Building the Healthcare Cloud

Steve Rubis rubiss@stifel.com (202) 778-4780
Stifel Equity Trading Desk (800) 424-8870
Industry Update
Initiating Coverage on Digital Healthcare; Building the Healthcare Cloud
What Is Digital Healthcare? Digital healthcare represents the convergence of the Internet and Cloud-based technologies
with the healthcare and life sciences industries in order to reduce costs and improve care outcomes. The mega-trends
driving digital healthcare stem from creating the digital backbone of U.S. healthcare and extend to consumerization,
quantified health, and population health. The primary focus of companies in the digital healthcare space revolves around
leveraging technology to solve healthcare related problems.
Building the Healthcare Cloud: While the current digital infrastructure seems built upon legacy enterprise software
systems, driven by government stimulus payments, we believe innovators are hard at work developing the healthcare
cloud. Healthcare Cloud companies typically exhibit an ability to communicate or drive significant ROI or cost savings,
either directly or indirectly improve care outcomes, and provide feedback and insight through analytics. We believe the
best digital healthcare companies exhibit a strong proprietary technological advantage and a management team featuring
a prominent technologist(s). The best positioned digital healthcare companies utilize a platform approach driven by strong
network effects.
The Digitization of Healthcare and Biopharma: We see the development of the Healthcare Cloud as driven by two
digitization pathways: the Healthcare 1.0 to Healthcare 2.0 shift and the Biopharma 1.0 to Biopharma 2.0 shift. The
commonality of these digitization pathways revolves around moving from fixed and inefficient cost structures to more
flexible, nimble cost structures that also provide insights and feedback to further improve care.
The Six Dimensions of Digital Healthcare: We provide investors with what we believe is an objective and unbiased
framework to better understand and analyze digital healthcare companies. Our six dimensions focus on technology,
platform, network effects, distribution, analytics, and capital allocation. In our view, understanding the strength and
limitations of companies across these six dimensions provide insight into the strength or weakness of the opportunity at
hand. We believe a strong showing across the platform, network effects, and analytics dimensions suggest the possibility
for a strong investment opportunity.
Drivers of Disruption: We believe several disruptive forces permeate the healthcare industry. These forces include the
ACA, consumerization of healthcare, ICD-10, Meaningful Use, as well as possible physician and provider shortages.
Robust Venture Funding: Venture investment in digital healthcare continues to increase as investors put to work $1,870
million in 2013, according to Rock Health. Given several recent digital healthcare IPOs, and the strong pace of funding,
we expect to see many more private digital healthcare companies pursue possible IPOs over the coming years.
Our Recommendations: We are initiating coverage of athenahealth, Medidata Solutions, eHealth, and HealthStream in
conjunction with our initiation on the Digital Healthcare industry. We are establishing a Buy rating on athenahealth (ATHN:
$124.50 here) with a 12-month target price of $155, which equates to an EV multiple of 6.7x our 2015 revenue estimate of
$920.5 million. We are establishing a Buy rating on the shares of Medidata Solutions (MDSO: $39.16 here) with a
12-month target price of $47, which equates to an EV multiple of 5.5x our 2015 revenue estimate of $414.7 million. We
are establishing a Hold rating on the shares of eHealth (EHTH: $36.19 here) and HealthStream (HSTM: $26.15 here). We
maintain a Buy rating on the shares of Everyday Health (EVDY: $16.60) and a Hold rating on shares of WebMD Health
Corp. (WBMD: $46.14).
Prices are as of the close, June 13, 2014.
June 16, 2014
Internet & Media
Digital Healthcare
Stifel does and seeks to do business with companies covered in its research reports. As a result, investors should
be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors
should consider this report as only a single factor in making their investment decision.
All relevant disclosures and certifications appear on pages 26 - 27 of this report.

An Introduction to Digital Healthcare
What is Digital Healthcare? We define digital healthcare as the convergence of
the Internet and Cloud-based technologies with the healthcare and life sciences
industries in order to reduce costs and improve care outcomes. Companies in the
digital healthcare space leverage technology to solve healthcare related
problems. These companies typically exhibit an ability to communicate or drive
significant ROI or cost savings, ability to either directly or indirectly improve care
outcomes, and provide feedback and insight through analytics. Additionally, we
believe the best digital healthcare companies also exhibit a strong proprietary
technological advantage and a management team featuring a prominent
technologist(s).
Our belief is that government incentives driving healthcare technology adoption
as well as disruption associated with the ACA is driving the development of the
healthcare cloud. We see four healthcare related mega-trends driving the
development of the healthcare cloud: the digitization of healthcare, the
consumerization of healthcare, quantified health, and population health. We
believe there are several public and private companies across several verticals
participating in these mega-trends. We highlight our newest recommendations of
publicly traded companies in the digital healthcare industry in Exhibit 1.
Exhibit 1: Digital Healthcare Initiation and Recommendations
Source: Company documents, and Stifel Research
We believe the digitization of healthcare represents an important secular
investing theme that will play out over the next decade. The promise of
healthcare digitization lies in the possibility of driving reduced healthcare costs.
We note that the consulting firm McKinsey estimates that digital healthcare
technology and analytics may drive $300 billion to $450 billion in cost savings
annually. In our view, these estimates represent the potential associated with the
digitization of healthcare.
Company Rating Valuation Investment Thesis Ratings
BUY
BUY
HOLD
HOLD
12 Buys /
13 Holds /
1 Sell
10 Buys /
0 Holds /
0 Sell
6 Buys /
3 Holds /
1 Sell
6 Buys /
1 Holds /
0 Sell
$155 12-month Price
Target
6.7x 2015E
EV/Revenues
$47 12-month Price
Target
5.5x 2015E
EV/Revenues
Current Multiples
2.3x 2015E EV/Sales
20.1x 2015E EV/Adj.
EBITDA
Current Multiples
3.0x 2015E EV/Sales
18.7x 2015E EV/adj.
EBITDA
Cloud-Based EHR and Practice Management
 Cornerstone Franchise
 Platform Approach / Network Effects
 Large / Expanding Addressable Market
 Catalysts
Cloud-Based Drug Development Services
 Cornerstone Franchise
 Point to Platform Shift
 Large and Growing TAM
 Catalysts
Health Plan Member Acquisition
 Eroding Technological Advantage
 Member Economics and Marketing
 Market Expansion Uncertainty
 Capital Allocation
Workforce Development / Quality Improvement
 Lack of Proprietary Tech Advantage
 Point to Platform Shift
 ICD-10 Product Uncertainty
 Addressable Market Uncertainty
What Is Digital Healthcare?
The convergence of the Internet and Cloud-Based technologies with the Healthcare and Life Sciences Industries in order to reduce
costs and improve care outcomes
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Digital Healthcare June 16, 2014

We believe that the digitization of healthcare remains in the very early stages and
the current focus lies in building the digital foundation (digitizing the clinical back-
office and clinical front-office). Once all constituents of the healthcare industry
(clinicians, hospitals, and patients) are digitized, new technological solutions
leveraging mobile and other new technologies born out of digitization should
move healthcare toward the goal of significant cost reductions.
In our view, healthcare digitization develops through four stages. The focus of
Stage 1 is developing a basic digital infrastructure that moves the clinical back-
office (medical records, billing, et al.) from pen and paper to digital. Stage 2 will
be driven by the development of new digital healthcare technologies that
leverage the wireless infrastructure digitizing the clinical front-office
(communication with patients, scheduling, monitoring, diagnostics, et al.). The
focus of Stage 2 is on developing wireless healthcare solutions leveraging mobile
technology (smartphones and tablets) that allow patients and clinicians to better
understand healthcare issues. In our view, an important aspect of Stage 2 lies in
driving consumer adoption and closing the digital healthcare eco-system. We
believe without patient buy-in, the digitization of healthcare will likely begin and
end with the clinical back-office.
In Stage 3, companies will begin to integrate developments achieved in Stage 1
and Stage 2; at this point we believe companies will focus on how to close the
eco-system in terms of their respective business models. Lastly, in Stage 4,
constituents will begin to focus on driving meaningful analysis off of the vast data
created by digitized healthcare. We believe Stage 4 represents the greatest
opportunity for the digitization of healthcare, but also represents the least defined
opportunity, as we remain in the early stages of healthcare digitization. In Exhibit
2, we provide a diagram that explains our framework, “The Four Stages of
Healthcare Digitization.”
Exhibit 2: The Four Stages of Healthcare Digitization
Source: Steve Rubis, “The Digital Healthcare Roadmap” Stifel Research, Fall 2013
We believe the early stages of the healthcare cloud are developing. The
healthcare cloud represents the confluence of several digital healthcare
companies providing new technological solutions to solve healthcare related
problems. In our view, there are several companies working to build out the cloud
infrastructure, which will allow other digital healthcare innovators to develop and
flourish over time. In our view, there are six digital healthcare verticals forming
the healthcare cloud today, including: health transparency, benefits distribution,
The Four Stages of Healthcare Digitization
Technological
Focus
Beneficiaries Investment Area(s)
Stage 1
• Digitizingthe Clinical Back-Office
Stage 2
• Digitizingthe Clincial Front-Office
Stage 3
• Integration
Stage 4
• Monetization
EMRs/EHRs
RCMs
PBMs
CROs
Digital
Healthcare
Combines
Stage 1 and
Stage 2
Entire Healthcare
Supply Chain
Clinicians
Hospitals
Consumers
Clinicians
Closes the
Eco-system by
Integrating
Stage 1 and Stage 2
Constituents
Focus on
Leveraging
the Value of
Data
Healthcare ITCompanies
Digital Healthcare Companies
In Stage 3, we believe Healthcare IT
companies will acquire Digital Healthcare
companies. Additionally, Digital Healthcare
companies will become IPO candidates
The Entire Eco-system:
Healthcare IT
Digital Healthcare Technology
Managed Care Organizations (MCO)s
Pharmaceuticals
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healthcare technology infrastructure, health & wellness services, the
biopharmaceutical complex, and population health.
The development of the healthcare cloud seems to be driven by four mega-
trends facing healthcare today. These mega-trends include: the digitization of
healthcare, the consumerization of healthcare, quantified health, and population
health. We believe that the latter three trends stem directly from the digitization of
healthcare. In other words, our belief is that a sound digital foundation is needed
for the consumerization of healthcare, quantified health, and population health
management to successfully develop.
The Digitization of Healthcare: The main driver of the healthcare cloud. We
believe the current digital foundation of healthcare is seemingly flawed, as the
current standards exhibit a lack of interoperability among other issues. We
believe that the development of a modernized digital infrastructure for healthcare
will determine the success or failure of additional healthcare mega-trends
described below.
The Consumerization of Healthcare: Creating a digital infrastructure for
healthcare should facilitate the successful consumerization of healthcare. The
ACA represents the main impetus for shifting the responsibility of healthcare
related management, costs, and decisions to consumers. The goal is to drive a
highly engaged consumer who takes the responsibility of managing his or her
health in all aspects very seriously. We believe the consumerization of healthcare
extends beyond facilitating consumer engagement through a point transaction. In
our view, the consumerization of healthcare entails a personalized experience
that facilitates engagement, and provides insights into healthcare outcomes.
Quantified Health: We believe the quantified health mega-trend focuses on
helping consumers become more engaged with their own health. The quantified
health movement focuses on leveraging technology and analytics to provide
insights and feedback for consumers managing their own health. The obvious
example revolves around fitness trackers and wearable devices with more
scientific examples such as WellDoc and Dexcom. These devices, platforms, and
systems are driving consumer engagement with health through analytics and
insight.
Population Health: We believe population health revolves around helping
providers and caregivers assist patients in becoming more active by closing care
gaps and driving better care coordination among healthcare providers.
Population health offerings use data and analytics to provide feedback and
insights to caregivers across the continuum of care.
We believe several publicly traded investment opportunities associated with the
healthcare cloud exist. Healthcare cloud participants range from SaaS
companies with proprietary technological advantages to companies providing
SaaS based distribution networks with weak technological advantages. We
provide an illustration of the developing healthcare cloud in Exhibit 3.
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Exhibit 3: Developing the Healthcare Cloud
Source: Stifel Research
Understanding the Key Digital Healthcare Industry Trends
The digitization of healthcare continues to unfold across two pathways. In our
view, there is an ongoing shift from healthcare 1.0 to healthcare 2.0, which
focuses on modernizing infrastructure, engaging patients, and reducing the cost
of care. At the same time, we believe the Biopharma 1.0 to Biopharma 2.0 shift
remains underway. The Biopharma shift entails shifting fixed cost structures to
flexible cost structures via technology. Ultimately, we see the digitization of
healthcare revolving around moving from fixed cost structures to more flexible,
leaner cost structures that can drive insights and feedback through analytics,
which ultimately leads to better and less expensive healthcare.
The Healthcare 1.0 to Healthcare 2.0 shift revolves around the digitization of the
U.S. healthcare infrastructure and extends beyond just electronic medical
records. In our view, the shift is driven by four fundamental changes revolving
around who pays for care, how the provider is paid, who is responsible for health
management, and are patients getting healthier. In the post-ACA environment,
consumers are more responsible for covering healthcare costs, providers are
increasingly paid on the value of their service, consumers are becoming more
engaged with their health, and the system continues to better quantify care
quality and outcomes. We see these fundamental changes through four mega
trends: (1) the digitization of healthcare, (2) the consumerization of healthcare,
(3) quantified health, and (4) population health. From these mega-trends stem
several digital healthcare verticals consisting of interesting companies leveraging
technology to drive the modernization of healthcare, see Exhibit 4.
Mega Trends
The Digitization of
Healthcare
The
Consumerization
of Healthcare
Quantified Health
Population Health
Industry Verticals Publicly Investable Examples
Health
Transparency
Benefits
Distribution
Healthcare
Technology
Infrastructure
Health & Wellness
Biopharma
Complex
Population Health
Building the Healthcare Cloud: Mega Trends Driving Change & Innovative Companies
Description
Building the digital
infrastructure of a cloud-based
healthcare system
Shifting the burden of payment
and responsibility of health
management decisions to the
consumer
Providing consumers the ability
to track and engage in health
management through feedback
and analytics
Providing healthcare providers
the ability to track, analyze, and
guide patients to better
outcomes
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Exhibit 4: Understanding the Healthcare 1.0 to Healthcare 2.0 Shift
In 2012, the biopharmaceutical industry experienced a significant patent cliff that
impacted numerous top 25 biopharmaceutical companies. In our view, two sets
of companies emerged from the patent cliff: new leaders that grew through the
cliff and will continue to drive growth, and those who were significantly impacted
and are just starting to reposition their business for growth. Based on
EvaluatePharma estimates, we expect biopharmaceutical R&D expenditures to
remain robust growing from $135 billion in 2013E to roughly $150 billion in
2018E. We believe that pipeline opportunities remain robust and will drive future
growth. As costs and complexity continue to rise, and technological advances
make personalized medicine a reality, we believe biopharmaceutical companies
will continue to look for innovative ways to drive efficiencies in clinical trials and
use these innovative offerings to ensure clinical trial success in any way possible.
We believe the residual impacts of patent cliffs are driving biopharmaceutical
companies to become leaner and more efficient. In our view, the industry
continues to undergo what we describe as the Biopharma 1.0 to Biopharma 2.0
shift, see Exhibit 5. The shift involves biopharmaceutical companies shifting
away from a fixed, less efficient cost structure to a flexible, more efficient cost
structure. The shift begins with moving from leading biopharma companies in
past cycles (e.g., AstraZeneca, Merck, Pfizer, et al.), to the new leaders in
biopharma, including: Abbvie, Biogen, Celgene, Gilead, Regeneron, et al. The
next stage of the shift involves moving away from commercial drugs focused on
large patient populations to narrow patient populations and biologics used in
specialty pharma. The third stage involves the digitization of processes such as
clinical trials and pharmaceutical sales reps. The last stage focuses on the shift
in advertising dollars from offline channels to digital channels driven by
sophisticated ROI analytics. We believe that the digitization of clinical trial
processes will remain a major opportunity for cost savings for several years to
come.
Who Pays?
How is the Provider Paid?
Personal Health Responsibility?
Are Health and Outcomes Improving?
Health Plan Consumer
Healthcare 1.0 Healthcare 2.0
Fee-for-Service
Enterprise Systems
Value-Based
Cloud Systems
Disengaged
Patient
Engaged
Patient
Maybe
Population Health
and Analytics
Mega Trends
The Digitization of
Healthcare
The
Consumerization
of Healthcare
Quantified Health
Population Health
Industry Verticals Examples
Health
Transparency
Benefits Design &
Enrollment
Healthcare IT
Health & Wellness
Clinical Informatics
Population Health
Care Coordination
Telehealth
Wearables
Chronic Disease
Understanding the Healthcare 1.0 to Healthcare 2.0 Shift: Megatrends, Participating Verticals, and Corporate Examples
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Exhibit 5: Understanding the Biopharma 1.0 to Biopharma 2.0 Shift
The Six Dimensions of Digital Healthcare
We believe the six dimensions of digital healthcare provide investors an unbiased
and objective way to analyze companies. The six dimensions allow investors to
analyze companies across aspects such as technology, platform capabilities,
network effects, distribution effects, analytics, and capital allocation. We believe
these six aspects are the fundamental drivers of success for digital healthcare
companies as the industry continues to evolve in a post-ACA environment. In
Exhibit 6, we illustrate the six dimensions of digital healthcare, the key questions
that drive each dimension, and what we believe are characteristics of the best
companies.
Biopharma 1.0 Biopharma 2.0 Description Examples
Old Biopharma
Companies
New Biopharma
Companies
New biopharma companies are launching
the new set of mega blockbuster drugs. Old
pharma companies heavily impacted by
patent cliffs are returning to growth
Old Companies: AstraZeneca, Eli Lilly,
GlaxoSmithKline, Merck,Pfizer, et al.
New Companies: Abbvie, Biogen,
Celgene, Gilead, Regeneron, et al.
Large Patient
Populations /
Commercial
Drugs
Specialty
Pharma /
Biologics &
Chronic
Diseases
Pipelines are focused on specialty pharma
and chronic diseases targeting narrower
patient populations with more complex
biologic products
Specialty Pharma: Hep C, HIV, MS
Large Populations: Diabetes, Asthma,
Depression, Pain, Infections
Pen and Paper
Data Solutions
Digitized
Solutions
Biopharma companies are digitizing
processes such as clinical trials and sales
reps to drive flexible cost structures and
efficiencies
Clinical Trials: Medidata Solutions
CRM Solutions: Veeva Systems
Long Tail Theme: Biopharmaceutical Companies Are Shifting From Fixed Cost to Flexible Cost Structures Via Technology
Offline
Advertising
Digital
Advertising
Sophisticated ROI analytics and patient
engagement metrics make digital channels
more compelling and efficient
Offline: TV, Journals, Sales Reps
Digital: Everyday Health, and WebMD
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Exhibit 6: Defining the Six Dimensions of Digital Healthcare
In terms of technology, we seek to understand if the company leverages new
technology to solve healthcare problems. Our goal is to determine whether or not
the company provides a SaaS-based offering or utilizes legacy enterprise
software. We believe the best companies utilize a cloud-based architecture and
facilitate interoperability where possible.
We believe an important characteristic for digital healthcare companies lies in a
platform approach. In our view, the best positioned companies for the long term
are able to take a point solution based on a proprietary technological advantage,
build out complimentary solutions over time, leverage acquisitions and other
innovators to enhance and extend product offerings, and finally expand to new
markets. In our view, the natural progression begins with a company focused on
developing a core solution, and then grows into a platform over time.
In our view, the benefit of network effects is an important aspect of digital
healthcare stories, which help to drive premium valuations. We seek to
understand if a company benefits from network effects in three ways: does the
company provide a point or platform solution, does each new user added to the
system increase the value of the entire network, and does each new product
enhance each existing product? The best positioned companies are able to
increase the value of the platform with each additional subscriber. At a minimum,
we believe the company should be able to drive network effects among its
products, which will likely be illustrated by increasing product density or multiple
product purchases.
The distribution dimension seeks to understand if a company benefits from a
scale user base and can drive distribution for other innovators. A user base at
scale illustrates the stickiness of the company’s core value proposition. We
believe that the companies with a scale user base can then become distribution
networks for other digital healthcare innovators.
The Six Dimensions Key Question(s) Characteristics
Technology
Platform
Network Effects
 Cloud-based
 Legacy Enterprise
 Proprietary or Acquired
 One Service or Many
 New Market Opportunities
Distribution
Analytics
Capital Allocation
 Point or Platform Solution
 Value of Each New User
 Does Each Product Enhance
the Value of Other Products
 Scale User Base
 Can Platform Drive Distribution
for Others
 Quantitative Performance
 Insights/Feedback
 Acquisitions
 Repurchases/Dividends
Solutions Should Be Built on
Cloud / Internet
Companies Should Exhibit an
Ability to Develop Solutions for
Adjacent Markets
Each Product Should Enhance the
Value of Other Products
Ability to Drive Platform Solutions
Companies Should Have a Sticky
User Base, a Capitive Audience
Companies Should Be Able to
Provide Data Insights
Companies Should Reinvest in
Developing the Platform
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We believe analytics represent a key driver for a company to establish and
develop a proprietary technological advantage. In our view, digital healthcare
companies should, at a minimum, be able to provide simple benchmarking tools
so clients can better understand performance. Additionally, digital healthcare
companies should be able to develop analytics that drive greater efficiency of
their platform and customer acquisition. In our view, the best positioned
companies offer and continue to refine analytics that provide data insights that
can drive better decisions and reduced costs at the point-of-care or point-of-
delivery.
The capital allocation dimension focuses on whether the company seeks to
reinvest in the business through acquisitions and innovation, or pursues share
repurchases and dividends. In our view, all platforms or entities focused on
capitalizing in the post-ACA environment should be investing to improve and
provide more innovative offerings. In our view, the new environment requires
more than simply bringing customers or clients to a service. Companies must be
able to provide services that drive engagement and help their core customer truly
understand performance. Additionally, we believe share repurchases and
dividends send the wrong message in an environment so acutely focused on cost
reductions.
In Exhibit 7, we provide our Six Dimensions of Digital Healthcare scorecard. Our
scorecard uses a numerical ranking system in an attempt to quantify company
specific performance across the six dimensions. Our scoring system gives zero
points for no capability, 2.5 points for minimal capability, 5.0 points for average
capability, 7.5 points for above average capability, and 10.0 points for excellent
capability or leadership in terms of the dimension in question. While we realize
that some subjectivity exists around our scoring on each specific dimension, we
believe that our overall scores provide a clear and accurate illustration of each
company’s competitive position and relative quality compared to several digital
healthcare companies.
Exhibit 7: The Six Dimensions of Digital Healthcare Scorecard
Source: Stifel research
Technology
Platform
Network
Effects
Distribution
Analytics
Capital
Allocation
10
10
10
10
10
10
7.5
10 10
7.5
10
10
10
7.5
7.5
7.5
7.5
10
7.5
2.5 = Minimal
Capabilities
5.0
2.5
0.0
5.0
5.0
5.0
2.5
7.5
7.5
5.0 5.0
5.0
2.5
5.0
10
7.5
10
Total Score 52.5 57.5 50.0 35.039.527.5
Rating
System
0.0 = No
Capabilities
5.0 =
Average
Capabilities
7.5 = Above
Average
Capabilities
10.0 =
Excellent /
Leader
Categories
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Analyzing the Digital Healthcare Investment Opportunity
We believe investors can qualify the digital healthcare investment opportunity
across three segments: core, growth, and transition. Companies that represent
core digital healthcare holdings exhibit a proprietary technological advantage and
platform approach. Those companies classified as growth exhibit a core
proprietary technological advantage and a focus on a specific vertical. The key
aspect of the growth category revolves around the fact that these companies are
still building and refining their core proprietary advantages. Those companies in
transition exhibit either no proprietary technological advantages or have weak
technological advantages. Also, uncertainty exists regarding the business model,
and they are likely focused on buying back stock and paying dividends. We
provide an illustration of our thoughts in Exhibit 8.
Exhibit 8: Qualifying the Digital Healthcare Investment Opportunity
The companies that we believe are core digital healthcare technology holdings
exhibit three characteristics: (1) a developed and established proprietary
technological advantage, (2) a platform of complimentary services stemming
from this advantage, and (3) an ability to leverage third-party innovators to further
improve the value of the platform. Publicly traded company examples include
athenahealth and Medidata Solutions.
Companies in the growth category have developed, or are continuing to develop,
their core proprietary technological advantage, and face the opportunity to grow
into a platform approach. For the most part, growth category companies are
vertically focused and likely focused on a more narrow solution portfolio.
Qualifying the Digital Healthcare Investment Opportunity
Core Growth Transition
Developed and established
proprietary technological
advantage
Platform of complimentary
services stemming from the
core technological advantage
Extending platform to leverage
third-party innovators
Public Company Examples: Public Company Examples: Public Company Examples:
Developing a proprietary
technological advantage
Faces the opportunity to build
a platform of complimentary
services
May be leveraging third-parties,
but focus is still on building the
proprietary core
No proprietaryor weak
proprietary technological
advantage
Lack of platform approach
Capital Allocation
Uncertainty revolving around
the business model or
management execution
Companies Can Evolve or Deteriorate Across These Segments
A Proprietary Technological Advantage Represents the Primary Driver
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Companies in this category may be leveraging third-party innovators, but the
primary focus remains on building and refining the company’s core offering.
Transition companies are those that exhibit no proprietary technological
advantage or a weak proprietary technological advantage at best. These entities
lack a platform approach that benefits from network effects and are more focused
on share repurchases and dividends. These entities also face uncertainty
regarding the company’s business model or management’s execution abilities.
A major focus of healthcare today revolves around reducing the high costs of
healthcare. The Institute for Healthcare Improvement (IHI) developed a
framework that describes an approach for optimizing health system performance.
The IHI Triple Aim identifies three dimensions necessary for health system
improvement: improving the patient experience of care, improving the health of
populations, and reducing the per capita cost of healthcare. In Exhibit 9, we
provide our Triple Aim of Digital Healthcare Companies, which focuses on an
ability to demonstrate performance, either directly or indirectly improve care
outcomes, and an ability to provide insight through analytics.
Exhibit 9: The Core Characteristics of Digital Healthcare Companies
Source: Stifel Research and the Institute for Healthcare Improvement
We believe an ability to communicate platform or service performance creates a
sticky consumer value proposition in a cost conscious environment. In our view,
digital healthcare companies experience trouble when they cannot communicate
ROI or performance i.e., WebMD in 2011 and 2012. Second, an ability to impact
care outcomes carries similar importance to an ability to communicate
performance. A digital healthcare company should be able to impact a care
outcome either directly or indirectly. We note that direct impacts involve
managing a patient, whereas indirect impacts involve managing a caregiver.
The Triple Aim of Digital Healthcare Companies
The Ability to Provide Demonstrable ROI
Through Improved Performance or Cost
Reduction
 Cost Conscious Environment
 Cost Savings Are a Top Priority
 Example: WBMD and EVDY
The Ability to Directly or Indirectly Affect
Care Outcomes
 Care Outcomes Are as Important as
Cost Reduction
 Direct = Managing a Patient
 Indirect = Managing a Caregiver
An Ability to Provide Insight and
Feedback Through Analytics
 Finding the Value in Data
 Benchmarking
 Using Data to Drive Real-Time
Insights and Feedback
The Fundamental Focus of All Digital Healthcare Companies
What Separates the Best from the Rest
A Proprietary Technological Advantage
that Drives Monetization
 Built / Developed Internally
 Represents the Core
 Drives Value Proposition
A Management Team with a High Profile
Technologist
 One or Several Executives are
Technologists
 These Executives Were Responsible
for Developing the Product
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Ultimately, these improvements are likely illustrated by the ability to illustrate and
communicate performance. Lastly, we believe digital healthcare companies
should be able to provide insight and feedback driven by data.
Additionally, we believe there are two additional characteristics that separate the
best from the rest. These characteristics include an ability to develop and
monetize a proprietary technological advantage and a management team with a
high profile technologist. In our view, a proprietary technological advantage
represents the lifeblood of digital healthcare companies. Such an advantage
allows the company to undertake a platform approach and likely benefit from
significant network effects over time.
Furthermore, we believe digital healthcare companies with a technologist as an
integral member of the executive team are high quality. We believe prominent
technologists are essential to effectively capitalizing on a technology company’s
long-term strategy. Two prominent examples in digital healthcare include Glen de
Vries at Medidata Solutions and Ed Park at athenahealth. These companies are
able to communicate to investors a highly articulated long-term technological
world view that provides a roadmap to understanding future innovation at their
company.
We believe a major distinguishing characteristic among digital healthcare
companies involves a platform approach. In our view, the platform approach
provides the digital healthcare company a long growth runway. Over time, the
company can leverage new monetization pathways for its core technology. In
Exhibit 10, we illustrate the Digital Healthcare Platform Development Cycle,
which consists of four stages. First, a company develops and refines a core
proprietary technological advantage. With a core product in place, the company
can then introduce complimentary products that, taken together, establish a
platform. Once a portfolio of offerings is established the company can then focus
on leveraging acquisitions and third-party innovators to further enhance the
platform. Companies will look to make opportunistic acquisitions that can form
the foundation of new offerings (this may occur between stage two and stage
three). Finally, the company can begin to think about expanding into adjacent
markets in order to expand their market opportunity.
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Exhibit 10: The Digital Healthcare Platform Development Cycle
A Note on the Platform Approach. We realize that not every digital healthcare
company will or has the opportunity to transform into a full platform. We believe
there will be successful point solution businesses as well. In our view, investors
should consider whether the point solution company represents a software
enabled service (SES), an infrastructure play (e.g., Single Sign On,
Interoperability, et al.), or a distribution platform / network. We recommend
investors pay close attention to the SES opportunities rather than the
infrastructure and distribution opportunities.
In Exhibit 11, we provide an illustration of the digital healthcare revenue
hierarchy. Our hierarchy of revenues focuses on four types of revenue streams:
(1) performance based revenues, (2) subscription based revenues, (3)
biopharma advertising, and (4) installation and maintenance revenues.
The Platform Development Cycle
1.) Develop ProprietaryCore
Technological Advantage
2.) Expand Via Development of
Complimentary Products /
Services
3.) Leverage Opportunistic
Acquisitions and Third-Party
Innovators
4.) Expand Into New / Adjacent
Markets
A Proprietary
Technological
Advantage
Sets the
Foundation for
Expanstion into
a
Full Platform
Solution
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Exhibit 11: Digital Healthcare Revenue Hierarchy
We believe performance based take-rates represent the best revenue stream in
digital healthcare. Performance take-rates are aligned with the pay-for-
performance post-ACA environment, compared to the pre-ACA pay-for-service
environment. Additionally, we believe take-rates offer the largest total
addressable market opportunities.
The majority of digital healthcare companies utilize a subscription based revenue
model. Subscriptions in digital healthcare can take many forms including: per
member per month, commissions, and per visit, et al., and often have
performance escalators attached. These subscriptions can be further segmented
by who pays for them: the employer, health plans, or the consumer. Currently,
we believe the employer and health plans are the most attractive. We note that
employers provide greater independence and flexibility to the innovator than a
health plan.
Biopharmaceutical advertising represents the baseline revenue opportunity for
digital healthcare companies. If an innovator can generate engagement,
communicate performance, or provide insights based on user data, the innovator
can likely monetize through biopharmaceutical advertising. Additionally, those
innovators focused on consumers become attractive as their offerings move
closer to the point-of-care decision point.
Lastly, we believe the worst revenue model for digital healthcare companies
revolves around installation and maintenance. In our view, these revenue
streams are representative of legacy enterprise system providers. We believe in
a highly cost conscious environment, coupled with a likely continued shift
towards cloud-based solutions, that such revenue streams may become
unsustainable over the long term (five to 10 years or more).
Digital Healthcare Innovator’s Dilemma: In January, a digital healthcare
debate focused on whether entrepreneurs should first focus on product
development or monetization strategy. We believe product focus should be the
primary focus of digital healthcare entrepreneurs, as we believe compelling
offerings that can engage a patient or healthcare professional can likely monetize
through advertising at a minimum. To paraphrase the social activist Saul
Digital Healthcare Revenue Hierarchy
1.) Performance Based Revenue
ex. Take-Rates
2.) Subscription Revenue
ex. Per Member Per Month
(PMPM)
Commission
Employer / Health Plan /
Consumer
3.) Biopharma Advertising
4.) Installation and Maintenance
Proprietary
Technological
Advantage
and
Demonstrable ROI
Drives Success
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Alinsky’s comments on ordination to the Catholic priesthood, innovators should
focus on identifying and developing a proprietary technological advantage and
the rest will follow.
We believe the best digital healthcare products utilize a platform approach,
allowing the company to move into related or new verticals e.g., additional drug
indications, analytics to drive outcomes, which allow companies to layer on
additional high quality revenue streams. A generic framework starts with
advertising, adds a subscription component, and then incorporates analytics to
further solidify the business model. We believe the best long-term models
incorporate an analytics component to either make the core business more
efficient, to help reduce healthcare costs, or to facilitate better healthcare
outcomes.
The Digital Healthcare Disruptors Paradox: How do digital healthcare
innovators disrupt an infrastructure designed to maintain the status quo?
Innovators need to be nimble enough to develop solutions based on new
technology, but astute enough to navigate current reimbursement models. The
issue speaks to our triple aim of digital healthcare in that innovators must always
have an eye toward proving the efficacy and value of their innovation. Over time,
we believe the healthcare infrastructure will move toward and adopt technologies
of digital healthcare disruptors. In the near term, innovators must be prepared to
figure out how to integrate new technologies into the current infrastructure with
minimal disruption.
The Healthcare IT Paradox: We believe a major paradox of healthcare IT
revolves around legacy enterprise EHR systems. The paradox holds that in
reality the EHR should represent the digital backbone of the healthcare complex.
In an ideal world, we would have a standard EHR design and technology that is
ubiquitous across all of healthcare i.e. the Internet of Healthcare. Additionally, the
paradox holds that the current environment of high implementation costs and
maintenance revenue model is unsustainable in an environment acutely focused
on cost efficiency.
In our view, the stimulus payments resulting from the HITECH/ARRA act drove
an EHR adoption super cycle. The HITECH/ARRA act provided nearly $22 billion
worth of incentives for providers to adopt and utilize electronic health records and
technology. We believe these stimulus payments generated a land grab whereby
several hundred EHR vendors developed systems and hurried to sign up new
clients. The stimulus created a highly fragmented market in which nearly 500
different technology providers exist. Many of the systems can be characterized
as legacy enterprise systems that lack interoperability, and in some cases poor
interoperability. Often times, these systems require high upfront installation costs
and recurring maintenance fees. We believe a system that requires high upfront
costs and recurring maintenance fees for less than optimal technology is
unsustainable.
The Key Drivers of Disruption
We believe several disruptive forces permeate the healthcare industry and are
driving the development of digital healthcare. Changes stemming from the ACA
are further driving the consumerization of healthcare. The disruptive forces facing
healthcare impact the entire care continuum ranging from benefits design and
delivery to the actual information infrastructure to consumer engagement and
health management.
We believe the front end of disruption revolves around benefits delivery and
benefit plan design. Employers continue to shift healthcare costs to consumers
as high deductible health plans (HDHPs) increasingly become the norm.
Companies such as Castlight Health and Change Healthcare are providing cost
transparency to help employers drive lower healthcare and benefit costs.
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Additionally, we note that defined contribution exchanges are developing more
sophisticated ways to recommend health plans to consumers. We believe tools
such as algorithmic recommendations place defined contribution exchanges at
the forefront of exchange technology innovation, and further illustrate the need to
not only provide a service or product, but to truly engage the consumer during
the decision process.
In terms of healthcare information technology, we believe two super-cycles exist:
the Healthcare IT Adoption Super-Cycle and the Healthcare IT Replacement
Super-Cycle. The $22 billion in stimulus funding made possible by HITECH /
ARRA created an EHR adoption super-cycle. The cycle began in the 2007 to
2009 period and lasted through the 2011 to 2013 period. The rush to adopt
technology due to incentive payments created a highly fragmented market of
nearly 500 different vendors. In our view, the key characteristics of the adoption
cycle revolve around inter- and intraoperability issues as well as systems
characterized by high installation costs and costly maintenance fees. Additional
catalysts driving technological adoption involved regulatory requirements such as
Meaningful Use measures, which drive the ability to obtain incentive payments,
as well as technology transitions such as the move to ICD-10.
In our view, the Healthcare IT Replacement Super-Cycle will play out over the
next five or ten years and should favor companies using cloud-based modern
technological solutions. We believe the key drivers of the replacement cycle
include: doctor dissatisfaction with current systems, further cloud-development
and awareness, consolidation of the 500-plus EHR vendors in existence, and
meeting technological requirements of Meaningful Use. We believe the key
characteristics of the replacement cycle will include greater interoperability and
collaboration, as well as better financial alignment with current pay-for-
performance structures. In our view, the key catalysts that will drive replacement
include improved technology, increased awareness of the cloud, and medical
providers and health systems looking to differentiate their offerings via
technology.
In other words, we believe that providers and health systems will ultimately view
the cloud, especially in terms of infrastructure, as a way to improve their ranking
and standing through technology. Additionally, as Meaningful Use requirements
become more complex, replacement becomes a more realistic option. We
provide an illustration of our thoughts regarding the Healthcare IT Adoption
Super-Cycle and Healthcare IT Replacement Super-Cycle in Exhibit 12.
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Exhibit 12: The HCIT Adoption and Replacement Super-Cycles
In Exhibit 13, we illustrate the EHR Adoption Super Cycle by looking at basic
EHR adoption rates. According to the CDC, roughly 78.4% of office based
physicians currently utilize some portion of an EHR, while only 48.1% utilize a
basic EHR system. While many providers remain on pen and paper, EHR
adoption seems to be relatively high. The Adoption Super Cycle created a highly
fragmented market where nearly 500 EHR vendors exist. We believe the
fragmentation was a direct result of people hurriedly purchasing systems in order
to obtain incentives, rather than taking a methodical approach and seeing which
systems would likely provide the best solution. Given that incentive payments are
set to go away in 2015, we believe the Replacement Super Cycle may be
underway.
Exhibit 13: The EHR / EMR Adoption Super Cycle
Source: CDC/NCHS, National Ambulatory Medical Care Survey, 2001 - 2013
We believe the next five to 10 years will represent an EHR Replacement Super
Cycle. The period will be led by a switch away from smaller EHR vendors that
cannot meet the technological requirements of Meaningful Use or other
The Healthcare IT Adoption Super-Cycle and Replacement Super-Cycle
The Adoption Super-Cycle The Replacement Super-Cycle
Drivers:
 HITECH/ARRA Stimulus
 Rush to adopt
 Fragmented market - 500-plus
vendors
Drivers:
 Doctor disatisfaction
 Cloud-development
 Consolidation
 Meaningful Use and ICD-10, et al.
Characteristics:
 Interoperabilitydifficulties
 Intraoperability difficulties
 High costs: implementation and
maintenance
Characteristics:
 More interoperability
 Colaboration due to technology
 Costs aligned with performance
Catalysts:
 Meaningful Use measures
 ICD-10 transition
 Other technological requirements
Catalysts:
 Better technology
 Increased adoption of the Cloud
 Differentiation via technology
18.2% 17.3% 17.3%
20.8%
23.9%
29.2%
34.8%
42.0%
48.3%
51.0%
57.0%
71.8%
78.4%
10.5% 11.8%
16.9%
21.8%
27.9%
33.9%
39.6%
48.1%
0.0%
10.0%
20.0%
30.0%
40.0%
50.0%
60.0%
70.0%
80.0%
90.0%
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
EMR/EHRPhysicianPenetration(%)
Office-Based Physicians with EMR/EHR Systems
Any EMR/EHR Basic System
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government established milestones e.g., ICD-10, et al. We believe the
Replacement Super Cycle will be driven by dissatisfaction among physicians and
likely focused on advanced technology. In Exhibit 14, we provide the results of a
Rand Corporation survey regarding physicians and professional satisfaction and
the role EHRs play in that satisfaction. The results show that physicians have
accepted the EHR and believe that it can help improve quality of care. However,
in terms of job satisfaction, EHR’s remain a pain point for physicians, as only
35% of respondents said an EHR improves job satisfaction. We believe as
systems fail to meet new technological requirements, coupled with dissatisfaction
among physicians, many smaller systems will disappear over time. These system
failures should provide opportunity for both the larger legacy enterprise providers,
as well as those offering cloud-based solutions.
Exhibit 14: Physician EHR / EMR Satisfaction Rates
Source: Friedberg, Mark, et al., “Factors Affecting Physician Professional Satisfaction and Their Implications for Patient Care, Health Systems, and Health
Policy” Rand Corporation and American Medical Association (AMA), 2013.
Technological requirements driven by the government seem to represent a key
catalyst for industry consolidation. Two major technological drivers revolve
around the transition to the International Classification of Diseases 10th edition
(ICD-10), as well as Meaningful Use measures. The transition to ICD-10 is
important because these are the codes used to classify patient treatment and
drive provider reimbursement. The ICD-9 to ICD-10 transition will increase the
total number of codes from 18,000 to 155,000, see Exhibit 15. We note that
Congress recently adopted legislation that delays the implementation of ICD-10
from October 1, 2014 by one year to October 1, 2015. We note that CMS
subsequently adopted the one year delay, as well. The delay may represent a
catalyst for the replacement cycle, as prior to the implementation delay; many
providers were set to pursue an upgrade to their current system. Given the full
year delay, we believe many providers may now be willing to discuss switching
systems altogether.
Item Percentage
Responding "Agree" or "Strongly Agree" to the following:
Our electronic health record improves my job satisfaction 35%
In our practice, our electronic health record improve the quality of care 61%
In our practice, our electronic health record requires me to perform tasks that other staff could perform 61%
Using an electronic health record enhances patient-doctor communication that is not face-to-face 54%
When I am providing clinical care, our electronic health record slows me down 43%
Our electronic health record improves my job satisfaction 38%
Using an electronic health record interferes with patient-doctor communication during face-to-face clinical care 36%
I receive an overwhelming number of electronic messages in this practice 31%
Based on my experience to date, I prefer using paper medical records instead of electronic records 18%
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Exhibit 15: ICD-10 Code Expansion Drives a Need for Education
Source: CMS and AMA
Meaningful Use measures represent an additional driver of technological
disruption driving the EHR replacement cycle. We note that Meaningful Use
requirements represent the standards that drive the ability of a provider to obtain
incentive payments for adoption of an EHR under the HITECH/ARRA act.
Meaningful Use Stage 1 began in 2011 and requires meeting 15 core objectives
and five of 10 menu objectives. Meaningful Use Stage 2 began in 2014 and
requires meeting 17 core objectives and three of six menu objectives.
Additionally, eligible providers must report on nine out of 64 approved clinical
quality measures (CQMs). We note that Meaningful Use Stage 3 is set to begin
in 2016. Currently, many are lobbying for the inclusion of patient-centric biometric
device functionality and telehealth measures in MU Stage 3. We believe as the
standards and requirements of Meaningful Use increase that the cloud will be
seen as the best option for solutions in the future.
The importance and necessity of healthcare provider education and workforce
development continues to increase as healthcare professional shortages linger.
The U.S. Department of Health and Human Services estimates that physician
supply will increase only 7% by 2020. Such tepid growth will not likely meet the
demand associated with the 30 million-plus Americans entering the healthcare
system because of the Affordable Care Act. Additionally, the Census Bureau
expects the number of American’s over 65 to grow 36% by 2020. These two
factors will make the looming physician shortage more acute and drive greater
interest in workforce development in order to fill the gap.
Exhibit 16: Physician Supply / Demand Imbalance
Source: Association of American Medical Colleges
14,000
68,000
ICD-9-CM ICD-10-CM
Diagnosis Codes
4,000
87,000
ICD-9-PCS ICD-10-PCS
Procedure Codes
699,100 709,700
735,600
759,800
785,400706,500
723,400
798,500
851,300
916,000
500,000
550,000
600,000
650,000
700,000
750,000
800,000
850,000
900,000
950,000
1,000,000
2008 2010 2015E 2020E 2025E
Physician Supply / Demand Imbalance Drive Educational Need
Physician Supply Physician Demand
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In Exhibit 17, we look at projected nurse and physician shortages estimated in
2025. Current estimates suggest that the U.S. will face a nursing shortage of
500,000 professionals by 2025. Additionally, physician shortages are expected to
reach 155,000 by 2025E. We note that the 155,000 physician shortage accounts
for the effects of healthcare reform via the ACA. Given these looming workforce
professional shortages, workforce development for healthcare professionals will
continue to be an important focus for the healthcare system for the foreseeable
future.
Exhibit 17: Projected Nurse and Physician Shortages by 2025E
Source: Peter I. Buerhaus, PhD, et al. The Future of the Nursing Workforce in the United States: Data, Trends and
Implications, 2009
Michael J. Dill and Edward S. Salsberg, “The Complexities of Physician Supply and Demand: Projections Through
2025,” Association of American Medical Colleges, November 2008, 28
Computer Sciences Corporation
The Digital Healthcare Innovators
We believe digital healthcare companies represent an important change agent
helping to facilitate the digitization of healthcare. In our view, the development of
new healthcare focused technological innovations will help to further advance the
development of a modern digital infrastructure. In Exhibit 18, we provide an
illustration of digital healthcare venture capital funding for the years 2011 to 2013
according to Rock Health. We note that VC funding continues to increase
significantly. We note that the first digital healthcare IPOs occurred in late 2013
and early 2014 with the IPOs of companies such as Veeva Systems, Care.com,
Tandem Diabetes, Castlight Health, and Everyday Health.
500,000
124,000
155,000
0
100,000
200,000
300,000
400,000
500,000
600,000
Nurses Physicians: Before Reform Physicians: After Reform
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Exhibit 18: Digital Healthcare VC Funding
Source: RockHealth
In Exhibit 19, we provide a list of the key venture capital investors focused on
digital healthcare. Several of these venture capital firms have extensive digital
healthcare portfolios. Additionally, we note that several of these venture capital
investors are regular speakers on digital healthcare topics at industry
conferences throughout the year. We believe at a high level venture investors
focus on six core areas: wellness / fitness, chronic diseases, 30-day
readmissions, aging in place, clinical trials, and telehealth, among many others.
Exhibit 19: Major Venture Capital Investors in Digital Healthcare
Source: Company documents
We provide a list of important digital healthcare eco-systems that exist and are
under development in Exhibit 20. We believe that these eco-systems represent
various focuses and market opportunities. Qualcomm, through Qualcomm Life,
represents a technology company building devices to connect different digital
healthcare products, while building a digital healthcare eco-system through a
venture investment portfolio. We believe that Apple also represents a formidable
player in the space as the company recently unveiled its HealthKit offering and
may possibly release an iWatch later this year.
$860
$1,970
$757
$1,401
$343
$890
$0
$500
$1,000
$1,500
$2,000
$2,500
JAN FEB MAR APR MAY JUN JUL AUG SEP OCT NOV DEC
Digital Healthcare Venture Funding 2011-2013
2013 2012 2011
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Exhibit 20: Important Digital Healthcare Eco-Systems
Source: Company documents
Private companies play an important role in digital healthcare, as the majority of
innovators are young private companies. Investors often ask, “What does a good
private digital healthcare company look like?” A common answer we have heard
from venture investors revolves around feel and just a gut sense that the
company in question appears to be high quality. We believe investors should
start with two questions. Does the company have a proprietary technological
advantage, and does the management team have tech expertise? Other aspects
to consider revolve around whether the company is partner agnostic. In certain
instances, a company beholden to a primary partner may limit the company’s
addressable market and the investment opportunity. Other aspects to consider
include revenue model, especially financial alignment with a pay-for-performance
environment, does the company solve a care-related issue or a software-related
issue, and does the company focus on the triple aim of digital healthcare as
described in Exhibit 9.
In Exhibit 21, we highlight several verticals that are prominent within digital
healthcare. In our view, these verticals consist of several innovative companies
leveraging technology to solve healthcare related problems (we note that our
nomenclature may not be perfect and that some companies may overlap several
verticals). We provide a list of digital healthcare companies according to their
respective product and service categories below (please note that this does not
represent a complete list of private digital healthcare companies).
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Exhibit 21: Areas of Digital Healthcare Investment Opportunity
Driving Innovative Solutions Across Several Verticals
Wearables
Telehealth
Benefits Distribution /
Insurance / Exchange
Health Transparency
/ Quality Information
/ Engagement
Healthcare
Infrastructure
Chronic Disease
Management
Population Health
Management
Care Coordination
Clinical Informatics
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Target Price Methodology/Risks
Medidata Solutions, Inc.
Our 12-month target price equates to an enterprise value multiple of 5.5x 2015E
revenue of $414.7 million.
Risks to Target Price:
 Valuation multiples
 Volatility associated with the switch from quarterly to annual guidance
 Lack of successful product innovation
 Unforeseen customer attrition
 A lack of enterprise platform sales
 A deterioration in the biopharma industry
athenahealth, Inc.
Our Buy rating and 12-month target price of $155 equates to an enterprise value
multiple of 6.7x our 2015 revenue estimate of $920.5 million.
Risks to Target Price:
 Volatility around valuation multiples
 Lack of successful product innovation
 Unforeseen customer attrition
 Epocrates integration
 Lack of traction around athenaCoordinator Enterprise (aCE)
 Lack of adoption of More Disruption Please partners
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Shares Market Enterprise FY14E
Price Outstanding Cap Value 2-YR Gross
Company Ticker Rating Coverage 6/13/2014 (Millions) ($000s) ($000s) FY14E FY15E FY14E FY15E Rev CAGR Margins
Digital Healthcare
Core
athenahealth ATHN Buy Rubis $124.50 39.5 $4,914.5 $5,069.5 6.8x 5.5x 38.5x 31.1x 24.4% 61.1%
Medidata Solutions MDSO Buy Rubis $39.16 52.3 $2,047.0 $1,876.0 5.5x 4.5x 23.5x 18.4x 22.4% 75.3%
Growth
The Advisory Board Company1
ABCO Buy Rosenbaum $49.93 37.2 $1,857.4 $1,669.9 2.9x 2.5x 16.9x 14.6x 15.3% 47.0%
Benefit Focus BNFT $37.99 24.5 $931.9 $856.9 6.4x 5.0x NM NM 27.4% 40.2%
Castlight Health CSLT Buy Reback $17.16 74.4 $1,276.7 $1,276.7 31.5x 16.3x NM NM 145.7% 37.9%
Everyday Health EVDY Buy Rubis $16.60 32.0 $530.7 $502.3 2.8x 2.4x 14.7x 11.2x 15.4% 73.0%
Veeva Systems VEEV Hold Roderick $21.31 143.2 $3,051.6 $3,051.6 14.5x 10.8x NM NM 47.5% 61.9%
Transition
eHealth EHTH Hold Rubis $36.19 19.0 $688.1 $575.8 2.7x 2.3x 32.1x 20.1x 19.0% 96.9%
HealthStream HSTM Hold Rubis $26.15 28.1 $734.1 $625.9 3.7x 3.0x 24.9x 18.7x 25.0% 56.2%
WebMD Health WBMD Hold Rubis $46.14 47.9 $2,212.0 $2,385.9 4.1x 3.7x 15.2x 12.8x 11.5% 60.2%
Mean 8.6x 5.8x 25.1x 19.0x 38.0% 61.0%
Median 5.5x 4.5x 24.2x 18.5x 24.4% 61.1%
Human Capital Management
Concur Technologies CNQR Buy Reback $89.19 60.1 $5,360.3 $4,955.1 7.2x 5.8x 70.9x 51.3x 25.6% 69.0%
Cornerstone OnDemand CSOD $41.05 52.7 $2,164.4 $2,091.0 7.8x 5.7x NM 47.5x 40.8% 72.7%
Ultimate Software Group ULTI Buy Reback $131.28 29.3 $3,846.5 $3,747.1 7.4x 6.1x 37.3x 29.2x 22.6% 61.6%
Workday2
WDAY Hold Reback $83.86 183.1 $15,354.8 $13,936.6 18.8x 13.1x NM NM 50.6% 64.5%
Mean 11.3x 8.3x 37.3x 38.3x 38.0% 66.3%
Median 7.8x 6.1x 37.3x 38.3x 40.8% 64.5%
Healthcare IT
Allscripts Healthcare Solutions MDRX $14.44 179.0 $2,584.8 $3,071.6 2.2x 2.0x 14.3x 11.9x 4.7% 43.8%
Cerner CERN $52.95 352.2 $18,650.6 $17,724.2 5.3x 4.7x 15.2x 13.2x 13.5% 82.7%
Computer Programs and Systems CPSI $61.60 11.2 $687.6 $658.4 3.1x 3.0x 11.0x 10.3x 5.1% 47.4%
Quality Systems3
QSII $15.85 60.6 $960.4 $842.2 1.8x 1.7x 11.5x 9.3x 6.3% 56.4%
Mean 3.4x 3.1x 12.6x 10.9x 8.3% 62.2%
Median 3.1x 3.0x 11.5x 10.3x 6.3% 56.4%
1. The Advisory Board Company fiscal year ends March, we utilize calendar year estimates where possible
2. Workday fiscal year ends January
3. Quality Systems fiscal year ends March
4. Estimates for companies rated not covered come from FactSet
Source: Company documents and Stifel estimates. Please note that financial estimates are those of the covering analyst where applicable
Not Covered
Not Covered
Not Covered
Not Covered
EV/Revenue EV/Adj. EBITDA
Digital Healthcare Comparative Valuation
Not Covered
Not Covered
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Important Disclosures and Certifications
I, Steve Rubis, certify that the views expressed in this research report accurately reflect my personal views about
the subject securities or issuers; and I, Steve Rubis, certify that no part of my compensation was, is, or will be
directly or indirectly related to the specific recommendations or views contained in this research report. For our
European Conflicts Management Policy go to the research page at www.stifel.com.
Q1 Q2 Q3 Q1 Q2 Q3 Q1 Q2 Q3 Q1 Q2
10
12
14
16
18
20
2012 2013 2014
04/22/14
B:$18
Rating and Price Target History for: Everyday Health, Inc. (EVDY) as of 06-13-2014
Created by BlueMatrix
Rating Key
B - Buy UR - Under Review
H - Hold NR - No Rating
S - Sell NA - Not Applicable
I - Initiation RS - Rating Suspended
D - Dropped
For a price chart with our ratings and target price changes for EVDY go to
http://sf.bluematrix.com/bluematrix/Disclosure?ticker=EVDY
Q1 Q2 Q3 Q1 Q2 Q3 Q1 Q2 Q3 Q1 Q2
0
15
30
45
60
2012 2013 2014
07/19/11
B:$47
11/03/11
H:NA
02/22/13
B:$26
05/08/13
B:$31
06/28/13
B:$35
08/01/13
B:$40
11/08/13
B:$43
01/10/14
B:$50
01/21/14
B:$55
03/04/14
H:NA
Rating and Price Target History for: WebMD Health Corp. (WBMD) as of 06-13-2014
Created by BlueMatrix
Rating Key
B - Buy UR - Under Review
H - Hold NR - No Rating
S - Sell NA - Not Applicable
I - Initiation RS - Rating Suspended
D - Dropped
For a price chart with our ratings and target price changes for WBMD go to
http://sf.bluematrix.com/bluematrix/Disclosure?ticker=WBMD
For applicable current disclosures for all covered companies please visit the Research Page at www.stifel.com or write to the
Stifel Research Department at the following address.
Page 26
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Stifel Research Department
Stifel, Nicolaus & Company, Incorporated.
One South Street
16th Floor
Baltimore, Md. 21202
Stifel research analysts receive compensation that is based upon (among other factors) Stifel's overall investment banking
revenues.
Our investment rating system is three tiered, defined as follows:
BUY -For U.S. securities we expect the stock to outperform the S&P 500 by more than 10% over the next 12 months. For
Canadian securities we expect the stock to outperform the S&P/TSX Composite Index by more than 10% over the next 12
months. For other non-U.S. securities we expect the stock to outperform the MSCI World Index by more than 10% over the
next 12 months. For yield-sensitive securities, we expect a total return in excess of 12% over the next 12 months for U.S.
securities as compared to the S&P 500, for Canadian securities as compared to the S&P/TSX Composite Index, and for other
non-U.S. securities as compared to the MSCI World Index.
HOLD -For U.S. securities we expect the stock to perform within 10% (plus or minus) of the S&P 500 over the next 12
months. For Canadian securities we expect the stock to perform within 10% (plus or minus) of the S&P/TSX Composite
Index. For other non-U.S. securities we expect the stock to perform within 10% (plus or minus) of the MSCI World Index. A
Hold rating is also used for yield-sensitive securities where we are comfortable with the safety of the dividend, but believe that
upside in the share price is limited.
SELL -For U.S. securities we expect the stock to underperform the S&P 500 by more than 10% over the next 12 months and
believe the stock could decline in value. For Canadian securities we expect the stock to underperform the S&P/TSX
Composite Index by more than 10% over the next 12 months and believe the stock could decline in value. For other non-U.S.
securities we expect the stock to underperform the MSCI World Index by more than 10% over the next 12 months and
believe the stock could decline in value.
Of the securities we rate, 48% are rated Buy, 50% are rated Hold, and 2% are rated Sell.
Within the last 12 months, Stifel or an affiliate has provided investment banking services for 20%, 9% and 0% of the
companies whose shares are rated Buy, Hold and Sell, respectively.
Additional Disclosures
Please visit the Research Page at www.stifel.com for the current research disclosures and respective target price
methodology applicable to the companies mentioned in this publication that are within Stifel's coverage universe. For a
discussion of risks to target price please see our stand-alone company reports and notes for all Buy-rated stocks.
The information contained herein has been prepared from sources believed to be reliable but is not guaranteed by us and is
not a complete summary or statement of all available data, nor is it considered an offer to buy or sell any securities referred to
herein. Opinions expressed are subject to change without notice and do not take into account the particular investment
objectives, financial situation or needs of individual investors. Employees of Stifel or its affiliates may, at times, release written
or oral commentary, technical analysis or trading strategies that differ from the opinions expressed within. Past performance
should not and cannot be viewed as an indicator of future performance.
Stifel is a multi-disciplined financial services firm that regularly seeks investment banking assignments and compensation
from issuers for services including, but not limited to, acting as an underwriter in an offering or financial advisor in a merger or
acquisition, or serving as a placement agent in private transactions.
These materials have been approved by Stifel Europe Limited, authorized and regulated by the Financial Conduct Authority
(FCA) in the UK, in connection with its distribution to professional clients and eligible counterparties in the European
Economic Area. (Stifel Europe Limited home office: London +44 20 7557 6030.) No investments or services mentioned are
available in the European Economic Area to retail clients or to anyone in Canada other than a Designated Institution. This
investment research report is classified as objective for the purposes of the FCA rules. Please contact a Stifel entity in your
jurisdiction if you require additional information.
Additional Information Available Upon Request
© 2014 Stifel, Nicolaus & Company, Incorporated, One South Street, Baltimore, MD 21202.
© 2014 Stifel Nicolaus Canada Inc. 79 Wellington Street West, 21st Floor Toronto, ON M5K 1B7.
All rights reserved.
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