From the Healtheon May, 1999 SEC 10-Q. Interested investors should at least glance at this. My personal favorite: "The healthcare industry
may not accept our solutions." What the heck,it's only a few$ billion.
FACTORS THAT MAY AFFECT FUTURE RESULTS OF OPERATIONS
Our quarterly operating results may vary.
Fluctuations in our quarterly results could affect the market price of our common stock in a manner unrelated to our long-term
operating performance. We expect that our quarterly revenue and operating results may fluctuate as a result of a number of
factors, including:
- changes in our strategic relationships;
- future acquisitions;
- our entry into new healthcare markets;
- new customers;
- new application and service offerings;
- software defects, delays in development and other quality factors;
- customer demand for our applications and services;
- our ability to meet project milestones or customer expectations;
- our mix of consulting and transaction fee revenue;
- variability in demand of Internet-based healthcare solutions;
- changes within the healthcare industry; and
- seasonality of demand.
We expect to increase activities and spending in substantially all of our operational areas. We base our expense levels in part
upon our expectations concerning future revenue and these expense levels are relatively fixed in the short-term. If we have
lower revenue, we may not be able to reduce our spending in the short-term in response. Any shortfall in revenue would have a
direct impact on our results of operations. For these and other reasons, we may not meet the earnings estimates of securities
analysts or investors and our stock price could suffer.
The healthcare industry may not accept our solutions.
To be successful, we must attract a significant number of customers throughout the healthcare industry. To date, the healthcare
industry has been resistant to adopting new information technology solutions. Electronic information exchange and transaction
processing by the healthcare industry is still developing. We believe that complexities in the nature of the healthcare transactions
that must be processed have hindered the development and acceptance of information technology solutions by the industry.
Conversion from traditional methods to electronic information exchange may not occur as rapidly as we expect it will. Even if
the conversion does occur as rapidly as we expect, healthcare industry participants may use applications and services offered
by others.
We believe that we must gain significant market share with our applications and services before our competitors introduce
alternative products, applications or services with features similar to our current or proposed offerings. Our business plan is
based on our belief that the value and market appeal of our solution will grow as the number of participants and the scope of
the transaction services available on our platform increase. We may not achieve the critical mass of users we believe is
necessary to become successful. In addition, we expect to generate a significant portion of our revenue from subscription and
transaction-based fees. Consequently, any significant shortfall in the number of users or transactions occurring over our platform
would adversely affect our financial results.
We rely on strategic relationships to generate revenue.
To be successful, we must establish and maintain strategic relationships with leaders in a number of healthcare industry
segments. This is critical to our success because we believe that these relationships will enable us to:
- extend the reach of our applications and services to the various participants in the healthcare industry;
- obtain specialized healthcare expertise;
- develop and deploy new applications;
- further enhance the Healtheon brand; and
- generate revenue.
Entering into strategic relationships is complicated because some of our current and future partners may decide to compete with
us. In addition, we may not be able to establish relationships with key participants in the healthcare industry if we have
established relationships with competitors of these key participants. Consequently, it is important that we are perceived as
independent of any particular customer or partner. Moreover, many potential partners may resist working with us until our
applications and services have been successfully introduced and have achieved market acceptance.
As we establish strategic relationships, we will depend on our partners' ability to generate increased acceptance and use of our
platform, applications and services. To date, we have established only a limited number of strategic relationships and these
relationships are in the early stages of development. We have limited experience in establishing and maintaining strategic
relationships with healthcare industry participants. If we lose any of these strategic relationships or fail to establish additional
relationships, or if our strategic partners fail to actively pursue additional business relationships and partnerships, we would not
be able to execute our business plans and our business would suffer significantly. On February 9, 1999, SmithKline Beecham
announced that it has agreed to sell SmithKline Labs to Quest Diagnostics, Incorporated. SmithKline Labs has been one of our
strategic partners since December 1997, and our relationship with them has been beneficial. Our agreements with SmithKline
Labs will remain in effect as a result of the acquisition. However, we will need to work with a new business partner, which
involves risks such as different customer requirements and working relationships. At this time, we are not aware of Quest's
intentions regarding our relationship with SmithKline Labs. Our business could be adversely affected if Quest does not pursue
the relationship to the same extent as SmithKline Labs. In addition, our ability to take advantage of our relationship with
SmithKline Labs may be impaired because the attention of management of the combining companies may be diverted during
and after the acquisition. We may not experience increased use of our platform, applications and services even if we establish
and maintain these strategic relationships.
Our business will suffer if we do not expand our suite of applications.
Our business will suffer if we do not expand the breadth of our applications quickly. We currently offer a limited number of
applications on our platform and our future success depends on quickly introducing new applications in several healthcare
segments. We do not have the internal resources and specialized healthcare expertise to develop all these applications
independently. Consequently, we must rely on a combination of internal development, strategic relationships, licensing and
acquisitions to develop these applications. Each of our applications, regardless of how it was developed, must be integrated
and customized to operate with existing customer legacy computer systems and our platform. Developing, integrating and
customizing these applications will be expensive and time consuming. Even if we are successful, these applications may never
achieve market acceptance, which could also cause our business to suffer.
We must acquire technologies and companies to increase our customer base.
We expect to continue to acquire technologies and other healthcare technology companies to increase the number and variety
of applications on our platform and to increase our customer base. For example, in May 1998 we acquired ActaMed, in
August 1998 we acquired substantially all the assets of Metis, LLC, and in April 1999 we announced that we have entered into
an agreement to acquire MedE America Corporation, or MedE. See Note 5 of "Notes to Condensed Consolidated Financial
Statements." To be successful, we will need to identify applications, technologies and businesses that are complementary to
ours, integrate disparate technologies and corporate cultures and manage a geographically dispersed company. Acquisitions
could divert our attention from other business concerns and expose us to unforeseen liabilities or risks associated with entering
new markets. Finally, we may lose key employees while integrating these new companies.
Integrating newly acquired organizations and technologies into our company could be expensive, time consuming and may strain
our resources. In addition, we may lose our current customers if any acquired companies have relationships with competitors of
our customers. Consequently, we may not be successful in integrating acquired businesses or technologies and may not achieve
anticipated revenue and cost benefits. The healthcare industry is consolidating and we expect that we will face intensified
competition for acquisitions, especially from larger, better-funded organizations. If we fail to execute our acquisition strategy
successfully for any reason, our business will suffer significantly.
We intend to pay for some of our acquisitions by issuing additional common stock and this could dilute our stockholders. We
may also use cash to buy companies or technologies in the future. If we do use cash, we may need to incur debt to pay for
these acquisitions. Acquisition financing may not be available on favorable terms or at all. In addition, we may be required to
amortize significant amounts of goodwill and other intangible assets in connection with future acquisitions, which would
materially increase our operating expenses.
We must manage our growth.
We have rapidly and significantly expanded our operations and expect to continue to do so. This growth has placed, and is
expected to continue to place, a significant strain on our managerial, operational, financial and other resources. As of March 31,
1999, we have grown our headcount significantly over the prior year. A large portion of this increase resulted from our
acquisitions of ActaMed in May 1998 and Metis, LLC in August 1998, which increased our payroll by 230 employees. We
expect to continue to hire a significant number of new employees to support our business. In addition, the proposed acquisition
of MedE will increase our headcount by approximately 450 employees.
Our current information systems, procedures and controls may not continue to support our operations and may hinder our
ability to exploit the market for healthcare applications and services. We are in the process of evaluating our accounting and
management information systems and anticipate that we may implement new systems within the next twelve months. We could
experience interruptions to our business while we transition to new systems.
Our business will suffer if commercial users do not accept Internet solutions.
Our business model depends on the adoption of Internet solutions by commercial users. Our business could suffer dramatically
if Internet solutions are not accepted or not perceived to be effective. The Internet may not prove to be a viable commercial
marketplace for a number of reasons, including:
- inadequate development of the necessary infrastructure for communication speed, access and server reliability;
- security and confidentiality concerns;
- lack of development of complementary products, such as high-speed modems and high-speed communication lines;
- implementation of competing technologies;
- delays in the development or adoption of new standards and protocols required to handle increased levels of Internet activity;
and
- governmental regulation.
We expect Internet use to grow in number of users and volume of traffic. The Internet infrastructure may be unable to support
the demands placed on it by this continued growth.
Growth in the demand for our applications and services depends on the adoption of Internet solutions by healthcare
participants, which requires the acceptance of a new way of conducting business and exchanging information. The healthcare
industry, in particular, relies on legacy systems that may be unable to benefit from our Internet-based platform. To maximize the
benefits of our platform, healthcare participants must be willing to allow sensitive information to be stored in our databases. We
can process transactions for healthcare participants that maintain information on their own proprietary databases. However, the
benefits of our connectivity and sophisticated information management solution are limited under these circumstances.
Customers using legacy and client-server systems may refuse to adopt new systems when they have made extensive investment
in hardware, software and training for older systems.
Performance or security problems with our systems could damage our business.
Our customer satisfaction and our business could be harmed if we or our customers experience any system delays, failures or
loss of data. We currently process substantially all our customer transactions and data at our facilities in Santa Clara, California
and Atlanta, Georgia. Although we have safeguards for emergencies, we do not have backup facilities to process information if
either of these facilities is not functioning. The occurrence of a major catastrophic event or other system failure at either the
Santa Clara or the Atlanta facility could interrupt
data processing or result in the loss of stored data. In addition, we depend on the efficient operation of Internet connections
from customers to our systems. These connections, in turn, depend on the efficient operation of Web browsers, Internet service
providers and Internet backbone service providers, all of which have had periodic operational problems or experienced
outages.
A material security breach could damage our reputation or result in liability to us. We retain confidential customer and patient
information in our processing centers. Therefore, it is critical that our facilities and infrastructure remain secure and that our
facilities and infrastructure are perceived by the marketplace to be secure. Despite the implementation of security measures, our
infrastructure may be vulnerable to physical break-ins, computer viruses, programming errors, attacks by third parties or similar
disruptive problems.
Technology may change faster than we can update our applications and services.
Healthcare information exchange and transaction processing is a relatively new and evolving market. The pace of change in our
markets is rapid and there are frequent new product introductions and evolving industry standards. We may be unsuccessful in
responding to technological developments and changing customer needs. In addition, our applications and services offerings
may become obsolete due to the adoption of new technologies or standards.
Our platform infrastructure and its scalability are not proven.
So far, we have processed a limited number and variety of transactions over our platform. Similarly, a limited number of
healthcare participants use our platform. Our systems may not accommodate increased use while maintaining acceptable overall
performance. We must continue to expand and adapt our network infrastructure to accommodate additional users, increased
transaction volumes and changing customer requirements. This expansion and adaptation will be expensive and will divert our
attention from other activities.
Many of our service agreements contain performance standards. If we fail to meet these standards, our customers could
terminate their agreements with us. The loss of any of our service agreements would directly and significantly impact our
business. We may be unable to expand or adapt our network infrastructure to meet additional demand or our customers'
changing needs on a timely basis and at a commercially reasonable cost, or at all.
Our revenues are concentrated in a few customers.
We expect that we will generate a significant portion of our revenue from a small number of customers for the next few years. If
we do not generate as much revenue from these customers as we expect, or if we lose any of these customers, our revenue will
be significantly reduced which would harm our business. For example, we receive a substantial majority of our revenue from
four customers. UnitedHealth Group, SmithKline Labs, Brown & Toland and Beech Street each accounted for over 10% of
our total revenue in the first quarter of 1999. As of April 28, 1999, UnitedHealth Group owned approximately 12.7% of our
stock and SmithKline Labs owned approximately 8.8% of our stock.
We face significant competition.
The market for healthcare information services is intensely competitive, rapidly evolving and subject to rapid technological
change. Many of our competitors have greater financial, technical, product development, marketing and other resources than
we have. These organizations may be better known and have more customers than us. We may be unable to compete
successfully against these organizations.
Many of our competitors have announced or introduced Internet strategies that will compete with our applications and services.
We have many competitors, including:
- healthcare information software vendors, including HBO & Company and Shared Medical Systems Corporation;
- healthcare electronic data interchange companies, including ENVOY Corporation and National Data Corporation;
- large information technology consulting service providers, including Andersen Consulting, International Business Machines
Corporation and Electronic Data Systems Corporation; and
- small regional organizations.
In addition, we expect that major software information systems companies and others specializing in the healthcare industry will
offer competitive applications or services. Some of our large customers may also compete with us.
Changes in the healthcare industry could adversely affect our business.
The healthcare industry is highly regulated and is subject to changing political, economic and regulatory influences. These factors
affect the purchasing practices and operation of healthcare organizations. Changes in current healthcare financing and
reimbursement systems could cause us to make unplanned modifications of applications or services, or result in delays or
cancellations of orders or in the revocation of endorsement of our applications and services by healthcare participants. Federal
and state legislatures have periodically considered programs to reform or amend the U.S. healthcare system at both the federal
and state level. These programs may contain proposals to increase governmental involvement in healthcare, lower
reimbursement rates or otherwise change the environment in which healthcare industry participants operate. Healthcare industry
participants may respond by reducing their investments or postponing investment decisions, including investments in our
applications and services. We do not know what effect any proposals would have on our business.
Many healthcare providers are consolidating to create integrated healthcare delivery systems with greater market power. These
providers may try to use their market power to negotiate price reductions for our applications and services. If we were forced
to reduce our prices, our operating margins would decrease. As the healthcare industry consolidates, competition for customers
will become more intense and the importance of acquiring each customer will become greater.
Government regulation could adversely affect our business.
Our business is subject to government regulation. Existing as well as new laws and regulations could adversely affect our
business. Laws and regulations may be adopted with respect to the Internet or other on-line services covering issues such as:
- user privacy;
- pricing;
- content;
- copyrights;
- distribution; and
- characteristics and quality of products and services.
Moreover, the applicability to the Internet of existing laws in various jurisdictions governing issues such as property ownership,
sales and other taxes, libel and personal privacy is uncertain and may take years to resolve. Demand for our applications and
services may be affected by additional regulation of the Internet. For example, until recently current Health Care Financing
Administration guidelines prohibited transmission of Medicare eligibility information over the Internet.
We are subject to extensive regulation relating to the confidentiality and release of patient records. Additional legislation
governing the distribution of medical records has been proposed at both the state and federal level. It may be expensive to
implement security or other measures designed to comply with any new legislation. Moreover, we may be restricted or
prevented from delivering patient records electronically.
Legislation currently being considered at the federal level could affect our business. For example, the Health Insurance
Portability and Accountability Act of 1996 mandates the use of standard transactions, standard identifiers, security and other
provisions by the year 2000. We are designing our platform and applications to comply with these proposed regulations;
however, until these regulations become final, they could change, which could cause us to use additional resources and lead to
delays in order to revise our platform and applications. In addition, our success depends on other healthcare participants
complying with these regulations.
Some computer applications and software are considered medical devices and are subject to regulation by the United States
Food and Drug Administration, or the FDA. We do not believe that our current applications
or services are subject to FDA regulation. We may expand our application and service offerings into areas that subject us to
FDA regulation. We have no experience in complying with FDA regulations. We believe that complying with FDA regulations
would be time consuming, burdensome and expensive and could delay our introduction of new applications or services.
We may face product-related liabilities.
Although we and our customers test our applications, they may contain defects or result in system failures. In addition, our
platform may experience problems in security, availability, scalability or other critical features. These defects or problems could
result in the loss of or delay in generating revenue, loss of market share, failure to achieve market acceptance, diversion of
development resources, injury to our reputation or increased insurance costs.
Many of our strategic relationships and services agreements involve providing critical information technology services to our
clients' businesses. Providing these services is complex because our clients have complex computing system environments. If
we fail to meet our clients' expectations, our reputation could suffer and we could be liable for damages. In addition, patient
care could suffer and we could be liable if our systems fail to deliver correct information in a timely manner. Our insurance may
not protect us from this risk. Finally, we could become liable if confidential information is disclosed inappropriately.
Our contracts limit our liability arising from our errors; however, these provisions may not be enforceable and may not protect
us from liability. While we have general liability insurance that we believe is adequate, including coverage for errors and
omissions, we may not be able to maintain this insurance on reasonable terms in the future. In addition, our insurance may not
be sufficient to cover large claims and our insurer could disclaim coverage on claims. If we are liable for an uninsured or
underinsured claim or if our premiums increase significantly, our financial condition could be materially harmed.
Our proprietary technology may be subjected to infringement claims or may be infringed upon.
Our intellectual property is important to our business. We could be subject to intellectual property infringement claims as the
number of our competitors grows and the functionality of our applications overlaps with competitive offerings. These claims,
even if not meritorious, could be expensive and divert our attention from operating our company. If we become liable to third
parties for infringing their intellectual property rights, we would be required to pay a substantial damage award and to develop
non-infringing technology, obtain a license or cease selling the applications that contain the infringing intellectual property. We
may be unable to develop non-infringing technology or obtain a license on commercially reasonable terms, or at all. In addition,
we may not be able to protect against misappropriation of our intellectual property. Third parties may infringe upon our
intellectual property rights, we may not detect this unauthorized use and we may be unable to enforce our rights.
Lengthy sales and implementation cycles for our solutions could adversely affect our revenue growth.
A key element of our strategy is to market our solutions directly to large healthcare organizations. We are unable to control
many of the factors that will influence our customers' buying decisions. We expect that the sales and implementation process
will be lengthy and will involve a significant technical evaluation and commitment of capital and other resources by our
customers. The sale and implementation of our solutions are subject to delays due to our customers' internal budgets and
procedures for approving large capital expenditures and deploying new technologies within their networks.
We will need to expend substantial resources to integrate our applications with the existing legacy and client-server
architectures of large healthcare organizations. We have limited experience in integrating our applications with large, complex
architectures, and we may experience delays in the integration process. These delays would, in turn, delay our ability to
generate revenue from these applications and could adversely affect our results of operations.
Our business will be adversely affected if we cannot attract and retain key personnel.
Our success will depend significantly on our senior management team and other key employees. We need to attract, integrate,
motivate and retain additional highly skilled technical people. In particular, we need to attract experienced professionals capable
of developing, selling and installing complex healthcare information systems. We face intense competition for these people. Our
executive management team is critical to our success. We do not maintain key person life insurance for anyone. |
