WELL Health scores street-high $14.25 target from Paradigm

Paradigm Capital analyst Daniel Rosenberg is raising his target price on Vancouver-based health tech company WELL Health Technologies (WELL Health Stock Quote, Charts, News, Analysts, Financials TSX:WELL), saying in an update to clients on Friday that he likes WELL’s new deal for a majority stake in US women’s health telemedicine company WISP.

WELL Health, which has a number of business segments including a digital Electronic Medical Records (EMR) business, a portfolio of telehealth services including one of the largest telehealth providers in Canada as well as digital health, billing and cybersecurity tech solutions, announced on Thursday a definitive stock purchase agreement to acquire about 53 per cent of WISP, which specializes in female-focused online reproduction and sexual health care. 

The deal would see WELL pay US$41 million in the form of US$27.7 million in cash, US$6.2 million in shares at $9.80 per share (representing a 27 per cent premium to the last closing price) and a multi-year earnout of US$7.4 million.

On purchasing the stake, WELL Chairman and CEO Hamed Shahbazi said in a press release, “Until recently, there has been a chronic under-supply of female focused healthcare services designed by female physicians, we know that the global women’s health market is a $30 billion-plus industry growing at six per cent annually.”

“We are very pleased to report that this proposed transaction is expected to position WELL as an emerging provider of women’s health services in the United States and that we plan to leverage the impactful success and know-how of the WISP operations in the US to launch similar services in other countries, starting with Canada. WISP’s strong value proposition has filled a critical gap in women’s health which represents a large and growing opportunity for WELL,” Shahbazi said.

WISP, founded in 2018, currently offers services through a one-time (US$39) or unlimited (US$10 per month) subscriptions, with a reported over 50 per cent returning subscription rate in its reproduction healthcare. 

The WELL presser said WISP has served 200,000 patients to date and currently serves all 50 US states.

“By offering discrete, timely access to treatments for ailments such as yeast infections, UTI’s, herpes, and other ailments related to sexual health, WISP has created a strong relationship with its customers, resulting in greater than 50 per cent returning/subscription revenue, and NPS scores of 79. WISP has experienced strong, profitable revenue growth, with its current annualized run-rate of approximately US$30 million, representing over 100 per cent year-over-year organic revenue growth. WISP’s rapidly growing digital revenue strengthens WELL’s digital portfolio and organic growth profile,” WELL said.

Looking at the deal, Rosenberg said the transaction multiple of about 1.4x EV/Revenue is “attractive for a rapidly growing, profitable company,” with the analyst noting that WELL has the right to acquire the remaining shares of WISP through a call option. 

“WISP provides an opportunity for WELL to target the underserved women’s health segment in Canada and internationally. WELL is approaching US$45 million in revenue run rate in the US and WISP’s complementary offerings to the existing asset base of Circle Medical and CRH bolster its presence in the US. In the long term, we see this as positive for a potential US listing and valuation re-rating closer to those of leading US peers,” Rosenberg wrote.

The analyst has made adjustments to his forecast to account for the acquisition and is now calling for fiscal 2021 and 2022 revenue of $293.2 million (unchanged) and $480.6 million (previously $442.8 million), respectively. On 2021 and 2022 operating adjusted EBITDA, Rosenberg is now estimating $50.3 million (previously $53.8 million) and $114.5 million (previously $105.1 million), respectively. Rosenberg estimates WELL’s gross margin going from 42.2 per cent in 2020 to 46.6 per cent in 2021 to 47.0 per cent in 2022. (All figures in Canadian dollars except where noted otherwise.)

With the update, Rosenberg has reiterated his “Buy” rating on WELL and raised his target price from $13.75 to $14.25, which at the time of publication represented a projected one-year return of 84 per cent.

Rosenberg said the update to his forecasts was the impetus for his target boost.

“Our valuation is driven by a sum-of-the-parts valuation. We use 6.5x 2022e EV/Revenue on WELL’s clinical assets and 14.0x 2022e on its technology assets. We think a US listing would support a valuation re-rating given WELL currently trades at 4.4x while peers are at 7.1x CY22e. Revenue with similar profiled US comparables such as Teladoc Health Inc. trade as high as 9.0x revenue. WELL has proven itself as a formidable capital allocator, and we fully expect its acquisition strategy to continue with increasing scale,” Rosenberg said.

After a huge run in 2020, WELL’s share price has been flat in 2021 and is currently down about four per cent year-to-date.

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