Inovalon (NASDAQ: INOV) sells its cloud based health care data to health plans and pharmaceutical companies across the United States. The company has data on 139 million members (~42% of the U.S. population) and has data on nearly 12 billion medical events covering nearly 99% of U.S. counties. Inovalon is Samadhi Partners #1 M&A target for 2017.
Inovalon's client base includes 76% of the top health plans by size and 87% of the top pharmaceutical/life science companies. Inovalon's cloud database and analytics platform - mainly its MORE2 registry gets smarter the more users it acquires and offers deeper data analytics capabilities. This machine learning technology is how Google came to dominate search. Inovalon's massive data sets makes it difficult for competitors to compete in the healthcare space. Moreover, Inovalon's QSI-XL cloud based data analytics platform gets faster the more users it has. Inovalon has nearly 140 million users and its processing speeds are unmatched. Inovalon's data diagnostics reaches more than 50% of all physicians in the U.S. and accounts for 1.2 billion clinical encounters per year.
Key growth drivers for Inovalon include value add volume upselling to existing client base because Inovalon's processing speed gets faster with increased use. Key highlights for 2016 included sales pipeline quadrupling, additional $15 billion in TAM, increased product expansion and marketing investments. Moreover, Inovalon has expanded its Electronic Health Record (EHR) interconnections more than 200% yoy over the last several years. EHR enables highly efficient data exchange automation, reduces costs, and increases stickiness of the client base as evidenced by a 44% cost reduction of clinical data aggregation. Total addressable market for Inovalon's EHR platform is approaching 60% of the U.S. clinical market.
What has created this opportunity?
Inovalon was founded in 1999 and its focus was to acquire as much data as possible for patients and healthcare providers. Inovalon IPO'd two years ago at $29 per share, more than double its current price. Inovalon has reduced revenue projections three quarters in a row and the stock is not popular on Wall Street. Furthermore, there is much uncertainty surrounding the future of Obamacare (aka Affordable Care Act or ACA) amid Trump's rhetoric about repealing the healthcare legislation. Inovalon's war chest of healthcare data will be valuable in determining the impacts of ACA legislation and how the resulting healthcare spend will impact the top and bottom lines for healthcare companies.
An acquisition for Inovalon seems more likely than not in the next 12 months because of the uncertainty surrounding Obamacare and the impact it could have on healthcare plans and pharmaceutical companies. Inovalon's platform can provide more data insights on exactly how repealing or reforming the ACA could affect business for healthcare plans and companies.
Value to an Acquirer
Inovalon has sold off amidst reduced guidance and macro level uncertainty surrounding Obamacare. The stock has fallen nearly 60% since its IPO two years ago. Inovalon has a large cash reserves, low debt and its overcapitalized balance sheet is likely to be very attractive to an acquirer.
Inovalon's closest public comp seems to be HealthStream (NASDAQ: HSTM) HealthStream trades at just over 3x sales. Inovalon's projected revenue for 2016 is projected to be $430 - $450 million. Using a midrange of $440 million, Inovalon would be worth ~1.32 billion, or ~$21 per share. Inovalon has about $7 per share in net cash, so an acquirer could fund the premium with the net cash on the balance sheet. Shareholders would be getting at least a 65% premium over current prices assuming a $20 takeout price and an acquirer would be getting a goldmine of data at a bargain price. The most likely public acquirers are Athena (NASDAQ: ATHN) or Cerner (NASDAQ: CERN). They both have strong balance sheets and would likely fund the deal with a combination of cash and equity. There are also a few private equity firms that could buy Inovalon.
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