More than a week ago, the co-founder and CEO of athenahealth, Jonathan Bush, announced his was stepping down and the health IT company he started back in 1997 announced plans to explore a potential sale.
These latest developments at the Watertown, Mass.-based company occurred as athenahealth has been fighting a takeover offer for $160 a share from Elliott Management, an activist investor, and on the heels of damaging allegations of sexual harassment against Bush, an outspoken industry leader known for his colorful personality and viewed as the definitive face of athenahealth.
The company got its start in the health IT space as a developer of practice management systems for physician practices and has steadily expanded its suite of network-enabled services for revenue cycle management and medical billing, electronic health record (EHR) systems, patient engagement, care coordination, and population health services. The company ranked at No. 13 on the Healthcare Informatics 100 list for 2018, with $1.2 billion in revenue.
These events effectively close one chapter in the 20-year-old company’s journey, and begin another one. The athenahealth board of directors has initiated a search process to identify qualified CEO candidates. In a statement, Jeff Immelt, executive chairman, said the company is approaching this process “with an open mind and a commitment to continuing to strengthen the company – including its rich data asset, platform strategy, and culture of innovation.” And he stated, “The Board and Jonathan agree that this change in leadership is appropriate as athenahealth turns to its next chapter.”
“It will be really interesting to see how all this plays out," Erik Bermudez, senior research director at Orem, Utah-based KLAS Research, says. "athenahealth is a disruptor in a market that is ripe and ready for change, and with a possible sale, with new leadership and new management coming in, there’s a lot of changes that are happening, both on the provider side and for athenahealth on the vendor side."
When athenahealth announced June 6 that Bush had stepped down, it also announced that it would explore a potential sale or merger or it may continue as an independent company. Before the announcement, the stock was at $151 a share, about 6 percent below the offer price. Ahead of the announcement, athenahealth shares were halted, and they initially rose nearly 6 percent once trading resumed.
That same day, senior research analyst Sean Wieland with Piper Jaffray, a U.S. investment bank and asset management firm, raised his target price for athenahealth from $155 to $179. “I think the bid on the table from Elliott for $160 represents the ‘downside’ here,” Wieland says, adding, “With these publicly traded vertical SaaS (Software-as-a-Service) companies, the median about is about 5x times revenue, so I think [athenahealth] is worth $179.” On June 19, athenahealth’s stock was at $160 a share.
In a research note, Sandy Draper, a Wall Street analyst with investment bank SunTrust Robinson Humphrey, wrote that Bush’s departure increases the likelihood of a sale, nothing that Bush has been the company’s only CEO, so far. With Bush stepping down, it will easier for potential buyers to make substantial changes “without having to go around him,” Draper wrote.
Also, Draper anticipates that recent developments will cause some near-term uncertainty and distraction, which could potentially benefit Cerner, Allscripts, CPSI and Quality Systems over the next few quarters.
Wieland contends that athenahealth “is among the best asset in health IT,” citing the company’s technology platform and noting that “the company's presence at the point of care and ability to crowd-source best practices in clinical and financial workflow are unsurpassed.” He also notes that the company’s decelerating growth of late is more a reflection of industry dynamics.
“If you look across the EHR space, the demand for EHRs has slowed. The stimulus from 10 years ago brought forward a decades’ worth of demand into a period of three or four years, so everybody ran out and bought something, and now we’re in this dry spell of demand,” he says, adding, “So, athenahealth’s revenue growth decelerates to ‘only’ 10 percent, which I would note is still higher than just about every EHR company out there.”
He continues, “I think the company has been under pressure for financial performance because of the slowing growth, which I think is endemic of the market. There still remains a huge opportunity to take the friction cost out of healthcare by connecting all these users using various EHRs, and the challenges around interoperability. I think athenahealth has an interesting way to solve those, and I think it will solve those, no matter whose hands it’s in.” He adds, “We believe athenahealth is going into this process from a vantage point of strength.”
So, who are likely suitors in a potential sale? The list of strategic buyers are many, Wieland says, including mega software companies such as Microsoft, Oracle or Salesforce. And financial buyers are also keen on the company's recurring revenue and strong ability to drive incremental margins, he notes.
In a blog post, Jacob Reider, M.D., a family physician and healthcare consultant who previously served as Deputy National Coordinator for Health IT, wrote that Apple, Cerner and Microsoft all were unlikely to buy Athenahealth, while also offering up other potential buyers, including Phillips, Roper/Strada Decision, Amazon and IBM.
Wieland contends that Amazon is not a likely buyer, noting that “They’re in the business of trying to leverage their core asset, their distribution capability, which they are very good at.” He adds, “Amazon doesn’t need one EHR company, they need all of them; they need to have relationships and they need APIs built with everyone, so I don’t think it’s Amazon.” While Apple is moving further into healthcare and is building APIs into health systems, “it’s the same situation that Amazon is faced with; Apple needs relationships with all the EHR companies, not just one,” Wieland says.
“I wouldn’t rule any of those out,” he says, adding, “In my opinion, a sale to a strategic buyer is the most likely, followed by a financial buyer, because there’s already one at the table.”
athenahealth’s Performance and Impact to Customers
Known in the market for its ambulatory cloud-based EHR systems, athenahealth jumped into the hospital EHR market in 2015 with the acquisition of RazorInsights. Since then, provider interest has skyrocketed, with athenaOne for Hospitals and Health Systems being the third most frequently selected hospital EHR solution in the U.S. in both 2015 and 2016, according to an October 2017 report from KLAS Research.
In a three-year-timeframe, athenahealth went from acquiring RazorInisghts to being KLAS-validated for providing an integrated patient record, inpatient to ambulatory. “That’s incredibly fast,” Bermudez says. “Time will tell how they’ll continue to disrupt this market. That’s not to say that they don’t have performance and execution challenges with this new [hospital] market, but they definitely have made inroads in terms of contracts and sales.”
A May 2018 KLAS report examining the acute care hospital space in 2017 found that 80 percent of new EHR contracts involved smaller hospitals, 200 beds or less. That report notes that athenahealth saw a significant number of acute care hospital “wins” in 2017, gaining 28 hospitals, all among hospitals with under 50 beds. athenahealth is capitalizing on smaller hospitals’ hunger for new technology, KLAS noted.
“athenahealth’s inpatient solution continued to gain traction, garnering more contract wins among small hospitals than any other solution. The cloud-based platform is particularly attractive to the smallest hospitals, who require minimal IT footprints and up-front costs,” the report states.
Bermudez cites several reasons for athenahealth’s early success in the hospital market. The company’s vision resonates with healthcare executives, he notes. “This market of small hospitals is ripe and ready for disruption; they’re ready for new models. athenahealth has a new offering, but also on top of that, a new cost structure, which is web-based and based on a percentage of its clients’ collections,” he says.
athenahealth’s hospital customers like having an integrated clinical/RCM solution for their hospital and clinics without a large up-front capital outlay, he says. “Most feel athenahealth’s innovative cost structure and web-based solution can help community hospitals stay financially viable and decrease IT and security resources in coming years. They feel that the cloud-based model will allow them to more quickly develop the solution to meet future healthcare needs,” the KLAS report states.
While the company seems to be gaining momentum in the hospital space, how will these latest developments and leadership changes impact new and existing customers?
Bermudez says he has asked a number of key athenahealth customers about the potential for new management. “What I heard is, because of athenahealth being who they are and because of the strong culture that they have built, they are less worried about athenahealth than they would be if it were another company. And, they indicated that it might be a good thing.”
He continues, “It’s been a public company and it’s really hard to serve two masters, Wall Street and customers and other stakeholders. Customers I talked to indicated that a sale would bring in new ownership and perhaps bring in a different set of priorities, and that could really help athenahealth get back to their roots and back to the culture they had when they began. I think there’s still a lot of excitement, and there’s some hesitancy as well.”
He adds, “It’ll be interesting to see how all these changes ultimately impact the customer experience and customer success.”
Before Bush’s departure, several of the company’s top leaders had stepped down, including Todd Park, who had co-founded the company with Bush, and then left in 2009 to take the position of chief technology officer of the United States in the Obama administration. Kyle Armbrester, who served as the company’s senior vice president and chief product officer, left the company back in April.
“We’re looking, potentially in the next six months to a year, at a brand-new management team that didn’t exist two or three years ago. It will be interesting to see the impact to the customer,” Bermudez says.
Elliott Management's Takeover Bid
Challenges at athenahealth began back in the spring of 2017 when Elliott Management, a New York hedge fund led by billionaire Paul Singer, said it had acquired a 9.2 percent stake in the company. According to reporting from The Boston Globe, the company’s stock had been in steady decline by the time Elliott Management began its campaign. In early 2017, the company reported revenue shortfalls for the fourth quarter in 2016. Under pressure from the activist shareholder to lift the firm’s stock price, athenahealth announced in August 2017 that it would reduce expenses by $100 million and restructure its leadership. At that time, Bush stepped down as chairman of the board.
In October 2017, the company announced a new strategic plan that included shuttering offices in San Francisco and Princeton, New Jersey and cutting 9 percent of its workforce to streamline its operational efficiencies. At that time, Bush acknowledged that 2017 revenue had fallen below expectations and that “lackluster market conditions in the post Meaningful Use era have contributed to a slowing of our growth rate.” The vendor also said it anticipated $4 million in losses from hurricanes Irma and Harvey.
And then in February, athenahealth announced double-digit growth in 2017, with revenue up 13 percent, however, year-end financials came in below estimates and the company reported a $55 million dip in consolidated bookings compared to the previous year.
As previously reported by Healthcare Informatics, last month Elliott Management made an all-cash takeover offer, which would value athenahealth at $6.9 billion. The investors sent a letter to athenahealth’s board proposing to acquire the company for $160 share, stating that the proposal “represents the best path forward for athenahealth, its shareholders, its employees and its broader mission.”
“We believe that athenahealth has great potential with a differentiated opportunity to fundamentally change the healthcare IT industry. While we may (or may not) differ on the road ahead, we recognize the unique and powerful accomplishments that have taken place at athenahealth due to Jonathan’s vision,” Elliott Management stated in the letter.
However, the investors also criticized company leadership for failing to make the changes necessary “to enable it to grow as it should and to create the kind of value its shareholders deserve.”
“We are faced now with the stark reality that athenahealth as a public-company investment, despite all of its promise, has not worked for many years, is not working today and will not work in the future,” the investors stated in the letter, specifically noting the company’s problems in the areas of sales execution, service delivery, product focus, forecasting, executive turnover, capital allocation, management discipline and corporate governance.