CareRx earns new “Buy” rating at Desjardins

Desjardins on Thursday launched coverage on of CareRx Corporation (CareRx Corporation Stock Quote, Chart, News, Analysts, Financials TSX:CRRX) with analyst David Newman saying the specialty pharmacy company is well-positioned to capitalize on secular tailwinds while continuing to consolidate in a fragmented market.

Headquartered in Toronto, CareRx (formerly Centric Health) is currently Canada’s largest provider of specialty pharmacy services, with over 52,000 residents in over 900 seniors communities (representing a 12-per-cent market share by number of beds), including long-term care (LTC) homes, retirement homes, assisted living facilities and group homes.

The company was once a diversified healthcare services company with business in a number of verticals including physiotherapy and rehabilitation, medical assessments, surgical and medical centres, retail and home medical equipment, retail pharmacies and institutional pharmacy operations. But over the past three years, Centric divested those non-core businesses to focus on specialty pharmacy, gaining about $4.6 million from the sales to pay parts of its debt.

Now, with over $210 million in annual run-rate revenue, CareRx emerged through a re-branding effort this past year. Currently, the company has about half of its business in Ontario and the rest in Alberta, BC and Saskatchewan, with the customer base slightly larger on retirement vs LTC homes at 52 per cent of beds versus 46 per cent. The company operates as a dispensing pharmacy and has 18 fulfillment centres near its customers and dispenses over 1.4 million prescriptions monthly.

In his report, Newman said CareRx is in the right field considering the aging demographics in Canada where by 2036 seniors aged 65 and older will represent one-quarter of the population and consume even greater amounts of the country’s healthcare spend.

Newman wrote, “CareRx’s growth strategy should be driven by: (1) a large and growing seniors market, as well as the rising prevalence of chronic disease (eg diabetes), leading to greater demand for specialty pharmacy services; (2) the company’s scalable multi-provincial platform to serve LTC and retirement facilities, as well as the at-home market, including procurement leverage; and (3) multiple organic growth and acquisition opportunities in a fragmented specialty or institutional pharmacy market, especially given rising regulations and ongoing pressure on drug costs, mark-ups and dispensing fees.”

Since completing a 20-for-one share consolidation last June, CareRx’s share price has been up and down, having now returned to about even for the past seven months.

But Newman said there’s room to grow in 2021 and has started off CareRx with a “Buy” rating at Average Risk and with a $7.50 target price. At press time, that target represented a one-year return of 75.6 per cent.

On its organic growth prospects, Newman emphasized CareRx’s ability to increase the number of beds under contract by leveraging its scalable national platform to win requests for proposals and contracts.

“In addition to its multi-provincial footprint and ability to service large institutions (customers), the company’s value proposition is supported by its strong operating platform, investment in technology, high service levels and ethical standards. CareRx’s superior quality of care to seniors should translate into more RFP wins and enable the company to maximize the utilization of its existing infrastructure,” Newman wrote.

On the M&A front, CareRx completed its biggest acquisition to date this past May in buying RemedyRx Specialty Pharmacy, a deal which added about 19,300 beds to CareRx.

Newman said there are likely to be more complementary acquisitions on the horizon.

“The pipeline has been more active than ever (no delays due to COVID-19, as evidenced by the SmartMeds acquisition announced in January 2021; might even have been expanded due to the pandemic),” Newman wrote.

“Aside from the large players, the market is highly fragmented, with 70 per cent of the industry comprising small mom-and-pop operators (serving several homes), hybrid operators (owning retail pharmacies and serving nursing and seniors homes) and others,” he said.

“In addition to the impact of COVID-19, the smaller players and hybrid competitors are being challenged by an increasingly regulated environment and greater demand for high-quality services with exacting standards (service and ethical standards), especially as the nursing home and retirement chains continue to consolidate the market. Furthermore, as provincial governments focus on managing drug spend, the smaller players may be forced to capitulate to a larger, well-funded player with greater economies of scale,” Newman wrote.

The analyst estimated CRRX to be currently trading at 6.6x EV/2022 EBITDA versus its peers at 12.0x. Looking ahead, Newman is projecting 2021 revenue and adjusted EBITDA of $206 million and $22.0 million, respectively, and 2022 revenue and adjusted EBITDA of $227 million and $25.2 million, respectively. For the upcoming fourth quarter 2020, Newman called for $46.0 million in revenue and adjusted EBITDA of $3.5 million.

CareRx last reported earnings in early November where its third quarter 2020 featured revenue up 45 per cent year-over-year to $45.6 million and adjusted EBITDA up 37 per cent to $3.8 million.