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Bull of the Day: Tabula Rasa HealthCare (TRHC)

Kevin Cook

Tabula Rasa HealthCare (TRHC) is a $1.2 billion medical IT firm focused on patient-specific, data-driven technology and solutions which enable healthcare organizations to optimize medication regimens to improve patient outcomes, reduce hospitalizations, lower healthcare costs and manage risk.

 

The company's cloud-based software applications, including platforms EireneRx and MedWise Advisor, deliver control and certainty to payers, providers and other healthcare organizations. And their innovative use of artificial intelligence technologies and cross-provider integrations for doctors and pharmacies to cross-reference prescription complications is becoming more important in an aging population taking more medicines.

 

Tabula Rasa is expected to grow sales 40% this year to $285 million. Below is a snapshot I took last month when I bought TRHC shares for the Zacks Healthcare Innovators portfolio. This view highlights projected sales growth in the face of the recent valuation haircut.

 

What you are seeing is 12-month forward sales estimates (the green line) rising from $210 million at the start of Q3 2018 to over $325 million projected into 2020, while price has dropped from $90 to $55...

 

 

Part of the pessimism is that while the company became profitable last year, it is expected to show no EPS growth this year and deliver a repeat of $0.77, giving it a P/E multiple of over 70X. And this after analysts held loftier expectations about 2019 growth as recently as last October when the consensus was for EPS of over $1.10. 

 

But the reason the stock became a Zacks #1 Rank again is due to upward EPS revisions that came in after the company's Q4 report on Feb 28 where management raised revenue guidance. Full-year 2019 consensus moved back up 10% from $0.70 to $0.77 and next year moved from $1.07 to $1.19.

 

New Partnerships, Acquisitions, and Innovations

 

One of the most exciting innovations for Tabula Rasa is their development of a complete medical records and IT solutions suite that integrates with other providers. In September, the company announced the creation of TRHC 2.0 for "Innovative Integrations, Interoperability and Advanced Healthcare Analytics." From the 9/7/18 press release...

 

Through accretive acquisitions and continued research and development, TRHC’s technology innovations and growing data lake provide a data continuum for clients enhancing the care of patients across the U.S. and abroad. 

 

MOORESTOWN, N.J., Sept. 07, 2018 (GLOBE NEWSWIRE) -- Tabula Rasa HealthCare, Inc. (“TRHC”) (NASDAQ:TRHC), a healthcare technology company advancing the field of medication safety, today announced its strategy to integrate and open its various technologies, facilitating seamless interoperability and access to vast data resources for its clients.

 

This technology strategy, referred to as TRHC 2.0, is designed to harness the power of TRHC’s core technologies, MedWise™ and EireneRx®, and to leverage other technologies brought into the company through acquisition, like SinfoniaRx’s RxCompanion®, and the recent Mediture and eClusive technologies for electronic health records and health plan management.

 

(end of TRHC press release excerpt)

 

The company also recently announced an important API integration with fellow healthcare IT company AthenaHealth, formerly public under the symbol ATHN and taken private in February by Elliot Management and Veritas Capital who teamed up to buy ATHN for over $5.5 billion in cash, or $135 per share. 

 

Athenahealth serves over 100 million patients through provider networks and will embed Tabula Rasa platforms in care and pharmacy settings. The integration is expected to be complete by Q4'19 and create a recurring revenue SaaS fee as well as a consulting fee for Tabula Rasa.

 

In December, Tabula Rasa announced an agreement to acquire Brisbane, Australia-based DoseMe. DoseMe is the developer of DoseMeRx, an advanced precision dosing tool to help physicians and pharmacists accurately dose patients’ high-risk parenteral medications based on individual needs, resulting in significant improvements to mortality, risk, and patient outcomes.

 

Already available in over 100 hospitals and infusion providers worldwide, DoseMeRx’s precision dosing capabilities will now be combined with TRHC’s proprietary Medication Risk Mitigation (MRM) technologies in order to enhance and accelerate medication safety solutions available in the hospital setting.

 

Adding Another Prescription for Wellness

 

In early March, Oppenheimer analysts reworked their estimates model to account for a recent $285 million convertible share offering and, you guessed it, another key acquisition.

 

Oppenheimer analyst Mohan Naidu lowered his price target for Tabula Rasa HealthCare to $88 from $97, while reiterating an Outperform rating on the shares after the company announced the acquisition of PrescribeWellness for $150 million in cash. The analyst believes the acquisition should provide leverage to Tabula Rasa HealthCare in pushing its solutions into the pharmacies by expanding on PrescribeWellness relationships to promote the combined company's proprietary technologies. This synergy should add high margin service revenues to the numbers, with Naidu expecting growth in about 20% range.

 

The Oppenheimer analyst team increased their 2019 and 2020 estimates to incorporate the higher growth implied in company guidance and also the contribution from the acquisitions. Their 2020 revenue estimate went up to $322 million from $310M.

 

In early April, investment bank Piper Jaffray reiterated their bull case for TRHC...

 

Tabula Rasa HealthCare Strengthened by SinfoniaRx

 

Piper Jaffray analyst Sean Wieland kept his Overweight rating and $73 price target on Tabula Rasa HealthCare after its SinfoniaRx unit put out its annual report, saying the company's key metrics demonstrate its ability to "help health plans meet CMS requirements and help pharmacists generate revenue." Wieland noted that the unit strengthens the value proposition of the combined Tabula Rasa HealthCare platforms and he remains positive on its revenue growth potential of over 20% for years to come.

 

Since reporting earnings in late Feb, here is where other analysts stand on their forward valuation (i.e., price targets)...

 

Cantor Fitz 3/1: $99

Benchmark 3/15: $90

Stifel Nicolaus 3/5: $70

Wells Fargo 3/6: $55 (obviously the Neutral view here)

 

And here was commentary from the Cantor analyst in late January when shares were trading $68...

 

Tabula Rasa shares attractive with 50% upside potential

 

Analyst Steven Halper reiterated an Overweight rating on Tabula Rasa HealthCare with a $99 price target. After meeting with management the analyst says the company remains upbeat regarding adoption of its Medication Risk Mitigation platform. Halper continues to believe Tabula Rasa is poised for sustained long term growth amid "favorable" policy and market tailwinds.

 

Halper viewed the stock as attractive up near $70, and he recently reiterated his $99 target, implying over 80% upside from between $50 and $55.

 

CMS’ New Value-Based Payment Program is a Catalyst for TRHC

 

Finally, as healthcare stocks recover from the fallout of last month's "single-payer panic" and "Medicare for All" scares, Tabula Rasa has found opportunity in the chaos. On April 25 commended a new initiative from the U.S. Department of Health and Human Services (HHS) and Centers for Medicare & Medicaid Services (CMS) to introduce new payment models for primary care that will require payment for health and outcomes rather than fee-for-service.

 

According to HHS Secretary Alex Azar, these models represent the biggest step ever taken toward building an American healthcare system that pays for value. The CMS projects that the new voluntary programs will shift at least a quarter of people in traditional Medicare out of fee-for-service, which will motivate providers to compete for these beneficiaries and be rewarded for their ability to keep patients healthy and out of the hospital, among other quality measures.

 

And on April 18, Piper Jaffray analyst Sean Wieland put out a note saying that TRHC stock weakness brings a "compelling entry point." Wieland said he was "incrementally more positive" on Tabula Rasa HealthCare's growth outlook after traveling with the company's CFO Brian Adams. He also noted that a new CVS Health (CVS) partnership provides a "strong validation" of Tabula Rasa's value proposition, and multiple opportunities should result in a higher margin product mix. He reiterated an Overweight rating on Tabula Rasa HealthCare with a $73 price target.

 

Bottom line for Tabula Rasa (TRHC): There are few ways to directly capitalize on the IT trends in medical records, systems, and data management -- especially after Athenahealth was taken private. So for me, buying a $1.2 billion innovator trading at only 3X sales -- which are growing at a blended rate over 30% for this year and next -- is an irresistible investment opportunity.

 

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