athenahealth to Buy Epocrates - Analyst Blog

Recently, athenahealth Inc. (ATHN), a provider of cloud-based services for physician practices and inpatient settings, inked a definitive agreement to acquire Epocrates Inc. (EPOC) for about $293 million in cash. The aggregate purchase price is based on a price of $11.75 per share, which reflects a 22% premium over the closing price of Epocrates on January 4, 2013.

athenahealth plans to fund the acquisition with available cash and available borrowing capacity from its existing credit facility. Exiting the third quarter, the company had cash and cash equivalents and short-term investments of $180.2 million, up 52.1% year over year, with no outstanding debt.

The Acquiree

Epocrates is a provider of point-of-care digital solutions in the healthcare industry. Its portfolio consists of well-regarded medical applications, which are currently available on major U.S. mobile platforms. The company launched its mobile and web-based electronic health record (EHR) solutions in July 2011. Epocrates reported revenues of $113.3 million in 2011, up 9% year over year.

Stockholders at Epocrates (accounting for 17.5% of the company's outstanding common stock) have expressed that they are in favor of the transaction. The acquisition is expected to close in the second quarter of 2013, subject to standard closing conditions.

Benefit of the Acquisition

The acquisition will enable athenahealth to increase its user network as Epocrates currently serves over a million healthcare professionals, including 330,000 physicians in the U.S. Further, the buyout will enhance brand awareness for athenahealth as Epocrates is recognized by 90% of physicians in the U.S.

Given the widespread mobile user base of Epocrates, athenahealth is expected to improve efficiency of new mobile workflows. Moreover, the mobile expertise of Epocrates in conjunction with athenahealth's cloud-based network should enable the latter to commercialize novel mobile applications.

We believe that the acquisition is part of the company's strategy to expand beyond the current cloud-based services – athenahealth's mainstay. We are optimistic about the company gaining a competitive edge over industry stalwarts, following the acquisition.

In addition, the acquisition is expected to improve athenahealth's access to small group physician practices with Epocrates' credible client base. The buyout might offset the trend toward consolidation of small physician group practices, which is a potential negative factor for athenahealth. This presents a solid growth opportunity in the near-term.    

Deal under Scrutiny

Following its recent announcement, the agreement has been subjected to legal scrutiny. The deal is currently entangled in lawsuits as law firms assert that the agreement does not uphold the interest of Epocrates' stockholders. This stems from their belief that athenahealth is underpaying for the acquisition.

Our Recommendation

Estimate revision trends for 2012 and 2013 reflect a bearish sentiment for athenahealth. Accordingly, the stock carries a short-term Zacks Rank #5 (Strong Sell). One of its peers Cerner Corporation (CERN) carries a Zacks Rank #3 (Hold). We maintain our long-term ‘Neutral' recommendation on athenahealth.