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athenahealth, Inc (ATHN): This Company Is Facing Some Serious Long-Term Challenges

athenahealth, Inc (NASDAQ:ATHN) is an electronic medical records (EMR) company at its core. It provides billing software and health records software to medical organizations big and small. Last year, it had purchased Epocrates, a quasi-social media company that makes a nifty smartphone app that most healthcare providers carry in order to look up prescribing information and get medical alerts.

athenahealth, Inc (NASDAQ:ATHN)

Despite the promise implied by the Epocrates acquisition, this article aims to make the case for Athenahealth being an overvalued company that may ultimately fail given the current trends in its industry.

The good

In the short-term, athenahealth, Inc (NASDAQ:ATHN) seems to be doing well, especially since it is growing revenue at a good pace (more than 30% year over year). This is due to Uncle Sam providing incentives to health care providers in order to meet something called “meaningful use.” The term “meaningful use” is a moving target and the purveyors of electronic medical records are cashing in on the adoption of their systems.

Athenahealth will benefit from the adoption of its systems and the maintenance fees associated with continued use. The challenge is to stay ahead of the changes and have enough support personnel to implement any changes needed. athenahealth, Inc (NASDAQ:ATHN) has fewer than 2,400 employees and it seems they are doing a good job of keeping them happy, but there are a lot of companies in this space and the skills needed in this industry take some time to build.

As a comparison, Allscripts Healthcare Solutions Inc (NASDAQ:MDRX) has more than 7,000 employees, and a market cap similar to Athenahealth. Allscripts’ market cap is around $2.5 billion, while Athenahealth’s is around $3 billion. Allscripts, though, has revenue more than three times higher than Athenahealth. Those extra employees are paying off for Allscripts, and even though the growth last quarter was not great, the future looks bright. Allscripts’ dbMotion has been adopted by a non-profit health system from Toledo, Ohio. ProMedica has 1,700 physicians and the system will allow a transition to a better optimized Accountable Care Organization (ACO).

If Athenahealth can leverage Epocrates and its flagship Anodyne product, it should catch up with Allscripts and its dbMotion product, and that is why investors are willing to pay 193 times earnings or so, and an estimated forward P/E of 58. It’s all about the growth potential. Allscripts has not been growing and Mr. Market hates that.

There are significant switching costs to adopting another EMR system. You have to migrate your data to the new system and you have to integrate your billing system and other systems. There is a moat here, but the moat is not filled with alligators. There are choices out there and the next few months will be critical since the Patient Protection and Care Act (PPCA) is scheduled to be implemented fully in 2014.

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