bank of america and merrill lynchbank of america and...

Bank of America and Merrill LynchBank of America and Merrill Lynch Health Care Conference

Carl Byers

SVP, Chief Financial Officer & Treasurer

Safe Harbor StatementSafe Harbor Statement

This presentation contains certain forward-looking statements that involve significant risks and uncertainties about athenahealth Inc including but not limited torisks and uncertainties about athenahealth, Inc., including, but not limited to, statements about our future financial and operating performance and the benefits of our service offerings. Forward-looking statements can often be identified with words such as “we expect,” “we anticipate,” “upcoming,” and similar expressions. No forward-looking statement can be guaranteed, and actual results and events may differ materially from results and events discussed in such forward-looking statements Such statementsresults and events discussed in such forward looking statements. Such statements involve risks, uncertainties, and assumptions. For a more complete discussion of risks, uncertainties, and assumptions that may affect athenahealth, Inc., please see our most recent Annual Report on Form 10-K and our other current public filings available at www.sec.gov and on the Investors section of our website at www.athenahealth.com. athenahealth is providing this information as of the date of this presentation and doesathenahealth is providing this information as of the date of this presentation and does not undertake any obligation to update any forward-looking statements contained in this presentation as a result of new information, future events, or otherwise.

Finally, during this presentation we will be referring to non-GAAP financial measures h Adj t d EBITDA Th GAAP t d i dsuch as Adjusted EBITDA. These non-GAAP measures are not prepared in accordance

with generally accepted accounting principles. A reconciliation between non-GAAP and the most directly comparable GAAP financial measures is available within the financial portion of this presentation and within the quarterly earnings press releases on the Investors section of our website.

Copyright athenahealth, Inc. 2009

We Deliver Internet-Based Business Services to Physician GroupsServices to Physician Groups

• Founded in 1997 – Based in Watertown, MA

• IPO in September 2007 (NASDAQ: ATHN)

• 2008 revenue: $139.6 million

37 quarters of consecutive revenue growth

Annual growth rate of 41% in Q1 2009

• Client base as of Q1 2009:

13,000+ physicians, 19,700+ total providers

Across 40 states and 60 medical specialties

As of March 31 2009


As of March 31, 2009

Our Vision Is an Information Infrastructure that Makes Healthcare Work the Way it ShouldMakes Healthcare Work the Way it Should

OUR ROLE Be the best at getting clinicians paid

Back Office: athenaCollectorSM 2

Launch Year

OUR ROLE Be the best at getting clinicians paid

• Web-based practice management system• Continuously updated payer billing rules• Integrated back office billing and collections service operations

SM

2000

Middle Office: athenaClinicalsSM

• Web-based electronic health record (EHR)• Continuously updated clinical order and P4P requirements• Integrated chart room ‘clinical’ service operations

2006

Front Office: athenaCommunicatorSM

• Web-based provider and patient portals • Continuously updated schedule, results, and billing protocols

2009


• Integrated front office patient service operations

9

The New Administration Embraces Payment Based ReformEmbraces Payment-Based Reform

President Barack Obama On paying for results rather than utilization:• “How are we going to reduce healthcare costs?…Let's invest in

mechanisms that look at who's doing a better job controlling costs while producing good quality outcomes…and let's reimburse on the basis of improved quality, as opposed to simply how many procedures you're doing ” (March 24 2009 – White House Press Conference)doing. (March 24, 2009 – White House Press Conference)

Dr. David Blumenthal, National Coordinator for Health Information Technology

On changing the payment system:On changing the payment system:• “Realizing the full potential of HIT depends in no small measure on

changing the healthcare system’s overall payment incentives so that providers benefit from improving the quality and efficiency of the


p p g q y yservices they provide.” (March 25, 2009 – New England Journal of Medicine)

The Revenue Cycle for Physicians is a Mess of Complex Analog Based Requirements

Payer Rules Content is Complex & Dynamic

of Complex Analog-Based Requirements

Example of a Rule And it Continues…


Controlling the Clinical Workflow Requires Mastering a Similar MessRequires Mastering a Similar Mess

1 day

1 doctor

115 faxes

10 ads

55 lab results

30 consult reports

19 pharmacy renewals

1 t t b l th t d i di t tt ti1 stat abnormal mammogram that needs immediate attention


Requirements At Each StepAre Diverse and Keep Changing

Rules vary from P4P revenue may depend

Care providers will Next steps and

Are Diverse and Keep Changing

payer to payer about which visits

are covered

P4P revenue may depend on weight, blood pressure and other pre‐exam data

issue Rx, lab, referral and other orders based on the exam

payment arrangements vary

widely

Schedule Check‐InPrep / Intake

Issue Orders

Process Results

Exam

Codes depend on examCo‐pays change and P4P reimbursement

Check‐Out

Codes depend on exam variables (e.g. number of bodily systems examined)

Co pays change and can vary from the

card

P4P reimbursement often based on lab

result data

Follow‐Up

Physician responsible for


Physician responsible for following up on results

and orders

Requirements At Each StepAre Diverse and Keep Changing

Rules vary from P4P revenue may depend

Care providers will Next steps and

Are Diverse and Keep Changing

payer to payer about which visits

are covered

P4P revenue may depend on weight, blood pressure and other pre‐exam data

issue Rx, lab, referral and other orders based on the exam

payment arrangements vary

widely

Schedule Check‐InPrep / Intake

Issue Orders

Process Results

Exam

Codes depend on examCo‐pays change and P4P reimbursement

Check‐Out

One common workflow with very different real‐time Codes depend on exam variables (e.g. number of bodily systems examined)

Co pays change and can vary from the

card

P4P reimbursement often based on lab

result datarequirements payer to payer, based on revenue cycle

and clinical rules that change all the timeFollow‐Up

Physician responsible for


Physician responsible for following up on results

and orders

A Fundamentally Different Approach and Business ModelApproach and Business Model

“Do-It-Yourself Internet-Based With Software”

Upfront capex, license fee and ongoingRevenue Model

Business Service

No capex, fees based on % of collectionsfee and ongoing

maintenance charges

Experience, creativity of

Revenue Model on % of collections

Collective experience individual clinic staff

F t d

Performance Driversp

of all clinics on the network

I t i li iFeatures and functionality of softwareValue Proposition

Improvement in clinic financial results


Client Results are Real and They Improve with Growthand They Improve with Growth

• Average client Days in Accounts Receivable (DAR) have declined due

Total ClaimsFirst-Pass Resolution Rate and

Client Days in AR

to scale and related operational improvements (e.g. FPR rate)

60

70 100%

MM

)

R

First-Pas

FPR over 90%*

50

80%

90%

Tota

l Cla

ims

(M

Day

s in

AR ss R

esolution Rate

30

40

2001 2002 2003 2004 2005 2006 2007 200870%

80%DAR under 50 days*


2001 2002 2003 2004 2005 2006 2007 2008

* As of Q1 2009

Going After an Addressable Market that Remains 100x Our Sizethat Remains 100x Our Size

athenahealth’s Collections < 1% U.S. Healthcare Expenditures = $2.1tn¹ Growth Trend – Ambulatory Care

athenahealth Collections $4.4bn (0.98%) CMS Data, Actual and Projected Ambulatory Spending

600.0

700.0

800.0

900.0

Estimated at $840bn by 20171

21%

Physician and Clinical

Services: $448bn1

CAGR = 6 %

100.0

200.0

300.0

400.0

500.0

$ in

Bill

ions

• Revenue cycle market opportunity $448bn x 2-8%2 = ~ $19bn

Market Opportunity

-2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

T l $ b

• Revenue cycle market opportunity $448bn x 2 8% = $19bn

$448bn x 1-3%2 = ~ $10bn• Clinical cycle market opportunity

• Patient cycle market opportunity TBD


¹ CMS estimate, 2006 (most recent data: http://www.cms.hhs.gov/NationalHealthExpendData/02_NationalHealthAccountsHistorical.asp#TopOfPage)2 Assumed rate of spending within medical practices for services that athenahealth offers on an outsourced basis

Total = ~$29bn+

Growth Driven by Physicians and CollectionsPhysicians and Collections

Physicians Collections and Revenue

11,967

12,58913,196

12,000

13,000

14,000

$885$932

$1,074$1,086

$40

$45

$900

$1,000

$1,100

6 3477,034

7,3937,639

8,1368,978

9,4239,810

10,356

8,000

9,000

10,000

11,000

,

ns $$518

$575$606

$666$704

$769$797

$25

$30

$35

$600

$700

$800

$900

Revenuti

ons

($M

M)

4,4764,585

5,2665,782 6,054

6,347

3,000

4,000

5,000

6,000

7,000

Phys

icia

n

$311$339$357

$388$436

$491$

$10

$15

$20

$200

$300

$400

$500

ue ($MM

)

Post

ed C

olle

ct

0

1,000

2,000

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1

2005 2006 2007

$0

$5

$0

$100

$200

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1

2005 2006 20072008 20082009 2009


2005 2006 2007

Physicians on athenaNet Revenue Posted Collections

2005 2006 2007

Note: Quarterly figures unaudited

2008 20082009 2009

Operating Leverage Translates Top-Line Growth into Expanding Profitability

$139.6

Revenue

Growth into Expanding Profitability($ in millions)

$100.8

$139.6

$42 1$29.8

$42.1

2007 2008 Q108 Q109

$54.8

$81.7$23.7

Adjusted EBITDA1Adjusted Gross Profit1

$17.1$24.3

$11.3

$4.0

$7.4


2007 2008 Q108 Q109 2007 2008 Q108 Q109

Margin: 54.4% 58.6% 57.4% 57.6% Margin: 11.3% 17.0% 13.5% 17.6%1 See non-GAAP reconciliations at conclusion of presentation

Non-GAAP Reconciliations

Adjusted Gross Margin Reconciliation

($ in millions)

Q108

Less: Direct Operating Expense (12.8) (18.3)

Total Revenue 29.8 42.1

Q109

( ) ( )

Add: Stock-based Compensation Expense Allocated to Direct Operating Expense

0.1 0.4

Add: Amortization of purchased intangibles - 0.08

Please note that Adjusted Gross Profit totals may be slightly different than the sum total of the component parts shown here due to rounding; for each area shown, including the Adjusted Gross Profit total, the amount shown is a rounded presentation of the actual result or total.

Adjusted Gross Profit1 17.1 24.3

Adjusted Gross Margin2 57.4% 57.6%

1. We define “Adjusted Gross Profit" as GAAP (generally accepted accounting principles) total revenue, less direct operating expense, plus stock-based compensation allocated to direct operating expense and amortization of purchased intangibles. Adjusted Gross Profit, as we define it, is a non-GAAP

The upcoming Adjusted Financial Metrics Discussion slide shows why the Company believes that Adjusted Gross Margin is a useful financial measure to investors and how Company management uses this financial measure to evaluate operating results.

g j p


p p g p p g jfinancial measure and may not be similar to Adjusted Gross Profit measures used by other companies.

2. Adjusted Gross Profit expressed as a percentage of total revenue.

Adjusted EBITDA Reconciliation

($ in millions)

Add Oth E (I )1

Net Income

Q108

(0 02)

1.8

(0 04)

2.3

Q109

Add: (Gain)/Loss on interest rate derivative contract - (0.2)Add: Other Expenses (Income)1

Add: Interest (Income) Expense, net(0.02)(0.7)

Add: Provision for Income Taxes 0.2

(0.04)

(0.2)1.9

Add: Depreciation and Amortization 1.4 1.6

Adjusted EBITDA2 4.0

Adjusted EBITDA Margin3 13.5%

Add: Stock-based Compensation Expense 1.3

Pl t th t Adj t d EBITDA t t l b li htl diff t th th t t l f th t t h h d t di f h

7.4

17.6%

1.9

1 Includes unrealized loss on warrant liability loss on disposal of assets and financial advisor fees paid by shareholders

The upcoming Adjusted Financial Metrics Discussion slide shows why the Company believes that Adjusted EBITDA is a useful financial measure to investors and how Company management uses this financial measure to evaluate operating results.

Please note that Adjusted EBITDA totals may be slightly different than the sum total of the component parts shown here due to rounding; for each area shown, including the Adjusted EBITDA total, the amount shown is a rounded presentation of the actual result or total.


1. Includes unrealized loss on warrant liability, loss on disposal of assets and financial advisor fees paid by shareholders.2. We define “Adjusted EBITDA" as GAAP (generally accepted accounting principles) net income before net interest expense, other expenses, unrealized

gain/loss on interest rate derivatives, income taxes, depreciation, amortization, and stock-based compensation expense. Adjusted EBITDA, as we define it, is a non-GAAP financial measure and may not be similar to adjusted EBITDA measures used by other companies.

3. Adjusted EBITDA expressed as a percentage of total revenue.

Adjusted Operating Income Reconciliation

($ in millions)

Operating Income

Q108

1.3

Add: Stock-based Compensation Expense 1.3

3.8

1.9

Q109

Adjusted Operating Income1 2.6

Adjusted Operating Income Margin2 8.6%

5.7

13.5%

Please note that Adjusted Operating Income totals may be slightly different than the sum total of the component parts shown here due to rounding; for h h i l di th Adj t d O ti I t t l th t h i d d t ti f th t l lt t t l

1 We define “Adjusted Operating Income" as GAAP (generally accepted accounting principles) Operating Income plus stock-based compensation expense

The upcoming Adjusted Financial Metrics Discussion slide shows why the Company believes that Adjusted Operating Income is a useful financial measure to investors and how Company management uses this financial measure to evaluate operating results.

each area shown, including the Adjusted Operating Income total, the amount shown is a rounded presentation of the actual result or total.


1. We define Adjusted Operating Income as GAAP (generally accepted accounting principles) Operating Income plus stock based compensation expense.2. Adjusted Operating Income expressed as a percentage of total revenue.

Adjusted Financial Metrics Discussion

Management believes that Adjusted Gross Margin, Adjusted EBITDA and Adjusted Operating Income provide useful information to investors about the Company's performance because they eliminate the effects of period-to-period changes in costs associated withinvestors about the Company s performance because they eliminate the effects of period to period changes in costs associated with capital investments, net income from interest on the Company's cash and marketable securities, stock-based compensation expense and similar expenses which are not directly attributable to the underlying performance of the Company's business operations. Management uses Adjusted Gross Margin, Adjusted EBITDA and Adjusted Operating Income in evaluating the overall performance of the Company'sbusiness operations and believes this performance measure provides useful information to investors. The Company adopted FASB Statement No. 123R, Share-Based Payments, effective January 1, 2006, which requires that share-based payments, including employee stock options be measured at their fair value and recorded as compensation expense in the Company's financial statements Prior to thestock options, be measured at their fair value and recorded as compensation expense in the Company s financial statements. Prior to the adoption of FAS 123R, the Company was required to record stock-based compensation expense using the awards' intrinsic value which generally resulted in no compensation expense being recorded in the financial statements. In accordance with the modified prospective method the Company used to adopt FAS 123R, the Company's financial statements for prior periods have not been restated to reflect, and do not include, changes in the method to expense share-based payments, including employee stock options, at their fair values. Though management finds Adjusted Gross Margin, Adjusted EBITDA and Adjusted Operating Income useful for evaluating aspects of the Company's business its reliance on this measure is limited because excluded items can have a material effect on the Company'sCompany's business, its reliance on this measure is limited because excluded items can have a material effect on the Company's earnings (or losses) calculated in accordance with GAAP.

Therefore, management uses Adjusted Gross Margin, Adjusted EBITDA and Adjusted Operating Income in conjunction with GAAP earnings (loss) in evaluating the overall performance of the Company's business operations. The Company believes that Adjusted Gross Margin, Adjusted EBITDA and Adjusted Operating Income provide investors with an additional tool for evaluating the Company's core g , j j p g p g p yperformance, which management uses in its own evaluation of overall performance, and a base-line for assessing the future earnings potential of the Company. While the GAAP results are more complete, the Company prefers to allow investors to have this supplemental metric since, with a reconciliation to GAAP, it may provide greater insight into the Company's financial results. Management does not intend the presentation of this non-GAAP financial measure to be considered in isolation or as a substitute for results prepared in accordance with GAAP. This non-GAAP financial measure should be read only in conjunction with the Company's consolidated financial statements prepared in accordance with GAAP


statements prepared in accordance with GAAP.

Bank of America and Merrill LynchBank of America and Merrill Lynch Health Care Conference

May 13, 2009

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