athenahealth Inc.: A smooth operator
athenahealth Inc. (Nasdaq:ATHN) is freeing physicians to focus on patients, smoothing operations by taking over back-office chores. The company’s business software and services are selling so fast that surgical precision will be needed to meet high expectations.
athenahealth’s software puts insurance rules and clinical processes into its practice management platform, taking over the administrative burdens of billing, reimbursement and handling of data. Its services have three parts: proprietary Internet-based software, a continually updated database of payer reimbursement process rules, and back-office billing and clinical data management.
The Watertown, Mass.-based company emphasizes the service aspect of its business, and this model has allowed it to grow sales organically. Sales reached $100.8 million in fiscal 2007 ending in December, from $75.8 million in 2006. That 33% gain is expected to be matched in 2008, when analysts expect sales of $134.4 million, and again in 2009, when projections average $180.5 million.
Although the company does not give specific guidance, it has targeted long-term annual sales growth at 30% or better. It has a 97% physician retention rate, which gives insight into future sales. athenahealth projects long-term gross margins at 57% to 59%, adjusted EBITDA margin of 27% to 32%, and operating margins at 23% to 27%.
Revenue expectations are heady as athenahealth readies to release its second-quarter results Tuesday. Analysts see demand for its services remaining strong as the company continues to sell into a wide range of practices and providers, both big and small. Just last week, the company announced it had signed up RediClinics, which runs in-store health-care facilities — including at 15 Wal-Mart stores — for its on-demand business services.
athenahealth has grown sales organically, developing in the past five years its Internet-based software services to extend its client base. In 2005, it formed a subsidiary in India to work with business partners there. As of Dec. 31, clients numbered more than 12,000 medical providers, including more than 9,400 physicians. It has market capitalization of $960 million.
Despite its sales success, athenahealth has yet to post an annual profit. Having lost $0.28 per share in 2007, this is the year to speed around the corner: Analysts expect earnings this fiscal year at $0.47, rising to $0.82 in 2009. Quite a moment, when the money starts coming down to the bottom line.
And not a moment too soon. athenahealth may be a spoonful of sugar for doctors, but its gyrating shares are the source of investor heartburn. athenahealth priced at $18 per share in its initial public offering in September, and nearly doubled on its first day of trading. It hit a high of $47.78 in November, only to fall to a low of $20.72 in March.
“While we believe much potential exists for continued growth of athenahealth’s top- and bottom-line results, we note that investors have already experienced a rollercoaster ride in the movement of ATHN’s shares …” said K. Newton Juhng, analyst at BB&T Capital Markets, initiating coverage in June at “hold.” At prices near Thursday’s close at $30.20, he said investors were fully valuing the potential growth of the company.
With analysts projecting 2008 earnings at $0.47, athenahealth is sporting a stiff P/E of 64. That’s a steep premium to the valuations of such peers as Allscripts Healthcare Solutions (Nasdaq:MDRX) and Quality Systems (Nasdaq:QSII).
“We believe the exuberance that drove up the valuation multiple in the months immediately following athenahealth’s IPO is not a good measure of the valuation range for the company,” said Juhng. “Even the near-60x range, the company currently receives is not sustainable, in our opinion, but we believe the multiple should eventually diminish as the company’s growth rate stabilizes.”
Valuation aside, athenahealth must be careful it isn’t snared by a better mousetrap. It has a convincing health-care technology business model, but there is no lack of predators hunting for health-care dollars. Driven by physician office collections, athenahealth takes part in the $448 billion in ambulatory care spending each year, as estimated by the U.S. Centers for Medicare and Medicaid Services for 2006.
Certain analysts are more sanguine. “We believe athenahealth offers several attractive investment characteristics, including an attractive business model and a relatively open-ended earnings growth opportunity,” said Corey Tobin at William Blair and Co. in early July. He said there is potential for higher earnings expectations for 2009 if management continues to execute, and he maintained an “outperform” rating.
The company also has a strong balance sheet — plumped by the initial public offering — with $67 million of cash and equivalents and less the $2 million of debt at the end of the first quarter.
But with expectations so high, a misstep could put athenahealth in traction. Then again, the company will at least know how to work the health-care system.
About the Author
Contributing author Jennifer Allen has two decades of experience as a writer and editor, mainly as a financial wire service correspondent.
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