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Athenahealth Wages War on Managed Care

The company, which made a splash with its IPO last week, aims to cut through bureaucracy.

Why would you name your health care company after a goddess of war? In the case of

Athenahealth

(ATHN) - Get Report

, which went public last week with one of the best first-day performances in some time, it seems the battle is being waged against the misguided titans of the managed-care industry.

Or as CEO Jonathan S. Bush

said

in

Entrepreneur

magazine, "The prudent warfare is using technology to get large, impersonal insurance companies to pay their claims properly."

So far it looks as if Bush, and fellow Booz Allen Hamilton alum Todd Park, have turned Athenahealth into one of the very few who are winning the battle. The company's Web-based approach to claims management helped push the company's offering price from the initial $14 to $16 a share range to the final offering price of $18 a share.

After the first day of trading, the stock closed 97% higher at $35.50. It closed Friday unchanged, however, as if the market were pausing to reconsider that first-day pop.

And while the company has yet to turn a profit and other long-term risks remain, the company's innovative approach makes the stock one of the rare recent IPOs to be in the red and still deserving of a warm welcome in the public markets.

Opportunity on the Web

Bush -- cousin of President George W. Bush, and the brother of

Access Hollywood

's Billy Bush -- seems inspired by war imagery: An old

bio page

from his Booz Allen days lists Shakespeare's

Henry V

as his favorite book.

But like many uprisings, Athenahealth was spawned from modest beginnings.

Park and Bush

set up

Athenahealth 10 years ago. At the time it was an OB/GYN clinic named Athena Healthcare with dreams of expanding into a national franchise. But the Byzantine system of billing and insurance caused daunting cash-flow problems. So, the two turned to Park's younger brother to create a technological solution to clinic bill management.

That solution involved the same prescient trick that helped turn

Salesforce.com

TheStreet Recommends

(CRM) - Get Report

into such a successful upstart: Eschew the proprietary software that involves costly installation, maintenance and training. Instead, handle all the processing on the Web so that users only need rely on a browser.

Like Salesforce, Athenahealth is building its client base around small enterprises -- mostly clinics with a handful of doctors or individual practices. It's signed up 10,500 clients over the past five years, but its churn rate has never been above 3% in any of those years.

Nearing Profitability?

The scattered base of potential clients has kept Athenahealth's revenue growth rate fairly high, but also fairly choppy.

The company's revenue grew 42% last year to $75.8 million, following 38% growth in 2005 and 58% growth in 2004. In the first half of this year, revenue is up 31% at $46.4 million.

Athenahealth charges clients between 2% and 8% of their own revenue. Clients are seeing even more money, bringing in an average increase of 10% in total collections and a 40% increase in the collection rate, the company's prospectus says.

Athenahealth has 50 employees whose sole task it is to update ever-shifting rules among myriad payers. And it's added to offerings with a similar service that automates tracking of patients' medical records.

Building and maintaining these databases has demanded R&D spending, and reaching out to hundreds of thousands of doctors' offices can put a strain on marketing costs, so Athenahealth has yet to post a profit.

But margins are falling and could push into profits soon. The company's operating loss in the first half of 2007 was equal to 0.6% of revenue, compared with 7.9% in the first half of 2006. And that's down from the negative operating margin of 18% in all of 2005.

Athenahealth is also using $33 million of the $82 million it raised in the offering to repay outstanding debt. That should help reduce the interest payments contributing to nonoperating expenses. The company paid $1.6 million in interest expenses in the first half of 2007.

But the big factor likely to push Athenahealth into profitability is its edge against competitors. The software market for medical billing and record-keeping has big players, including

GE

(GE) - Get Report

,

Siemens

(SI) - Get Report

and

McKesson

(MCK) - Get Report

. But they tend to use locally installed software, which is often less user-friendly and less adaptive to the complex and changing health care system.

Athenahealth's long history with a browser-based platform has those advantages.

Risks Remain

There are two caveats involved with Athenahealth's stock. The first is its valuation. The magnificent first-day pop lifted the market cap to $1.12 billion, or nearly 15% of revenue. For a company whose revenue is growing at 31% this year (significantly slower than last year's 42%), that's quite a risk for investors to take.

The second is this little tidbit tucked into a revised version of Athenahealth's prospectus: After noting that it has six patents pending but no issued patents, the company says, "We have received a final office action rejecting application on our oldest and broadest application."

Without strong patents, Athenahealth is vulnerable to its deeper-pocketed competitors copying wholesale its successful business model and is sitting prey for those who do hold patents on similar technologies. Athenahealth is facing one such lawsuit, which seems to be mired in legal limbo.

Bad news on the patent front could take the wind out of Athenahealth's stock, which could in turn harm the company's own promising future.

That would be too bad since Athenahealth is one of the few gaining ground in the long war against our hellish managed-care system.