Desjardins debunks WELL Health short-seller’s report

Investors should be cautious about a recent short report on WELL Health Technologies (WELL Health Technologies Stock Quote, Chart, News, Analysts, Financials TSX:WELL), according to Desjardins analyst David Newman, who in a Monday update to clients gave a point-by-point response to it. Newman reiterated his “Buy” rating and $10.50 per share target price for WELL, which at the time of publication represented a projected one-year return of 51.1 per cent.

Canadian health technology and primary clinic company WELL Health Technologies was the subject of a short-seller attack on Friday from Grizzly Research, with the report claiming that WELL has regularly overpaid for its acquisitions, including its just-closed US$327.9-million gastroenterology and anesthesia company CRH Medical.

WELL’s share price slid less than a percentage point on Friday and finished Monday up 10.6 per cent.

Looking at the short report, Newman began by pointing out the associated disclaimer posted by Grizzly Research which said that Grizzly along with its clients and/or investors had a direct or indirect short position in the stock.

Newman said, “We would like to address a report titled ‘We believe Well Health Technologies is a Toxic Roll-Up,’ published on April 23, 2021, by Grizzly Research, which touts its prowess in producing differentiated research on publicly traded companies through in-depth due diligence. We encourage investors to read the report with caution.”

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Newman began with Grizzly’s claims about CRH, which argued that the acquisition was problematic on a number of fronts, starting with the fact that CRH had lost its key customer, United Digestive, prior to WELL’s acquisition and that CRH had had another prospective buyer before WELL which declined to take it up.

On those points, Newman said United Digestive actually resigned with CRH in February of this year (albeit in a non-exclusive agreement and at lower economics than the initial agreement), while on the prior suitor, Newman said according to WELL, its US$4.00 per share bid for CRH, announced in February 2021, was in reality a lower offer than the US$4.50 offered by the other potential buyer in November 2019.

On WELL’s acquisition of healthcare practice management platform Adracare, the Grizzly report alleged WELL paid a 300-per-cent premium for Adracare, a company that went bankrupt in 2019 when it was under the name OrbCare.

In response, Newman said Adracare emerged from bankruptcy with a stronger pipeline of customers with upside potential, including clients from the fast-growing medical cannabis space.

On WELL’s $4.75-million payment for Adracare, Newman wrote, “Despite Grizzly’s opinion that WELL overpaid for the asset, we believe a multiple of 2.4x on Adracare’s expected revenue of ~$2 million (based on existing customer relationships and new contracts signed as projected over the next six months) is reasonable, especially given Adracare’s technology offerings (a telehealth and practice management software and a light EMR system for allied healthcare professionals).”

“Also keep in mind that Adracare represents a relatively immaterial percentage of WELL’s overall business, i.e., a $4.75-million acquisition for $2 million in revenue versus WELL’s market cap of >$1.1 billion and revenue run rate approaching $300 million,” Newman said.

(All figures in Canadian dollars except where noted otherwise.)

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On WELL’s majority interest in US telehealth company Circle Medical, announced in November of last year, Grizzly said Circle is both “years in time and decades in technology” behind the main telehealth players in the US, that Circle’s own CEO had said the company is not a technology business and that Circle did not benefit as it should have from the COVID-19 tailwind in the telehealth space.

To those allegations, Newman said it is “highly misleading” to interpret Circle’s business vis a vis technology through an outdated (2018) comment made by its CEO and that while Circle Medical’s growth going forward may slow compared to 2020, the overall balance between in-person and virtual medical visits is not expected to return to pre-COVID levels.

“Circle now operates three clinics in San Francisco, California and Texas, opened a new office in Montreal with a growing team of software developers (it plans to grow from the current 10 employees in the Montreal office to 75 over the next three years) and licenses out its technology to the Kind Health clinic in San Diego, California. Of its $10 million in revenue run rate, more than half comes from digital services (versus clinical),” Newman wrote.

As for WELL’s acquisition of cybersecurity business Source 44 in December, 2020, Newman said Grizzly’s claims stemmed from invalid and unrelated reasoning.

On WELL’s purchase of Insig Corp and its virtual clinics under Tia Health, Grizzly’s report questioned the breadth of Tia’s business, both currently and potentially. By way of response, Newman said Tia’s network involves over 400 doctors, not the 150 the report had claimed and that as opposed to being “a startup with no total addressable market,” as the report said, Newman quoted PwC and Global Market Insights which estimate the current digital healthcare market in Canada at about $5 billion and the global market at about US$106 billion.

“We believe the estimate for Canada is conservative, with market participants we spoke to citing a market size of >$6 billion, which we consider to be the TAM for Tia Health. The company is also far from a start-up. Insig is among the top five telehealth providers in Canada, supporting >2,800 healthcare practitioners and >500,000 patients since its inception,” Newman wrote.

Finally, the Grizzly report questioned the value of WELL’s technology, saying that its OSCAR EMR (electronic medical records) business relies on open-source software. On this, Newman said the report again missed the point.

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“With the acquisition of OpenHealth and the customer migration from ClearMedica, WELL has effectively acquired all approved OSCAR EMR vendors in Canada, holding a ~14–15 per cent market share of the Canadian EMR market (trailing only TELUS Health and Loblaw’s QHR),” Newman wrote. “It has started to acquire non-OSCAR EMR providers such as Intrahealth, broadening its addressable market.”

Disclosure: Jayson MacLean and Nick Waddell own shares in WELL Health Technologies and WELL is an annual sponsor of Cantech Letter.