Yesterday, at the 2014 Ira Sohn Investment Conference, David Einhorn recommended shorting athenahealth, Inc (NASDAQ: ATHN) sending shares down over 13% today. David Einhorn had 66 pages of slides for the presentation, which is a bit below his average. Below (as promised readers can find the full presentation)
This is the 19th Annual Sohn Investment Conference.
The first time I spoke here was in 2002. It is amazing how this great event has grown, and I am honored to be here.
A couple weeks ago, we wrote in our quarterly letter that we believe that a narrow group of cool kid stocks have disconnected from traditional valuations and formed a bubble. This got a lot of criticism. Half the critics thought we were talking our book, even though we didn’t name names. The other half were upset that we didn’t tell them which stocks we were short.
Since we can’t seem to please anybody, I’ve decided to validate both criticisms. Today, I’m going to illustrate the bubble basket doing a deep dive into one of the companies, while not disclosing the others.
This company is an excellent company with an excellent product, run by a well?meaning and honest, though occasionally promotional CEO. The world may be a better place if it succeeds, and even though we are short, I am in no way rooting for it to fail.
Its main problem is that it isn’t positioned to succeed the way the bulls hope, as the assumptions the bulls are making are not plausible. The stock is simply at the wrong price. It’s caught up in a bubble and could easily fall 80% or more from its recent peak.
Let me introduce you to athenahealth, Inc (NASDAQ: ATHN)
I think athena deserves a smaller capitalization, and I’m not just referring to how it fails to capitalize the first letter of its name. Let’s start with ‘what does athena do’?
Athena provides software and services primarily to what is called the ‘Ambulatory’ healthcare market, which consists mostly of non?hospital based physician practices.
Its services include bill collection and claims processing, electronic health records, patient communication, and care coordination.
Source: athenahealth, Inc (NASDAQ: ATHN) website at http://landing.athenahealth.com/g/improvecare
AthenaClinicals is a service enabled by software that manages patient heath records electronically.
AthenaCollector is practice management software combined with outsourced revenue cycle management, or RCM, where athena streamlines a practice’s collection process.
These two products generate the vast majority of athena’s revenues, but there is also athenaCoordinator and athenaCommunicator, which enable care coordination among providers and communication with patients.
For these services athena charges based on a percentage of collections, usually between 4 and 7 percent.
Source: athenahealth website at https://www.athenahealth.com/enterprise?solutions/integrated?healthcare? solutions.php
Morgan Stanley says the average doctor currently collects $636,000 annually, on the way to $1.3 million in 2030.
Currently, athena’s doctors collect only $370,000 of which athena keeps about 4.4% or $16,000. Athena’s doctors get much less than the national average because athena has a concentration in low?earning primary care physicians.
Even if athena were to win higher?billing physicians, athena would adjust its billing rate downward because it prices its business to earn a certain amount per physician, and uses a sliding scale so higher?billing doctors pay a lower percentage.
Without explaining why or how, Morgan Stanley assumes that the average athena doctor will catch up to the national average, and that athena won’t offer sliding scale discounts to higher?billing doctors. This appears to be a modelling error.
Morgan Stanley assumes athena will recognize $63,000 in revenues per doctor by 2030 from $16,000 today.
We think it is more reasonable to assume that revenue per doctor grows with Ambulatory spending. On that basis, Athena’s revenue per doctor would still more than double to $36,600 in 2030.
Source: athenahealth’s collection per doctor and revenues per doctor are based upon Morgan Stanley & Co. estimates as provided to Greenlight in April 2014. Inflation adjusted revenues per doctor and industry average collections per doctor are Greenlight calculations based on CMS estimates.