S
w
9B10N012
EMDEON INC.1
Rajnee Singh and Rishabh Jain wrote this case under the supervision of Professor Jim Hatch solely to provide material for class
discussion. The authors do not intend to illustrate either effective or ineffective handling of a managerial situation. The authors may
have disguised certain names and other identifying information to protect confidentiality.
Richard Ivey School of Business Foundation prohibits any form of reproduction, storage or transmission without its written
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Copyright © 2010, Richard Ivey School of Business Foundation
Version (A) 2010-08-17
INTRODUCTION
On July 15, 2009, Marcus Gentles, an analyst at a New York-based investment bank, sat down at his desk
with a steaming cup of coffee, ready to burn the midnight oil. Emdeon Inc. (Emdeon), one of the largest
medical claims processing companies in the United States, was contemplating an initial public offering
(IPO) of its shares, and Gentles had been given the task of coming up with an initial valuation of the shares
for the anticipated US$330 million2 offering. A second task facing Gentles was to provide an outline of the
major risks and opportunities associated with an investment in Emdeon that could be made available to the
investment bank’s securities sales force.
HEALTH CARE INFORMATION TECHNOLOGY IN THE UNITED STATES
Health care expenditures were a large and growing component of the U.S. economy, with $2.4 trillion of
spending in 2008, representing 16 per cent of gross domestic product (GDP). Expenditures were expected
to grow at a rate of 6.2 per cent per year, to $4.4 trillion or 20 per cent of GDP in 2018. The cost of health
care administration was approximately $360 billion in 2008, or 17 per cent of total health care
expenditures. Over $150 billion of these costs were spent on health care revenue and payment
administration-related activities. 3
The health care industry in the United States featured a complex network of stakeholders, including
providers, payers and patients. Providers of health care were any individuals or organizations that delivered
medical or health care services to individuals, such as hospitals, laboratories and medical professionals.
Payers referred to the organizations — rather than the patient — that financed or reimbursed the cost of
health services provided, such as commercial insurance companies or governmental payers. The health
care revenue and payment cycle consisted of the various steps that providers undertook to ensure that the
1
This case has been written on the basis of published sources only. Consequently, the interpretation and perspectives
presented in this case are not necessarily those of Emdeon Inc. or any of its employees.
2
All funds in U.S. dollars unless specified otherwise.
3
EDGAR SEC filing Form 424B4, accessed January 28, 2010.
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large number of different payers reimbursed them for the medical care that they provided to patients. The
main steps in this process consisted of the following:
Pre-Care & Medical Treatment: The provider verified insurance benefits available to the patient,
ensured the medical treatments adhered to medical guidelines and collected relevant eligibility and
demographic information; in addition, the provider collected any pre-authorization for patient procedures
and treated the patient.
Claim Management: The provider prepared and submitted paper or electronic claims (invoices) to a payer
either directly or through a claims processing company for services rendered. The payer verified the claim
and determined payment based on the patient’s health plan design.
Payment Distribution: The payer sent payment and payment explanation (ie. remittance advice) to the
provider and also sent an explanation of benefits (EOB) to the patient, a document detailing medical
benefits claimed, reduced or denied.
Payment Posting & Denial Management: The provider posted payments internally, reconciled payment
with accounts receivable, submitted any claims to secondary insurers if applicable and evaluated any
denial/underpayment of claims.
Patient Billing & Payment: The provider sent a bill to the patient for any remaining balance and posted
payments received.
Managing the information and cash flow between payers, providers and patients had historically been
extremely cumbersome and heavily paper-based. A fragmented industry of providers faced increased
medical care-related reporting and documentation requirements and growing complexity in the
reimbursement process; in addition, rising patient financial responsibility for cost of care put pressure on
providers to collect payment at the point of care. Payers also managed frequently-changing reimbursement
mechanisms involving multiple parties and government mandates that continued to increase the
administrative burden. Although there had been major consolidation among private payers in recent years,
the claims systems had not been effectively integrated, resulting in high costs in administrating various
health plans. It was also challenging for providers and payers to identify instances of inappropriate
payments leading to fraud: industry estimates indicated that between $68 billion and $226 billion in health
care costs annually were attributable to fraud4. These administrative inefficiencies were compounded by
the fact that providers and payers had historically under-invested in administrative and clinical information
systems.
In order to manage these increasingly complicated transactions, providers and payers turned to health care
claims processing companies: these companies were “middle-men,” as they provided services that
processed the transactions between payers and providers. Claims processing companies were also known
as “clearing houses.” Historically this model had been quite successful, since claims processing companies
were able to satisfy the particular needs of different payers and providers while ensuring compliance with
the complex laws and regulations that governed the health care industry; however, despite its success in the
past, there was some concern that the claims processing model might not be sustainable long-term in the
health care industry, with low growth rates projected for the next five to 10 years. Providers were
beginning to submit and receive claims directly with the payer, possibly making the role of the claims
processing firm redundant. As more payers and providers switched to in-house revenue and payment cycle
4
EDGAR SEC filing Form 424B4, accessed January 28, 2010.
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solutions, the dominant players in the claims processing space had to either change their business model to
adapt to the changing customer needs, or continue to compete for business in a shrinking market base.
In addition to facilitating claims processing, providers were increasingly recognizing the need to use health
care software to help with a range of related administrative functions; in response, various health care
claims processing companies tried to fill this need by developing a more comprehensive suite of
administrative software for their existing client base, expanding their role into health care information
technology (IT) solutions, as opposed to solely claims processing services. Health care IT companies
provided software to payers and providers that helped them manage all facets of their health care
administration—from revenue management software to electronic health records.
Among the many public policy initiatives under President Obama’s administration were efforts to reduce
health care administrative inefficiencies by encouraging the conversion from paper to electronic
transactions. Only 43 per cent of health care transactions were electronic, and this represented a huge area
of potential cost savings. It was expected that processing a paper claim would cost $1.58, while processing
an electronic claim would cost $0.85. For customers, a paper claim would cost $12.50 to send, compared to
an electronic claim which would cost $2.505; moreover, the Obama administration was attempting to
extend and expand coverage to a larger number of citizens, which would lead to a further growth in
transaction volumes throughout the health care industry.
With health care costs rising faster than ever before, the industry was increasingly looking towards IT to
reduce costs and improve patient care. Government initiatives included encouraging physician use of
electronic prescription technology through the Health Insurance Portability and Accountability Act in
2008, and promoting the adoption of electronic health records in the American Recovery and Reinvestment
Act (ARRA) stimulus bill in 2009. The time frame for the U.S. market to transition over to a completely
electronic system was dependent on the passing of government legislation and the speed of electronic
adoption in the industry, and thus was very uncertain; however, major changes in billing processes — such
as switching from paper to electronic — were anticipated over the next three to five years.
EMDEON INC.
Emdeon was a leading provider of revenue and payment cycle management software solutions, connecting
payers, providers and patients in the U.S health care system and handling nearly $650 billion in health care
claims annually. As the largest financial and administrative information exchange in the U.S. health care
system, it processed four billion health care transactions in 2008, representing approximately 50 per cent of
commercial health care claims delivered electronically in the U.S. and 25 per cent of all health care
transactions. Emdeon employed approximately 2,200 people at its headquarters in Nashville and its main
data centres in Nashville, Memphis, Toledo, Ohio and Bridgeton, Mo.
As such a significant processor of medical claims and transactions, Emdeon’s core business was often
referred to as a clearing house; however processing transactions was not Emdeon’s only business. With
over 50 product and service offerings, Emdeon’s health IT software solutions were designed to increase
efficiencies and cash flows throughout the many steps of the revenue and payment cycle for both payers
and providers. These software solutions helped to integrate and automate key business and administrative
functions throughout the patient encounter. Some of these functions included pre-care patient eligibility
and benefits verification, claims management and adjudication, payment distribution, payment posting and
denial management and patient billing and payment collection (see Exhibit 1).
5
EDGAR SEC filing Form 424B4, accessed January 28, 2010.
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The company’s three primary customer segments were payers, providers and pharmacies. Payer services
could be subdivided into claims management and payment services, and provider services into patient
statements, revenue cycle management and dental. Pharmacy services customers consisted of national
pharmacy chains, prescription benefit managers, local drugstores and other related payers. Emdeon’s main
services were patient statements, payment services and claims management, which accounted for 31 per
cent, 22 per cent and 21 per cent of total revenue mix in 2008, respectively (see Exhibit 2).
Emdeon possessed the most extensive national network among health care service firms, including
340,000 providers, 1,200 government and commercial providers, 5,000 hospitals, 81,000 dentists, 55,000
pharmacies and 600 vendor partners. Emdeon was also the exclusive provider of certain electronic
eligibility and benefits verification and claims management services under managed gateway agreements
(MGAs) for more than 370 payer customers, representing 25 per cent of all U.S. payers. Its long-standing
customer relationships were a testament to the company, as its 50 largest customers had an average tenure
of 12 years as of June 2009, and average annual customer attrition was approximately three per cent,
before adding in new customer volumes. With products and services that addressed all five segments of the
revenue and payment cycle process, this network could be leveraged to cross-sell to existing customers,
and Emdeon believed it had only tapped 25 per cent of revenue opportunities for existing products.
Emdeon additionally raised awareness of the cost savings available through an electronic system (see
Exhibit 3). Although electronic transactions were less expensive for customers, an electronic transaction
represented a 50 per cent margin boost for Emdeon when compared to a paper or manual one. Emdeon had
provided an educational grant for a Center of Health Transformation white paper entitled “Taking the
Paper out of Paperwork: How Electronic Administration Can Save the U.S. Health System Billions,”
issued in early 2009, and developed the U.S. Healthcare Efficiency Index, which raised awareness of
potential cost savings by improving the efficiency of the business side of the health care system.
Emdeon’s core clearing house business had historically been a stable, low-risk business model. With a
recurring transaction-centred revenue base and relatively low capital requirements, its revenues were
related to predictable claims volume. In 2008, 90 per cent to 95 per cent of revenue was recurring in nature,
and no single customer represented more than 5.6 per cent of total revenue. The firm had a relatively
higher debt to equity ratio of 1.1 as compared to other companies in the industry: this could prove to create
capital expenditure limits and required Emdeon to demonstrate good debt coverage when raising additional
funds.
The firm’s principal shareholders, the two private equity firms General Atlantic LLC and Hellman &
Friedman, controlled more than 50 per cent of the combined voting shares and maintained a close
relationship with Emdeon management. Emdeon employed an experienced and long-standing management
team that had steered the company’s high-growth strategy towards developing new high-value solutions for
their customers’ revenue and payment cycle, pursued selective acquisitions, increased customer penetration
by capitalizing on significant cross-selling opportunities and continued to transition health care transactions
from paper to electronic. The company had recently completed three acquisitions: GE Healthcare
Information Technology’s print and mail service business in September 2008; The Sentinel Group, a health
care fraud and abuse management company in May 2009; eRx, a provider of electronic pharmacy health
care solutions in July 2009. These acquisitions were expected to help Emdeon cater more effectively to its
customers’ evolving needs.
Emdeon also captured over 25 terabytes of historical claim data that provided access to data generated at or
close to the point of care, and included clinical data licensed from WebMD. The company had yet to
leverage this expansive data to create business intelligence and analytic solutions.
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Financial statements for Emdeon can be found in Exhibits 4 and 5.
VALUING EMDEON
Discounted Cash Flows Analysis
Gentles’ first step in his analysis had been to calculate the value of Emdeon’s equity employing the free
cash flows to equity method (see Exhibit 6). In order to make this calculation he had estimated the free
cash flows to equity for the next 10 years. He assumed that net income would grow at 10 per cent in 2009,
and at 25 per cent for the nine years thereafter. In computing the cost of equity capital he assumed that the
risk free rate (as reflected in the long-term government bond rate) was 3.2 per cent, and the market risk
premium was approximately six per cent. Looking at comparable companies, Gentles noted that a beta of
1.35 seemed reasonable for the health care technology company. He also assumed a terminal growth rate
of three per cent. This analysis suggested that the offering price per share should be $12.23. Gentles also
performed a sensitivity analysis to test the key variables of this valuation (see Exhibit 7).
Comparable Companies Analysis
Gentles gathered information on selected competing companies in Emdeon’s market, brief descriptions of
which are provided below. The detailed financial information for these firms can be seen in Exhibit 8.
Gentles divided the companies into two groups: health IT software companies and claims/transaction
processing companies.
As an analyst report from Madison-Williams stated:
When evaluating Emdeon, it is hard to find comparable companies because of Emdeon’s
unrivalled place in the middle of healthcare transactions. Most rival clearinghouses are
more narrow in scope, focusing on certain revenue streams, regional areas, or provider
types. Likewise, most publicly traded healthcare IT vendors are growing faster, but are
also focused on software licenses to providers.6
Gentles knew that finding a single company whose business was comparable to Emdeon was unlikely, and
thus wondered how to approach the valuation.
Health Care IT Companies7
AthenaHealth, Inc.
Based in Massachusetts, AthenaHealth provided internet-based solutions for doctors. According to their
2009 annual report, AthenaHealth believed it was the first company to integrate the following services into
a single service for physicians: internet-based software, a continually updated database of payer
reimbursement rules, back-office billing and clinical data services and automated and live patient
communication services. AthenaCollector was the company’s primary offering, which automated and
managed billing and related functions for physician practices. AthenaClinicals automated and managed
6
7
Analyst report from Madison-Williams and Company, dated December 18, 2009.
All company descriptions have been abstracted from their respective annual reports.
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electronic medical records, and AthenaCommunicator communicated with patients to support compliance
and improve care.
AthenaHealth had also grown its network to a national scale, which created economies of scope for both
AthenaHealth and for physicians. Key success factors for this company centred on attracting and retaining
clients, keeping its technology and databases up-to-date and providing superior service. As revenue
management and information management was becoming increasingly complex in health care, significant
opportunities were being created for firms like AthenaHealth which helped increase efficiencies and
decreased costs of managing flows of cash and information. AthenaHealth faced intense competition from
larger players such as GE Healthcare, Siemens, McKesson and Ingenix.
Allscripts-Misys Healthcare Solutions Inc.
Allscripts was a Chicago-based provider of clinical software, services and IT solutions for physicians and
other health care providers. Allscripts aimed to provide physicians with the right information at the right
time in order to improve patient safety and clinical outcomes. It provided software applications including
electronic health records (EHR), hospital care management and discharge management solutions,
document imaging solutions and a range of solutions for home care and other post-acute facilities.
Allscripts supplied solutions to more than 160,000 physicians and 800 hospitals across the United States.
The Company’s award-winning EHR solutions enhanced physician productivity using tablet personal
computers, wireless handheld devices or desktop workstations which were designed to automate common
activities such as prescribing, dictating, ordering lab tests and viewing results, documenting clinical
encounters and capturing charges. The company also offered practice management solutions that combined
scheduling and revenue cycle management tools. All in all, Allscripts’ product portfolio aimed to address
every step in the reimbursement cycle for health care organizations, payers and clearinghouses.
Interestingly, 82 per cent of their physician clients who used their financial back-office operations did not
currently use Allscripts EHR services; therefore, the company saw a huge opportunity to sell its EHR and
related solutions to its existing client base. Like most companies in this market, Allscripts had to deal with
competitive pressures from larger, more established companies.
Cerner Inc.
Cerner was a Missouri-based health care IT company that provided solutions and devices for health care
organizations of all sizes, from single-doctor practices to entire countries. Cerner products included an
electronic medical record platform, ePrescribe for automatic prescription filling and refilling as well as
numerous other front- and back-office solutions that aimed to reduce costs and improve patient care. It
offered an array of hardware solutions to its customers, as well as a consulting service to help customers
select and implement a particular solution. Worldwide, Cerner’s solutions were used by more than 2,300
hospitals, 3,400 physician practices (covering over 30,000 physicians), 600 ambulatory facilities, 700
home health facilities and 1,500 retail pharmacies.
Quality Systems, Inc.
Quality Systems was a California-based health care IT company. It developed and marketed information
systems that automated certain functions in medical and dental practices, networks of practices, ambulatory
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care centres, community health centres and medical and dental schools. Quality Systems provided
computer-based practice management and medical records, and specialized in providing management
software for dental practices. Since adoption levels for EHR software were relatively low at the time,
Quality Systems competed to replace its clients’ outdated paper-based patient records. The company also
provided revenue cycle management (RCM) to a variety of health care providers through its wholly-owned
subsidiary, NextGen. NextGen also provided electronic data interchange (EDI) and claims processing
services, such as forwarding insurance claims electronically from payers to providers and helping medical
practices issue statements to patients; however, instead of offering many of these services in-house,
Quality Systems tended to outsource them to national clearing houses with which they had strong
relationships. Major risks faced by the company included the threat of competition, failure to keep pace
with the emerging software and risks of any regulatory changes that may affect their business.
Claims and Transaction Processing / Clearing House Companies
Automatic Data Processing, Inc.
Automatic Data Processing (ADP) was a New Jersey-based company that assisted its approximately
540,000 clients worldwide to process, manage and retain employee payroll, tax and benefits information.
ADP served clients that were small, medium and national-sized; however, no single client made up more
than two per cent of ADP’s revenues. In addition to processing human resource information for its clients,
ADP also offered a variety of software products that allowed its clients to manage human resource
information on their own. These software solutions were offered in traditional and web-based formats.
Eighty per cent of ADP’s employer services business was based in the United States. In addition to its
employer services business, ADP offered Dealer Services, which provided IT solutions for automotive,
truck, recreational vehicle and heavy machinery retailers.
For a company such as ADP to succeed, it was important that they built and maintained long-term
relationships that created recurring revenue streams. Major risks for the business included changing
government regulations (i.e. employment and tax laws), security and privacy breaches and disruptions to
ADP’s technology.
Paychex, Inc.
Paychex was based in Rochester, New York and offered human resource, payroll and benefits services to
small and medium-sized businesses; specifically, the company served its clients’ diverse transaction needs
by offering payroll processing, employee payment services, payroll tax administration, regulatory
compliance services, health benefits and administration and workers compensation insurance services. To
date, Paychex serviced 554,000 employers. While Paychex’s competitors focused on medium to large
businesses (more than 100 employees), Paychex believed that small businesses were an underpenetrated
market. By outsourcing their administrative burdens to Paychex, these small businesses would be better
able to meet their compliance requirements and still provide competitive benefits for their employees;
however, these clients were more likely to go out of business, and thus Paychex’s client retention was
typically lower than industry average. Paychex’s primary competitor was ADP Inc., but Paychex’s network
of clients was significantly smaller than ADP’s.
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DST Systems, Inc.
DST Systems, Inc. (DST) was a Missouri-based IT services company. The company’s financial services
division offered advanced information processing and software services to mutual funds, investment
managers, insurance companies, health care providers, banks, brokers, health care payers, real estate
partnerships, third party administrators and medical practice groups. Services offered by this division
included the following: shareowner record keeping, retirement plan record keeping, distribution support
solutions, business process management, investment management software, health care administration
processing services and pharmacy claims processing.
DST’s output solutions division offered integrated print and electronic billing solutions: this allowed DST
to provide these billing services to industries that required high quality, accurate and timely statement and
billing services, such as the financial services, communication and health care industries. DST also owned
significant real estate subsidiaries, equity securities and other financial interests that made up its
investments and other division. DST operated largely in the United States, incurring 89.2 per cent of its
revenues there, and 17.2 per cent of revenues came from health care-related services such as claims
processing, member and provider management and benefit plan management.
Visa Inc.
Visa Inc. (Visa) offered electronic payment solutions to a network of retail clients. It managed information
and processed transactions between banks, retailers, consumers and businesses. Among its offerings to
financial institutions were consumer credit, debit, prepaid and commercial payment solutions. Visa’s
primary competitor was MasterCard Incorporated.
OTHER CONSIDERATIONS
Gentles knew that other qualitative factors might have an influence on the valuation that he would present
to his boss: one of these was market conditions. According to the National Bureau of Economic Research,
a long-running recession began in the United States in December 2007, triggered by the bursting of a
global housing bubble, which peaked in 2006.8 This eventually led to the collapse of several large U.S.
financial institutions in 2008, primarily due to exposure of packaged subprime mortgage loans and the
associated credit default swaps issued to insure these loans. In the fall of 2008, the credit market squeeze
rapidly developed into a global financial crisis, resulting in extreme stock market volatility, declines in
consumer wealth and damaged investor confidence. Between June 2007 and November 2008, Americans
lost an estimated average of more than a quarter of their collective net worth. The government responded
with an unprecedented $700 billion bank bailout and $787 billion fiscal stimulus package. There was also a
global coordinated cut in interest rates. By early 2009, the credit markets started to ease up and stock
markets began to gradually stabilize. Although unemployment rates were still rising, a growing number of
economists believed that the recession had ended by July 2009.9
Health care-related firms had traditionally been a driver of the IPO market, leading all industries in terms
of IPO deals from 2004 to 2006, and coming second to the technology industry in 2007. IPO activity in
2007 was robust with 231 offerings and $53 billion raised — the highest volume and largest proceeds since
2000; however, average total returns on IPOs in 2007 were lower than the average returns from 2003 to
8
9
http//www.nber.org/ “Determination of the December 2007 Peak in Economic Activity,” accessed December 11, 2008.
http://www.bea.gov/, accessed April 5, 2010.
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2006. This decline was largely attributed to the fallout from the mortgage crisis, resulting in investors
quickly bailing out of the portions of their portfolio in which they had the least experience and confidence,
i.e., recently acquired IPOs.
Since the late 1970s, the slowest year for new issuances in the United States occurred in 2008. A slowing
economy, growing credit market turmoil and spiking volatility caused the market to all but completely shut
down from August 2008 to March 2009. The financing environment for health care-related offerings,
including biotechnology, pharmaceuticals and U.S. health service firms was especially unfavourable, as
uncertainty around valuation created difficulty in pricing offerings. Only three health care IPOs were
completed in 2008, and all were priced below their original ranges. Compared to the 38 health care-related
IPOs in 2007, this represented a decline of 92 per cent, higher than the overall volume decline of 86 per
cent for all IPO shares. The health care sector also performed poorly, as the New York Stock Exchange
(NYSE) Health Care Index had a 2008 price return of -25.5 per cent, compared to 3.04 per cent in 2007.
After a dismal performance in 2008, the U.S. IPO environment began to improve as markets began to
stabilize in the second quarter of 2009. With a pent-up demand for equity and a large pipeline of deals,
companies were starting to take advantage of the widening window of opportunity to raise capital. Industry
insiders and investors were still cautious though, and mature companies with realistic valuations in a
growing sector had a better chance of successfully raising capital. Medidata Solutions, a clinical data
software provider, debuted successfully in June 2009, the first health care service-related issuance in nearly
two years. With investor appetite increasing, the economy recovering and new legislation potentially
leading to more profit in the industry, analysts were optimistic about the health care technology sector. 10
The size of the IPO discount was another factor in the valuation of Emdeon. IPOs are typically priced at a
discount to their “fair trading value” depending on the particular issues and the market conditions at the
time of the offering. IPO discounts had been in the range of 15 per cent to 25 per cent historically, but in
order to unclog the IPO pipeline, deals could build in a larger than average discount. Gentles wondered
what a reasonable IPO discount might be for the Emdeon offering. Given all these issues, Gentles leaned
back in his chair and began the process of trying to value Emdeon’s shares for its upcoming share offering.
10
For information on the IPO environment see, “Global IPO Review,” accessed March 31, 2009
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Exhibit 1
HEALTH CARE REVENUE AND PAYMENT CYCLE
Consumers
(Patients)
Pre-Care (Eligibility and Benefits Verification)
Claims Management/ Submission
Providers
Payment & Remittance Distribution /
Claims Denial and AR Management
Payers
Pharmacies
Pre-care &
Medical
Treatment
Claims
Management /
Adjudication
Payment
Distribution
Payment
Posting /
Denial
Management
Patient Billing
& Payment
Emdeon’s End-to-End Services
•Demographic information
•Eligibility & benefits
verification
•Patient responsibility
estimation
•Ability to pay
•Payment risk assessment
•POS payment collection
•Authorization & referral
•Pre-certification
•Data repository
•Lab order entry/results
Source: Company documents.
•Claim submission
•Claims adjudication
(for pharmacy)
•Claim
inventory/tracking
•Claim status reporting
•Claim receipt (paper,
electronic)
•Fraud & abuse
investigation
•Electronic prescribing
•Provider payments
(paper/electronic)
•Remittance advice
•Patient
Explanation of
Benefits
•Denial/underpayment
monitoring
•Manage remittance
inventory
•Denial analysis/correction
•Payment posting
•Secondary billing
•Patient statements
•Online billing and payment
•Return mail management
•Document archive
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Exhibit 2
EMDEON SERVICES REVENUE MIX
Source: Company documents.
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Exhibit 3
ELECTRONIC VERSUS PAPER PENETRATION BY CLAIMS CYCLE STAGE (2008)
Source: Company documents.
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Exhibit 4
STATEMENT OF EARNINGS
(All figures in US$ millions)
Emdeon Inc. Statement of Earnings
Years ended Dec. 31
Six-months ended
2008
2009
2007
2008
Revenues
Cost of goods sold
Gross profit
808.5
514.5
294.0
853.6
540.6
313.0
422.9
270.9
152.0
444.4
271.6
172.8
Operating expenses
Research & development
Sales, marketing, general and administrative
Depreciation and amortization
Other
Total operating expenses
Operating income
28.5
94.5
62.8
185.8
108.2
29.7
91.3
97.8
3.0
221.8
91.2
13.5
46.8
46.2
106.5
45.5
14.4
51.5
50.3
0.2
116.4
56.4
(1.5)
74.3
35.4
18.1
17.3
(0.9)
71.7
20.4
8.5
11.9
(0.6)
29.4
16.7
8.5
8.2
(0.05)
35.1
21.3
3.6
17.7
Interest income
Interest expense
Earnings before income taxes (EBIT)
Income tax provision (benefit)
Net income
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Exhibit 5
BALANCE SHEET
(All figures in US$ millions)
Emdeon Inc. Balance Sheet
Years ended
31
2007
2008
6-months
ended
2009
33.7
123.1
3.5
15.4
175.7
71.5
144.1
2.3
21.1
239.0
96.1
148.4
3.8
20
268.3
113.5
667.0
398.6
2.3
1,357.1
136.0
646.9
971.0
7.3
2,000.2
136.6
649.6
940.6
8.3
2,003.4
Accounts payable
Accrued expenses
Due to HLTH Corp.
Deferred revenues
Current portion of long-term debt
Total current liabilities
10.0
75.4
0.7
16.1
7.2
109.4
0.8
79.5
12.1
17.2
109.6
5.8
75.5
12.3
3.3
96.9
Long-term debt (excl. current portion)
Deferred income tax liabilities
Other long-term liabilities
Minority interest
Total non-current liabilities
864.7
59.9
22.3
946.9
808.0
159.8
44.7
206.5
1,219.0
797.8
156.8
32
216.0
1,202.6
Additional paid in capital
Accumulated other income
Retained earnings
Total equity
300.5
(14.4)
14.8
300.9
670.6
(23.1)
24.1
671.6
683.6
(17.4)
37.7
703.9
Total liabilities & equity
1,357.2
2,000.2
2,003.4
Cash & equivalents
Accounts receivable
Deferred income tax assets
Prepaid expenses & other current assets
Total current assets
Property & equipment
Goodwill
Intangible assets
Other assets
Total assets
Dec.
Page 15
9B10N012
Exhibit 6
DISCOUNTED CASH FLOW ANALYSIS
Fiscal year ending December 31
(in US$ millions)
2007A
2008A
Net income growth rate
2009E
Terminal
2010E 2011E 2012E 2013E 2014E 2015E 2016E 2017E 2018E value
10%
25%
25%
25%
25%
25%
25%
25%
25%
25%
Net income
Depreciation & amortization
Stock-based compensation
Capital expenditures
Net borrowing
17.3
62.8
6.6
(50.2)
(53.1)
11.2
97.8
3.6
(355.3)
(0.3)
12.3
106.0
19.0
(105.8)
114.3
15.4
112.9
16.0
(74.1)
0.0
19.3
123.8
15.2
(125.3)
(7.2)
Change in working capital
(23.5)
(35.3)
(4.6)
(7.8)
Free cash flows
(40.1)
(278.3)
141.2
11.3%
1.00
Discount rate
Periods (for discounting)
Discount factor
Present value of annual cash flow
0.90
126.88
Present value of total cash flows
Number of shares (in millions)
Value per share
Assumptions
Cost of equity
Risk free rate (10 year US treasury rate)
Market risk premium
Beta
Terminal growth rate
$1,406.67
115.00
$12.23
11.30%
3.20%
6.00%
1.35
3.00%
24.1
151.0
9.9
(100.2)
(7.2)
30.1
133.5
10.3
(90.7)
47.6
37.6
141.2
10.6
(95.0)
8.4
47.0
148.3
11.0
(98.0)
8.5
58.7
154.0
11.6
(91.3)
8.6
73.4
159.3
12.3
(94.7)
8.7
91.8
164.4
12.7
(98.1)
8.8
38.0
(2.7)
(2.4)
(1.7)
(1.0)
(0.5)
0.2
1.1
62.4
63.8
74.9
128.4
101.1
115.8
141.1
159.2
180.7
11.3%
2.00
11.3%
3.00
11.3%
4.00
11.3%
5.00
11.3%
6.00
11.3%
7.00
11.3%
8.00
11.3%
9.00
11.3%
10.00
0.81
50.37
0.73
46.24
0.65
48.78
0.59
75.16
0.53
53.18
0.47
54.73
0.42
59.94
0.38
60.75
0.34
61.94
2242.3
11.3%
10.00
0.34
768.68
Page 16
9B10N012
Exhibit 7
DISCOUNTED CASH FLOW SENSITIVITY ANALYSIS
Discount rate
10.0%
10.5%
11.0%
11.5%
12.0%
12.5%
13.0%
1.5%
$13.13
$12.29
$11.54
$10.87
$10.26
$9.72
$9.22
Terminal growth rate
2.0%
2.5%
3.0%
$13.62
$14.18
$14.81
$12.71
$13.18
$13.71
$11.90
$12.30
$12.75
$11.18
$11.52
$11.91
$10.53
$10.83
$11.16
$9.95
$10.21
$10.50
$9.43
$9.66
$9.90
3.5%
$15.54
$14.32
$13.26
$12.34
$11.53
$10.82
$10.18
4.0%
$16.40
$15.02
$13.85
$12.83
$11.95
$11.17
$10.49
Page 17
9B10N012
Exhibit 8
COMPARABLE COMPANY INFORMATION
Share
price
9/18/09
Health software/IT
Allscripts (MDRX)
AthenaHealth (ATHN)
Cerner (CERN)
Quality Systems (QSII)
Health software/IT average
$
$
$
$
$
17.30
40.19
70.93
59.54
41.48
Transactions/claims processing
Automatic Data Processing (ADP)
Paychex Inc. (PAYX)
DST Systems (DST)
Visa (V)
Transactions/claims processing ave.
$
$
$
$
$
39.39
29.68
46.49
73.79
47.34
Emdeon (EM)
$ 16.60
Market
cap
2714
1464
6271
1748
2651
EV Debt D/E
2798
1315
5694
1624
2500
63.7
8.9
95.5
49.7
19755 18285 42.7
10631 6721
2125 3265 620.9
72996 44.0
10837 25317 235.9
0.09
0.07
0.06
0.07
EBIT
45.9
17.2
292
72.4
87.4
EVBETA
EBITDA
EBITDA
P/E
2009 % growth 2010 % growth 2009 2010 2009 2010
126
36
479
85
159.2
0.01 1796.7
2010
- 805.2
809
0.98 274.3
435
0.00 3538.0
3900
0.33 1603.6 1788.5
1352 2719 830.7 1.10
101.0
Source: Data obtained from Barclays Capital, “Equity Research – Emdeon Inc, September 21, 2009
207
3.8%
100.0%
11.7%
6.3%
22.6%
156
57
547
115
193
-0.3% 2050
-10.5% 825
-7.6% 454
21.9% 4500
0.9% 1957
9.2%
258
23.8%
58.0%
14.2%
35.3%
31.4%
22.2
36.5
11.9
19.1
21.0
17.9
23.1
10.4
14.1
15.5
32.1
68.1
30.4
35
39.8
28.7
42.8
25.9
27.3
30.4
1.22
2.10
0.65
0.86
1.21
2.0% 9.1 8.9 15.3 16.1
2.0% 8.3 8.1 22 21.7
4.4% 7.5 7.2 12.4 11.5
15.4% 18.7 16.2 25 21.1
6.0% 10.9 10.1 18.7 17.6
0.77
0.88
1.02
0.85
0.88
25.0% 13.2 10.5 27.2 20.5
1.35