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Emdeon: reading its IPO prospectus

Reading Time: 8 minutes

(Update 16Sept09) Brean Murry is out with a selling rating with Emdeon (source: StreetInsider). Quote:

While investors may be focusing on the potential benefit from healthcare reform, we view the benefit as a potential one-time boost to the growth rate in claims that will revert back to the low-single digits after the anniversary of enrollment…We apply a 13x multiple to our 2010 cash EPS estimate, which we believe may prove overly generous, to arrive at a fair value of $13 per share.

(Original) First heard about Emdeon (NYSE:EM) from Cramer on Mad Money before its IPO. I watch Mad Money from time to time, mostly for entertainment (not for ideas or education). But this healthcare bill processor IPO sounds interesting especially at this time. And to make it more interesting, the stock did not get huge pop post IPO. Hm. So I went ahead and looked at its IPO Prospectus.

Emdeon logo pic

Our services are delivered primarily through recurring, transaction-based processes that leverage our revenue and payment cycle network, the single largest financial and administrative information exchange in the U.S. healthcare system. In 2008, we processed a total of 4.0 billion healthcare-related transactions (my comment: Visa in Healthcare?), including approximately one out of every two commercial healthcare claims delivered electronically in the United States. We have developed our network of payers and providers over 25 years and connect to virtually all private and government payers, claim-submitting providers and pharmacies, making it extremely difficult, expensive and time-consuming for competitors to replicate our market position. (ADP in healthcare billing?)
……
Because we serve as a central point of communication and data aggregation for our customers, our network captures the most comprehensive and timely sources of U.S. healthcare information, including approximately 25 terabytes of historical claim data to which we add an average of 125 million rows of data daily. (Google in healthcare information?)

Healthcare expenditures are a large and growing component of the U.S. economy, representing $2.2 trillion in 2007, or 16.2% of GDP, and are expected to grow at 6.2% per year to $4.4 trillion, or 20% of GDP, in 2018. We believe the cost of healthcare administration in the U.S. was approximately $360 billion in 2008, or 17% of total healthcare expenditures, and that $150 billion of these costs were spent by payers and providers on billing and insurance administration-related activities alone. We believe the increased need to slow the rise in healthcare expenditures, particularly during the current period of U.S. economic weakness, increased financial pressures on payers and providers and public policy initiatives to reduce healthcare administrative inefficiencies should accelerate adoption of our solutions. (reform or not, the digitalization trend should help Emdeon’s business)

……
We are pursuing the following growth strategies:

• Continue to Drive Healthcare’s Transition from Paper-Based to Electronic Transactions (V/MA: paper to plastic?)
……..

Valuation
According to Investopedia: It’s an expensive stock. With more than 88 million shares outstanding, the market cap’s around $1.5 billion. Annualizing the 13.6 million earned in the first six months of the year, the P/E becomes 55. However, the potential earnings growth here more than offsets the expense.

But recall how GOOG, MA were priced (and many people’s response) in their IPO? In this day of age, finding hidden gems (like MSFT, DELL, CSCO, RIMM in their formative days) is almost impossible.

Risk
The main risk is regulatory uncertainty, as we know the healthcare reform debate is heated up. The reform may not pass congress, which means the 46 million uninsured will not be added to boost transaction volume (note this is only one factor to boost transaction volume). Another risk is the company is controlled by General Atlantic, the private equity company, they have more say on business strategy and they could do things to benefit themselves while hurting other common shareholders.

Last but not least, the company is headquartered in Nashville. There are not many big companies based in Nashville, the capital of country music.

Disclosure: I have long positions in EM.

Further readings (I am not endorsing any of recommendation etc.)
North American Market for Third Party Payroll Payment and Healthcare Transaction Processing

(Update 12Sept09) More from 424b4 (prospectus)
Risk factors
Copied top 3 from prospectus

We face significant competition for our products and services.

The markets for our various products and services are intensely competitive, continually evolving and, in some cases, subject to rapid technological change. While we do not believe any single competitor offers a similarly expansive suite of products and services, we face competition from many healthcare information systems companies and other technology companies within segments of the revenue and payment cycle markets. We also compete with certain of our customers that provide internally some of the same products and services that we offer. Our key competitors include: (i) healthcare transaction processing companies, including those providing electronic data interchange (“EDI”) and/or Internet-based services and those providing services through other means, such as paper and fax; (ii) healthcare information system vendors that support providers, including physician practice management system and electronic medical record system vendors; (iii) large information technology consulting service providers; and (iv) health insurance companies, pharmacy benefit management companies and pharmacies that provide or are developing electronic transaction services for use by providers and/or by their members and customers. In addition, major software, hardware, information systems and business process outsourcing companies, both with and without healthcare companies as their partners, offer or have announced their intention to offer products or services that are competitive with products and services that we offer.

Within certain of the products and services markets in which we operate, we face competition from entities that are significantly larger and have greater financial resources than we do and have established reputations for success in implementing healthcare electronic transaction processing systems. Other companies have targeted these markets for growth, including by developing new technologies utilizing Internet-based systems. We may not be able to compete successfully with these companies, and these or other competitors may commercialize products, services or technologies that render our products, services or technologies obsolete or less marketable.

Some of our customers compete with us and some, instead of using a third party provider, perform internally some of the same services that we offer.

Some of our existing customers compete with us or may plan to do so or belong to alliances that compete with us or plan to do so, either with respect to the same products and services we provide to them or with respect to some of our other lines of business. For example, some of our payer customers currently offer, through affiliated clearinghouses, through Web portals and other means, electronic data transmission services to providers that allow the provider to bypass third party EDI service providers such as us, and additional payers may do so in the future. The ability of payers to replicate our products and services may adversely affect the terms and conditions we are able to negotiate in our agreements with them and our transaction volume with them, which directly relates to our revenues. We may not be able to maintain our existing relationships for connectivity services with payers or develop new relationships on satisfactory terms, if at all. In addition, some of our products and services allow payers to outsource business processes that they have been or could be performing internally and, in order for us to be able to compete, use of our products and services must be more efficient for them than use of internal resources.

If we are unable to retain our existing customers, our business, financial condition and results of operations could suffer.

Our success depends substantially upon the retention of our customers, particularly due to our transaction-based, recurring revenue model. We may not be able to retain some of our existing customers if we are unable to continue to provide products and services that our payer customers believe enable them to achieve improved efficiencies and cost-effectiveness, and that our provider customers believe allow them to more effectively manage their revenue cycle, increase reimbursement rates and improve cash flows. We also may not be able to retain customers if our electronic and/or paper-based solutions contain errors or otherwise fail to perform properly or if our pricing structure is no longer competitive. Historically, we have enjoyed high customer retention rates; however, we may not be able to maintain high retention rates in the future. Our transaction-based, recurring revenues depend in part upon maintaining this high customer retention rate, and if we are unable to maintain our historically high customer retention rate, our business, financial condition and results of operations could be adversely impacted.

Healthcare reform

Recent developments in the healthcare industry could adversely affect our business.

National healthcare reform is currently a major focus at the federal level, and congressional leaders are targeting legislation to be passed by the fall. There are currently numerous federal, state and private initiatives and studies seeking ways to increase the use of information technology in healthcare as a means of improving care and reducing costs. These initiatives may result in additional or costly legal and regulatory requirements that are applicable to us and our customers, may encourage more companies to enter our markets, may provide advantages to our competitors and may result in the development of technology solutions that compete with ours.

Any such reforms or initiatives, whether private or governmental, may result in a reduction of expenditures by customers or potential customers in the healthcare industry, which could have an adverse effect on our business. General reductions in expenditures by healthcare industry constituents could result from, among other things:

• government regulation or private initiatives that affect the manner in which providers interact with patients, payers or other healthcare industry constituents, including changes in pricing or means of delivery of healthcare products and services;

• reductions in governmental funding for healthcare; and

• adverse changes in business or economic conditions affecting payers or providers, pharmaceutical companies, medical device manufacturers or other healthcare industry constituents.

Even if general expenditures by industry constituents remain the same or increase, other developments in the healthcare industry may result in reduced spending on information technology and services or in some or all of the specific markets we serve or are planning to serve. In addition, our customers’ expectations regarding pending or potential industry developments may also affect their budgeting processes and spending plans with respect to the types of products and services we provide. For example, use of our products and services could be affected by:

• changes in the billing patterns of providers;

• changes in the design of health insurance plans;

• changes in the contracting methods payers use in their relationships with providers; and

• decreases in marketing expenditures by pharmaceutical companies or medical device manufacturers, as a result of governmental regulation or private initiatives that discourage or prohibit promotional activities by pharmaceutical or medical device companies.

The healthcare industry has changed significantly in recent years and we expect that significant changes will continue to occur. The timing and impact of developments in the healthcare industry are difficult to predict. We cannot be sure that the markets for our products and services will continue to exist at current levels or that we will have adequate technical, financial and marketing resources to react to changes in those markets.

US demographics

We also expect to continue to be affected by pricing pressure in our industry, which has led (and is expected to continue to lead) to reduced prices for the same services. We have sought in the past and will continue to seek to mitigate pricing pressure by (i) providing additional value-added products and services, (ii) increasing the volume of services we provide and (iii) managing our costs. In addition, significant changes in regulatory schemes, such as the new updated HIPAA standard electronic transaction code set requirements for ICD-10, ARRA and other federal healthcare policy initiatives, and demographic trends affecting the healthcare industry, such as population growth and aging, could affect the frequency and nature of our customers’ healthcare transactional activity. The impact of such changes could impact our revenues, cost of operations and infrastructure expenses and thereby affect our results of operations and the way we operate our business. For example, an increase in the U.S. population, if such increase is accompanied by an increase in the U.S. population that has health benefits, or the aging of the U.S. population, which requires an overall increased need for healthcare services, may result in an increase in our transaction volumes which, in turn, may increase our revenues and costs of operations.

Reference
LinkedIn
http://www.linkedin.com/companies/emdeon-business-services

Glassdoor
http://www.glassdoor.com/Reviews/Emdeon-Reviews-E134512.htm

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