Epocrates Attracted Athenahealth Buyout by Getting Back to Basics in Mobile
When I sat down with Epocrates CEO Andrew Hurd on December 19, I wanted to know why the company had decided to abandon its ambitious project to build an electronic health record (EHR) system, which previous executives had portrayed as a cornerstone of the company’s expansion. I also wanted to hear what opportunities for growth Hurd saw for the company, now that it had fallen back on its original mobile medical reference technology, which dates to the Palm Pilot era.
I didn’t know at the time that Epocrates (NASDAQ: EPOC) would soon be entertaining a $293 million acquisition offer from Massachusetts-based suitor Athenahealth (NASDAQ: ATHN). But my questions ended up revealing a lot about Hurd’s focus for the company—and helped to explain why an acquirer would see the 13-year-old San Mateo outfit as a worthwhile purchase.
In particular, Hurd made it clear that he sees Epocrates’ intimate relationship with doctors—more than 330,000 of whom use its smartphone and tablet apps to look up information about drug interactions, diagnosis codes, and the like—as its unique strength. It seems that this is exactly what made the company attractive to Athenahealth, which says it plans to use the Epocrates platform to help raise the visibility of its own cloud-based EHR, billing, practice management, and care coordination services.
“Someday, hopefully, in the not too distant future, we can start to offer the Epocrates users little tastes” of Athenahealth’s services, said Jonathan Bush, Athenahealth’s CEO, in a video explaining the acquisition. Given that nearly half of all U.S. physicians, and more than a million clinicians overall, use Epocrates regularly, that could be a powerful marketing strategy.
I talked briefly again with Hurd today, just before publication of this article, and the CEO called Athenahealth the “best landing place” for Epocrates. “From an Epocrates perspective, what was really important for us was [finding] the right home for our employees and for our users,” Hurd says. “Anybody who has ever interacted with Athenahealth [will see] there is an alignment of vision and a passion around providing tools that allow physicians to be more efficient and deliver higher-quality care.”
According to Hurd, the acquisition offer evolved out of a “partnership discussion” that began several months ago between Epocrates and Athenahealth. The latter company was initially looking for help publicizing and distributing its own mobile apps, but it gradually became clear that the relationship could go much deeper.
“We have grown successfully, but we really only have 38,000 active physician users on our network, and we have about 30 percent awareness across our target audience,” says Rob Cosinuke, Athenahealth’s chief marketing officer. “The biggest single change we need, to continue to grow, is to get people to learn our name. So for us, this was an opportunity to really own our own destiny, from the standpoint of getting access to the physician base.”
Clearly, however, there was another big factor opening the way for the acquisition: Epocrates’ affordability. After the company went public at $16 per share in February 2011, its stock reached a brief high around $30, but it took a plunge in August 2011 and hasn’t traded above $12 since then.
Athenahealth’s cash offer, which must be approved by shareholders before the deal can take effect, came in at $11.75 per share, or 22 percent above the stock’s January 4 closing price. Some analysts think that’s too rich, given that Epocrates didn’t show much earnings growth in 2012. But, this being the world of finance, a bevy of securities litigation firms is saying just the opposite—they think that Epocrates didn’t shop the company around adequately and that Athenahealth is underpaying.
But Epocrates has much else to recommend it, aside from the price. New mobile health startups are springing up left and right to exploit the possibilities of smartphones and tablets in the clinic and on the hospital floor. And healthcare companies like Athenahealth that have so far lacked a convincing mobile strategy are scrambling to find one. That’s been Epocrates’ business for more than a decade.
“Basically every company in the world is trying to figure out how to go from online to mobile, but we have cracked the code,” Hurd told me in December. “We are in the enviable position of having almost 100 percent of our revenue come from mobile.” (The lion’s share comes from pharmaceutical companies that pay Epocrates to promote white papers and other drug information from within the apps.)
Epocrates’ product roadmap, the way Hurd laid it out to me before the Athenahealth news, involved adding new types of information for doctors (including long-form content such as journal articles) and new features such as secure text messaging and private communities for doctors. Hurd also said he wants to move beyond the pharmaceutical emphasis to work with new types of sponsors.
As part of Athenahealth, Epocrates’ plans wouldn’t change drastically. “We will probably be able to focus on fewer things and do them even better,” Hurd says. “We are in general alignment on the roadmap.”
The key thing to recognize about these plans is that they all stick fairly close to Epocrates’ original identity as a trusted provider of medical reference data. “A lot of going concerns that are established tend to fall down when they lose sight of what they have and why they have it,” says Hurd, who joined the company in March 2012. “What we have done a great job at is delivering great content to the form factor that [doctors] want, their phone, at the point of care.”
The first big step in Hurd’s turnaround effort at Epocrates was canceling the company’s project to build an EHR system. Given that Athenahealth sells its own EHR and wasn’t in the market for a second one, Hurd’s decision was probably key to setting the stage for the acquisition. But the way he explains the move, the reversal was mainly about recognizing where the company’s real competencies lay.
Hurd’s predecessor in the CEO suite, Rose Crane, told me in late 2010 that she saw an EHR system as a natural extension of Epocrates’ brand. At the time, many technology providers were scrambling to help medical practices capture their share of the $19 billion in federal EHR conversion incentives offered under the 2009 economic stimulus package. Crane said there was an opportunity to focus on an overlooked group: small practices in need of no-hassle technology.
An Epocrates EHR, she said, would reflect the simplicity of Epocrates’ existing apps, and would excel at highlighting drug-prescribing information and other reference data missing from most commercial health record systems. And because Epocrates was already expert at monetizing its mobile platforms through sponsorships, she said, the company would be able to undercut competing EHR providers on price.
But by mid-2011 Epocrates still hadn’t launched its EHR beyond a small group of beta testers. The delay in rolling out the system to paying users was one of the factors that led Epocrates to warn shareholders of lower-than-expected earnings for the second half of 2011. The day after that guidance appeared, Epocrates shares lost 40 percent of their value, dropping from $16.69 to $9.89.
Epocrates’ board canned the EHR project in November 2011—and Crane along with it. “The business had spent a fairly significant amount of time and effort on a pre-revenue initiative,” says Hurd. “The decision was made that they were not going to continue to pursue that. That meant a direction change, which meant a strategy change, which meant a leadership change.”
Hurd knows his way around patient records; he was previously CEO of Carefx, a Scottsdale, AZ-based company whose Fusionfx software helps hospitals aggregate patient information scattered across multiple computer systems. (Harris Corporation acquired Carefx in 2011 for $155 million.) He says the concept behind the Epocrates EHR was “intellectually sound,” and he agrees that the EHR business is a good one, where many companies are providing value.
But it’s not a technology to be undertaken lightly, he says. “The amount of time it takes to build an EHR is usually not defined in single-digit years. If you look at the market realities, the leading companies have taken decades. There is clearly a lot of money being made in that business, and there is great innovation that will occur there, but the purpose it serves and the way it is used is very different from how Epocrates is used.”
“I really have nothing bad to say about Rose,” Hurd adds. “I think she took her shot as this thing occurred.” But the overlap Crane perceived between Epocrates’ existing mobile tools and electronic health records just wasn’t there, he says.
“I will explain it this way,” Hurd says. “I think at some point in the future, 5 or 10 years from now, every physician will have two systems. They will have an EHR provided to them by their hospital, their practice, or whomever. EHRs are exceptional at documentation, data aggregation, reimbursement, all these important aspects, and are largely desktop- and PC-driven. And then they’ll have another system for streamlined, unencumbered access to dynamic information, always accessible on the device they have with them—their smartphone or tablet or their iPad mini or whatever it might be.”
That’s the part where Epocrates can excel, “because we have been doing it for years,” Hurd says. “When I came in, I said, ‘Here is the asset, let’s put some fresh eyes on what we can do with it.’”
The average user of Epocrates has had the app on their smartphone (or before that, on their PDA) for five years, Hurd points out. That means pulling out a mobile device during a patient encounter and using Epocrates—to check on drug interactions and other prescribing information, for example—is literally part of many physicians’ muscle memory.
“At the point of care, where a physician’s got maybe 3 minutes with a patient, getting access to that information in less than a minute becomes incredibly important,” Hurd says. “We have won that space. There is nobody better than we are at that less-than-a-minute category for finding drug-drug interactions, symptoms, diagnoses.”
The opportunity now, Hurd thinks, is to make Epocrates useful for more time-consuming tasks such as brushing up on treatment guidelines, reading news reports and journal articles, networking with other clinicians, and even completing continuing medical education courses. He also says the company is working on a consumer-oriented app designed to “extend the encounter” with patients and ensure that they have ongoing access to authoritative drug information and care instructions.
Already, many doctors and nurses who use Epocrates “swivel” their phones around to show patients dosing information or pictures of the pills they’re taking, Hurd says. That’s now even easier using Epocrates’ native iPad app, released Dec. 6. But beyond that, Hurd thinks physicians would like to be able to refer patients to a consumer version of the app. “The physician would be able to say, ‘This is the knowledge base I’m using to manage your medications. If you have questions about how those interact or the side effects that might occur, I suggest you use this same knowledge base as well.’”
Hurd says a patient-oriented Epocrates app might also include detailed home-care instructions (in place of the bad photocopies that many patients take home with them after a visit to the doctor), as well as a journaling tool to help patients keep track of their symptoms. Doctors will recommend the consumer app, he predicts, as an antidote to the welter of health apps already available, each drawing on different information.
“If you are a doctor and 200 of your patients show up with [health] apps on their phones, they will probably have 196 different apps. That is when you feel clumsy and frustrated,” Hurd says. “No other business has been in the position that we’re in, to go from being in the service of the physician to being in the service of the consumer.”
At the same time, the Epocrates physician app will become more powerful as the company adds features like secure, privacy-compliant text and multimedia messaging. That’s a service other companies already provide (I’ve covered one secure medical messaging startup called Medigram), but Hurd thinks such a feature would be “in line with the capabilities Epocrates has demonstrated in terms of being streamlined, unencumbered, cool, and smart.”
He paints a hypothetical scenario in which an emergency-room physician is in need of a consult on a patient with a skin problem. “An ER doc might not be a specialty in dermatology, but would have the ability to take a picture of a rash and connect in a secure way to a dermatologist who happens to be in their network,” he says. “The communication may be no more than ‘That patient looks fine’ or ‘I can see that patient at 2:00 pm.’”
Historically, Epocrates’ revenue has come from three sources. Subscriptions to premium versions of the app account for 20 percent, and market research surveys provide another 20 percent. The last big chunk, 60 percent, comes from drug manufacturers, who pay for exposure in the form of in-app advertising and “DocAlerts” that give users the option to request sponsored reports or contact manufacturers directly by e-mail or phone.
Hurd told me in December that he wants to take that business “beyond pharma” to other potential sponsors such as medical device makers. A manufacturer of cardiac stents, for example, might use DocAlert to offer the 12,000 cardiologists who use Epocrates a report comparing medicated and non-medicated stents.
Post-acquisition, of course, Epocrates would have an important new marketing client: Athenahealth. “For years, Athenahealth has been seeking a ‘lite’ entry point that will allow physicians to learn about our services and sample our capabilities,” CEO Bush said in a blog post about the proposed merger. Assuming the deal closes, Bush said, “we will immediately set to work” giving Epocrates users the option to sign up for athenaCoordinator and athenaClinicals, the company’s care coordination and EHR services.
At the same time, Bush said, Athenahealth could help Epocrates by deepening the research data it sells to drug companies, and adding new consulting and diagnostic data to its existing drug reference tools.
Cosinuke, the Athenahealth marketing officer, offered a specific example . “On Epocrates there is a CPT lookup capability,” he says, referring to the diagnostic codes physicians use to apply for insurance reimbursement for a given patient encounter. “At Athenahelath we’ve got CPT data by specialty and by zip code available. So a pediatrician using Epocrates in Phoenix, Arizona, could see what other pediatricians in Phoenix are being paid for the same procedure code.” This new information might appear on an Epocrates page sponsored by Athenahealth, thus completing the awareness-raising loop.
Bush said it will take at least 90 days for the deal to close and that “there are lots of kinks to iron.” And even before the acquisition news, Hurd acknowledged that the new apps and features he envisions would take a while to roll out.
“I’m not going to tell you this is a 30-day plan,” he said. “But that is why I am here. We are really well positioned, with thousands of clinicians accessing our application to make important decisions at the point of care. That is a fun thing, to wake up every morning and know you are making that kind of impact.”
Here’s an official Athenahealth video about the proposed merger.