Inovalon Holdings Inc. (INOV, Financial) is a leading provider of data analytics and cloud-based platforms to the healthcare ecosystem. It can access, aggregate, normalize and analyze real-time and on-demand patient-specific data from a number of disparate healthcare datasets and disparate connected healthcare systems. The company is a critical component of a data-driven healthcare ecosystem and is known to leverage massive datasets that are expanding rapidly to deliver differentiated capabilities to its customers.
This company has been in the news recently for a potential acquisition by Nordic Capital, which has led to a strong runup in its stock price. This leaves arbitrage players who are late to the game with the question, is there a further M&A upside to the stock?
Recent financial performance
Inovalon managed to report an all-around beat for its recent quarterly result. The company reported revenue of $190.44 million for the quarter ended June 30, 2021, which was up 17.40% compared to the $162.22 million in revenue reported in the corresponding quarter of the previous year. The company beat the analyst consensus estimate of $184.86 million.
By the end of the quarter, the MORE Registry dataset contained over 338 million unique patients and over 63 billion medical events, increasing 6% and 14% as compared to last year, respectively.
Revenues translated into a gross margin of 72.87% and an operating margin of 12.73%, which were higher than that in the same quarter of 2020.
Inovalon reported net income of $9.58 million, and its adjusted earnings per share (EPS) of 19 cents was 2 cents above the average Wall Street expectations.
In terms of cash flows, Inovalon generated $25.09 million in the form of operating cash flows and spent $28.76 million in investing activities during the previous quarter.
Factors driving revenue growth
Inovalon is expanding its datasets, connectivity and cloud-based portfolio by developing the Inovalon ONE Platform, resulting in an accelerated launch sequence of high-value offerings. Given the huge market opportunity and growing demand for the Inovalon ONE Platform, the company is continuing to invest in its sales as well as a marketing engine to drive further organic revenue growth.
Additionally, the company is implementing its Annual Contract Value (ACV) Sales that are coming online, resulting in a layering of new sales on top of their existing subscription-based platform. The significant layering of subscription-based platform revenue is fuelling the company’s revenue growth significantly. The fact that the subscription revenue represented around 89% of the company’s total top-line in the second quarter of 2021 means the company's business model is highly predictable, which makes it an attractive investment for private equity funds.
Also, the increased size of Inovalon’s datasets and the strength of its analytics base are dynamically increasing the client value realization, supporting strong pricing as well as contract extensions. The commercial ACA, Medicare Advantage and Medicaid markets are growing at a high-single-digit rate, which is contributing to the growth of the company.
Potential acquisition by Nordic Capital
As per Bloomberg reports, Inovalon is in talks to be acquired by Stockholm-based private equity fund Nordic Capital. A final agreement between the two parties has not been reached as per the writing of this article, which is why there is little awareness about what the final valuation of the company could be according to an acquisition deal. Thus, arbitrage players will need to determine for themselves how much upside they think the stock has. Moreover, the company’s stock price has already shot through the roof despite the fact that there is a chance that discussions could still fall apart, making it entirely possible that the valuation of the deal could fall near or below investors' expectations.
However, there is a strong rationale behind the market optimism. Nordic Capital has a focus on healthcare and a history of successfully closing such transactions in the past. The company recently agreed to invest in Dutch outpatient healthcare provider EquipeZorgbedrijven, followed by an approximately $846 million deal in June for Advanz Pharma, a speciality pharmaceutical company. Thus, Inovalon wouldn't be their first acquisition in healthcare. Moreover, macro indicators also indicate a strong rise in healthcare deals this year. Bloomberg data estimates $106 billion will be going into acquisitions in the global healthcare industry by private equity funds alone. Given the fact that Inovalon has one of the top healthcare databases used by some of the largest insurers as well as pharmaceutical companies, it will not be surprising at all if the company gets acquired by Nordic Capital or another private equity sponsor.
Final thoughts
As we can see in the above chart, Inovalon’s shares are risen sharply over the past six months, giving it a market capitalization of approximately $5.9 billion. It is worth highlighting that after a long period of heavy capital outflow undertaken to achieve the preliminary incremental buildout of the latest Inovalon ONE Platform, there has been a downtrend in its capital expenditures, which is what makes it even more suitable for a private equity sponsor. Inovalon’s current modular design platform supports highly efficient innovation as well as ongoing expansion of their solution portfolio. Even if we ignore the acquisition-related upside, for the time being, the management’s updated 2021 guidance indicates a 17% organic growth in the top-line, which I think merits the rise in the stock price.
M&A news-based trades are usually risky, especially when an acquisition deal has yet to be reached, and the important thing is to pick companies that can be held for the long-term even if the M&A talks fail. Inovalon is one such company given its robust client retention and contract renewals, increasing value-driven pricing strength, long contract tenures, strong underlying patient membership dynamics and excellent revenue predictability given the subscription-based model. I believe that it would certainly not hurt investors to hold this stock even if the acquisition talks fall apart.
