Athenahealth (NASDAQ:ATHN) is trying to bust down barriers so that patients and healthcare providers have easy access to comprehensive electronic healthcare records, but not everyone's happy with the progress it's making. Recently, activist investor Elliott Management offered to acquire it for $160 per share following a scathing critique of the company's operations. Is this a deal that could get done?

In this episode of The Motley Fool's Industry Focus: Healthcare, analysts Kristine Harjes and Todd Campbell discuss if the criticism is fair and if athenahealth's likely to be acquired. Also, they update investors on Takeda's plan to merge with Shire Plc (NASDAQ:SHPG) in a $62 billion deal and how patience finally paid off for Portola Pharmaceuticals (NASDAQ:PTLA) investors.

A full transcript follows the video.

This video was recorded on May 9, 2018.

Kristine Harjes: Welcome to Industry Focus, the podcast that dives into a different sector of the stock market every day. We're talking Healthcare today, May 9th. I'm your host, Kristine Harjes, and I have the wonderful healthcare writer, Todd Campbell, on the phone with me. Todd, I hope you had some coffee and some breakfast this morning, because we have a lot to cover today.

Todd Campbell: We sure do. We've got some interesting M&A news to cover, don't we, Kristine?

Harjes: Yeah, actually, a lot of this is directly tied to M&A. We have one big, long story to talk about, and then, after we take a quick break, we'll talk about two other hopefully shorter stories. First up, activist investment firm Elliott Management made an all-cash offer to buy athenahealth, which is a software provider for the healthcare industry, for about $7 billion or a $160 per share offering. This news came out on Monday morning and the stock rose to about $146 per share by the end of the day, which was a nice 16% top, but notably not quite a pop all the way to that $160 offering level. What's going on here?

Campbell: It's interesting, too, because that's a cash deal. This is, here, I'm handing you money in the pocket. There's no arbitrage risk or financing or anything like that to be worried about. Elliott Capital has so much money. They have $35 billion, and they've been around so long, since 1977, they have all the resources they need that they can tap into to get this deal done very quickly. 

But, the hitch might be that Jonathan Bush, who's the outspoken CEO of athenahealth, may not want to do a deal. He may not want to sell his company because he's been such a big vocal evangelist for changing how we handle and consume and use information about our health.

Harjes: That's really the crux of the issue here. athenahealth's management team clearly does not get along with Elliott. Elliott is the largest activist investment firm in the world, meaning, as an activist investment firm, they push athenahealth to do certain things. And now, when you read this letter of the offering from Elliott to athenahealth, there is so much criticism of the business and of the management team and their decisions. It's actually rather scathing. Of course, it's phrased pretty diplomatically, but you can read between the lines and tell that there's a lot of animosity between the two parties.

Campbell: Yeah. I pulled out a bunch of different quotes. I'm sure you did, too. It says, hey, we believe that athenahealth has great potential and it's very differentiated, and we've had some constructive "conversations" in the past with them, [laughs] but then it just goes on to just blow them away. "The company's stock price has deeply under-performed all relevant benchmarks for more than five years. This chronic under-performance is driven by athenahealth-specific factors, including poor execution, significant management turnover, inefficient allocation of resources, and the loss of strategic focus. Even companies operating in far less market segments with secular challenges have managed to operate better."

Harjes: Ouch! [laughs] That's such a take-down! So, you look at these criticisms, and the question that sticks out to me is, is Elliott being fair here? Are these valid criticisms? You mentioned the management turnover criticism. That's an interesting one to me because they have had management shake-ups within the broader team, but Jonathan Bush, who you already mentioned, he's been the CEO since he founded this company in 1997. So, yes and no to that one. The under-performance, I'm also not really sure I'm sold on that criticism. The stock's up 43% over the last year, it's up 78% over the last five years. I don't know exactly what benchmark Elliott was referring to, but if you want to just compare it to the S&P 500, that's an out-performance on both the last year and the last five years. It's also outperformed the healthcare sector ETF. So, without specifics, I'm not really sure if that's a valid one.

Campbell: Yeah. They rolled out some numbers, and they said there was underperformance prior to the news of Elliott coming out and being interested. Obviously, the increase closed that gap a little bit. But it's what we talk about all the time, Kristine, when we're talking about time horizon. If you own a stock for one month and you underperform, how mad should you really be at management? If you own it for three or five years, OK, you can start to get a little frustrated, I could see. But anybody who bought athenahealth shares back when they were $20 a share back in 2010 probably isn't too concerned by the fact that athenahealth is trading at like $150 now.

Harjes: Yeah. You're right. It's interesting to watch this, especially because Elliott has, or at least they claim to have, a pretty long-term vision for this company. That's why they want to take it private, they don't want the company to be so tied to having to report on a quarterly basis and please investors, that they would rather execute a long-term strategy privately. But, I mean, as you pointed out, it seems like athenahealth does have that long-term vision.

Campbell: Yeah, this is very weird to me. It's almost like, remember when Steve Jobs, way back in the day, got forced out and they replaced him with an operational leader at Apple (NASDAQ:AAPL)? God, that must have been, what, the late 80s or early 90s, something like that. You look at some of these cult of personality-type leaders, and they have these big visions. And you said it yourself, I'd like to invest in those kinds of leaders, not pan them. 

So, I think this is a very interesting situation, because it's not like athenahealth is going backwards. Revenue was up 13%. That's a deceleration from where it was, over the course of the last few years, but it's still growing by double-digits. And the wide-open runway that's available to reshape healthcare by improving our access to digital information, that's a massive opportunity. And I kind of wonder about whether or not Elliott is being a little disingenuous with this, because they're saying, "We don't want to be in the eyes of investors." Well, they're the ones who are criticizing this long-term vision that Bush has.

Harjes: Yeah. It's interesting. If you put yourself in Elliott's shoes, this kind of makes a lot of sense. They think the company has a big runway. You point out the frustration of our healthcare system as it is. Anybody that's been to a doctor's office and has struggled with accessing their medical records or sharing them between different providers, you know that the EHR space, the electronic health records space, is ripe for innovation. So, this company is working in a really important area. Their margins are great, their growth is good. So, I can see why Elliott would say, "Hey, you know what? We'll pay a 27% premium to just have them completely to ourselves." But, also -- and here's a really important point -- if another bidder emerges, Elliott already has a very big stake. They have an 8.9% stake in athenahealth. If another bidder emerges with an even higher offering, that's another winning scenario for Elliott. So, it really seems like this company has positioned themselves to win-win.

Campbell: You know, that's a really interesting point, Kristine. You're right. Typically, you'd like to try to do these kinds of take-private, LBO kind of deals, whatever, with a friendly handshake behind closed doors. You don't necessarily take it to the public in the form of a letter. And one of the things that they disclosed in the letter is, they actually tried to approach athenahealth's board last year to discuss some sort of a go-private opportunity, and they came away shunned [laughs] for bringing it up. They also, in one of the lines of that letter, indicated, or suggested, at least, that they weren't the only one that's approached athenahealth about trying to do something. You're right. Maybe this is forcing the issue, trying to spark a bidding war so that Elliott can profit from it.

Harjes: Yeah. The exact line is, "Other parties have also expressed interest." That is clear as day.

Campbell: It sure is. It'll be very interesting to see if any of those other companies emerge and can convince Jonathan Bush to do it. Now, there are a couple of companies that jump to mind that I feel like would be good fits, Kristine.

Harjes: [laughs] OK, let's do some speculating!

Campbell: Alright! Remember that show we did not that long ago that talked about how Berkshire Hathaway, JPMorgan and Amazon are teaming up to reshape healthcare in America?

Harjes: Yeah.

Campbell: Well, they're looking for a leader of that company. So, it would be kind of cool, in a way, if they were able to convince Jonathan Bush, "Hey, we want you to lead this entire initiative. You have this huge vision of how you'd like to reshape healthcare. We'll buy athenahealth, and we'll go from there." Now, that's a little bit of a long shot, but it would seem to make some sense to me, anyway.

Harjes: Here's another reason that I want to add on to that -- Jonathan Bush seems like the personality type to be working at a big tech company. He's this no holds barred kind of character. I remember at his JPMorgan speech this past January, he started out his entire presentation by pointing out his contribution to the diversity of the conference by not being named Michael, which was a reference to an article that had been published by Stat News over the course of the conference that there were more men named Michael presenting at the conference than women at all presenting. Which, whether or not you think that joke was in good taste, his speech was super captivating. You make the point that he might not be the best operational execution type of guy, but he is a visionary, and I could see him leading a big, nebulous initiative like what we were talking about with JPHathAzon.

Campbell: [laughs] Right. HathAzon, that's awesome. And then, the other company that would seem to make a lot of sense to me, Kristine, would be Apple. You know? Think about this, right?

Harjes: OK, sure, it fits right in with that again, tech.

Campbell: Yeah! I mean, Tim Cook has made healthcare a priority for Apple. If you look at the announcement that came out in January, the new Apple Health app actually allows you to integrate athenahealth, and I think Epic is participating, and maybe a third one too, I don't know if it's Cerner or not, in being able to bring all of your health records onto the Apple Health app. So, they've already demonstrated a willingness and an interest in doing this. And I don't know if you remember this or not, Kristine, but there was some chatter last summer, summer of 2017, I think it was maybe a Citibank analyst who came out and floated the balloon that maybe it would be a good idea for Apple to knock on athenahealth's door.

Harjes: Interesting! It's bold! Cool. For the second half of our show, we have a couple of quick updates for you. For those who have been following along with Industry Focus: Healthcare, you know that we covered previously Takeda potentially buying Shire. This is a Japanese pharmaceutical company, Takeda, looking to buy Dublin-based Shire. We covered it on April 4th. If you missed that episode, now we have the update that, yeah, this is happening.

Campbell: Yeah. There was a little bit of back-and-forth here. Takeda went to Shire after they indicated that they have some interest, and Shire rejected one offer and then rejected another offer, and then eventually just sent a team of people to Japan to try to see if they could hammer something out. And in the interim, was it Allergan, Kristine? Another company popped up their head for like a day and a half and said, "Hey, we might kick the tires, too!" And maybe, when that fell apart, Shire's board said, "You know what, our best option is Takeda." They've accepted the deal now. It's a $62 billion deal. It creates a company with $30 billion in annual revenue. It's a very interesting deal, because it's creating a company that really, Kristine, could be one of the fastest-growing of the big pharmas you can invest in worldwide.

Harjes: And it would be big. This would be the world's eighth-largest drug maker. It certainly gives Takeda a lot more international reach, particularly in the U.S. and the E.U. About two-thirds of Shire's sales are in the U.S. market, which is an extremely lucrative market, so I can see why Takeda's interested here. It also adds to their gastro and their neurosciences lineup. 

But, shareholders have not been happy about this. I think a large part of that is because A, it's expensive, and B, they're borrowing money to finance it. What that does to their ratings and their balance sheet is to be determined. But, I do want to point out that just today, Moody's actually downgraded Takeda, and they stated that the downgrade was reflective of their previous debt levels -- meaning, not even with this news of how they plan on financing an acquisition of Shire -- and that they will need to reevaluate if the deal goes through as proposed. So, a lot of interesting stats in that Moody's downgrade, looking forward to what would actually happen when and if Takeda does go through with this. Of course, even though we still need to see if the shareholders of both companies approve it, it's looking pretty likely that this will close in about early 2019.

Campbell: And, just some accounting, Kristine. If you happen to be an owner of Shire and you're like, "OK, the deal got done, and it's worth this many billions, what does that really mean for my shares?" You'll get $33 in cash, and then you can either get 0.839 shares in the merged company, or 1.678 Takeda ADS for every Shire share you own. So, you have to decide whether or not you want the cash, and then, if you want the Takeda shares in the trade in Japan or if you want the ADS and go from there. 

What's interesting, you mentioned it's the eighth-biggest biopharma after this deal. I'd mention, the other seven before it are probably much more widely owned than Takeda. It will be interesting to see whether or not institutions start adding more shares in Takeda if the deal gets done. Then, of course, like you said, we're going to see what happens with the dividend and the ratings, because with this much of a debt level, it could be that you're not going to get the dividend increases that we've recently seen out of the company.

Harjes: That's a great point. Right now, they're paying out a 3.42% dividend, which is pretty meaty, and I'm sure there'd be plenty of shareholders who would be upset if they were to end up cutting that. 

Anyway, last story of the day. We want to update you guys about Portola! [laughs] I hope our listeners aren't sick of hearing us talk about this. I was thinking about it earlier today, I knew that we were going to be talking about Portola, and I wish we could make a metric that had captured a ratio between the number of minutes that we've spent discussing a stock on this show relative to that stock's market cap, because Portola would be by far the highest. [laughs] 

Campbell: And what crazy ups and downs over the course of the last three years that you and I, and even prior, Michael, [laughs] end up talking about this company and what it was doing to try to improve upon the use of anticoagulants here and worldwide. One of the things that's made that such a roller coaster ride for Portola investors has been its factor Xa anticoagulant reversal agent, Andexxa, which had been filed for approval previously and had been rejected, then got refiled for approval, and now, finally approved.

Harjes: Yes! So, last Friday, we got the news that Andexxa was finally approved by the FDA after a very bumpy road where, honestly, it wasn't looking good. I mean, initially, when we were digging into this company, before it ever applied for approval of Andexxa, we thought the numbers looked really good. And when the application was rejected back in August of 2016, it definitely caught me by surprise. The FDA cited a need for more data demonstrating its ability to reverse factor Xa inhibitory activity. They resubmitted that application last year, but again, in December, we had more bad news when the FDA pushed back its approval decision date to get more time with the data. But, finally, sigh of relief, it was finally approved. The stock gained about 25% on the news, so it was a good day for shareholders. 

This is a pretty significant approval. To put some numbers behind it, there are over 100,000 hospital admissions and 2,000 deaths in the United States every month because of bleeding events in patients taking Factor Xa inhibitors, which are this new class of blood thinners or anticoagulants that are increasingly being used in place of Warfarin to prevent stroke or pulmonary embolism and venous thromboembolism. And now, this is the first-ever approved reversal agent.

Campbell: Right. Factor Xa, they work upstream in the coagulation cascade of Warfarin, which is a vitamin K-oriented inhibitor. There's less monitoring, there's less dietary restrictions, and they've been very well received as a result. I think that investors should recognize that it's a really large market. If you look at Eliquis and Xarelto, the two biggest factor Xas that are on the market, their combined sales last year were in excess of $5 billion.

Harjes: Yeah. Which kind of leads us to what else is going on with Portola: this is actually their second approval. Their first approval was for their own factor Xa anticoagulant called Bevyxxa. That was launched back in January of this year after an approval in the summer of 2017. So, if you look at the opportunity for this company, between Bevyxxa and now Andexxa, to me, I think they're still a buy, even at current levels. They're still pretty tiny. They're, what, $2.7 billion in market cap?

Campbell: Yeah, and I think you could make an argument that both of these drugs should generate hundreds of millions of dollars each and could, potentially, at some point, end up reaching blockbuster status. Obviously, we'll need to see a couple of quarters play out and see whether or not, how widely used and embraced they are. I can't imagine, though, that if you're an ambulatory center, if you're a hospital, you're not going to stock Andexxa, especially given how widespread the use of factor Xas are and how much of a need there is to reverse bleeding in these emergency situations. 

And then, as far as Andexxa, Lovenox is the drug that that one is displacing. It was approved based on trials competing against Lovenox head to head, and that drug, in its peak, was raking in, I think, $2.5-2.7 billion a year. So, you can make an argument that both of these drugs could be meaningful drugs. And that raises the question, OK, would any other company want to come in and buy Portola? There's reasons to think that there'd be synergies for a company like Bristol-Myers or Pfizer stepping up, because those are the two companies that make Eliquis. And they've also, Kristine, you may remember, licensed the rights to sell Andexxa in Japan, if it ever gets approved there. 

It's an interesting story. We wanted to update everybody on it because we've talked so much about it and there's been so many puts and takes over the years.

Harjes: And we will absolutely continue to update, hopefully not excessively. But, whenever there's news, I bet we'll end up talking about it on this show. Alright, Todd, thank you very much for going through all that with me. As always, people on the program may have interests in the stocks that they talk about, and The Motley Fool may have formal recommendations for or against, so don't buy or sell stocks based solely on what you hear. This show is produced by Austin Morgan. For Todd Campbell, I'm Kristine Harjes. Thanks for listening and Fool on!

John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Kristine Harjes owns shares of Apple and Portola Pharmaceuticals. Todd Campbell owns shares of Amazon, Apple, Pfizer, and Portola Pharmaceuticals. The Motley Fool owns shares of and recommends Amazon, Apple, Athenahealth, Berkshire Hathaway (B shares), and Moody's. The Motley Fool has the following options: long January 2020 $150 calls on Apple and short January 2020 $155 calls on Apple. The Motley Fool recommends Cerner. The Motley Fool has a disclosure policy.