Inovalon (NASDAQ:INOV), a cloud based data analytics firm based out of Maryland, is set to go forward with their initial public offering this Thursday. The health and technology firm is expected to raise $690 million through the issuance of 25.55 million shares. This valuation surpasses their initial $500 million offering which was filed on December 30th 2014. With medical costs in the United States at an all-time high and the increasing importance of data and information analysis in the healthcare industry, the stage is set; Inovalon has a substantial opportunity before them.
Inovalon’s Wide Client Base
Inovalon’s technology allows the entire healthcare industry, including hospitals, health plans, doctors, pharmaceutical companies and researchers to improve clinical and quality outcomes as well as financial performance. They deliver customer value with these four components:
- Data Integration: effective health data assimilation
- Advanced analytics: data analysis including gaps in care, quality, integrity and financial performance
- Intervention platforms: service and software to help address analysis results
- Business Processing: summarize analytics, benchmarking, compliance
Four major trends in the healthcare industry are contributing to the increased demand for Inovalon’s platform:
Rise in healthcare costs
Healthcare spending in America has reached $3 trillion dollars in 2012, representing more than 17% of total GDP. This figure is expected to increase to 22% of GDP by 2039, according to the congressional budget office. These high costs are thought to be unsustainable and as a result, the healthcare market will be seeking out more effective and efficient ways of providing care. Mckinsey & Co. reports that healthcare data analytics could save the economy $300 to $450 billion annually.
Transition to a value based payment model (where an organization is responsible for the healthcare of a group of patients) incentivizes cost reductions and adds value at the patient level. This shift is expected to increase focus on analyzing, reporting, optimizing, accuracy and quality, all of which will benefit Inovalon. The number of patients using capitated payments is expected to increase 88% to 150 million in four years.
Surge in digital healthcare data
The amount of digitized healthcare information created on a daily basis is growing at an exponential rate. From patient records, to lab results, to hospital billing information, it is becoming paramount for the healthcare industry to utilize these databases in order to increase quality of care and efficiency.
Complexity of Healthcare system
As technology, treatment, diagnostic methods and the regulatory framework are becoming increasingly complex; the need for data analysis will continue to grow.
Top Line Traction Tricking Down to Profits
Inovalon revenues have grown 17.5% to $271 million in the last nine months ended September 30th 2014 from $231 million for the same period one year ago. By company estimates, INOV is on pace to end the year with $362 million in sales, top line growth of 22%. Historically, Inovalon has demonstrated the ability to increase growth rate except for 2012-2013, when sales shrank by 1.5% due to a client deciding to discontinue arrangement. Since, Inovalon has recovered nicely.
Inovalon’s operating income jumped an impressive 94% to $85.9 million for the nine months in 2014. This increase has been attributed to the top line growth, mentioned above, as well as significant cost reductions. The company has made an effort to increase operational efficiency through automation and implementation of new technologies that standardize their services. As a result, EBITDA is being estimated at $133 million and Net income at $66 million for the year ended December 31 2014, representing an 85% and 99% increase respectively from the prior year.
Expense trimming and revenue traction have improved margins. For the first 9 months of 2014, Inovalon achieved the highest operating margin since 2011, at 32%, and a net income margin peaking at 19%. These numbers are expected to continue to improve as the company’s revenue mix leans towards data analytics (up to 58% of revenues) and efficiency initiatives gain more traction. Unlike some recent IPOs, Inovalon is a running lean, profitable operation.
When compared to peers Veeva(NYSE:VEEV) and IMS Health Holdings(NYSE:IMS), Inovalon can be considered a bargain, based on the IPO valuation. Not only would INOV be considerably cheaper than both competitors in terms of sales, EBITDA and earnings, but would also sporting a much higher operating and profit margin.
Compared to the industry average, Inovalon finds itself in very favorable position in terms of liquidity and ability to cover its short term debt. With a return on asset of 21% compared to an industry average 5.6%, INOV’s excess cash is in no way detrimental to its profitability.
In terms of growth strategies for the future, management intends to increase the type of services delivered to existing clients and leverage the networking effect with long tenured customers to expand client base. The company will continue to innovate into new technologies that will accelerate big data processing on their existing platforms. As a result, customers will experience complex calculation speeds that are ten times as fast as competitors. Management has also remained open to the idea of expanding their offering through acquisitions, including internationally. Inovalon believes the company can replicate their domestic success in foreign countries facing the same dilemma of surging medical costs.
It is important to keep in mind some risk factors that may stump the firm’s growth, however, including new data protection/privacy laws, a breach in security measures and agreement cancelations from existing clients.
Growth, Profitability Support Inovalon Valuation
The high demand and growth for Inovalon’s platform is quite apparent. The company has already recorded 9.2 billion medical events (medical procedures, changes in patients’ medical conditions etc..). This number is growing at an exponential pace of 3.0% compounding monthly, or 42.6% annually since the early 2000s. Fueled by the direction of the data and health care landscape, possible global expansion, cross-selling and growing their client base, INOV is showing no signs of slowing down. At their current valuation, the company has significant room for price appreciation. Extrapolating their current earnings growth rate of 92% and using a conservative industry average P/E of 51x would result in a share price of $47.98, which is 84.5% above the public offering. This is the highest range investors should reach for INOV stock. With such metrics, expect volatile swings during the first day of trading. After all, this is a growth company that is in two of the hottest sectors, cloud computing and healthcare. Nonetheless, strong industry tailwinds and a robust financial standing will make Inovalon a solid long term investment.