CFA Institute Research Challenge · 2016-06-21 · CFA Institute Research Challenge 2013 INVESTMENT...

CFA Institute Research Challenge

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CFA Institute Research Challenge 2013

Athenahealth, Inc. Ticker: ATHN (NASDAQ)

Price: 130.73 (November 18, 2013)

Recommendation: BUY TARGET PRICE: $159 (22% Upside)

ATHENAHEALTH: RISING TO THE CLOUD ATHN is a buy because of its wise strategic acquisitions, proven cross selling abilities, demonstrated ability to land enterprise size deals, and an

increasing shift towards cloud-based health care information systems.

The acquisition of Epocrates (EPOC), a popular mobile application for medical information,

will increase market penetration and awareness. Working off EPOC’s 50%+ physician market

share, ATHN stands to double its provider base if it captured just 10% of the EPOC user base, a very

doable proposition. Working off EPOC’s 90% market awareness, ATHN should increase its

awareness amongst small group practices, which are expensive and time consuming to enroll. In

support of our thesis, we conducted an independent survey of medical providers across the US,

which indicates that 81% of physicians use mobile clinical reference applications more than 3-4 days

a week.

Cross-selling and solutions integration will fuel further growth. With the market increasingly

moving to integrated, cloud-based solutions, ATHN will expand gains made by cross-selling

athenaClinicals, its EHR solution, and athenaCommunicator, its automated messaging solution, with

athenaCollector, its flagship billing solution. As of 3Q13, 34% and 51% of Collector users were also

using Clinicals and Communicator respectively. We expect these to grow to 46% and 66% as ATHN

continues to sell two solutions (a “double barrel” sale) and three solutions (a “triple barrel” sale) at a

time. From FY10 to FY13, ATHN grew 43% as a result of these two types of sales. Our proprietary

industry survey of physicians warrants the above: ATHN’s cloud-based, easy-to-use, robust solutions

point to continued revenue and margin growth through wider market penetration and economies of

scale.

ATHN’s potential to land enterprise deals is undervalued. ATHN’s deal with Ascension Health

Care boosts market share as Ascension’s 4,000 providers left Cerner, a key competitor, and switched

to ATHN. With this deal, we expect ATHN’s revenues to increase by $50M (12% of FY12 revenues)

and bolster ATHN’s ability to secure enterprise deals, which made up 59% of provider growth in

YTD 2013. More importantly, it signals ATHN’s solutions and its pay-for-performance pricing

strategy is desired by much larger and prominent clients. We project ATHN’s prospective clients,

who currently use server based systems, to reduce IT costs by 39.8%, a figure larger than market

estimates. As the industry consolidates, we expect ATHN to benefit from this competitive advantage.

ATHN will profit as cloud-based services gain from a growing shift towards Electronic Health

Records (EHR). The cloud offers universal access, full redundancy, seamless upgrading, and

economies of scale. All EHR systems will benefit from the introduction of new diagnosis codes and

regulations on electronic record keeping. We expect the market to grow from $3.9B (FY13) to

$5.4B (FY17) – a CAGR of 8.5%. Further, ATHN is the only provider with all its services,

including deep back-office ones, in the cloud. Our proprietary survey also revealed that 52% of non-

cloud based respondents want to switch to a cloud-based vendor in the next 12 months.

ATHN is underpriced: ATHN is priced for its strong revenue growth which we expect to continue.

Our target price of $159 represents an upside potential of 22%. Our simulation model indicates a

95% probability that ATHN’s stock price will rise.

FY Revenue Physician Market

Ending Growth Growth Share

FY12A 30% 44% 4.0%

FY13F 43% 50% 5.2%

FY14E 47% 46% 7.4%

FY15E 40% 39% 10.0%

FY16E 37% 35% 13.2%

FY EBITDA EBIT Diluted

Ending Margin Margin EPS

FY12A 13.3% 7.3% 0.52

FY13F 11.3% 3.9% 0.37

FY14E 13.9% 4.1% 0.53

FY15E 14.5% 8.5% 1.62

FY16E 15.1% 11.1% 2.92

Shares Outstanding (mm) 37.17

ATHN 82%

Russell 2000 48%

Spread 34%

Current Price

52 Week Price Range

Base Case Target

Bull Case Target

Bear Case Target

EPOC and Arsenal effect

0.33

$127

KEY RATIOS & PROJECTIONS

Trading

$130.73

$62.57 - $144.42

$159

$186

Mkt. Cap. ($mm)

Institutional Holdings

0.43

1.12

-

4,770.98

123.49%

Insider Holdings

6M Performance

1.83%

Market Profile

Volume (mm)

3m Avg Vol (mm)

Beta

Dividend Yield

900

950

1000

1050

1100

1150

1200

1250

60

70

80

90

100

110

120

130

140

150ATHN Russell 2000

Sources: 2012 10k, 2013 10-Q, Bloomberg,

S&P Capital IQ, Yahoo Finance, Student

Research

Healthcare IT - Healthcare


INVESTMENT SUMMARY

Epocrates

EPOC, with a provider base of 330,000, will lead to a doubling of ATHN’s client

base as we expect that 10% of the EPOC client base, at a minimum, will migrate to

ATHN over the next 5 years. Using a conservative estimate of ATHN’s $9,000 average

revenue per physician as a guide (we expect this trend to be stable in the future – Exhibit

1), this should yield a revenue increase of $250-300M (60% of current revenue). Another

gain over this period will be the integration of ATHN’s solutions into mobile devices.

According to a survey by comScore (Exhibit 2), with 85% of providers expecting tablets

and 94% expecting mobile devices to be adopted in their practices, we are particularly

bullish on this prospect.

Another benefit is increased awareness. Having identified awareness (30%) as a problem,

increased awareness through EPOC will boost ATHN’s marketing efforts. With an

ATHN product in the palms of 50% of physicians, its integrated solutions will become a

much more powerful draw. We expect even greater long term benefits as EPOC’s mobile

device platform base attracts newly minted physicians comfortable with mobile apps and

perpetuate ATHN’s advantage in this channel.

Cross-Selling

Cross-Selling is a key feature of ATHN’s athenaOne strategy and part and parcel of

its solutions architecture (Exhibit 3). Since rolling out Clinicals in FY06 and

Communicator in FY10, ATHN has cross-sold 30% Clinicals and 41% Communicator

with its flagship Collector. With the market opting for more integrated solutions, 83% of

new deals in 2Q13 were Collector + Clinicals, up from 22% in 1Q09, and 78% of new

deals in 2Q13 were Collector + Clinicals + Communicator, up from 14% in 2Q10. We

expect this trend to continue and expect double-barreled and triple-barreled sales to

increase to 89% and 83% respectively by FY15. The impact to clients of integrated

solutions is also triple-barreled: 1) improved work flows/care coordination and

minimized errors, 2) significant cost savings, and 3) 24/7 data access from any location

with seamless upgrading.

Enterprise Deals

The healthcare industry should continue to consolidate over the next five years,

leading to growth in enterprise deals - a positive prospect for ATHN. The last three

years have seen an increased number of providers joining ATHN’s network through

enterprise deals; 38.5% in 2010 to 58.6% in YTD13. In the case of Ascension Health

Care, which added 4,000 providers to ATHN, we estimate revenues to be more than

$50.0M, 18% more than the analyst estimates of $42.5M. We believe Ascension to be

one of a growing number of enterprise-sized organization adopting best-of-breed

solutions, playing to ATHN’s strengths, and driving future growth, as outlined in Exhibit

4. We expect a conservative 12.1% CAGR of new physicians to be added from the 500+

enterprise group from YTD13 to FY16, compared to a 141% CAGR from FY10 to

YTD13. (Appendix 17)

ATHN’s pay-for-performance pricing, workflows, and cloud-based solutions minimize

the need for IT support and infrastructure. With just IT support costing hospitals 1.7% of

revenues, ATHN’s 1% pricing allows for significant IT cost savings (39.8%) as small

percent gains become large dollar gains due to high hospital dollar revenue bases.

All Leading To Revenue

ATHN has generated +30% annual revenue growth rates over the last 5 years. We

expect this to continue. As of 3Q13, ATHN’s revenues of $423M have already

surpassed FY12’s $422M. We project FY13 revenues to be $603.7M, a 43% increase

over FY12 due to the effect of seasonality. With only 57% of all physicians using EHR,

we expect 40% of physicians not using EHRs to shift to these in response to government

and regulatory inducements. ATHN, with a 5% market share, should add 160,000

physicians to its base in the next 5 years.

The Affordable Care Act (ACA) will add 18.3M new members to the system. With

ATHN’s revenues tied to billings, and with provider billings projected to increase at a

4.6% average in the next 5 years, we expect ATHN’s revenues to grow at an annual rate

of 5% as a result of the ACA and the switch to EHR. In dollars, healthcare costs should

increase by about $29B, which at a minimum will translate into $48M increased revenues

for ATHN in FY14.

Exhibit 1: ATHN Revenue Per Physician

$8,900

$9,000

$9,100

-2.00%

-1.00%

0.00%

1.00%

2.00%

FY13 FY14 FY15 FY16

Cross Selling Bargain Power Decrease

Industry Revenue / Physician Revenue/ Physician Exhibit 2: Mobile Phone and Tablet Usage among

physicians

Exhibit 3: Double Barrel and Triple Barrel Sales

0

500

1000

1500

2000

2500

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

3/1

5/1

7/1

9/1

11

/1

1/1

3/1

5/1

7/1

9/1

11

/1

1/1

3/1

5/1

7/1

9/1

11

/1

1/1

3/1

5/1

7/1

9/1

11

/1

1/1

3/1

Ne

t N

ew

Clle

cto

r P

hys

icia

ns

Gro

wth

Rat

e

Net New Collector Physicians Double Barrel Growth Triple Barrel Growth

Exhibit 4: Enterprise-Sized growth by Group Size

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

18,000

FY10 FY11 FY12 3Q13 FY14E FY15E FY16E

100-249 250-499 >500

1 physician using 3 products = 3 physicians

Exhibit 5: New Physicians to ATHN


Technology

Software as a service (SaaS) has a flexible delivery mechanism, lower costs, and

ATHN’s algorithms yield higher efficiencies in claims processing. A recent survey by

Black Book showed that 87% of practices need to upgrade their billing systems, and of

these, two thirds wanted to move to or stay with a cloud-based system. The preferences

are evident with ATHN, which increased its provider network by 45% from 43,092

(3Q12) to 62,495 (3Q13). These preferences have also punished some of ATHN’s server-

based competitors - e.g. Allscripts has seen earnings fall, while McKesson had flat

revenues and Quality Systems saw revenue growth slow to 8% in FY13.

BUSINESS DESCRIPTION

ATHN was founded in 1997 by Jonathan Bush and Todd Park and is currently

headquartered in Watertown, Massachusetts. With a recurring revenue model, top line is

driven by growth of its physician network, billings growth in its base, and the cross-

selling of multiple solutions. ATHN has no international operations and their current aim is to focus on expanding their client base in the U.S. Its key services are:

athenaCollector®

AthenaCollector (Collector) is a revenue management service, a service found to be best-

of-breed by the research firm KLAS. Coupled to a patented billing rules engine, Collector

also provides detailed insights into a group’s performance. Priced between 2% and 8% of

collections, Collector comprised 75.6% of ATHN’s revenue in 3Q13 and 54% of

ATHN’s physicians use this service offering. Moreover, it has increased practice

efficiency over the years, with client receivables falling 73% and First Pass Resolution

Rate (FPRR) increasing 25% since 2001. (Exhibit 7)

athenaClinicals®

Covering 18% of ATHN’s physician network, athenaClinicals (Clinicals) automates and

manages EHR processes. The service guarantees to incorporate changing government

program requirements on time and has secured Meaningful Use payments for 96% of its

eligible clients in FY12. With a growth rate of 70% in FY12, Clinicals was the second

fastest growing segment for ATHN. Priced between 1% and 4% of collections, Clinicals

contributed 12.8% to ATHN’s 3Q13 revenue. We expect it to generate 22.6% of total

revenue by FY15.

athenaCommunicator®

athenaCommunicator (Communicator) reduces patient no-shows and optimizes

scheduling using features like automated messaging function, live operators and an

online patient portal. These help providers significantly increase their number of

revenue-generating appointments. Of ATHN’s solutions, Communicator has seen the

highest growth of 147% in FY12. Priced between 1% and 2% of collections, 28% of

ATHN’s physicians currently use Communicator, which contributed 11.6% of ATHN’s

3Q13 revenues. We expect Communicator to yield 15.4% of total revenue by FY15.

athenaCoordinator®

athenaCoordinator (Coordinator), a cloud-based care coordination model, streamlines

ordering and referrals to pharmacies, labs, specialists, and other providers. With services

for insurance pre-certification and patient registration, it helps users save time and focus

on patient care.

athenaClarity®

athenaClarity provides cost and quality data analytics. It analyzes data across even

unrelated systems and delivers useful knowledge about caregiver activity and patient

populations. Also, it provides an easy to use platform that optimizes operations and care

management. ATHN has a first mover advantage in this segment. It has one of the best

solutions in the industry, and has forced its competitors to try and catch up.

Epocrates

ATHN acquired EPOC, a leading clinical reference mobile application, in March 2013.

The acquisition combined EPOC’s mobile device expertise with ATHN’s cloud-based

solutions to introduce new mobile device-based workflows. ATHN will leverage EPOC’s

reach to cross-sell its solutions.

Exhibit 6: Revenue Composition by Service

Exhibit 7: Increasing value-added for ATHN’s clients

30.0

40.0

50.0

60.0

70.0

70%

80%

90%

100%

First-Pass Resolution Rate Days in Account Receivable

Exhibit 8: Range of Pricing by Service and FY13

growth rate (size reflects percentage of revenue)

Exhibit 9: Degree of Service Integration

athenaCollector

athenaClinicals

athenaCommunicator

33%

14%

20%

31%

0%1% 1%


MANAGEMENT Management

(Detailed descriptions in Appendix 12)

Jonathan S. Bush founded ATHN in 1997 and currently serves as Board Chairman,

CEO and President. He previously served as a consultant at Booz-Allen & Hamilton. In

2013, Mr. Bush received the Massachusetts Technology Leadership Council’s CEO of

the Year award.

Timothy M. Adams has been with the company since 2010 and is its CFO, Senior Vice

President, and Treasurer. Prior to ATHN, he held VP, CIO and CFO roles at Keystone

Dental, Constitutional Medical Investors and Cytyc Corporation respectively.

Edward Y. Park has been with ATHN since 2010 and serves as its Executive VP and

COO. He is a member of the Board of Directors of Kyruus and HealthPoint Services.

Prior to joining ATHN, Mr. Park was a Co-Chair on the Technology Committee for the

National Alliance for Health Information Technology.

Jeremy E. Delinsky joined ATHN in 2004 and currently serves as their CTO and VP of

athenaNet. Prior to joining ATHN, Mr. Delinsky worked in the healthcare industry

practice at Deloitte Consulting.

Corporate Governance:

ATHN has adopted the Corporate Governance Code of best practices. Analyzing their

code of conduct we have identified areas in which the company complies with best

practices and one non-compliant feature.

Compliant:

Independence of Board of Directors: 8 out of 9 Directors are independent

Internal Control Committee: Composed of independent Directors, attendance in at

least 75% of meetings mandatory

Nominating and Governance Committee: All members are non-executives, and

there is a transparent procedure for the presentation of candidate lists with no

management bias

Nominating and Governance Committee: All members are non-executives, and

there is a transparent procedure for the presentation of candidate lists with no

management bias

Non-Compliant:

Independence of Chairman: Chairman and CEO are the same

OWNERSHIP / INVESTORS

Institutional investors own 123.49% of ATHN equity. This implies that 23.49% of

ATHN’s stock has been shorted.

Short selling of ATHN by long/short equity hedge funds occurred primarily in July and

August 2013 post the results of 2Q13, which did not match analyst expectations. With the

expectation of future poor performance of the stock and the company, these hedge funds

still hold their positions, whereas the stock has risen ~20% ever since. Additionally,

ranking by volume of ATHN stocks shorted by these hedge funds was least among their

respective positions.

Morgan Stanley Investment Management (MSIM) is the largest shareholder with a 14%

stake, that increased by 23% in FY13. Other large investors are Fidelity Investments,

Sands Capital Management, Artisan Partners, and Janus Capital Management. Each of

these large investors has increased their holdings since FY07 and together they hold 52%

of outstanding shares.

Insiders comprise 1.8% of shares, with CEO Jonathan Bush holding 1.3%. Although

ATHN’s insider holdings are below those of its competitors, we feel that management’s

incentives are fully aligned with shareholders for two key reasons. Firstly, ATHN has

been making all the right moves to improve market share, revenues, and margins.

Secondly, ATHN’s CEO and its Board increased their holdings by 6% and 2.1%

respectively in FY13. Looking ahead, we project insider holdings to increase

significantly as the company’s results yield gains to insiders receiving stock options.

Exhibit 10: Top 5 Institutional Holding

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

16.0

18.0

20.0

FY07 FY08 FY09 FY10 FY11 FY12 Latest

Sh

are

Ho

ldin

g (

in

mil

lio

ns

)

Total shares of top five institutional holdings

Percentage of Total Equity

“Due to the longevity of employees, working there

feels like working with friends and family.” –

Anonymous Employee, Glassdoor review

“Senior management at Athenahealth is very vocal

about the company’s vision, which is great!” –

Rob.P, Glassdoor review

“As much as management is driven to achieve

excellence, they encourage work-life balance

motivating every employee to stay longer with

Athena!” – Mark.G, Indeed review

“Senior management takes into account voices of its

employees, that has taken the company far in a short

span of time” – Gary.N, Indeed review


INDUSTRY OVERVIEW & COMPETITIVE POSITIONING

The U.S. healthcare industry, which has historically fueled the growth in health care

information technology (HCIT), accounts for about $2.5 trillion in annual expenditures

(~18% of GDP) and is projected to grow at a 5.8% CAGR through FY20. The HCIT

market is forecast to grow at a 7.4% CAGR to $31.3 billion by FY17 from $21.9 billion

in FY12. This reflects increasing demand for clinical information technology,

administrative solutions, and services such as billing, EHR, order entry systems, and

diagnostic information. We predict this market to shift more and more to the cloud as

providers consolidate and demand integrated, lower cost, universally-accessible solutions

to meet growing ranks of insured customers and new government regulations. To explain

each player’s positioning, we show Exhibit 12, a strategy canvas that compares ATHN

and its key competitors’ relative positioning in the HCIT market.

(See Exhibit 11 for Porter’s Five Forces and details in Appendix 16)

Increasing shift towards cloud-based solutions

There has been a significant shift amongst HCIT providers to cloud-based platforms from

$1.8 billion in FY11 to $3.9 billion by FY13. This shift is expected to continue to grow at

a 20% CAGR to $5.4 billion by FY17. Our proprietary survey of U.S. physicians

indicates that 64% of server-based users intend to shift to cloud-based solutions over the

next 12-18 months. The survey also indicates that satisfaction rates among cloud-based

users are significantly higher (Exhibit 13).Our findings are mirrored by a Black Book

survey that reveals that almost two thirds of respondents would either want to move to or

stay with a cloud-based system.

Our direct interviews with HCIT managers further refine these observations. For

example, in one interview we conducted with Mr. Jeremy Davis, EHR Program Manager

at Mt. Auburn Hospital in Cambridge, Massachusetts, he attributed the industry-wide

shift to the pay-for-performance pricing model that ATHN champions. This model

reduces initial capital investment, simplifies implementation, provides superior

accessibility and scalability, and reduces IT resource requirements.

ATHN, which pioneered cloud-based solutions, is a market leader and stands to gain

market share with this shift to the cloud. There is direct evidence of this as competitors

like Allscripts and Quality Systems, which do not offer cloud-based systems, have seen

revenue fall (Exhibit 14), whereas ATHN has maintained a 30% revenue growth rate.

Industry Consolidation

With lower government reimbursements and increased consolidation among managed

care organizations, hospitals, in particular, are consolidating. Between FY08 and FY13,

the number of hospitals fell by 1.3% annually. The ACA slowed down this consolidation

somewhat, but numbers are still expected to decline by 0.6% annually until FY18.

Enterprise-sized hospitals are beginning to realize the advantages of integrated, cloud-

based solutions that offer best-in-breed services. This is where ATHN has a competitive

advantage, with its ability to cross-sell its multiple solutions. Historically dominant in

the small medical practice space, ATHN has added nearly 25% of its current provider

base through enterprise deals between FY10 and FY13. Hospital consolidation might

reduce ATHN’s margins as larger organizations may use their volume pricing advantage.

While this is probable, cross-selling gives ATHN a margin cushion of 2.4%, which

should offset any margin reductions.

A growing number of newly graduating physicians and their mobile app preferences

will increase ATHN’s market share. According to a recent KLAS survey, the EHR

adoption rate of young physicians is 53% but only 24% among retiring physicians. This

trend shows that new physicians will demand EHR systems to manage their practices.

According to our proprietary survey, 68% of respondents already use clinical reference

applications on their smartphones or tablets and many others (23%) are considering

adopting them in the near future. The results also reveal a mean user satisfaction of

providers to be 4.32 and that 81% use these apps more than 3-4 times a week (Appendix

1). With athenaCoordinator, ATHN has a great platform to integrate EPOC with the

company’s EHR and gain market share as more and more physicians will opt for mobile

and tablet-based apps.

ATHN’s proven customer service and ease of use puts it at a competitive advantage.

Our proprietary survey indicates that ease of use is a priority for physicians as 78% of

respondents consider it key in choosing a practice management solution. ATHN ranks

Exhibit 11: Forces Affecting ATHN

(1-lowest intensity to 5 – highest intensity)

0

1

2

3

4

5

Threat of newEntrants

Bargainning Powerof Suppliers

Bargainning Powerof Buyers

Competition in theIndustry

Threat of SubstituteProducts

Exhibit 12: Strategy Canvas - HCIT

Exhibit 13: How satisfied are you with your current

EHR and Practice Management System?

Exhibit 14:Revenue Growth Rate

0%

20%

40%

60%

2007 2008 2009 2010 2011 2012 2013

Allscripts Greenway Quality Systems

Cerner Athenahealth


high on functionality and ease of use compared to its competitors (Exhibit 15). Moreover,

interviews with users indicate that ATHN consistently provides top-shelf service and

technical support.

Affordable Care Act

On March 23, 2010, President Obama signed the Patient Protection and Affordable Care

Act (ACA). The ACA expanded Medicaid, the health care insurance program for the

poor, and requires most U.S. residents to have health insurance.

The expansion of Medicaid in the 26 US states volunteering to move forward will result

in 9.3M newly insured individuals. The federal government will pay 100% of all costs up

until FY16 and 90% until FY20. The remaining states are expected to serve uninsured

residents using their existing hospital network. These hospitals, however, will receive

reduced federal funding in the future as Washington, migrates charity care payments

away from hospitals and towards Medicaid premiums. This should force these other

states to join the ACA Medicaid program, and further increase the number of the

formally insured.

The Massachusetts Healthcare Reform program, a precursor to the ACA, serves as a

model for predicting the increase in the number of insured individuals nation-wide.

Using this model, we forecast 18.3M newly insured individuals by FY18 from ACA. This

will increase total healthcare costs by almost $29B by FY18. Using $1,600 as the average

cost per newly insured individual and tying it to ATHN’s 5% market share; we expect

potential ATHN revenues to increase by $48M in FY14 from the ACA of which $32M

would come from Medicaid. This growth will be augmented by the increase in ATHN’s

market share due to other, non-ACA factors (Exhibit 16).

EHR Incentive Programs and ICD-10

In February 2009, the federal government passed a stimulus bill that included an

estimated $35+ billion of stage-based incentives to eligible providers if they implement

EHR technologies. The stages are: 1) EHR adoption, 2) significant increases in its usage,

and 3) quality data reporting. Providers are required to move from stage to stage every

two years after initially qualifying for the incentives. As a result, FY12 saw a 15%

increase in the EHR market as revenues for this industry reached $20.7B and 75% of

eligible professionals have registered for the program as of May, 2013.

Although EHR revenue growth rates are expected to slow down by FY16, they will

not have a major impact on ATHN. At a time when many of its competitors are

experiencing flat or decreasing market share, ATHN has shown a constant growth in the

number of providers it adds. EHR players like Epic, Cerner, Allscripts and Quality

Systems took 80% of the benefits of recent EHR incentive programs, which will be

complete by FY16 and slow future growth. ATHN, which was not able to reap these

benefits due to its low initial market share, will see continued growth due to its growing

customer base and best-of-breed product (Exhibit 17).

ATHN can take advantage of the ICD-10 disruption. On October 1st, 2014, the ICD-9

codes that report medical diagnoses will be replaced by ICD-10. This transition is

mandatory for everyone covered by the Health Insurance Portability Accountability Act

(HIPAA). A survey of physicians reveals that only 38% of respondents are somewhat

confident about their practice’s ability to transition. Moreover, only 34% respondents

expressed faith in their vendor’s ability to ensure their practices’ transition. In light of

this, ATHN became the first vendor to give an ICD-10 guarantee. ATHN’s

management has vowed to ensure that it will be ICD-10 ready and has put in place teams

that will work with clients to ensure compliance by the deadline.

Exhibit 15: Ease of Use by number of features

Company EMR PM

CCHIT

Criteria Training Security Support

Total Features 49 18 54 10 11 20

ATHN 49 17 54 10 11 17

Greenway 21 8 27 5 6 5

eClinicalWork 19 8 54 2 7 6

AdvancedMD 17 9 19 6 8 7

Allscripts 16 17 52 10 7 9

Epic 38 17 53 10 10 12

*Cloud-based *Software-based

“Athena EMR is one of the best out there for Physicians

to consider as a choice for their EMR needs. It is

Physician friendly, easy to navigate and, most of all, has

the best consumer service that answers all questions in

timely manner.”- Amy, All About Kids Pediatrics

Exhibit 16: Impact of ACA on ATHN Revenues and

ATHN user Patient Base

$0

$50

$100

$150

$200

$250

0%

5%

10%

15%

20%

25%

30%

FY14 FY15 FY16 FY17 FY18

$ M

illio

ns

% ATHN providers's patients of total new patientsgenarated by the ACA

Incremental Revenue ATHN

Exhibit 17: EHR Penetration among all Physicians

and ATHN capture of EHR-using Base

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

20%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

2009 2010 2011 2012 2013 2014 2015 2016

Year

Total Physician using EMR /Total Physicians

ATHN Physicians/Total EMR Users


FINANCIAL ANALYSIS

Revenue growth will continue

Revenues reached a record $423.4M to 3Q13. Revenue growth for the last five years has

remained above 30% and we expect revenues to increase by a CAGR of 40.2% to FY17

(Exhibit 5, 18). The main drivers will be enhanced ATHN awareness due to EPOC,

penetration into the enterprise account segment, and a general shift towards cloud-based

solutions. These factors are expected to increase the number of physicians under

Athena’s net, which has already grown at a CAGR of 42.9% over the last four years. This

number is significantly above its competitors and shows ATHN’s ability to gain

Ambulatory EHR market share (Exhibit 19).

Margins will improve

ATHN improved its EBIT margins as it achieved improved operational efficiencies.

Margins improved from 9.5% in FY09 to 10.5% in FY11, but this figure dropped in

FY12-FY13 due to the increased costs and depreciation charges related to the acquisition

of EPOC and Arsenal on the Charles. We expect EBIT margin to reach 13% by FY17

due to increased automation in the coming years which will decrease COGS as well as

general and administrative expenses. EBITDA margins have also remained healthy for

the last 5 years and we project them to increase from 11.3% in FY13 to 15.2% in FY16.

DuPont Analysis – drivers of profitability

In the analyzed historical period, ROE increased from 8% in FY09 to 9.3% in FY11. The

main drivers for this increase were increasing EBIT margins and the tax burden. Asset

turnover also increased during this period which increased the ROA from 4.87% in FY09

to 6.25% in FY11. EBIT margin and hence the ROE decreased in FY12 and FY13 due to

the increased costs associated with the EPOC and Arsenal on the Charles acquisitions.

Our estimates indicate that once the dust from these acquisitions settles, profit margins

will grow from FY14 onwards. The overall increase in the ROE will be fueled primarily

by a projected increase in EBIT margin from 4% (FY13) to 11% (FY16) and a sharp rise

in asset turnover from 1.09 (FY13) to 1.46 (FY16) which indicates ATHN’s efficient

utilization of resources. Higher profit margins in the future will also drive ROA from

4.82% in FY13 to 7.80% in FY16 (Exhibit 20).

Historical cash flows show a strong trend ATHN has shown strong historical free cash flows. These increased at a 57.1% CAGR

between FY08 and FY12 and only slowed down in FY13 due to the acquisition of EPOC

and compensation expenses. Cash flow from operations was $70.2M in FY2012, and this

figure will rise 14% to $80.5M in FY13 as ATHN intends to limit its capital expenditures

until it reaps the benefits from its recent acquisitions.

Balance Sheet and Financing

ATHN’s strong cash flows have allowed it to grow its cash flow to total assets at a

CAGR of 20.7% from FY08 to FY12. We expect this trend to continue as our projections

estimate a strong cash position of about 38.7% to total assets by FY16. ATHN’s debt-to-

equity ratio was 0.50 in 3QFY13 due to the new debt it added to buy EPOC and Arsenal

on the Charles in FY13. This number will go down to zero by FY18 as ATHN pays down

all its debt. Dividends are not a factor as ATHN has never paid any dividends and

judging from their 3Q13 conference call, they don’t intend to change that policy in the

foreseeable future.

As of September 30, 2013, ATHN had $75M available in an unsecured revolving credit

facility in place to fund future capital expenditures. We project their interest coverage

ratio to be 10.4% in FY14 and this to increase to 91% in FY16 as debt is extinguished

and EBIT margins improve.

Exhibit 18: Revenue Growth by Component

26%

31%

36%

41%

46%

51%

0

500

1000

1500

2000

2500

2011A 2012A 2013F 2014E 2015E

Business Services Implementation & Other

Epocrates Revenue Growth Rate

Exhibit 19: Ambulatory EHR Market Share

0%

4%

8%

12%

16%

20%

24%

FY09 FY10 FY11 FY12 FY13F FY14E FY15E FY16E FY17E

Am

bu

lato

ry E

HR

Mark

et

Sh

are

Year ALLSCRIPTS GREENWAY CERNER

Athenahealth eClinicalWorks

Exhibit 20: DuPont Analysis


VALUATION

(Detailed financials are in appendix 2 - 10)

Methodology

We use a weighted average of a 10-year discounted cash flow (DCF) and comparables to

arrive at a target price of $159, which indicates an upside potential of 22% over the

current $130.73 stock price. The weights we assigned are:

70% DCF

30% Comparables

DCF

We ran our DCF over a 10-year period because ATHN still has significant medium term,

non-steady state growth rates. This is because there are so many potential clients without

an EMR system that are excellent adopters of ATHN’s solutions. Thus, we base our

revenue projections on ATHN’s ability to add providers. Also, we increased future

margins as economies of scale work in favor of ATHN’s cloud-based solutions.

We ran 3 different scenarios in years 1-4 to reflect potential deviations from our base

case assumptions: a 32.5% CAGR Base Case (50% weight), a 37.1% CAGR Bull Case

(30% weight), and a 24.0% CAGR Bear Case (20% weight). The Base Case assumes

that 10% of EPOC users will switch to ATHN and that cross-selling will partially offset

the predicted consolidation among hospitals and their associated pricing power impact on

margins. The Bull Case assumes that 15% of EPOC users will switch and that cross-

selling will largely offset hospital consolidation. The Bear Case assumes that 5% of

EPOC users will switch and that cross-selling will not offset hospital consolidation.

Comparables

ATHN’s business model is fairly unique so the available firms may not be pure

comparables. Since we have been arguing that being cloud-based solutions convey an

advantage to ATHN over its competitors, and since so few of them are cloud-based, we

under-weigh the comparables. We broke down the comparables into the following

segments along with their relative weights:

Cloud-based (80%)

Cloud-based non-EMR Healthcare IT (10%)

Client/Server-based EMR (10%)

The first group contains cloud-based firms in various industries. While we understand

that adding firms that are not in HCIT is unorthodox, we strongly feel that cloud-based

firms, no matter the industry, are in the same life cycle stage. In effect, the investments

requirements and projected growth rates of ATHN are comparable to those of other web

based companies. No matter the segment, we used xP/E, xRevenue, xEBIT and xFCF as

our multiples, each with equal weight. In doing this, we excluded EPOC as well as

Arsenal on the Charles to ensure that we used only ATHN’s organic numbers.

Price Simulation

To refine our analysis further, we ran simulations to quantify stock price fluctuations

resulting from different CAGR over the next 10 years. Basically, these fluctuations are

just the residuals of a linear regression run on the last 5 years’ financials. With a

logarithmic function relating each subsequent quarter’s revenue to the reference 1Q08

revenue and a predictor function considering the number of quarters away from the

reference quarter, the exponential output is a growth fluctuation multiplier. In forecasting

quarter-on-quarter (Q-o-Q) future revenues, a fluctuation multiplier is sampled and

replaced with new values using the calculated fluctuations.

The simulation ran 5,000 iterations until it reached stable results. Exhibit 24 shows the

future revenues distribution over the next 10 years, while Exhibit 25 shows the resulting

stock price distribution. In both cases, the red line shows the average price and the blue

line shows the 5th percentile. The dashed line is the current stock price of ATHN. Bottom

line, our model predicts with a higher than 95% probability that ATHN’s stock price will

rise.

Exhibit 21: Stock Price Football Field

Exhibit 22: Scenario Summary

Comparables DCF Average Probability

Bull Case 161 197 186 30%

Base Case 136 165 156 50%

Bear Case 101 138 127 20%

Weight 30% 70%

Target Price 159

Exhibit 23: Stock Price Sensitivities to Growth and

Discount Rates

7.0% 8.0% 9.0% 10.0% 11.0%

1.7% 225 178 145 121 102

2.2% 245 191 154 127 107

2.7% 270 207 165 134 112

3.2% 302 226 177 143 118

3.7% 344 249 191 152 124TV

Gro

wth

Ra

te

Wacc

Exhibit 24: Revenue Distribution Simulation

Results

Exhibit 25: Stock Price Distribution Simulation

Result


INVESTMENT RISKS & DEBATE

Market Risks

Greater competitive environment might decrease

ATHN’s market share (Probability=Moderate,

Impact=Major)

Market View:

Large, integrated technology companies like GE

Healthcare, Allscripts, and McKesson that have

longer operating histories and greater resources may

become more active via acquisitions and additional

investments. Some competitors might consolidate to

improve the breadth of their products or start

providing highly specialized solutions that could lead

to pricing pressures.

Our View:

Unlike its competitors, ATHN has been consistently

driving up its market share and revenue growth

organically. It uses strategic acquisitions, such as

EPOC, to expand its breadth of products, while

meeting the evolving expectations of providers, e.g.

universal access, mobile device-based solutions, and

lower cost systems.

Cloud-based HCIT services may not grow as expected (Probability=Unlikely, Impact=Major)

Market View:

Large enterprises might not see the advantages of cloud-based healthcare IT services. Many large hospitals that have already invested in

their server-based systems might not want to switch, as switching to a pay-for-performance model might turn out to be too costly for

them.

Our View:

ATHN provides physicians with a solid ROI – with 39.8% IT cost reductions in the short term being particularly appealing to the largest

networks. Recent successes with large enterprises, such as Ascension, shows that ATHN has the potential to convert large hospitals to

their cloud-based solutions.

Industry consolidation might reduce demand for ATHN’s services (Probability=Unlikely, Impact=Minor)

Market View:

The consolidation of hospitals might result in the termination of existing contracts held by the smaller hospitals/practices merged or

acquired. Consolidation will increase customers’ bargaining power and decrease revenue per collection for ATHN.

Our View:

ATHN can maintain sufficient cross-selling activity to ensure that it offsets any decrease in revenue per collections due to consolidation.

Operational Risks

ATHN may not realize the predicted benefits from the EPOC acquisition (Probability=Unlikely, Impact=Severe)

Market View:

Integrating EPOC might require additional resources that might have been best destined to other operations. Not realizing these

synergies might be dilutive in the long run. ATHN’s business will suffer if they are not able to retain existing EPOC users, let alone

convert them to its practice management solutions.

Our View:

EPOC’s 90% awareness quotient, combined with a growing physician preference towards mobile devices and tablets, has been under-

estimated. Our survey results show a strong shift towards mobile device-based healthcare services in the coming years that have not

been factored into the stock price. Also, we predict that forward-thinking physicians will gravitate towards ATHN’s integration of

mobile devices to its other solutions.


ATHN may not be able to maintain its past growth rates (Probability=Rare, Impact=Severe)

Market View:

It is unrealistic for ATHN to maintain current growth rate as this market will most likely saturate in the future due to too much

competition.

Our View:

ATHN’s acquisition of EPOC and its Ascension deal indicate that the firm is looking at greenfield areas for growth. We think these

areas promise significant payoffs based on our proprietary survey of providers.

A failure to land more enterprise deals might dampen growth (Probability=Moderate, Impact=Moderate)

Market View:

Enterprise deals are not easy to come by and if they don’t continue succeeding, they run the risk of losing credibility.

Our View:

ATHN has landed a number of enterprise deals other than the Ascension deal in the last 3 years (see Appendix 17). These deals indicate

that the enterprise-level marketing is paying off.

A failure to maintain cross-selling activities will hurt revenue growth (Probability=Moderate, Impact=Minor)

Market View:

Failure to effectively promote the athenaOne marketing strategy will hurt ATHN’s projected revenue growth.

Our View:

The athenaOne concept is not just a cross selling marketing strategy, it is embedded in the architecture of the solutions. Employee

comments and our own research indicate that CEO Jonathan Bush lays a lot of emphasis on this. ATHN has demonstrated increasing

potential to cross-sell its products in the past.

Regulation Risk

The HITECH act might not fuel industry growth any further (Probability=Likely, Impact=Minor)

Market View:

The industry has already realized most of the growth due to the IT regulation. This growth will slow down in the future and hurt ATHN.

Our View:

Even if there are no government incentives going forward, we believe that ATHN’s pay-for-performance model is attractive to an

industry looking to hold costs in check while serving more clients and providing better outcomes. ATHN has been relatively less

dependent on HITECH to fuel growth over the last few years.

Healthcare reform and new regulations could impose increased costs on ATHN (Probability=Likely, Impact=Minor)

Market View:

Substantive healthcare reform or applicable regulatory requirements might force ATHN to change or adapt their software.

The conversion to ICD-10 for coding medical diagnoses will cause significant disruptions in the industry, and it could result in increased

costs for ATHN in implementing new services.

Our View:

ATHN’s ICD-10 guarantee, which is the first of its kind from an HCIT vendor, shows management’s foresight in predicting the effects

of regulatory reforms. All in all, we see ATHN improving on past performance, thus driving stock prices to higher levels.

Price Chart & Historical Event


APPENDIX 1 – HEALTHCARE SURVEY RESULTS AND ANALYSIS

Healthcare Information Technology Survey Analysis

The future of athenahealth’s profitability will rely greatly on a shift of

medical practice management towards the cloud, and an increase in the

usage of mobile devices by physicians for clinical reference. To have a

better idea of ATHN’s growth opportunities, our team of investment

analysts conducted a survey of 123 healthcare providers representing

32 states in the US.

74% of individuals who completed our survey were doctors and the other

26% were either hospital administrators or IT specialists. As doctors are

the primary users of EHRs and clinical reference applications, we feel

that our sample size is an adequate representation of individuals who

might consider using athenahealth’s products.

We found that the majority (47%) of those surveyed were between

the ages of 30-39, while 32% were in the 40-49 age group, 11% in the

50-59 and 10% were in their twenties.

We were also interested in the size of the practice that these providers

were affiliated with, and results showed that 42% were affiliated with a

median group (11-75 physicians), 16% were part of a large group (75+)

and the remaining 42% were either part of a small group (2-10) or sole

practitioners. This result indicates that our survey could be biased

towards the views of small to medium groups of healthcare providers.

With regards to their Practice Management and EHR systems, 47% of

respondents stated that they used a server-based system, 37% stated that

their EHR system was cloud based and 16% revealed that they use an

in-house system for these tasks. This finding reflects the current

positioning of server-based healthcare IT companies as large groups of

physicians (75+) and some median groups (11-75) in our survey

predominantly use a server based system. Interestingly, 62%

respondents indicated that they were one of the primary decision makers

in the purchase of their current system.

Exhibit 1: What kind of role do you assume at your

current practice?

Exhibit 2: Age Demograhpics

Exhibit 3: What is the size of the practice that you are

affiliated with?

Exhibit 4: What type of Practice Management System

and EHR do you use?


A focal point of our survey was to gauge the features that medical

practices want to improve on in their Practice Management

Software/EHRs. The results revealed an interesting trend that almost 52%

of respondents were unhappy about the ease of use of their current

systems, while the second most undesirable characteristic was the quality

or functionality of their current system (42%). When asked about the

primary characteristics they would focus on in a new system, 78%

responded that ease of use would be one of the top priorities, while

63% and 58% respondents also selected quality and technical support

respectively. Price was also an important factor, as 53% of respondents

selected that option.

Perhaps one of the most important insights from the survey was the

satisfaction levels of respondents with their current EHR systems. We

measured satisfaction levels on a scale of 1 to 5, with 1 representing very

unsatisfied 5 representing very satisfied. 83% of medical providers who

had a cloud-based system were either satisfied or very satisfied with their

systems, whereas this figure dropped to only 30% for providers who used

a server-based system. In-house systems seemed to be the most unpopular

as 32% of users of such systems were either unsatisfied or very

unsatisfied. Overall, the satisfaction rate of cloud- based systems

(mean of 4.19) is much higher than that of server-based systems (mean

of 3.21) and in-house systems (mean of 2.91). This finding substantiates

our argument that cloud-based HCIT services will have a greater market

share going into the future as preferences shift towards ease of use and

overall client satisfaction.

What is interesting is that 64% of those using server-based and in-house

systems want to change their system within the next year. On the other

hand, only 5% of cloud based clients want to switch their vendors in the

coming year.

To have a better understanding about the preferences of HCIT users, we

asked those who wanted to switch within the next year about their vendor

preferences. Out of the server-based users who expressed an intention to

switch within the next 12 months, 80% said that they would prefer a

cloud based system. Overall, this implies that 52% of respondents in

our survey that currently use server based systems showed an

intention to switch to a cloud based vendor within the next 12 months.

This finding supports our thesis that the industry is going to shift towards

the cloud due to shifting consumer preferences. This also indicates that

ATHN is competitively positioned with respect to its competitors who

provide software solutions with an immense upfront cost.

Exhibit 5: What is the most important feature to

look at when you purchase an EHR service?

Exhibit 6: How satisfied are you with your current

EHR and Practice Management System?

Exhibit 7: When would you prefer to change to a

new Practice Management/EHR system? (figure

represents respondents who are currently server-

based)

Exhibit 8: What kind of Practice Management or

EHR system would you want to switch to?(figure

represents respondents who are currently server-

based)

Switch to Cloud-Based

80%

Switch to Other20%


With regards to customer satisfaction, customers of cloud-based services

are much more satisfied with their technical support as compared to

software users. This also indicates that service companies in this sector

are better prepared and more focused on improving the overall experience

of their clients.

With athenahealth’s acquisition of Epocrates, we felt that it was important

get an idea of how useful clinical reference mobile applications are in the

day to day activities of medical providers. 68% of doctor’s in our survey

use clinical reference applications and 81% of those who don’t are

considering using it in the future. This supports earlier findings that a

growing number of physicians have started to use smartphones and

mobile tablets. Moreover, this indicates the potential of ATHN’s

awareness going forward as 90% of US physicians know of the brand.

With regards to the usage of such mobile applications, out of those doctors

who use them, 24% use it every day, 57% of them use it almost 3-4 times

a week and the remaining 19% use it less than once a week or once a

month. With regards to the usefulness of such mobile applications, the

mean satisfaction level came up to be 3.89 (on a scale of 1-5), with more

than 50% respondents stating that these applications are useful. This

usage frequency points towards ATHN not only capitalizing on Epocrates’

clinical reference applications, but also marketing its main ATHN

products through different channels, as Epocrates is in the hands of 50%

of US physicians.

Key Results of the Survey:

Ease of use and quality of EHR software is a top priority for

medical providers.

Satisfaction rates of cloud-based services are significantly higher

than those of other types.

64% of non-cloud based users want to switch to a new system

within the next one year.

80% of non-cloud based users who want to switch, indicated a

preference towards cloud-based solutions.

Customers of cloud-based services are much more satisfied with

their customer service when compared to users of server-based

products.

68% of Doctors use clinical reference applications on their

smartphone or tablets. Out of the those who don’t, 81% showed

an intention to use them in the future.

Usage of mobile clinical reference applications is high among

physicians.

A slight majority feels that these mobile applications are useful.

Exhibit 9: Technical Support Rating According to

Customers

Exhibit 10: Do you use a mobile application for

clinical reference?

Exhibit 11: How often do you use a mobile clinical

reference application?


APPENDIX 2 – Income Statement (GAAP) ATHN Income Statement

(In U.S. millions) Estimated

2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022

Total Revenue 245.5 324.1 422.3 603.7 886.1 1,240.4 1,699.3 2,327.3 3,158.9 4,287.8 5,820.2 7,900.1 10,723.3

Cost Of Goods Sold 96.6 122.8 166.9 238.6 347.5 482.8 656.3 891.8 1,201.1 1,617.4 2,178.0 2,932.6 3,948.4

Gross Profit 149.0 201.3 255.4 365.1 538.6 757.7 1,043.0 1,435.4 1,957.9 2,670.4 3,642.2 4,967.5 6,774.9

Selling General & Admin Exp. 95.8 127.2 165.0 236.0 343.7 477.4 648.9 881.7 1,196.8 1,624.4 2,204.9 2,992.9 4,062.5

Stock-Based Compensation - - 0.3 0.4 0.5 0.8 1.0 1.4 1.9 2.6 3.5 4.8 6.5

R & D Exp. 18.4 23.3 33.8 60.4 70.9 99.2 135.9 186.2 252.7 343.0 465.6 632.0 857.9

Depreciation & Amort. 11.1 16.7 25.4 44.9 87.2 74.4 68.3 67.6 72.2 82.4 99.0 123.7 158.7

Other Operating Expense/(Income) - - - - - - - - - - - - -

Other Operating Exp., Total 125.4 167.3 224.5 341.6 502.3 651.8 854.1 1,136.9 1,523.6 2,052.5 2,773.1 3,753.4 5,085.6

Operating Income 23.6 34.0 30.9 23.5 36.3 105.8 188.9 298.6 434.2 617.9 869.1 1,214.1 1,689.3

Interest Expense - - - - (2.3) (2.1) (1.9) (1.7) (1.6) (1.4) - - -

Interest and Invest. Income - - - - 0.1 0.1 0.1 0.2 0.2 0.3 0.4 0.5 0.7

Net Interest Exp. - - - - (2.2) (2.0) (1.8) (1.6) (1.3) (1.1) 0.4 0.5 0.7

Other Non-Operating Inc. (Exp.) (0.5) 0.1 0.3 - - - - - - - - - -

EBT Excl. Unusual Items 23.1 34.1 31.2 23.5 34.1 103.8 187.1 297.0 432.9 616.9 869.5 1,214.6 1,690.0

Merger & Related Restruct. Charges - (1.2) (1.4) - - - - - - - - - -

Impairment of Goodwill - - - - - - - - - - - - -

Gain (Loss) On Sale Of Assets - - - 0.1 - - - - - - - - -

Asset Writedown - - - - - - - - - - - - -

Other Unusual Items - - 5.1 - - - - - - - - - -

EBT Incl. Unusual Items 23.1 32.9 34.9 23.6 34.1 103.8 187.1 297.0 432.9 616.9 869.5 1,214.6 1,690.0

Income Tax Expense 10.4 13.8 16.1 9.9 14.3 43.7 78.7 125.0 182.1 259.5 365.8 511.0 711.1

Earnings from Cont. Ops. 12.7 19.0 18.7 13.7 19.7 60.1 108.4 172.0 250.8 357.3 503.6 703.6 978.9

Earnings of Discontinued Ops. - - - - - - - - - - - - -

Extraord. Item & Account. Change - - - - - - - - - - - - -

Net Income to Company 12.7 19.0 18.7 13.7 19.7 60.1 108.4 172.0 250.8 357.3 503.6 703.6 978.9

Minority Int. in Earnings - - - - - - - - - - - - -

Net Income 12.7 19.0 18.7 13.7 19.7 60.1 108.4 172.0 250.8 357.3 503.6 703.6 978.9

Shares Outstanding 34.3 35.3 36.3 37.2 37.2 37.2 37.2 37.2 37.2 37.2 37.2 37.2 37.2

Earnings Per Share 0.4 0.5 0.5 0.4 0.5 1.6 2.9 4.6 6.7 9.6 13.5 18.9 26.3

Historical Projected


APPENDIX 3 – Balance Sheet (GAAP)

ATHN Balance Sheet


2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022

ASSETS

Cash And Equivalents 35.9 57.8 155.0 47.5 155.8 309.1 507.4 789.2 1,068.7 1,610.5 2,350.3 3,364.9 4,755.3

Short Term Investments 80.2 62.1 38.1 - - - - - - - - - -

Accounts Receivable 36.9 49.0 61.9 96.7 136.1 189.8 256.7 354.8 475.2 651.4 877.8 1,197.9 1,619.7

Prepaid Exp. 6.7 9.0 10.9 15.6 22.9 32.1 44.0 60.2 81.7 110.9 150.6 204.4 277.4

Deferred Tax Assets, Curr. 3.9 5.2 6.9 9.9 14.5 20.3 27.8 38.1 51.7 70.1 95.2 129.2 175.4

Restricted Cash - - 1.4 - - - - - - - - - -

Other Current Assets - - - - - - - - - - - - -

Total Current Assets 163.7 183.1 274.2 169.7 329.3 551.3 835.8 1,242.3 1,677.3 2,443.0 3,474.0 4,896.4 6,827.8

Gross Property, Plant & Equipment 53.8 86.2 103.9 265.2 290.6 326.1 374.7 441.3 531.8 654.5 821.1 1,047.2 1,354.1

Accumulated Depreciation (21.9) (33.9) (49.9) (66.4) (127.3) (177.3) (222.8) (269.3) (322.0) (386.2) (468.3) (576.3) (720.4)

Net Property, Plant & Equipment 31.9 52.3 54.0 198.8 163.3 148.8 151.9 172.0 209.8 268.3 352.8 470.9 633.7

Long-term Investments 7.2 18.6 2.8 4.0 5.8 8.1 11.2 15.3 20.7 28.2 38.2 51.9 70.4

Goodwill 22.5 47.3 48.1 196.2 182.2 169.2 157.1 145.9 135.4 125.8 116.8 108.4 100.7

Other Intangibles 16.3 27.0 37.6 201.1 186.7 173.4 161.0 149.5 138.8 128.9 119.7 111.1 103.2

Deferred Tax Assets, LT 11.0 12.5 11.8 - - - - - - - - - -

Other Long-Term Assets 8.7 7.9 - - - - - - - - - - -

Total Assets 261.2 348.8 428.5 769.7 867.3 1,050.8 1,316.9 1,724.9 2,182.1 2,994.1 4,101.4 5,638.8 7,735.8

LIABILITIES & STOCKHOLDER'S EQUITY

Current Liabilities

Accounts Payable 0.6 6.3 1.7 9.8 7.0 16.3 15.4 27.7 30.3 47.8 57.3 84.2 106.3

Accrued Exp. 26.5 39.1 51.6 73.8 108.3 151.6 207.7 284.4 386.1 524.0 711.3 965.5 1,310.5

Short-term Borrowings - - - - - - - - - - - - -

Curr. Port. of LT Debt 3.4 - - 15.0 15.0 15.0 15.0 15.0 117.9 - - - -

Unearned Revenue, Current 5.0 6.3 8.2 11.7 17.2 24.1 33.0 45.2 61.4 83.4 113.1 153.6 208.5

Other Current Liabilities 5.2 7.8 5.3 12.6 106.9 143.7 198.2 273.5 276.0 537.6 733.3 999.4 1,361.2

Total Current Liabilities 40.6 59.6 66.8 122.9 254.4 350.7 469.2 645.8 871.7 1,192.8 1,615.0 2,202.6 2,986.5

Long-Term Debt 6.3 - - 177.9 162.9 147.9 132.9 117.9 - - - - -

Unearned Revenue, Non-Current 35.7 44.3 45.5 65.1 95.5 133.7 183.2 250.8 340.5 462.2 627.3 851.5 1,155.8

Def. Tax Liability, Non-Curr. - - - 72.4 - - - - - - - - -

Other Non-Current Liabilities 7.9 8.5 4.5 6.4 9.4 13.1 18.0 24.6 33.5 45.4 61.6 83.7 113.6

Total Liabilities 90.4 112.3 116.8 444.7 522.2 645.5 803.3 1,039.2 1,245.6 1,700.3 2,304.0 3,137.8 4,255.9

Stockholders' Equity

Common Stock 0.4 0.4 0.4 0.4 0.4 0.4 0.4 0.4 0.4 0.4 0.4 0.4 0.4

Additional Paid In Capital 200.3 247.1 303.5 303.5 303.5 303.5 303.5 303.5 303.5 303.5 303.5 303.5 303.5

Retained Earnings (28.8) (9.7) 9.0 22.7 42.4 102.6 210.9 383.0 633.7 991.1 1,494.7 2,198.3 3,177.2

Treasury Stock (1.2) (1.2) (1.2) (1.2) (1.2) (1.2) (1.2) (1.2) (1.2) (1.2) (1.2) (1.2) (1.2)

Comprehensive Inc. and Other 0.0 (0.1) (0.1) (0.4) - - - - - - - - -

Total Common Equity 170.8 236.5 311.6 325.0 345.1 405.3 513.7 685.7 936.5 1,293.8 1,797.4 2,501.0 3,479.9

Total Equity 170.8 236.5 311.6 325.0 345.1 405.3 513.7 685.7 936.5 1,293.8 1,797.4 2,501.0 3,479.9

Total Liabilities And Equity 261.2 348.8 428.5 769.7 867.3 1,050.8 1,316.9 1,724.9 2,182.1 2,994.1 4,101.4 5,638.8 7,735.8



APPENDIX 4 – Cash Flow Statement (GAAP)

ATHN Cash Flow Statement


2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022

Operating Activities

Net Income 12.7 19.0 18.7 13.7 19.7 60.1 108.4 172.0 250.8 357.3 503.6 703.6 978.9

Depreciation & Amort. 8.6 12.4 16.7 16.5 60.8 50.0 45.6 46.5 52.7 64.2 82.1 108.0 144.1

Amort. of Goodwill and Intangibles 1.8 2.2 3.4 28.4 26.3 24.5 22.7 21.1 19.6 18.2 16.9 15.7 14.6

Depreciation & Amort., Total 10.4 14.6 20.1 44.9 87.2 74.4 68.3 67.6 72.2 82.4 99.0 123.7 158.7

Other Amortization 2.6 4.4 9.0 - - - - - - - - - -

(Gain) Loss On Sale Of Invest. 1.2 1.6 1.3 0.1 - - - - - - - - -

Stock-Based Compensation 14.5 18.9 27.2 38.9 57.2 80.0 109.6 150.1 203.7 276.6 375.4 509.5 691.6

Tax Benefit from Stock Options (9.2) (14.2) (14.2) - - - - - - - - - -

Provision & Write-off of Bad debts 1.8 1.1 0.2 - - - - - - - - - -

Other Operating Activities 1.0 (2.8) (6.2) - - - - - - - - - -

Change in Acc. Receivable (5.3) (12.1) (12.8) (34.8) (39.4) (53.7) (66.9) (98.1) (120.4) (176.2) (226.4) (320.1) (421.7)

Change in Acc. Payable (1.0) 0.7 0.0 8.0 (2.8) 9.3 (0.9) 12.3 2.6 17.5 9.6 26.8 22.2

Change in Unearned Rev. 7.9 10.0 3.0 23.1 35.9 45.1 58.4 79.9 105.8 143.6 195.0 264.6 359.2

Change in Other Net Operating Assets 8.4 19.6 23.8 (4.7) (7.3) (9.2) (11.9) (16.2) (21.5) (29.2) (39.6) (53.8) (73.0)

Cash from Ops. 44.7 60.8 70.2 89.3 150.5 206.1 264.9 367.6 493.2 672.0 916.5 1,254.3 1,715.9

Investing Activities

Capital Expenditure (15.9) (16.7) (23.9) (17.3) (25.4) (35.5) (48.6) (66.6) (90.4) (122.7) (166.6) (226.1) (306.9)

Sale of Property, Plant, and Equipment 0.4 - 0.2 - - - - - - - - - -

Cash Acquisitions - (34.9) (5.8) (410.1) - - - - - - - - -

Sale (Purchase) of Intangible assets (3.9) (7.8) (15.7) (21.3) - - - - - - - - -

Invest. in Marketable & Equity Securt. (34.7) 2.4 41.4 54.2 - - - - - - - - -

Other Investing Activities 0.5 3.7 3.7 (1.2) (1.9) (2.3) (3.0) (4.1) (5.5) (7.4) (10.1) (13.7) (18.5)

Cash from Investing (53.6) (53.2) (0.1) (395.7) (27.2) (37.8) (51.7) (70.7) (95.9) (130.1) (176.7) (239.8) (325.5)

Financing Activities

Short Term Debt Issued - - - 15.0 - - - - - - - - -

Long-Term Debt Issued - - - 177.9 - - - - - - - - -

Total Debt Issued - - - 192.9 - - - - - - - - -

Short Term Debt Repaid - - - - - - - - - - - - -

Long-Term Debt Repaid (3.5) (9.2) - - (15.0) (15.0) (15.0) (15.0) (117.9) - - - -

Total Debt Repaid (3.5) (9.2) - - (15.0) (15.0) (15.0) (15.0) (117.9) - - - -

Issuance of Common Stock 8.6 14.1 18.7 25.1 - - - - - - - - -

Repurchase of Common Stock - - - - - - - - - - - - -

Issuance of Pref. Stock - - - - - - - - - - - - -

Total Dividends Paid - - - - - - - - - - - - -

Other Financing Activities 9.1 9.5 8.4 (19.1) - - - - - - - - -

Cash from Financing 14.1 14.4 27.1 198.9 (15.0) (15.0) (15.0) (15.0) (117.9) - - - -

Foreign Exchange Rate Adj. 0.2 (0.1) 0.0 - - - - - - - - - -

Net Change in Cash 5.4 21.8 97.2 (107.5) 108.3 153.3 198.3 281.8 279.5 541.8 739.9 1,014.6 1,390.4



APPENDIX 5 – Base Case DCF


2013 2014 2015 2016 2017 2018 2019 2020 2021 2022

EBIT 23.5 36.3 105.8 188.9 298.6 434.2 617.9 869.1 1,214.1 1,689.3

Tax Adjusted EBIT 13.6 21.0 61.3 109.4 172.9 251.5 358.0 503.4 703.3 978.5

Depr & Amort. 44.9 87.2 74.4 68.3 67.6 72.2 82.4 99.0 123.7 158.7

CapEx 17.3 25.4 35.5 48.6 66.6 90.4 122.7 166.6 226.1 306.9

Increase in W.C. (7.6) 14.1 9.1 22.2 23.4 (67.8) 164.4 64.5 86.5 118.8

FCF 48.9 68.7 91.1 106.8 150.6 301.2 153.2 371.4 514.4 711.5

7.0% 8.0% 9.0% 10.0% 11.0% Beta 1.12

1.7% 224.6 178.3 145.4 121.0 102.2 Tax Rate 42.1%

2.2% 245.0 191.4 154.3 127.2 106.8 WACC 9.0%

2.7% 270.3 207.0 164.6 134.4 111.9 TV Growth Rate 2.7%

3.2% 302.1 225.8 176.6 142.5 117.7

3.7% 343.6 249.0 191.0 152.0 124.2 TV 11,598.0

WACC

TV

Gro

wth

Ra

te

Projected

Appendix 5: Base Case DCF

DCF Assumptions

APPENDIX 6 – Bull Case DCF


2013 2014 2015 2016 2017 2018 2019 2020 2021 2022

EBIT 23.5 40.0 116.3 210.3 337.7 491.4 701.1 989.6 1,387.9 1,939.1

Tax Adjusted EBIT 22.5 23.2 67.3 121.8 195.6 284.7 406.1 573.2 804.0 1,123.3

Depr & Amort. 44.9 87.2 74.4 68.3 67.6 72.2 82.4 99.0 123.7 158.7

CapEx 17.3 25.4 35.5 48.6 66.6 90.4 122.7 166.6 226.1 306.9

Increase in W.C. (7.6) 14.2 9.2 22.3 23.5 (67.5) 164.8 65.1 87.3 120.1

FCF 57.8 70.8 97.1 119.1 173.1 334.0 201.1 440.6 614.2 854.9

7.0% 8.0% 9.0% 10.0% 11.0% Beta 1.12

1.7% 269.0 213.5 174.0 144.6 122.1 Tax Rate 42.1%

2.2% 293.6 229.2 184.6 152.2 127.6 WACC 9.0%

2.7% 323.9 247.9 197.0 160.7 133.8 TV Growth Rate 2.7%

3.2% 362.2 270.5 211.5 170.5 140.7

3.7% 412.0 298.4 228.7 181.9 148.6 TV 13,936.7

Appendix 6: Bull Case DCF

Projected

WACC DCF Assumptions

TV

Gro

wth

Ra

te

APPENDIX 7 – Bear Case DCF


2013 2014 2015 2016 2017 2018 2019 2020 2021 2022

EBIT 23.5 32.7 93.6 166.0 260.0 374.3 526.1 729.8 1,004.6 1,376.5

Tax Adjusted EBIT 22.5 19.0 54.2 96.2 150.6 216.8 304.7 422.7 581.9 797.3

Depr & Amort. 44.9 87.2 74.3 67.6 66.2 69.7 78.0 91.7 111.9 140.2

CapEx 17.3 24.9 33.7 45.5 61.5 81.8 108.8 144.7 192.4 255.8

Increase in W.C. (7.6) 11.7 6.6 22.2 18.7 (74.2) 156.2 50.9 68.0 90.5

FCF 57.8 69.5 88.2 96.1 136.5 279.0 117.8 318.8 433.4 591.2

7.0% 8.0% 9.0% 10.0% 11.0% Beta 1.12

1.7% 188.1 149.6 122.2 101.8 86.1 Tax Rate 42.1%

2.2% 205.1 160.5 129.5 107.0 89.9 WACC 9.0%

2.7% 226.0 173.4 138.1 112.9 94.2 TV Growth Rate 2.7%

3.2% 252.5 189.0 148.1 119.7 99.0

3.7% 287.0 208.3 160.0 127.6 104.4 TV 9,637.8

Appendix 7: Bear Case DCF

Projected

WACC DCF Assumptions

TV

Gro

wth

Ra

te


APPENDIX 8 – Comparables Summary

P/E EV/Rev EV/EBIT EV/FCF Weight

Web-based Various Industry Group 211.5 8.7 107.5 148.0 80%

Web-based Healthcare IT Group 71.5 5.1 44.4 42.1 10%

Server-based EHR 25.1 3.4 20.1 32.0 10%

Industry Average 178.9 7.8 92.4 125.8

Adjust ATHN FY13 161.3 8.4 119.6 93.2

Implied Price 145 122 100 178

Weight 25% 25% 25% 25%

Target Price 136


APPENDIX 9 – Comparable Companies

Name Ticker Mkt Cap(M) Cloud-based? P/E EV/ Rev EV/EBIT EV/FCF

Adjusted ATHN FY13Q3 ATHN 4960 Yes 161.3 8.4 119.6 93.2

Web-based Various Industry Group

Callidus CALD 434 Yes 37.2

Concur CNQR 5447 Yes 9.6 189.0

Cornerstone CSOD 2536 Yes 15.1 667.3

DealerTrak TRAK 1881 Yes 139.3 4.1 112.4 34.7

Jive Software JIVE 775 Yes 4.6

LogMeln LOGM 775 Yes 290.8 3.6 43.5

NetSuite N 7371 Yes 18.6 167.9

Salesforce CRM 34157 Yes 10.1 58.9

Ultimate Software ULTI 4399 Yes 204.5 11.0 102.6 114.2

Vocus VOCS 193 Yes 1.3 19.4

Average 211.55 8.67 107.48 148.02

Cloud-based non-EHR healthcare IT

HMS Holdings HMSY 1886 No 35.0 4.0 21.5 25.2

HealthStream Inc HSTM 921 Yes 95.7 6.6 56.3 31.1

Medidata Solutions MDSO 3048 Yes 132.5 10.9 82.2 112.2

Omnicell Inc OMCL 819 No 31.3 2.0 21.2 29.1

Simulation Plus SLP 85 No 29.5 7.4 18.2 158.9

WebMD Health Corp WBMD 1622 Yes 2.8 46.3 24.1

Streamline Health Solutions STRM 100 Yes 4.1

Vocera Communications VCRA 418 No 2.9

icad inc ICAD 97 No 3.2

Craneware plc CRW 199 Yes 24.0 4.1 16.1 26.2

Med Assets Inc MDAS 1355 Yes 33.7 3.2 21.1 16.7

Greenway Medical Technologies GWAY 607 Yes 4.4

AdvancedMD Private Yes

eClinical Works Private Yes

McKesson Private Yes

Average 71.5 5.1 44.4 42.1

Client/Server-based EHR

Allscripts Healthcare Solutions MDRX 2680 No 12.9 2.3 50.5

Cerner Corp. CERN 19683 No 45.0 6.7 29.0 40.9

Computer Programs and Systems CPSI 667 No 20.7 3.3 14.4 29.8

Quality Systems QSII 1390 No 29.8 2.9 17.6 18.0

General Electirc health GE 275192 No 17.2 2.0 19.3 21.0

Epic Systems Private No

Average 25.12 3.45 20.06 32.05

Appendix 9: Comparable Companies


APPENDIX 10 – Bootstrap Simulation

We ran a Bootstrap simulation to forecast future quarterly revenues for the ten years from FYE13 to FYE22. These quarterly

revenue forecasts work off ATHN’s actual quarterly growth rates between 1Q08 and 3Q13. The mathematics consider not

only the QoQ growth rates during this period but also the growth rate of the quarter being calculated in relation to 1Q08, the

reference quarter. In doing so, the Bootstrap provides a more refined prediction of quarterly revenue than if it just considered

QoQ growth rates.

The model also considers fluctuations away from the mean and thus gives a percentile distribution of the results. Since we

wish to be conservative, our results list the 5th percentile to put a floor to our target price. In effect, our lowest value for

ATHN stock - $140.97- has a 95% probability of occurring. Finally, because even small differences in growth, especially in

the early years, affect our target price, we were particularly careful about the early quarters in our forecast. Thus, we run

multiple iterations on the model until the difference from one iteration to the next became negligible. This refinement means

that our QoQ fluctuation is minimized.

For our simulation, we assumed the following:

The company’s revenue will fluctuate using characteristics similar to those embedded in the quarters between 1Q08

to 3Q13

Aside from the quarterly growth rates and their statistical fluctuations, all other assumptions used to determine the

target price were kept the same

The Weighed Average Cost of Capital (WACC) is 9% and the Terminal Value (TV) growth rate is 2.7%

Growth rate fluctuations are calculated using the exponential form of the residuals as per below:

4,3,2,1 and 2013,2009 where,log ,

,1

,

qyR

Rqy

qy

qy .

Using the methodology outlined above, we forecast ATHN’s predicted average growth rate to be:

%8.34%1001exp

and the fluctuation multipliers to be:

qy,exp

The actual growth rate for one year is %1001expexp , qy

. When forecasting future revenue, we sampled a

fluctuation multiplier and multiplied it with the assumed growth rate of a specific quarter. We treated this growth rate as the

actual growth rate and forecast future quarterly revenues. As mentioned above, we ran simulations with 5,000 iterations until

the system reached steady state. The table below summarizes our revenues by year and the target price per share they imply:

Bootstrap Simulation of Annual Revenue for 2013 - 2022

2013 2014 2015 2016 2017 2018 2019 2020 2021 2022

Mean $ 589.29 $ 846.51 $ 1,202.69 $ 1,656.20 $ 2,262.92 $ 3,074.34 $ 4,160.79 $ 5,627.42 $ 7,620.75 $ 10,309.81

Median $ 588.91 $ 844.05 $ 1,197.18 $ 1,638.79 $ 2,234.07 $ 3,026.01 $ 4,088.30 $ 5,528.12 $ 7,423.28 $ 10,061.59

5th percentile $ 578.04 $ 753.43 $ 1002.16 $ 1326.48 $ 1743.48 $ 2284.45 $ 2978.87 $ 3885.68 $ 5134.20 $ 6774.34

Predicted Target Price per Share

Mean $ 154.69

Median $ 153.65

5th percentile $ 140.97


APPENDIX 11 – ATHN SWOT Analysis


APPENDIX 12 – COMPENSATION OF MANAGEMENT TEAM


APPENDIX 13 – ATHN Board of Directors

Name Title Role Years on board Background

Jonathan

Bush

Chairman, Chief Executive

Officer and President

Internal 1997-Present • Cofounded Athenahealth, Inc. in 1997

• Served as an EMT for the City of New Orleans, and was trained as

a medic in the U.S. Army

• Served as a Consultant at Booz-Allen & Hamilton

• M.B.A. Master’s degree from Harvard Business School

• B.A. - College of Social Studies from Wesleyan University

Brandon

H. Hull

Lead Director and Member of

Audit Committee

External 1999-Present • Serves on the boards of directors of Cardio Optics, Replication

Medical, CodeRyte and FluidNet.

• Served as General Partner of Cardinal Partners

• Served as principal of the Edison Venture Fund

• M.B.A. - The Wharton School at the University of Pennsylvania.

• B.A. - Wheaton College

Amy

Aberneth

y M.D.,

Ph.D.

Director External 2013-Present • Serves as internist and medical oncologist at Duke University

Medical Center; Director of the Duke Center for Learning Health

Care and the Duke Cancer Care Research Program.

• PhD - Flinders University of South Australia

• Graduated from the University of Pennsylvania and Duke

University School of Medicine

Charles

D. Baker

Director and Member of Audit

Committee

External 2012-Present • Services and Secretary of Administration and Finance for the state

of Massachusetts

• Served as the Republican nominee for Governor of Massachusetts

• Served as Chief Executive Officer of Harvard Pilgrim Health Care

• Served as Secretary of Health and Human

• M.B.A. from the Kellogg Graduate School of Management at

Northwestern University

• B.A. - English from Harvard College

Dev

Ittycheria

Director, Chairman of

Nominating & Corporate

Governance Committee and

Member of Compensation

Committee

External 2010-Present • Serviced as the president of the Enterprise Service Management

business of BMC Software

• Serviced as president and CEO of BladeLogic

• Serviced as president & CEO of Applica

• BS - Rutgers University

John A.

Kane

Director and Chairman of

Audit Committee

External 2007-Present • Serves as a director of Merchants Bank, Spheris Inc

• Served as Senior Vice President, Finance and Administration,

Chief Financial Officer and Treasurer of IDX Systems Corporation

• Served as audit manager at Ernst & Young, LLP

• B.S., Master - Brigham Young University.

Jacquelin

e B.

Kosecoff

Ph.D.,

Director, Member of

Nominating Committee,

Member of Compensation

Committee and Member of

Nominating & Corporate

Governance Committee

External 2012-Present • Managing Partner at Moriah Partners, LLC

• Served as a Senior Advisor at Optum

• Served as Chief Executive Officer of OptumRx

• Served as Chief Executive Officer of Ovations Pharmacy Solutions

Division

• Served as a professor at the School of Medicine and Public Health

at the University of California, Los Angeles (UCLA)

• Ph.D. - UCLA

• M.S. - Brown University

• B.A. - UCLA

James L.

Mann

Director, Chairman of

Compensation Committee and

Member of Nominating &

Corporate Governance

Committee

External 2006-Present • Served as Chairman of the Board of Directors of SunGard

• Served as President and COO of Bradford National Corp.

• B.A. - Wichita State University

David E.

Robinson

Director External 2011-Present • Served athenahealth as Executive Advisor from July 2010 to

December 2010 and Executive Vice President and Chief Operating

Officer from February 2009 through June 2010.

• Served as the Executive Vice President of SunGard Data Systems

Inc.

• M.B.A. - University of Chicago

• M.S. - University of Rochester

• B.S. - Carnegie Mellon University


APPENDIX 14 – Revenue per physician cushion against bargain power decrease

Assumptions and Calculations:

We assume 100% of ATHN’s physicians to be on athenaCollector, currently 34% and 51% of

Collector clients use athenaClinicals and athenaCommunicator. Using average price of the three

products and applying respective weights, we derive revenue per collection per physician as

6.6%.

Due to cross selling efforts, we expect 73% and 83% of Collector physicians to use Clinicals

and Communicator respectively. This would lead revenue per collection per physician to

increase to 8.1%. In case of consolidation and reduction of margins, we have a cushion of 1.5%

in this case.

In the optimistic case, if all physicians use all three products we derive revenue per collection

per physician to be 9%. In case of consolidation and reduction of margins, we have a cushion of

2.4% in this case.

FY13Q3 FY15Q3E

If all physicians use

three products

AthenaCommunicator 51% 83% 100%

AthenaClinicals 34% 73% 100%

AthenaCollector 100% 100% 100%

Price range Average Price

AthenaCommunicator 1% - 2% 1.5%

AthenaClinicals 1% - 4% 2.5%

AthenaCollector 2% - 8% 5.0%

Rev / Collection / Phys. 6.6% 8.1% 9.0%

Cushion 1.5% 2.4%

Assumptions:

Cushion for bargian power decrease

Cushion for bargian power decrease

Every physician of Athenahealth use Athenacollector


APPENDIX 15 – Affordable Care Act

Affordable Care Act (ACA)

The ACA requires U.S. citizens and legal residents to have health insurance. To achieve this, it

created web-based insurance exchanges that allow uninsured Americans to find health

insurance plans in their state. The ACA offers varying subsidies depending on an individual or

family’s income provided it falls between 138-400% of the federal poverty level (FPL -

$19,530 for a family of three in 2013). Individuals below the 138% FPL will be covered by

expanded Medicaid programs, which are optional for each state.

The number of Medicaid-eligible individuals is 24.5M (51% of the uninsured). As of October

22, 2013 there are 26 states taking up the option to insure them. Under the ACA, the federal

government will pay 100% of new Medicaid expenses to 2016. After 2016, the federal

government will pay 90% of Medicaid expenses. States that do not take up the Medicaid

option will serve their uninsured residents using charity care, which the federal government

will not subsidize. We expect 5M newly insured individuals joining via the Medicaid Program

in 2013-2014.

For those uninsured not eligible for Medicaid, the populations break out as follows: 15.1M

(39% of the uninsured) with incomes of 138-400%FPL, and 4.9M (10% of the uninsured)

above 400%FPL. These individuals must obtain insurance either on their own, through their

employer, or via the insurance exchanges. We assume that 15% of the former group and 30%

of the latter group, a total of 3.7M individuals, will obtain insurance.

In dollar terms, the additional insured will increase the patient population served via ATHN

solutions by 2.7M. Using our per-insured average billings, we predict incremental revenues to

be $214M by FY18, as outlined in the tables below.

FY14 FY15 FY16 FY17 FY18

Market

newly

insured

patients

(millions)

7.04 7.37 7.69 8.02 8.68

Newly

insured

patients -

ATHN

users

(millions)

0.48 0.72 1.07 2.32 2.73

Incremental

Revenue

ATHN

(millions $)

32.24 51.17 85.84 138.83 213.65

Affordable Care Act (millions)

139% - 399%

(FPL)

population

400% + (FPL)

populationTotal

18.48 4.92 47.9224.52

0%-138% (FPL)

population

Uninsured population by income level (millions)


APPENDIX 16 – Porter's Five Forces

Threat of new Entrants 1) medium and rising barriers to enter the market

2) the links with other suppliers in the medical supply chain needed to achieve

interoperability

3) certification (administrated by the Certification Commission for Health

Information Technology – CCHIT) needed

4) high switching costs

Bargaining Power of Suppliers 1) low employee negotiating power because of the competition from cheaper

labor regions

2) low negotiating power from hardware platforms and medical devices

providers because of serious challenge

Bargaining Power of Buyers 1) low but rising buying power

2) 53.2% of physicians are full or part owners of their medical practices (AMA

survey, 2012), giving them low buying power

3) more physicians are giving up private businesses and being employed by

hospital, reducing demand from private medical practices

4) increased hospital consolidation and group purchasing increases the

bargaining power

Competitive Rivalry in the Industry 1) high and dropping competition

2) majority of EMR vendors will have merged, been acquired or ceased

operations within five years as they fail to sustain operations by the time

meaningful use stage 3 is fully implemented (black book survey, 2013)

Threat of Substitutes 1) low and dropping

2) the primary substitute of healthcare IT industry, which is paper records, is

becoming less attractive


APPENDIX 17 – Enterprise Account wins from 2010

Account Quarter Announced Offerings Physicians

Lourdes Medical Associates (LMA) 1Q10 Collector 100

Caritas Christi 1Q10 Clinicals 375

Vanguard Health Systems 1Q10 Clinicals 250

Vohra Wound 2Q10 Collector 100

CHRISTUS Health 3Q10 Collector + Clinicals + Communicator 150

West Penn Allegheny Health System 4Q10 Collector 600

St. Vincent's HealthCare 4Q10 Collector 120

Summit Medical Group 4Q10 Collector 170

CaroMont Health 1Q11 Collector + Clinicals + Communicator 200

University Hospitals 3Q11 Collector 800

Detriot Medical Center 3Q11 Collector 125

Harbin Clinic 3Q11 Collector + Clinicals + Communicator 140

ProMedica 4Q11 Collector 330

OhioMedica 4Q11 Collector + Communicator 900

Health Management Associates (HMA) 3Q12 Collector + Clinicals + Communicator 900

MedExpress Urgent Care 3Q12 Collector + Clinicals + Communicator 250

Children's Hospital Los Angeles Medical Group 4Q12 Collector 500

Emergency Medicine Physicians (EMP) 4Q12 Collector + Communicator 800

Children's Hospital Central California 4Q12 Collector + Clinicals + Communicator 127

Lahey Health 2Q12 Clarity

INTEGRIS Health 2Q13 Collector + Communicator + Clarity 300

Ascension Health Alliance 3Q13 Collector + Communicator + Clarity 4000 (providers)

Hallmark Health System 3Q13 Clarity 700

Riverside Medical Group 4Q13 Collector 300

Enterprise account wins since 2010

Enterprise accounts are those with 100+ physicians


Disclosures: Ownership and material conflicts of interest:

The author(s), or a member of their household, of this report does not hold a financial interest in the securities of this

company.

The author(s), or a member of their household, of this report does not know of the existence of any conflicts of interest

that might bias the content or publication of this report.

Receipt of compensation:

Compensation of the author(s) of this report is not based on investment banking revenue.

Position as a officer or director:

The author(s), or a member of their household, does not serve as an officer, director or advisory board member of the

subject company.

Market making:

The author(s) does not act as a market maker in the subject company’s securities.

Disclaimer:

The information set forth herein has been obtained or derived from sources generally available to the public and

believed by the author(s) to be reliable, but the author(s) does not make any representation or warranty, express or

implied, as to its accuracy or completeness. The information is not intended to be used as the basis of any investment

decisions by any person or entity. This information does not constitute investment advice, nor is it an offer or a

solicitation of an offer to buy or sell any security. This report should not be considered to be a recommendation by any

individual affiliated with The Boston Security Analysts Society, CFA Institute or the CFA Institute Research Challenge with

regard to this company’s stock.

CFA Institute Research Challenge

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