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Morningstar | No Update on Athena Strategic Review, but We Believe a Buyout Is Increasingly the Right Move

Between a takeover bid from activist investor Elliott Management in May and former CEO Jonathan Bush stepping down in June, Athenahealth has seen a tumultuous second quarter. Management did not provide an update on the board's strategic review of a potential sale, merger, or other transaction. Nevertheless, we expect there to be some decision made within the next few quarters and believe the deliberate nature of the board’s review process is a positive from a shareholder value perspective. However, as we have previously said, we believe the best course for Athena at the very least would be to accept Elliott’s offer of $160 per share. Thus, we are reiterating our $160 fair value estimate and no-moat rating for the healthcare IT player.

Management expressed that client churn for the quarter was in line with their expectations, but there were some warning signs of attrition in the firm's client base. Athena experienced weakness in the hospital segment, with total discharge bed days flat from last quarter, and in population health, with total covered lives down by 1% from last quarter. While population health is a small portion of the business and the decline was minimal compared with changes in prior quarters, this is the first time we've seen such a weakness in the hospital segment, which had steady double-digit sequential growth in total discharge days in the last several quarters. This indicates that the firm didn't offset hospital attrition this quarter, even with eight hospitals going live this quarter. We believe this development is confirmation of the headwinds the firm will face in a maturing and increasingly competitive HCIT market and reinforces our belief that strategic alternatives beyond the current status quo is the best course for shareholders.

On the earnings call, management emphasized Athena's focus on its small provider niche, which is in line with our thesis that Athena would have difficulty moving upstream to larger providers due to entrenched incumbent competition. While we commend the firm's focus on client satisfaction and research and development, we continue to believe that as a stand-alone company, Athena will face challenges from a tough operating environment, with providers pressured to reduce costs and larger competitors vying for share. Thus, we reiterate that Elliott Management's all-cash takeover bid of $160 per share is a good deal for investors, and we believe the board should consider a sale or other transaction to maximize shareholder value.