Quality growth rarely comes cheap, but Wall Street seems to have taken it a little too far in the case of Athenahealth (NASDAQ:ATHN). The ambulatory care market is still a growth opportunity, and the company is only just beginning to develop products that can seriously address the acute care market. Even so, it will take truly remarkable growth and share gains for Athenahealth to grow into its current valuation.
Collector's value proposition has made it into a winner
Athenahealth got its start with athenaCollector, a revenue cycle management product that helps clinics improve their billing management. The Collector product uses a rules-based engine that can be updated in nearly real-time to respond to changes in payer rules and policies. Approximately 30% of medical claims are initially rejected by payers, often for preventable errors that Collector can detect and correct, and athenahealth boasts that Collector takes the first-pass rate from about 70% to around 94%.
Customers pay a percentage of collections to athenahealth for Collector, with athenahealth basing pricing in part on targeted gross margins. The company has historically taken about 4% of collections in payment (with a range of 2% to 6%), but this has been trending closer to 3% in recent quarters. Even though there is some "sticker shock" with Collector pricing, the company indicates that Collector delivers an 8% or greater improvement in collections to users, with a roughly 30% decrease in accounts receivable days.
Broadening into records management has been more difficult
Collector has been a strong product for Athenahealth, with most analysts estimating that it holds about 5% share in the revenue cycle management space. In the larger electronic records management market (often called EHR or EMR), Athenahealth has thus far had less success with athenaClinicals despite consistently high satisfaction survey scores.
Clinicals offers many of the same features and functions as the records management platforms sold by Cerner (NASDAQ:CERN), Allscripts (NASDAQ:MDRX), Epic, and McKesson. As is the case with Collector, Athenahealth uses a SaaS model and uses a similar pricing model (though taking a smaller percentage).
Clinicals offers faster deployment and higher provider attestation rates than many competing platforms, but acceptance has been slow. Only about one-third of Collector physicians use Clinicals (and very few use Clinicals but not Collector) and the company has about 2% to 3% of the ambulatory market. Share estimates vary considerably by method (revenue-based, attestation-based, etc.), but all methodologies show Athenahealth trails Cerner, Quality Systems, Epic, and Allscripts, and trails the latter two by a considerable amount.
Driving growth through multiple channels
Some of Athenahealth's challenges with Clinicals can be attributed to experience and market recognition. With Clinicals having come out in 2006, it's still a new kid on the block and regarded as something of an unknown quantity.
Building name recognition has been a priority for the company and a major motivation for the acquisition of Epocrates last year. Epocrates is a popular mobile app drug reference tool, with reportedly more than half of U.S. physicians using the product. Physician awareness of Epocrates is exceptionally high and athenahealth is hoping to use that exposure to drive cross-selling opportunities for Collector and Clinicals.
Developing more value-added offerings for the athenaNet platform is another key part of the company's strategy. Communicator helps to automate tasks like appointment scheduling and reminders, as well as payment and care reminders. Coordinator simplifies the referrals process, and Clarity adds analytics and benchmarking capabilities.
The latest and greatest may prove to be Enterprise Coordinator – a system designed for large acute care settings that takes data from multiple systems and integrates it into a single view in a web-based environment.
Can Athenahealth grow enough?
In terms of satisfaction surveys, Athenahealth consistently scores very strongly with Collector and does pretty well with Clinicals as well. What's more, while Cerner, Allscripts, and others are now moving toward SaaS platforms, Athenahealth has been there all along and has a demonstrated record of developing and introducing new service offerings that integrate well with existing products.
The problem, though, is scale and economics. Cerner and Epic practically dominate the large hospital EHR market. While the penetration rate in the ambulatory care market (where Athenahealth is much more competitive) is still estimated to be only around 50%, the penetration rates go up with the size of the practice which means that most of the unpenetrated accounts are small practices and the economics there are not as compelling.
Another, bigger, problem is expectations. Even if you give Athenahealth a generous 9% discount rate and assume that the company can generate strong free cash flow margins on the order of 20%, Athenahealth will need a whopping $5 billion-plus in revenue in 2023 to justify today's price. Said differently, Athenahealth will have to be bigger than Allscripts, Cerner, and Quality Systems are combined today.
Can it be done? There certainly have been incredible growth stories and the health care IT market is not so well-established or entrenched that Athenahealth cannot drive significant revenue growth with better offerings leading to deeper market penetration and market share. Likewise, the company could prove to be even more profitable than that 20% bogey (a 30% FCF margin would require "only" $3.5 billion in revenue).
The Bottom Line
Growth investors who are comfortable with "forget the valuation and buy the growth" stories can probably find a lot to like in Athenahealth. The company is delivering organic growth north of 25% and still has only single-digit market share in some large, growing markets. For investors more concerned about multiples and valuation, it's more challenging to envision scenarios in which Athenahealth is noticeably cheap.