Thisisthe19th AnnualSohn InvestmentConference.ThefirsttimeI spokeherewasin2002.Itisamazinghowthisgreateventhasgrown,andIamhonoredtobehere.

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Acoupleweeksago,wewroteinourquarterlyletterthatwebelievethatanarrowgroupofcoolkidstockshavedisconnectedfromtraditionalvaluationsandformedabubble.Thisgotalotofcriticism.Halfthecriticsthoughtweweretalkingourbook,eventhoughwedidntnamenames.Theotherhalfwereupsetthatwedidnttellthemwhichstockswewereshort.Sincewecantseemtopleaseanybody,Ivedecidedtovalidatebothcriticisms.Today,Imgoingtoillustratethebubblebasketdoingadeepdiveintooneofthecompanies,whilenotdisclosingtheothers.Thiscompanyisanexcellentcompanywithanexcellentproduct,runbyawellmeaningandhonest,thoughoccasionallypromotionalCEO.Theworldmaybeabetterplaceifitsucceeds,andeventhoughweareshort,Iaminnowayrootingforittofail.Itsmainproblemisthatitisntpositionedtosucceedthewaythebullshope,astheassumptionsthebullsaremakingarenotplausible.Thestockissimplyatthewrongprice.Itscaughtupinabubbleandcouldeasilyfall80%ormorefromitsrecentpeak.Letmeintroduceyoutoathenahealth.

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Ithinkathenadeservesasmallercapitalization,andImnotjustreferringtohowitfailstocapitalizethefirstletterofitsname.Letsstartwithwhatdoesathenado?AthenaprovidessoftwareandservicesprimarilytowhatiscalledtheAmbulatoryhealthcaremarket,whichconsistsmostlyofnonhospitalbasedphysicianpractices.Itsservicesincludebill collectionandclaimsprocessing,electronichealthrecords,patientcommunication,andcarecoordination._____________Source:athenahealth websiteathttp://landing.athenahealth.com/g/improvecare

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AthenaClinicals isaserviceenabledbysoftwarethatmanagespatientheathrecordselectronically.AthenaCollector ispracticemanagementsoftwarecombinedwithoutsourcedrevenuecyclemanagement,orRCM,whereathenastreamlinesapracticescollectionprocess.Thesetwo productsgeneratethevastmajorityofathenasrevenues,butthereisalsoathenaCoordinator andathenaCommunicator,whichenablecarecoordinationamongproviders andcommunicationwithpatients.Fortheseservicesathenachargesbased onapercentageofcollections,usuallybetween4and7percent._____________Source:athenahealth websiteathttps://www.athenahealth.com/enterprisesolutions/integratedhealthcaresolutions.php

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Athenais alsotryingtoentertheinpatientorhospitalmarket,throughanewservicecalledEnterpriseCoordinator.Thisofferssmallhospitalsarangeofcarecoordinationfunctionsincludingpatientadmissions,insuranceprecertification,referralmanagement,postcarefollowup,andpreventativecareoutreach.Athenajustannounceditsfirsttwotrialcustomerslastmonth.Thisisverymuchaworkinprogress,anditisunclearwhetherathenawillsucceedinthissegment._____________Source:athenahealth presentationonJanuary15,2014atJ.P.Morgan32ndAnnualHealthcareConference(http://investors.athenahealth.com/events.cfm)

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Letsgettothemosteyecatchingthingaboutallthebubblestocks thestockchart.Thisoneisfromthe2007IPOthroughtheendofFebruary.YoucanseethatthiswasanicestockthatwasdoingwelluntilNovemberof2012,whenitwentballisticandmorethantripled,from$60to$204,injust16months._____________Source:BloombergL.P.

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Whathasbeendriving thisexceptionalshareperformance?Thechartsuggestsenormousfinancialprogresstojustifytheexplosivereratingoftheshares._____________Source:http://www.dreamstime.com/royaltyfreestockimagestrongbusinessmanconceptimage26018596

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Youdexpectresultsinexcessofthetargetsof30%annualrevenuegrowth,andimprovinggrossandoperatingmargins.Butyoudbewrong._____________Source:athenahealth 5thAnnualInvestorSummitonDecember6,2012(http://investors.athenahealth.com/events.cfm)

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Athenamisseditsorganicrevenuegrowthtargetfor2013,andanalystshavecutrevenueexpectationsforboth2014and2015._____________Source:Revenueestimatesforfiscalyears2013,2014,and2015arehistoricalBloombergconsensusestimatesfornotedtimeperiodsasretrievedfromBloomberginMay2014.RevenueestimatesfromApril2013(for2013,2014,and2015)havebeenadjustedbyGreenlightfortheimpactofacquisitionswhoseresultswereincorporatedintoathenahealths guidanceinMay2013.Actualresultsforfiscalyear2013arefromathenahealths Form10K.

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Andwhathappenedtotheintendedmarginleverage?Thebluelineisthehistoricalmarginandforwardlookinganalystestimatesasofearly2013.Theredlineiswhatthecompanydeliveredin2013andshowsthenowloweredanalystestimatesfromhere.Asisfashionablewithbubblestocksthesedays,marginsthatincludestockcompensationasanexpenseareverylowandarenowexpectedtoremainthereforatleastthenextcoupleofyears._____________Source:AdjustedEBITmarginestimatesfor2013,2014,and2015arehistoricalBloombergconsensusestimatesfornotedtimeperiodsasretrievedfromBloomberginMay2014whichwerethenadjustedforGreenlightsestimateofstockbasedcompensationin2013,2014,and2015.ActualEBITmarginsfor2010,2011,2012,and2013areGreenlightscalculationsbasedonathenahealths Form10Kforeachrespectiveperiod.

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Earningsestimateshavefollowedthesamepath.Itsnoteworthythatin2009,whenthestockwaslessthan$50,analyststhoughtthecompanywouldbeearningmorethan$3.00persharebynow.2015estimateshavealsofallendramatically._____________Source:AdjustedandGAAPEPSestimatesarehistoricalBloombergconsensusestimatesfornotedtimeperiodsasretrievedfromBloomberginMay2014.

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Notthatitseemstomatter_____________Source:Oppenheimer&Co.Inc.reportdatedDecember11,2013.Cartoonfromhttp://www.jantoo.com/cartoon/12260615

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So,athenamisseditstopandbottomlineestimates,andthestockalmostquintupledinthethreeyearsthroughearlyMarchofthisyear.Whatmight explainthemove?

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Thisistheathenahealths CEO,JonathanBushyes,heispartofthatBushfamily.Letsseeifhecanexplaintheexcitement.[videoclip]_____________Source:Compilationcomprisedofexcerptsfromthefollowing:1)HealthDatapalooza onJune3,2013(https://www.youtube.com/watch?v=Ka_gTyVRjSE);2)athenahealth 6thAnnualInvestorSummitonDecember12,2013(http://investors.athenahealth.com/events.cfm);3)EHRtv interviewwithAnnandEricFishmanonOctober27,2010(http://www.ehrtv.com/athenahealthjonathanbushnov2010/);4)FOXNewsNetworkonMarch27,2012(http://video.foxbusiness.com/v/1532985902001/athenahealthceoonhealthcarelawcloudcomputing/#sp=showclips);and5)CableNewsNetworkonApril20,2011(http://money.cnn.com/video/news/2011/04/18/n_athena_cloud.cnnmoney/).

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Ofcourse,sellside analystsarehappytofuel thefire.Hereisone,usingprettymucheveryhotbuzzwordhecanthinkof.Actually,athenaisnoneofthosethings,butitsagreatwaytopromotethestock._____________Source:PiperJaffray &Co.reportdatedOctober21,2013.

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Andthentheresthisguy[videoclip]_____________Source:CNBConJanuary10,2013(http://video.cnbc.com/gallery/?play=1&video=3000140380)

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Sure,Jim.AndAlGoreinventedtheinternet...

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Therearemanystocksthatcantbevaluedasamultipleofprofitsorcashflowsbecausetheyhavelittleornone.Soanalystsareleftwithrelativevaluations.Hereishowathenaseemsreasonablenexttoitspeers.Buttheimplicationisthatitspeersareproperlyvalued._____________Source:BloombergconsensusestimatesfornotedtimeperiodsasretrievedfromBloomberginMay2014.

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Itsallamatterofperspective.Dependingonwhichstockyouarethinkingabout,allthesestocksseemreasonablecomparedtotheothers.Thisiswhathappensinabubble.

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Asstocksriseinthefaceofdeterioratingfundamentals,sharesdisconnectfromconventionalvaluations.JonathanBushunderstandsbubbledynamicsperfectly.[videoclip]_____________Source:TheIndusEntrepreneurs,TiECON East,onMay22,2009(https://www.youtube.com/watch?v=mJpE27wL4RA)

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I believewheninvestorsattempttovaluethedisconnectedstocksusingconventionalmethods,theytypicallycantcomeclosetocurrentvalues.However,onApril23rd,MorganStanleyissueda22pagereportaboutathenathatputmytheorytothetest.Init,theanalystusesadiscountedcashflowtoarriveatvaluesthatarguablyjustifythecurrentshareprice.And,Iwillstipulatethatthe DCFmodelusesaproperandstandardtechnique.Itevenincorporatesnoncashstockcompasanexpensesothatlongtermdilutionistakenintoaccount._____________Source:MorganStanley&Co.reportdatedApril23,2014

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By tryingtobridgethegapbetweenthebubblepricesandconventionalvaluations,thereportdoesagreatservicetothoseofuswhocantfathomthepricesofbubblestocks.ItanswersthequestionofWhatdoyouhavetobelievewillhappeninordertojustifythestockprice?_____________Source:http://www.flickr.com/photos/playingwithlight/2399114248/

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TheDCFshowstherevenue buildupbyproductcategory.Theexistingbusinesswillgrowfrom$743millionthisyeartoabout$5.7billionin2030.Ontopofthat,thehospitalserviceofferingthatathenajustlaunchedwilladdanother$1.2billion.ThisisexpectedtobefollowedbyanasofyetundevelopedhospitalcollectionsservicethatMorganStanleyishopingthecompanywilllaunchin2017,andapatientrecordssoftwareofferingexpectedin2018.Togetherthesewillgrowtobea$3.1billionbusinessby2030.Ifallgoesaccordingtoforecast,revenueswillcompoundat18%forthenext15yearsandathenawillbecomea$10billionrevenuecompany._____________Source:MorganStanley&Co.estimatesasprovidedtoGreenlightinApril2014.

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According toMorganStanley,athenaisworth$192pershareinabasecaseDCF.Thisisbrokendowninto$120forAmbulatoryand$72forInpatient._____________Source:MorganStanley&Co.reportdatedApril23,2014

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LetstestMorganStanleysassumptions.Todayathenaserves37,000doctors andearns$16,000perdoctor.In2030,MorganStanleyestimatesathenawillhave86,000doctorsandget$63,000perdoctor.Webelievethattheseassumptionsarequiteaggressiveandlikelytoprovetoooptimistic.Forthemoment,letsassumeMorganStanleyisrightaboutthenumberofdoctorsandchallengeonlytherevenueperdoctor._____________Source:MorganStanley&Co.estimatesasprovidedtoGreenlightinApril2014.

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MorganStanleysaystheaveragedoctorcurrentlycollects$636,000annually,onthewayto$1.3millionin2030.Currently,athenasdoctorscollectonly$370,000ofwhichathenakeepsabout4.4%or$16,000.Athenasdoctorsgetmuchlessthanthenationalaveragebecauseathenahasaconcentrationinlowearningprimarycarephysicians.Evenifathenaweretowinhigherbillingphysicians,athenawouldadjustitsbillingratedownwardbecauseitpricesitsbusinesstoearnacertainamountperphysician,andusesaslidingscalesohigherbillingdoctorspayalowerpercentage.Withoutexplainingwhyorhow,MorganStanleyassumesthattheaverageathenadoctorwillcatchuptothenationalaverage,andthatathenawontofferslidingscalediscountstohigherbillingdoctors.Thisappearstobeamodellingerror.MorganStanleyassumesathenawillrecognize$63,000inrevenuesperdoctorby2030from$16,000today.WethinkitismorereasonabletoassumethatrevenueperdoctorgrowswithAmbulatoryspending.Onthatbasis,Athena'srevenueperdoctorwouldstillmorethandoubleto$36,600in2030.

_____________Source:athenahealths collectionperdoctorandrevenuesperdoctorarebaseduponMorganStanley&Co.estimatesasprovidedtoGreenlightinApril2014.InflationadjustedrevenuesperdoctorandindustryaveragecollectionsperdoctorareGreenlightcalculationsbasedonCMSestimates.

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IfwecutMorganStanleysrevenueperdoctorassumption from$63,000to$36,600,itreducestheDCFvalueby$44.ThisreducesMorganStanleysbasecaseDCFvalueforathenasAmbulatorybusinessfrom$120to$76pershare._____________Source:MorganStanley&Co.estimatesasprovidedtoGreenlightinApril2014andGreenlightcalculatedadjustmentstoMorganStanley&Co.estimates.GreenlightsadjustmentstoMorganStanleysmethods,factors,andcalculationswereinthesolediscretionofGreenlight.

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Now,letstalkaboutMorganStanleysEBITbeforestockbasedcompensationmarginassumption. MorganStanley'sreportgoesfor22pagesdetailingitsanalysisoftheaddressablemarket,andathena'srevenueopportunity.Andthenwithoutawordofexplanationitplugsina30%EBITmarginassumptionin2030.MorganStanleyspredictedneartermEBITrampfromabout10%todayto13%attheendofthedecadeispossible. 30%marginsarenot.AnditisthisassumptionthatdrivesthebulkoftheDCFderivedvalue._____________Source:MorganStanley&Co.estimatesasprovidedtoGreenlightinApril2014.

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Totestthemarginquestionwehavetoaskwhether thebusinesshasalotofoperatingleveragesothatincrementalrevenuescanflowthroughtothebottomlinewithfewincrementalexpenses.Historically,softwarebusinesseshavesometimesbeenabletodothatbecausedevelopingsoftwarehasafixedinvestment,andincrementallicenseescancomewithlowmarginalcosts.A servicebusiness,bydefinition,doesnthavethatleverage.Andathenaisaservicebusiness.JustlistentotheCEO.[videoclip]_____________Source:TheHealthCareBloginterviewwithMatthewHoltonFebruary21,2011atHIMSS2011(http://thehealthcareblog.com/blog/2011/02/24/jonathanbushhimss11/)

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JonathanBushlikestocompareathenatoAmazon.Andhebelievesthatbecauseathenascustomersaccessthesoftwarethroughawebbasedportal,athenaisacloudcompanyjustlikeamazon.Whenastoreaddsawebsite,itdoesnotmagicallybecomeacloudbasedretailer.Likewise,whenmybankallowsmetocheckmyaccountbalanceonline,itdoesnotsuddenlybecomeacloudbasedfinancialinstitution._____________Source:http://www.cartoonstock.com/cartoonview.asp?catref=mlyn2008

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Hisuseofthewordcloudissomewhatnebulous.Herehedescribessomeoftheservicesbehindthesoftware:[videoclip]_____________Source:Compilationcomprisedofexcerptsfromthefollowing:1)FoxNewsNetworkonJuly24,2009(http://media2.foxnews.com/072409/072409_business_athena_B1200.flv);2)InternationalBusinessForum2nd AnnualDigitalHealthcareSummitonApril14,2011(https://www.youtube.com/watch?v=UxF84LO6dRQ);3)MITEmTech onOctober9,2013(http://www2.technologyreview.com/emtech/13/video/day1/);4)VentureAtlanta2012onOctober18,2012(https://www.youtube.com/watch?v=S_RDCp0jKY);5)EHRtvinterviewwithAnnandEricFishmanatHIMSSonFebruary21,2012(http://www.ehrtv.com/himss2012athenahealthjonathanbush/);6)EHRtv interviewwithAnnandEricFishmanonOctober27,2010(http://www.ehrtv.com/athenahealthjonathanbushnov2010/);7)TheFuquaSchoolofBusiness,November5,2013(https://www.youtube.com/watch?v=SwuQ2QFs73s);and8)HealthCareBloginterviewwithMatthewHoltatHIMSS2011onFebruary21,2011(http://thehealthcareblog.com/blog/2011/02/24/jonathanbushhimss11/)

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Whenotherindustriestakemundaneornotsomundanetasksoffacompanyshands,wecallthatbusiness processoutsourcingorBPO.Whenthecompanygetsbetteratitbecauseithasmorecustomers,moredata,andawebbasedinterface,it doesntmakethemafusionofSaaS,mobile,social,andcrowdsourcing.It makesthemamoreefficient BPO.Beforeeverybodygotlostintheclouds,athenawasgroupedwithotherfinancialandtransactionprocessingcompanies.Thesearegoodbusinesses,buttheydontmerittripledigitP/Es.Currently,BPOcompaniesmostlyhavehighteensP/Es._____________Source:KPMGCorporateFinance,February28,2011

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Webelievethemostdirectcompsfor athenaareAccretiveHealth, MedAssets,andTenetHospitalsConiferdivision.Thesebusinesseshave, onaverage,a10%operatingmarginbeforestockbasedcompensation.TheCEOofAccretiveHealth acompanyfocusedpurelyonoutsourcedhospitalRCMstatedthatthecompanystargetoperatingmarginswereinthemidteensshortly,beforethecompanyranintoregulatorytrouble._____________Source:ServiceproviderspresentedforcomparisonwereselectedbyGreenlightinitssolediscretion.GreenlightestimatesbasedupontheaverageofthethreemostrecentlyfiledForms10Kforeachserviceprovider.Initssolediscretion,Greenlightmadeadjustmentstoreportedsegmentresultsforstockbasedcompensationandtoallocatecorporateexpensestosegments,amongotheradjustments.

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So, nowletsgobacktoMorganStanleysmarginestimates.ThelowoperatingleveragemakestheEBITrampto13%bytheendofthedecadeplausible.But,theproposedrampto30%bytheendof2030isnot.Bytheway,intheMorganStanleybearcasethatyieldsan$82valuation,theyassumeEBITmarginrampstoonly 27.5%.Thatiswhatpassesforconservatismduringabubble._____________Source:MorganStanley&Co.estimatesasprovidedtoGreenlightinApril2014andGreenlightcalculatedadjustmentstoMorganStanley&Co.estimates.GreenlightsadjustmentstoMorganStanleysmethods,factors,andcalculationswereinthesolediscretionofGreenlight.

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Ifwechangetherevenueperdoctorto$36,600andassumeapeakmarginof15%,ratherthanMorganStanleys30%,thisreducesMorganStanleysbasecaseDCFvaluefortheAmbulatorybusinessbyanadditional$33.OuradjustedDCFvaluefortheestablishedambulatorybusinessistherefore$43pershare. Thisrepresentsagood,optimisticvalueforathena'sestablishedbusiness._____________Source:MorganStanley&Co.estimatesasprovidedtoGreenlightinApril2014andGreenlightcalculatedadjustmentstoMorganStanley&Co.estimates.GreenlightsadjustmentstoMorganStanleysmethods,factors,andcalculationswereinthesolediscretionofGreenlight.

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Sowhatabouttheinpatientorhospitalmarket?HereareMorganStanleysassumptions.Asyoucansee,thehospitalsegmentisforecasttogrowfromzerotomorethan40%ofathenasrevenues...Howlikelyisthat?_____________Source:MorganStanley&Co.estimatesasprovidedtoGreenlightinApril2014.

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Insteadofwaitinguntil ithas afull suiteofsoftwaretoofferhospitals,athenahasdevelopedanewBPOofferingcalledEnterpriseCoordinator,inwhichitwilltakeoverahospitalsadmissions,referrals,prebillings,andpatientcommunicationfunctions.Athenasfirstalphacustomersforthisnewservicearelongtimeathenaclients,StewardHealthCareandGriffinHospital.WhenaskedontheAprilearningscallaboutathenahavingtocutitsalreadynegativemarginpricingstructureforthisnewoffering,JonathanBush washisevercandidself._____________Source:athenahealth FirstQuarter2014EarningsConferenceCall,April18,2014

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Andwhataboutthefutureproducts?MorganStanleysInpatientforecastassumesathenalaunchesanewrevenuecyclemanagementservicein2017thatwillreach$2.5billionofrevenuesby2030._____________Source:MorganStanley&Co.estimatesasprovidedtoGreenlightinApril2014.

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That$2.5billionimpliesthatathenawins6%ofthehospitalindustry. Thisis200%ofthecurrentmarketbecauselessthan3%ofhospitalsoutsourcetheirrevenuecollectiontoday.Hospitalsdontoutsourcebecausetheyhavecustomizedcontractswithlargerpayerssothereislittlebenefitfromthestandardizationofcollectionmethodsthatoutsourcersoffer.MorganStanleyassumesthathospitalswillembraceoutsourcing,andthatathenawilllaunchaviableservicethatwinssignificantmarketshareat30%EBITmargins._____________Source:RCMinpatientmarketpenetrationrepresentsafuture15%annualgrowthratetotheHealthcareInformationManagementSystemsSocietysestimateforcurrentRCMinpatientpenetration.Marketshareforathenahealth reflectsMorganStanley&Co.estimatesasprovidedtoGreenlightinApril2014.

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MorganStanleysassumptionsarenotjustoptimistic,theyseemtoignoretherealitythatevenathenascurrentsolutionishalfbaked._____________Source:MorganStanleyTMTConference,March6,2014

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This iswhatafullyintegratedhospitalsoftwarepackagelookslike.Itinvolveseverypartofthehospital,frombillingtopatientmonitoringtosupplychainmanagement.Theytakeyearstodesignandafortunetobuild.ThecompanythatdominatesthisspaceisEpicSystems._____________Source:http://healthit.ahrq.gov/keytopics/architecturehealthit

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Epicmakescompletesoftwaresolutionsforhospitals,largemedicalgroups,andintegratedhealthcareorganizations, andhasemergedastheundisputedwinnerfromthefragmentedITmarket.It costsanywherefromtenstoevenhundredsofmillionsofdollarstoinstallEpic,butthishasntdeterredthemostwellrespectedhospitalCIOs.Infact,therearecitiesinthiscountrywhereeverymajorhospitalisonEpic, ormovinginthatdirectionbecauseoftheeaseofsharingdata._____________Source:Greenlightanalysisofthe2013top10hospitalsineachspecialtyasrankedbyUSNews&WorldReport(http://health.usnews.com/besthospitals/rankings)

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Epic'sclientretentionrateisnear100%.WallStreetanalystsdon'tpromotetheEPICperspectiveonhealthcareITbecauseitisaprivatecompany.Oh,andtheyarefromWisconsin.GoPackers..._____________Source:TheVeronaPress,August9,2013(http://www.connectverona.com/articles/2013/08/09/epicwowschambergroup)

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AsfarascloudbasedITgoes,Epicscontinuedsuccessshowsthathospitalsarentlookingforacobbledtogetherbestinbreedsolution.Justashospitalsimposestructurefromthetopdown,thehospitalsthemselvesseemcomfortablehavingaproprietarysolutionimposeduponthem,provideditisintegrated,efficient,andinteroperable.Epicisallofthesethings.Anditsnotjusthospitals_____________Source:http://cartoonsy.com/cartoons/maycliniccartooncartoonscartoondrawings914

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Epicisnowexpandingintoothermarkets.CVSsMinuteClinichasbeenalongtimeathenaclientinpracticemanagementandrevenuecollection.

InFebruary,whenCVSdecidedtostopusingitsownproprietaryelectronichealthrecordsproduct,itshouldhavebeenaneasywinforathenaClinicals.Instead,CVSwentwithEpic,furthercementingEpicsplaceasthegotoapplication._____________Source:CVSCaremarkpressreleaseonFebruary21,2014(http://info.cvscaremark.com/newsroom/pressreleases/cvsminuteclinictransitionepiccareelectronicmedicalrecord)

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YetJonathanBushcontinuestobelievethatofcourse cloudbasedsolutionswillbethestandardforhealthcareIT.Itdoesntworkthatway.Thestandardshavebeendecidedinthelastfiveyears,andthe winnersarentthesingledigitsharecloudcompanies.Thestandardisthe2000lb.gorilla fromWisconsinthathasthebiggesthospitals,the275,000doctors,andnoweventhelocalclinics.Andastheselargeinstitutionskeepacquiringsmallerhospitalsanddoctors'practices,andpushingEpicITsystemsdownthechain,Epic'sdominancewillonlygrow._____________Source:HealthInformationTechnology:AFewYearsofMagicalThinking?HealthAffairs,27no.5(2008)(http://content.healthaffairs.org/content/27/5/w383.full.pdf+html)

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Andwhataboutathenabeingthehealthcareinternetbackbone?[videoclip]_____________Source:Compilationcomprisedofexcerptsfromthefollowing:1)BYURollinsCenterforBusinessonSeptember24,2008(https://www.youtube.com/watch?v=CSqS_HRoBLo);2)EHRtv interviewAnnandEricFishmanatMGMAonOctober23,2011(http://www.ehrtv.com/athenahealthjonathanbush/);3)VentureAtlanta2012onOctober18,2012(https://www.youtube.com/watch?v=S_RDCp0jKY);4)MITEmTech onOctober9,2013(http://www2.technologyreview.com/emtech/13/video/day1/);and5)FOXNewsNetworkinterviewatForbesHealthcareSummitonOctober10,2013(http://www.foxbusiness.com/government/2013/10/10/fbnatforbeshealthcaresummit/).

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Jonathanknowshehassomeproblemsthere,too.[videoclip]Likemanyotherpeople,JonathanBushwantstofixhealthcare.Thefixhehasinmindis"ahealthy,sustainablemarketforhealthinformationexchange"but,ashenotes,regulationsandculturalresistancehavekeptthisfromhappening.Nonetheless,athenahascontinueddownthispathinthehopesthattheregulationswillchange.In2011,athenalobbiedforandreceivedasmallexemptionfromtheantikickbacklaws,grantedbytheOfficeoftheInspectorGeneral.Thecompanybelievedthatthiswouldbethecrackinthedamthatwouldeventuallyleadtoanopenmarket.Instead,theOIGreverseditsdecisionlastmonth,signalingthatanychangeintheselawsisnotlikelywithoutanactofCongress.Webelievethatifthelawsaroundthisdochange,asmallplayerlikeathenaisunlikelytobeinacentralpositionwhereitcanextractmonopolyprofits.Inthemeantime,athenahasntdemonstratedaviablebusinessmodelforcontinuingtobuildthebackbone._____________Source:EHRtv interviewwithAnnandEricFishmanatMGMAonOctober23,2011(http://www.ehrtv.com/athenahealthjonathanbush/)

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Sowheredoesthatleaveus?WhileathenamaybeabletocreateanInpatientsoftwareoffering,itwillbeanexpensiveandriskyundertaking.Cerner,anotherlargehealthcareITcompany,hasspent$2.7billioninthelastdecadeonR&D,whileEpicreportedlywillspendmorethan$300millioninR&Dthisyear.MorganStanleys30%marginassumptionforInpatientisevenlessrealisticthanitisinAmbulatory.Itwillbeevenharderforathenatogenerateattractivemarginsfromlargeenterprisecustomersthanfromsmallphysicianpractices.Wethinkwearebeingquitegenerousbyadjustingtoa15%margin.Itwouldbeeasytoargueforsomethingevenlower.ThoughweareinclinedtovalueInpatientatzero,wecannotdisprovethatwhichdoesnotexist.Andinvestorsliketodream.However,wethinkitisappropriatetodiscountthispotentialataratereflectiveofaventureinvestment.A15%marginanda20%discountratestillseemratherforgiving.YoucanseetheseadjustmentshavealotofimpactontheInpatientopportunity.$7pershareseemsmuchmorerealisticthan$72foraproductthatforthemostpartisyearsawayfromcommercialintroduction,letalonesuccess._____________Source:MorganStanley&Co.estimatesasprovidedtoGreenlightinApril2014andGreenlightcalculatedadjustmentstoMorganStanley&Co.estimates.GreenlightsadjustmentstoMorganStanleysmethods,factors,andcalculationswereinthesolediscretionofGreenlight.

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Puttingittogether:WestartedwithMorganStanleysbasecaseDCFvalueof$192pershareandtookitoutofthecloudsbyadjustingvariousimplausibleassumptionsinthemodel.Thisleadstoastilloptimistic,butatleastconceivable$50value._____________Source:MorganStanley&Co.estimatesasprovidedtoGreenlightinApril2014andGreenlightcalculatedadjustmentstoMorganStanley&Co.estimates.GreenlightsadjustmentstoMorganStanleysmethods,factors,andcalculationswereinthesolediscretionofGreenlight.

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Ofcourse,thereisabearcase,whichisworse_____________Source:http://www.cartoonstock.com/cartoonview.asp?catref=mba0046

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Therehasbeenagreatdealofconsolidationinhealthcare,withhospitalsbuyingupphysicianpracticesanddirectlyemployingdoctorsinordertocollecthigherfeesandbettercontrolthecostofcare.Anditshappenedfasterthansomepeopleexpected.CertainlyfasterthanJonathanBushanticipated.

[videoclip]Ashospitalsacquirephysicians,thehospitalswillchoosetheITsystemsandathenawilllosedoctorsthatwillbemovedtoasystemlikeEpic._____________Source:MeaningfulHITNewsinterviewinFebruary2011atHIMSS2011(http://www.meaningfulhitnews.com/2011/02/28/videoathenahealthsjonathanbushathimss11/)

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Wehaveidentifiedthesesixcustomersthatwebelieveathenamayloseinthecomingyears._____________Source:Greenlightopinionbaseduponpublicstatements,newsarticles,announcementsforopenemploymentpositions,anddiscussionswithindustryparticipants.

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Thisvertical integrationisnttheonlythingshrinkingthemarket.Anotherbigpartofthepuzzle isthatdoctorsweregiven hugesubsidiestoadoptelectronichealthrecordsaspartofthe2009schtimulus bill.Jonathanexplains:[videoclip]_____________Source:HealthcareExperienceDesign,closingkeynoteatHxD 2012onMarch26,2012(http://www.healthcareexperiencedesign.com/2012/speakers/jonathanBush.html)

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Afew yearsago,doctorswerepaid$44,000toimplementanduseanEHR.Latelastyearthisdroppedto$24,000,andinafewmonthstheincentivewilldisappearaltogether.Accordingly,mostdoctorswhoaregoingtoadoptEHRshavealreadydoneso,andthegreenfieldopportunityhasbeenpenetrated._____________Source:TotalEMRincentivepaymentsisfromCMSAnIntroductiontotheMedicareEHRIncentiveProgramfromEligibleProfessionals(http://www.cms.gov/RegulationsandGuidance/Legislation/EHRIncentivePrograms/downloads/Beginners_Guide.pdf).PercentageofofficebasedphysicianswithEHRisfromtheCDCsUseandCharacteristicsofEHRSystems(http://www.cdc.gov/nchs/data/databriefs/db111.pdf).

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Asfortheremaining doctorswhoarestillshoppingforEHRs,athenassuccess inthelowerendoftheambulatorymarkethasledtocompetitionthere,too.Companieslikekareo,eClinicalWorks,andCareCloud haveallintroducedcompetingpackagesofRCMandEHRatlowerprices.Itmaybehardforathenatoachievemuchmargingrowthinsuchacompetitivemarket.

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Andthentherescapitation,whereprovidersarepaidaflatratefortakingcareofadefinedpatientpopulation.Thisisanexistentialthreattoathena'scollectionbusiness,asthereisnoreasontopayabillcollectorwhenthebillispaidbeforetheserviceisdelivered.Jonathanseemstoagree:[videoclip]_____________Source:MeaningfulHITNewsinterviewinFebruary2011atHIMSS2011(http://www.meaningfulhitnews.com/2011/02/28/videoathenahealthsjonathanbushathimss11/)

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JonathanBush'ssincere,wellintentioneddesireto"makehealthcareworkasitshould"isamajorthreattoathenasshareholders.Therewillalwaysbehighrisk,lowmarginthingstodothatwillmakehealthcarebetter.Itisaseeminglyintractableproblem.[videoclip]Isaidatthetopofthispresentationthattheworldmaybeabetterplaceifathenasucceeds.ButshareholdersmightwanttoconsidertheramificationsofthelikelymisallocationofcapitalifJonathanBushcontinuestouseathena'sprofits as,quotingJonathan,"ahugecanoffixit._____________Source:VentureAtlanta2012onOctober18,2012(https://www.youtube.com/watch?v=S_RDCp0jKY)

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Webelievethatthereareseriousriskstothisbusinessmodelthatarebeingmostlyignoredbybullishinvestorsandsellsideanalysts.

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Alessoptimisticscenariothatmaybeevenmorelikelythanthe$50DCFcasewouldhavethenumberofdoctorscappingoutat74,000ratherthan86,000,withrevenuesperdoctorincreasingroughlyattherateofinflationuntiltheendofdecade,atwhichpointcapitationand/orcompetitionslowsthegrowthto1%peryear.EBITmarginsexpandto13%,inlinewithathenasbestcomparables,butdontimprovefurther. Theinpatientsegmentdoesnotbecomeaprofitablebusiness,butdoesnotbecomeacashsinkholeeither.Onthatbasis,theDCFfallsto$14pershareoraboutamarketmultipleoncurrentnonGAAPearnings. Withthestockat$127,Idontthinkitisworthwhiletofurtherparsetheassumptions.

_____________Source:MorganStanley&Co.estimatesasprovidedtoGreenlightinApril2014andGreenlightcalculatedadjustmentstoMorganStanley&Co.estimates.GreenlightsadjustmentstoMorganStanleysmethods,factors,andcalculationswereinthesolediscretionofGreenlight.

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Nowheresthecompletestockchart. Inrecentweekstheshareshavefallensharply.Perhapsthebubbleisdeflating.Thethingaboutbubblestocksisthatthebestreasontoownthemisthattheyaregoingup.Whentheystopgoingup,thereisnoreasontoownthem.Thegapbetweenthetopofthebubblepriceandthepricewhereadisciplinedgrowthinvestorwillbecomeinterestedisverylarge.Whentheystopgoingup,thesestocksbecomefallingknives.Ithinkthisonehasmuchfurthertofall.Butyoudonthavetolistentome._____________Source:BloombergL.P.

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Here'sJonathanBushonelasttimeinNovember,whenthestockwastradingat142,provingthathegetsthejoke,andthatheunderstandsWallStreetevenbetterthanheunderstandshealthcare.[playclip]_____________Source:TheFuquaSchoolofBusiness,November5,2013(https://www.youtube.com/watch?v=SwuQ2QFs73s)

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Hereisasnippetfromanothercompanythattriedtochangehealthcare.

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ThiscomesfromWebMDaboutadecadeago.Itturnsoutitishardertotransformhealthcarethansomemightthink.

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