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Positive Outlook for Well Health; M&A in the Sector Heating Up Given Amazon, TPG and Telus

Late last week Well Health (WELL.CN) provided a business update for the Q2/2022 period, ahead of the quarterly earnings release expected in mid August. Given that omni channel patient visits increased by 50% y/y and 7% sequentially, Q2 revenues are expected to top C$130M in what is expected to be another record quarter. More specifically, adjusted EBITDA is seen exceeding C$23M while FCF is expected to be C$15M. From the U.S. side, both Circle Medical and Wisp are expected to deliver positive adjusted EBITDA. It was noted that Circle Medical’s y/y growth was driven by patient visits increasing by nearly 400%. Together with Wisp, Circle Medical exceeded $115M in annualized run rate revenues, exceeding May’s $110M and March’s $100M. This growth trajectory is built on a solid foundation from the virtual services, along with meaningful growth from patient visits and physicians. From CRH, a record number of cases was seen in Q2/2022 (125,160) driven largely by organic growth. Company-wide, nearly 1.173M patient interactions in Q2/2022 far exceeded the 1.065 interactions from Q2/2021. While making significant inroads in the U.S., Well Health continues to be the undisputed dominant player in the Canadian market. With over $70M in cash in treasury and access to $300M in undrawn credit, expect the aggressive M&A to continue into the end of the year.

Speaking of M&A, though Well Health's outlook for the quarterly results are looking strong, the much more interesting news from late last week was the announcement that Amazon (AMZN) would be buying 1Life Healthcare (ONEM) for the equivalent of $18 per share or an approximately 76% premium to the previous closing price. The all-cash transaction is for the equivalent of $3.9B and points to a further buildout of Amazon Care, as offerings for in-person and virtual care services will eventually be integrated with the PillPack pharmacy service. The synergies certainly sound compelling if Amazon were to twin its home medication delivery PillPack service with 1Life’s offerings in tele-health services and wellness visits. With all things pertaining to data and/or Amazon, expect anti-trust to be a bit of an issue with the takeover, however we do expect all to go smoothly with an expected close date towards the end of 2022.

1Life Healthcare (more specifically, doing business as One Medical) provides members with 24/7 access to a whole suite of digital tools pertaining to health so that the company can keep up to speed on members needs in an effort to provide quality care typically insured by commercial or medicare plans. Unlike telehealth-only companies, One Medical offers in-person visits as well, at a network of medical offices spread throughout the U.S. This is very much like Well Health’s model for patient care both in the digital and physical realms.

We see Amazon’s acquisition as timely seeing as YTD, shares of 1Life Healthcare have declined by nearly 45% right before the acquisition bid was announced. Moreover, much like a lot of the other digital, telehealth companies, the pre-acquisition share price was at a near 80% decline from a peak of over $50 per share back in early 2021. Specifically, Amazon is paying 3.6x EV/2022e sales for the yet to be profitable company - a figure which is slightly ahead of Well Health’s 3.1x EV/2021e purchase multiple when it announced its $373M bid for CMH Medical in February 2021. What’s telling is that Well Health currently trades at a 2.1x EV/Sales multiple and at a 11.5x EV/EBITDA multiple which is well below (no pun intended) the current multiples for peers based on consensus FY/2022 estimates.

Well Health's valuation discount is even more telling given that from the above peer group, only Well Health and Apollo Medical are expected to be profitable in FY/2022 (WELL expecting EPS of $0.15 while AMEH is expecting $1.03). In addition to Amazon’s deal, the last eight weeks has seen an increasing number of announced transactions in the sector. Of note, recall TELUS’s (T.CN) acquisition of LifeWorks (LWRK.CN) for approximately $2.3B in early June and TPG’s acquisition of Convey Health’s (CNVY) remaining shares (TPG already owned nearly 75% of Convey). These two acquisitions were announced at premiums of 143% and 77% respectively to the previous day’s pre-announcement close. TSX listing aside, we feel that Well Health's valuation discount to U.S. peers is unjustified given the company's bullish outlook and management's proven track record (specifically that of CEO Hamed Shahbazi) of executing on numerous transactions, consolidating and integrating them into the broader business.


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