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Health Catalyst To Acquire Able Health For DOS Platform Addition

Quick Take

Health Catalyst (HCAT) has announced the proposed acquisition of Able Health for up to $32 million in total consideration.

Able has developed healthcare-centric quality and regulatory measurement tracking software.

With the deal, HCAT will add capabilities to its DOS platform, but my bias on the stock at its present level is NEUTRAL.

Target Company

San Francisco-based Able was founded to provide healthcare institutions with enhanced service quality and regulatory compliance measurement software delivered via a SaaS revenue model.

Management is headed by co-founder and CEO Rachel Katz, who was previously a consultant at McKinsey & Company and the World Economic Forum.

Below is an overview video of Able’s offering related to EHR vendors:

Source: Able Health

The firm’s software provides MIPS (Merit-based Incentive Payment System) reporting which seeks to measure performance in four areas: quality, improvement activities, promoting interoperability and cost.

The only disclosed financing event for the firm was its funding of $120,000 received through incubator Y Combinator.

Market & Competition

According to a 2019 market research report by MarketsandMarkets, the market for patient safety and risk management software is expected to reach $2.2 billion by 2024, up from $1.3 billion in 2019.

This represents a forecast CAGR (Compound Annual Growth Rate) of 11.2% from 2019 to 2024

The main drivers for this expected growth are a rising need to reduce healthcare costs through medical errors, hospital-acquired infections and increasing government initiatives to focus on patient outcomes.

The MIPS reporting software market is not exactly within the patient risk software market, but is likely to see similar growth rates over the near-term as provider payments transition to a merit-based care system.

Acquisition Terms & Financials

HCAT disclosed the acquisition price and terms as $27 million in cash and up to a maximum of $5 million in potential earn out consideration to be paid in common stock.

Management said that it doesn’t expect the deal to have a material impact on its GAAP revenue or adjusted EBITDA in 2020.

A review of the firm’s most recent published financial results indicate that as of September 30, 2019 HCAT had $241.4 million in cash and short-term investments and $113.4 million in total liabilities of which $47.9 million was long-term debt.

Free cash flow for the twelve months ended September 30, 2019 was a negative ($26.9 million).

In the past 12 months, HCAT’s stock price has risen 18.5% since its IPO in July 2019. vs. the U.S. Healthcare Services industry’s rise of 29.6% and the U.S. overall market index’ rise of 20.30% over the previous 12 months, as the HCAT chart indicates below:

Source: Simply Wall St.

Earnings surprises versus analyst consensus estimates have been positive for the two reporting periods since its IPO in mid 2019, as the chart shows below:

Source: Seeking Alpha

Valuation Metrics

Below is a table of relevant capitalization and valuation figures for the company:

Measure

Amount

Market Capitalization

$1,130,000,000

Enterprise Value

$938,290,000

Price / Sales

2.25

Enterprise Value / Sales

6.36

Enterprise Value / EBITDA

-20.99

Revenue Growth Rate

54.04%

Earnings Per Share [FWD]

-$1.09

Source: Company Financials

Commentary

HCAT is acquiring Able to further build out its quality and regulatory measurement offerings to customers.

As HCAT CEO Dan Burton stated in the deal announcement,

Able Health is a mission-driven company with a best-of-breed SaaS application that will further enhance Health Catalyst’s Quality and Regulatory Measures capabilities. Able Health’s measures engine, powered by DOS, will bring great value to our customers by further relieving the massive burden of regulatory measures. Furthermore, this demonstrates Health Catalyst’s ability to integrate and scale software applications on top of our DOS platform.

The deal for Able was likely not valued on a revenue basis, but as a ‘team and technology’ deal designed to improve its capabilities.

As healthcare reimbursement transitions to a merit-based incentive system, the demand for measuring results in the healthcare context should increase significantly.

While the acquisition likely won’t move the need for HCAT’s stock price, it does provide investors with an important signal as to how HCAT management is allocating resources.

As for the HCAT stock, after an IPO in July 2019, the stock rose significantly, only to pull back markedly since, while still remaining 18% above its IPO price.

The question is what will be a positive and meaningful catalyst from here?

HCAT would need to make a strong turn toward profitability, grow revenue sharply or make a major acquisition that was applauded by investors.

I expect further acquisitions, although not ‘major,’ as HCAT management seeks to increase the value of its platform.

But, I don’t see a major turn toward profitability or sharp revenue growth in the cards for the near term, so my bias is NEUTRAL.

I research IPOs and technology M&A deals.

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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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