15%annualgrowthratetotheHealthcare
InformationManagementSystemsSocietysestimateforcurrentRCMinpatientpenetration.Marketshare
forathenahealth reflectsMorganStanley&Co.estimatesasprovidedtoGreenlightinApril2014.
40
MorganStanleysassumptionsarenotjustoptimistic,theyseemtoignoretherealitythat
evenathenascurrentsolutionishalfbaked.
_____________
Source:MorganStanleyTMTConference,March6,2014
41
This iswhatafullyintegratedhospitalsoftwarepackagelookslike.Itinvolveseverypartof
thehospital,frombillingtopatientmonitoringtosupplychainmanagement.
Theytakeyearstodesignandafortunetobuild.
ThecompanythatdominatesthisspaceisEpicSystems.
_____________
Source:http://healthit.ahrq.gov/keytopics/architecturehealthit
42
Epicmakescompletesoftwaresolutionsforhospitals,largemedicalgroups,andintegrated
healthcareorganizations, andhasemergedastheundisputedwinnerfromthefragmented
ITmarket.
It costsanywherefromtenstoevenhundredsofmillionsofdollarstoinstallEpic,butthis
hasntdeterredthemostwellrespectedhospitalCIOs.
Infact,therearecitiesinthiscountrywhereeverymajorhospitalisonEpic, ormovingin
thatdirectionbecauseoftheeaseofsharingdata.
_____________
Source:Greenlightanalysisofthe2013top10hospitalsineachspecialtyasrankedbyUSNews&World
Report(http://health.usnews.com/besthospitals/rankings)
43
Epic'sclientretentionrateisnear100%.WallStreetanalystsdon'tpromotetheEPIC
perspectiveonhealthcareITbecauseitisaprivatecompany.
Oh,andtheyarefromWisconsin.GoPackers...
_____________
Source:TheVeronaPress,August9,2013(http://www.connectverona.com/articles/2013/08/09/epicwows
chambergroup)
44
AsfarascloudbasedITgoes,Epicscontinuedsuccessshowsthathospitalsarentlooking
foracobbledtogetherbestinbreedsolution.
Justashospitalsimposestructurefromthetopdown,thehospitalsthemselvesseem
comfortablehavingaproprietarysolutionimposeduponthem,provideditisintegrated,
efficient,andinteroperable.
Epicisallofthesethings.
Anditsnotjusthospitals
_____________
Source:http://cartoonsy.com/cartoons/maycliniccartooncartoonscartoondrawings914
45
Epicisnowexpandingintoothermarkets.
CVSsMinuteClinichasbeenalongtimeathenaclientinpracticemanagementandrevenue
collection.
InFebruary,whenCVSdecidedtostopusingitsownproprietaryelectronichealthrecords
product,itshouldhavebeenaneasywinforathenaClinicals.
Instead,CVSwentwithEpic,furthercementingEpicsplaceasthegotoapplication.
_____________
Source:CVSCaremarkpressreleaseonFebruary21,2014(http://info.cvscaremark.com/newsroom/press
releases/cvsminuteclinictransitionepiccareelectronicmedicalrecord)
46
YetJonathanBushcontinuestobelievethatofcourse cloudbasedsolutionswillbethe
standardforhealthcareIT.
Itdoesntworkthatway.
Thestandardshavebeendecidedinthelastfiveyears,andthe winnersarentthesingle
digitsharecloudcompanies.
Thestandardisthe2000lb.gorilla fromWisconsinthathasthebiggesthospitals,the
275,000doctors,andnoweventhelocalclinics.
Andastheselargeinstitutionskeepacquiringsmallerhospitalsanddoctors'practices,and
pushingEpicITsystemsdownthechain,Epic'sdominancewillonlygrow.
_____________
Source:HealthInformationTechnology:AFewYearsofMagicalThinking?HealthAffairs,27no.5(2008)
(http://content.healthaffairs.org/content/27/5/w383.full.pdf+html)
47
Andwhataboutathenabeingthehealthcareinternetbackbone?
[videoclip]
_____________
Source:Compilationcomprisedofexcerptsfromthefollowing:1)BYURollinsCenterforBusinesson
September24,2008(https://www.youtube.com/watch?v=CSqS_HRoBLo);2)EHRtv interviewAnnandEric
FishmanatMGMAonOctober23,2011(http://www.ehrtv.com/athenahealthjonathanbush/);3)Venture
Atlanta2012onOctober18,2012(https://www.youtube.com/watch?v=S_RDCp0jKY);4)MITEmTech on
October9,2013(http://www2.technologyreview.com/emtech/13/video/day1/);and5)FOXNewsNetwork
interviewatForbesHealthcareSummitonOctober10,2013
(http://www.foxbusiness.com/government/2013/10/10/fbnatforbeshealthcaresummit/).
48
Jonathanknowshehassomeproblemsthere,too.
[videoclip]
Likemanyotherpeople,JonathanBushwantstofixhealthcare.
Thefixhehasinmindis"ahealthy,sustainablemarketforhealthinformationexchange"but,ashe
notes,regulationsandculturalresistancehavekeptthisfromhappening.
Nonetheless,athenahascontinueddownthispathinthehopesthattheregulationswillchange.
In2011,athenalobbiedforandreceivedasmallexemptionfromtheantikickbacklaws,grantedby
theOfficeoftheInspectorGeneral.Thecompanybelievedthatthiswouldbethecrackinthedam
thatwouldeventuallyleadtoanopenmarket.
Instead,theOIGreverseditsdecisionlastmonth,signalingthatanychangeintheselawsisnot
likelywithoutanactofCongress.
Webelievethatifthelawsaroundthisdochange,asmallplayerlikeathenaisunlikelytobeina
centralpositionwhereitcanextractmonopolyprofits.Inthemeantime,athenahasnt
demonstratedaviablebusinessmodelforcontinuingtobuildthebackbone.
_____________
Source:EHRtv interviewwithAnnandEricFishmanatMGMAonOctober23,2011(http://www.ehrtv.com/athena
healthjonathanbush/)
49
Sowheredoesthatleaveus?
WhileathenamaybeabletocreateanInpatientsoftwareoffering,itwillbeanexpensive
andriskyundertaking.Cerner,anotherlargehealthcareITcompany,hasspent$2.7billion
inthelastdecadeonR&D,whileEpicreportedlywillspendmorethan$300millioninR&D
thisyear.
MorganStanleys30%marginassumptionforInpatientisevenlessrealisticthanitisin
Ambulatory.Itwillbeevenharderforathenatogenerateattractivemarginsfromlarge
enterprisecustomersthanfromsmallphysicianpractices.Wethinkwearebeingquite
generousbyadjustingtoa15%margin.Itwouldbeeasytoargueforsomethingeven
lower.
ThoughweareinclinedtovalueInpatientatzero,wecannotdisprovethatwhichdoesnot
exist.Andinvestorsliketodream.However,wethinkitisappropriatetodiscountthis
potentialataratereflectiveofaventureinvestment.A15%marginanda20%discount
ratestillseemratherforgiving.Youcanseetheseadjustmentshavealotofimpactonthe
Inpatientopportunity.$7pershareseemsmuchmorerealisticthan$72foraproductthat
forthemostpartisyearsawayfromcommercialintroduction,letalonesuccess.
_____________
Source:MorganStanley&Co.estimatesasprovidedtoGreenlightinApril2014andGreenlightcalculated
adjustmentstoMorganStanley&Co.estimates.GreenlightsadjustmentstoMorganStanleysmethods,
factors,andcalculationswereinthesolediscretionofGreenlight.
50
Puttingittogether:WestartedwithMorganStanleysbasecaseDCFvalueof$192per
shareandtookitoutofthecloudsbyadjustingvariousimplausibleassumptionsinthe
model.Thisleadstoastilloptimistic,butatleastconceivable$50value.
_____________
Source:MorganStanley&Co.estimatesasprovidedtoGreenlightinApril2014andGreenlightcalculated
adjustmentstoMorganStanley&Co.estimates.GreenlightsadjustmentstoMorganStanleysmethods,
factors,andcalculationswereinthesolediscretionofGreenlight.
51
Ofcourse,thereisabearcase,whichisworse
_____________
Source:http://www.cartoonstock.com/cartoonview.asp?catref=mba0046
52
Therehasbeenagreatdealofconsolidationinhealthcare,withhospitalsbuyingup
physicianpracticesanddirectlyemployingdoctorsinordertocollecthigherfeesandbetter
controlthecostofcare.
Anditshappenedfasterthansomepeopleexpected.CertainlyfasterthanJonathanBush
anticipated.
[videoclip]
Ashospitalsacquirephysicians,thehospitalswillchoosetheITsystemsandathenawill
losedoctorsthatwillbemovedtoasystemlikeEpic.
_____________
Source:MeaningfulHITNewsinterviewinFebruary2011atHIMSS2011
(http://www.meaningfulhitnews.com/2011/02/28/videoathenahealthsjonathanbushathimss11/)
53
Wehaveidentifiedthesesixcustomersthatwebelieveathenamayloseinthecoming
years.
_____________
Source:Greenlightopinionbaseduponpublicstatements,newsarticles,announcementsforopen
employmentpositions,anddiscussionswithindustryparticipants.
54
Thisvertical integrationisnttheonlythingshrinkingthemarket.Anotherbigpartofthe
puzzle isthatdoctorsweregiven hugesubsidiestoadoptelectronichealthrecordsaspart
ofthe2009schtimulus bill.
Jonathanexplains:
[videoclip]
_____________
Source:HealthcareExperienceDesign,closingkeynoteatHxD 2012onMarch26,2012
(http://www.healthcareexperiencedesign.com/2012/speakers/jonathanBush.html)
55
Afew yearsago,doctorswerepaid$44,000toimplementanduseanEHR.Latelastyear
thisdroppedto$24,000,andinafewmonthstheincentivewilldisappearaltogether.
Accordingly,mostdoctorswhoaregoingtoadoptEHRshavealreadydoneso,andthe
greenfieldopportunityhasbeenpenetrated.
_____________
Source:TotalEMRincentivepaymentsisfromCMSAnIntroductiontotheMedicareEHRIncentiveProgram
fromEligibleProfessionals(http://www.cms.gov/Regulationsand
Guidance/Legislation/EHRIncentivePrograms/downloads/Beginners_Guide.pdf).Percentageofofficebased
physicianswithEHRisfromtheCDCsUseandCharacteristicsofEHRSystems
(http://www.cdc.gov/nchs/data/databriefs/db111.pdf).
56
Asfortheremaining doctorswhoarestillshoppingforEHRs,athenassuccess inthelower
endoftheambulatorymarkethasledtocompetitionthere,too.
Companieslikekareo,eClinicalWorks,andCareCloud haveallintroducedcompeting
packagesofRCMandEHRatlowerprices.Itmaybehardforathenatoachievemuch
margingrowthinsuchacompetitivemarket.
57
Andthentherescapitation,whereprovidersarepaidaflatratefortakingcareofadefined
patientpopulation.
Thisisanexistentialthreattoathena'scollectionbusiness,asthereisnoreasontopaya
billcollectorwhenthebillispaidbeforetheserviceisdelivered.
Jonathanseemstoagree:
[videoclip]
_____________
Source:MeaningfulHITNewsinterviewinFebruary2011atHIMSS2011
(http://www.meaningfulhitnews.com/2011/02/28/videoathenahealthsjonathanbushathimss11/)
58
JonathanBush'ssincere,wellintentioneddesireto"makehealthcareworkasitshould"isa
majorthreattoathenasshareholders.
Therewillalwaysbehighrisk,lowmarginthingstodothatwillmakehealthcarebetter.Itis
aseeminglyintractableproblem.
[videoclip]
Isaidatthetopofthispresentationthattheworldmaybeabetterplaceifathena
succeeds.Butshareholdersmightwanttoconsidertheramificationsofthelikely
misallocationofcapitalifJonathanBushcontinuestouseathena'sprofits as,quoting
Jonathan,"ahugecanoffixit.
_____________
Source:VentureAtlanta2012onOctober18,2012(https://www.youtube.com/watch?v=S_RDCp0jKY)
59
Webelievethatthereareseriousriskstothisbusinessmodelthatarebeingmostlyignored
bybullishinvestorsandsellsideanalysts.
60
Alessoptimisticscenariothatmaybeevenmorelikelythanthe$50DCFcasewouldhave
thenumberofdoctorscappingoutat74,000ratherthan86,000,withrevenuesperdoctor
increasingroughlyattherateofinflationuntiltheendofdecade,atwhichpointcapitation
and/orcompetitionslowsthegrowthto1%peryear.
EBITmarginsexpandto13%,inlinewithathenasbestcomparables,butdontimprove
further. Theinpatientsegmentdoesnotbecomeaprofitablebusiness,butdoesnot
becomeacashsinkholeeither.
Onthatbasis,theDCFfallsto$14pershareoraboutamarketmultipleoncurrentnon
GAAPearnings. Withthestockat$127,Idontthinkitisworthwhiletofurtherparsethe
assumptions.
_____________
Source:MorganStanley&Co.estimatesasprovidedtoGreenlightinApril2014andGreenlightcalculated
adjustmentstoMorganStanley&Co.estimates.GreenlightsadjustmentstoMorganStanleysmethods,
factors,andcalculationswereinthesolediscretionofGreenlight.
61
Nowheresthecompletestockchart. Inrecentweekstheshareshavefallensharply.
Perhapsthebubbleisdeflating.
Thethingaboutbubblestocksisthatthebestreasontoownthemisthattheyaregoing
up.Whentheystopgoingup,thereisnoreasontoownthem.
Thegapbetweenthetopofthebubblepriceandthepricewhereadisciplinedgrowth
investorwillbecomeinterestedisverylarge.Whentheystopgoingup,thesestocks
becomefallingknives.Ithinkthisonehasmuchfurthertofall.
Butyoudonthavetolistentome.
_____________
Source:BloombergL.P.
62
Here'sJonathanBushonelasttimeinNovember,whenthestockwastradingat142,
provingthathegetsthejoke,andthatheunderstandsWallStreetevenbetterthanhe
understandshealthcare.
[playclip]
_____________
Source:TheFuquaSchoolofBusiness,November5,2013
(https://www.youtube.com/watch?v=SwuQ2QFs73s)
63
64
Hereisasnippetfromanothercompanythattriedtochangehealthcare.
65
ThiscomesfromWebMDaboutadecadeago.Itturnsoutitishardertotransform
healthcarethansomemightthink.
66