Custom Health Holdings is a buy, this analyst says

Stifel analyst Justin Keywood says Custom Health Holdings (Custom Health Holdings Stock Quote, Chart, News, Analysts, Financials TSX:CHLT) is building critical healthcare infrastructure around medication adherence, supporting a high-growth revenue model.

As reported by the Globe and Mail, in a July 7 report, Keywood initiated coverage of Custom Health with a “Buy” rating and $12.00 target. He said there is upside potential to $18 per share.

Kelowna-based Custom Health began trading on the TSX on June 24.

Keywood said medication non-adherence is a US$500-billion annual problem in the U.S., with only about 50% of prescriptions taken as directed. He said Custom Health’s end-to-end platform has produced 98% medication adherence through its Spencer at-home pill-dispensing and monitoring device, proprietary AdhereNet software and AI platform, and network of automated pharmacies.

“Recognizing the value of Custom’s solution, including for opioid management, U.S. payors are providing widespread referrals and reimbursement for US$1,800/patient clinical ARR, at 60% GM,” Keywood said.

He said that model, paired with traditional pharmacy dispensing at about 20% gross margins, creates a high-growth double-stack revenue opportunity.

Keywood expects patient growth to drive the stock. He forecasts Custom Health’s current patient base of about 6,000 to expand to 17,000 next year, out of 100,000 contracted patients, helped by the acquisition of InnovativeRx. He expects revenue growth of more than 100%.

For the quarter ended March 31, Custom Health reported revenue of US$4.3-million, up 5% from a year earlier, and gross profit of US$2.1-million, up 14%. Gross margin improved to 48.6% from 44.8%.

The company reported an Adjusted EBITDA loss of US$5.3-million, compared with a loss of US$3.0-million a year earlier, and a net loss from continuing operations of US$8.5-million.

Including InnovativeRx, Custom Health reported pro forma quarterly revenue of US$12.9-million, implying an annualized revenue run-rate of US$51.6-million.

Custom Health also received US$9.6-million from subscription receipts tied to its public listing and secured up to US$50-million in new financing facilities, with more than US$35-million undrawn.

CEO Shane Bishop said the company is operating at a different scale after its TSX listing, InnovativeRx acquisition and expanded pharmacy network.

“By integrating acquired pharmacies onto our proprietary AdhereNet platform, we are able to rapidly grow patient volumes and accelerate revenue growth,” Bishop said.

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