Battle over "Mobile Healthcare"

Mike is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Electronic health record and practice management provider Athenahealth (NASDAQ: ATHN) recently announced its intention to purchase mobile medical-reference and "point-of-care" provider Epocrates (NASDAQ: EPOC) for about $293 million in cash. Under the terms of the formal offer, San Mateo, California-based Epocrates shareholders would receive cash payouts of $11.75 per share. No options or purchase warrants would be extended or exchanged. Depending upon the speed with which it is approved by Epocrates's shareholder base, the deal could close by the end of the first quarter of 2013.

This deal appears to provide Epocrates shareholders with a solid value. Relative to the stock's December 28, 2012 closing price of $8.66, the $11.75-per-share offer represents a premium of approximately 35.7 percent. Although the stock rose to nearly $12 per share on takeover rumors in September of 2012, it has spent most of the past year and a half between $7 and $10 per share. However, it traded above $20 per share shortly after its IPO in early 2011. As such, Athenahealth can claim to be snapping up Epocrates during a period of temporary weakness.

Watertown, Massachusetts-based Athenahealth is a major player in the rapidly-growing electronic health records space. Known as EHRs, electronic health records are cloud-based tools that permit physicians, hospitals and clinic managers to store patient information. These tools also enable them to communicate effectively with the insurance providers and state-level Medicare offices that are responsible for their primary revenue streams. With the recent passage of the Affordable Care Act, electronic medical records look to become increasingly central to the profitability of healthcare providers.

The company also offers powerful practice-management tools that permit clinics' clerical staff to organize electronic files and invoices more effectively. Since most of its cloud-based services are compatible only with desktop and laptop computers, the company's competitive interest in mobile-focused Epocrates is clear. Athenahealth employs about 1,800 full-time employees and serves healthcare providers across the United States.

Epocrates develops and markets a number of mobile-friendly medical applications for doctors, clinic managers and medical students. One of its most popular offerings is an encyclopedia-like reference tool that permits physicians and students to access in-depth information about drugs and disorders from tablets or smartphones. It also operates a healthcare-centric "news wire" and offers several key electronic services for drugstore and hospital pharmacists. Epocrates employs about 300 workers and lost $9.5 million on $110 million in gross revenues during the 2011 fiscal year.

Athenahealth's purchase of Epocrates provides it with a foothold in the emerging mobile healthcare field. As mobile technology becomes increasingly essential in the dynamic healthcare ecosystem, the market for services like those provided by Epocrates appears poised to explode. Within a decade, Athenahealth could see its mobile-related revenues expand by an order of magnitude over Epocrates's current baseline.

The mobile healthcare field is already crowded. New York-based WebMD (NASDAQ: WBMD) already offers a mobile health reference and point-of-service system known as MedScape. Since WebMD is roughly the size of Athenahealth and competes in many of the same sub-fields, it is a natural competitor of the growing firm. Although there is probably ample room for WebMD and Athenahealth to exist within the mobile healthcare market, it is clear that each company wishes to establish its proprietary platform as the industry-standard interface at an early stage. Other competitors in the space include Epic Systems, a privately-held, Wisconsin-based electronic health records developer.

A pending lawsuit may yet derail the deal between Athenahealth and Epocrates. As is customary in the aftermath of merger announcements, the suit focuses on the offer's potential undervaluing of Epocrates shares. Although it has not yet been filed, the suit's brief notes that several analysts have set price targets above the offer price. It also notes that the company's average post-IPO trading price is nearly 50 cents per share higher than the offer price. 

The merit of the pending lawsuit is dubious. Since its IPO, Epocrates has issued several mediocre earnings reports and revised its guidance downwards on several occasions. Additionally, the company has yet to turn a profit on a consistent basis since going public. Despite its long-term promise, it is clear that Epocrates must shake off a number of classic start-up issues before attaining full profitability. In this light, its acquisition by a larger and more stable rival with which it has natural synergies appears well-advised.

Assuming that any potential legal challenges are dismissed or settled, the merger between these two companies should close by April of 2013. Despite questions about Epocrates's fair value, the deal appears to represent an excellent short-term value for the smaller company's shareholders. With its potential to expose Athenahealth to the fast-growing mobile healthcare market, it looks to deliver long-term value to that company's shareholders as well. Current Epocrates shareholders would do well to watch Athenahealth's price action during the coming months. If the stock's price dips, it may present an attractive target for the mountains of post-deal cash that these investors will have on their ledgers.


mthiessen has no position in any stocks mentioned. The Motley Fool recommends Athenahealth. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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