Health Tech Company Acquiring Ontario Health Management Firm, Its Largest Transaction Ever
Research Report

In an April 8 research note, analyst Yue Ma reported that in light of CloudMD Software & Services Inc. (DOC:TSX.V; DOCRF:OTCQB; 6PH:FSE) agreeing to acquire Oncidium, Research Capital Corp. increased its financial forecasts and its target price on CloudMD to CA$3.90 per share from CA$3.60. CloudMD's stock is trading now at about CA$2.01 per share.

Ma described Oncidium as a healthcare company based in Ontario, Canada, that helps employers optimize employee disability management by providing virtual occupational health services, medical assessments and absentee oversight. Oncidium "has built a difficult-to-replicate ecosystem of more than 1,000 health care practitioners and over 500 loyal clients (many are Fortune 500 companies) employing over 2 million employees across the country," the analyst wrote.

"This transformative deal not only is financially accretive to CloudMD but also provides the company with significant cross-selling opportunities via the 2 million employees, expands its national footprint and product offerings as well as increases its medical capacity," Ma stated.

The analyst indicated that for its acquisition of Oncidium, CloudMD will pay CA$68 million upfront, CA$30 million of it in cash, the remainder in shares (at CA$2.30 per share). The company also will pay, in cash or shares, a CA$32 million performance-based earnout over three years. The transaction is expected to close in June.

"CloudMD noted the total transaction value ($100 million) carried a valuation of 1.5x sales and 8.1x adjusted EBITDA, implying Oncidium is estimated to generate $66.7 million in revenues and $12.3 million in adjusted EBITDA three years after the closing," Ma wrote.

In that same time frame, CloudMD's management expects Oncidium to achieve a 30% compound annual growth rate in revenue, Ma relayed. Regarding Oncidium's impact on CloudMD revenue, CloudMD projects that the acquisition will increase the annualized revenue run rate of its enterprise health solution (EHS) division to CA$53 million, with a 40% gross margin and a 10% adjusted EBITDA margin. CloudMD also anticipates the deal will boost its total annualized revenue run rate to CA$122 million from CA$85 million.

It looks as if Oncidium is on track to meet those metrics, Ma noted. Annualization of Oncidium's past four months' revenue amounts to CA$40 million, which is higher than the $37 million of revenue the company generated in the last 12 months.

As far as the outlook for CloudMD, Ma indicated that its 14 acquisitions to date have "laid a solid foundation for the company to grow organically in the long-term run."

Research Capital has a Buy rating on CloudMD.

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