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FOR INSTITUTIONAL USE ONLY
THE FUTURE OF DIGITAL HEALTH: CATCHING HEALTHCARE’S DIGITAL WAVE
June 2016
STEVEN WARDELLDIGITAL HEALTH ANALYST
617.639.3081
MATTHEW DELLELO, CFADIGITAL HEALTH ASSOCIATE
617.918.4812
Please refer to the Disclosure Appendix for Analyst Certification. To access Price Charts and Disclosures specific to CoveredCompanies, please refer to https://leerink.bluematrix.com/bluematrix/Disclosure2 or send a request to Leerink PartnersEditorial Department, One Federal Street, 37th Floor, Boston, MA 02110.The description of Leerink Partners benchmarks is available by contacting the Leerink Partners Editorial Department.
FOR INSTITUTIONAL USE ONLY
• Proprietary Healthcare Research on:
- Next-gen healthcare IT (NUAN, PGND, IMPR)
- Digital pharma service (IMS, MDSO, VEEV)
- Online health media (WBMD, EVDY)
- Digital health benefits (HQY, WAGE, TDOC,
CSLT)
- Health consumerism (FIT, WBMD, EVDY)
• Investor Bus Tours & Booth Tours
• Healthcare & Technology Investor Conferences
2
STEVEN WARDELL
• Initiated coverage of Digital Health sector in
October 2014
• 16 years in digital health and life science,
including at PatientKeeper (mobile EMR) and
Activate Networks (big data healthcare analytics)
• Most extensive digital health research franchise
on Wall Street, and longest track record covering
sector
FOR INSTITUTIONAL USE ONLY
3
DIGITAL HEALTH OVERVIEW
Managed Care Employer R&D Commerical Hospital CIO Other Clinical Grade Cons. Grade
Nuance (NUAN) Press Ganey
(PGND)
Imprivata
(IMPR)
HealthStream
(HSTM)
Press Ganey
(PGND)
Everyday Health
(EVDY)
Medidata
(MDSO)
WebMD
(WBMD)
Vocera (VCRA) Omnicell
(OMCL)
Philips (PHG) Fitbit (FIT)
Healthways
(HWAY)
WageWorks
(WAGE)
Everyday Health
(EVDY)
Inovalon (INOV) Advisory Board
(ABCO)
Garmin (GRMN)
Castlight
(CSLT)
Model N
(MODN)
Evolent (EVH) NantHealth (NH) Weight
Watchers
(WTW)
Weight
Watchers
(WTW)
Philips (PHG) Mindbody (MB)
Care.com
(CRCM)
= covered by the Leerink Research Digital Health franchise
Digital Health Benefits Digital Pharma Services NextGen Healthcare IT Consumer Digital Health
HealthEquity (HQY)
Teladoc (TDOC)
Benefitfocus (BNFT)
Quintiles IMS (Q-IMS)
Veeva (VEEV)
WebMD (WBMD)
FOR INSTITUTIONAL USE ONLY
DIGITAL HEALTH VALUATION COMPS
Sources: FactSet market data and consensus estimates as of close on 6/8/16. Fiscal years calendarized where applicable; EBITDA and EPS
are non-GAAP where available. NM - not meaningful; Enterprise Value based on a market cap that includes basic shares outstanding only.
4
Highlight = covered company
Street Street % EBIT
6/8/2016 Price CY16 EPS Eq. Val. 5-Yr Avg CY2 Rev CY2 EPS PEG Margin Short
Ticker Rat. Close Target vs. Street TAM ($m) (a) 16E 17E NTM P/E 16E 17E 16E 17E Growth Growth (c) 15A Int.
DIGITAL HEALTH BENEFITS
Benefitfocus BNFT - $39.71 - - - 1,160 NM NM NM NM NM 4.9 4.0 23% NM NM (23%) 6%
Castlight Health CSLT MP $4.77 $4.30 NM $1.7-5b 451 NM NM NM NM NM 3.3 2.6 27% NM NM (86%) 11%
HealthEquity HQY OP $29.12 $33.00 1.6% $7b 1,730 61.9 46.7 71.1 26.9 21.0 9.3 7.4 25% 32% 1.9 21% 7%
Healthways HWAY - $12.59 - - - 455 52.9 32.5 36.7 8.2 7.3 0.9 0.8 6% NM NM 0% 5%
Teladoc TDOC OP $12.62 $21.00 NM $17b 489 NM NM NM NM NM 3.3 2.3 45% NM NM (72%) 9%
WageWorks WAGE OP $59.23 $59.00 2.6% $21b 2,164 41.9 35.5 42.1 15.2 13.0 4.6 4.2 11% 18% 2.3 23% 4%
Median - - - - - - - 52.9 35.5 42.1 15.2 13.0 4.0 3.3 24% 25% 2.1 (11%) 7%
DIGITAL PHARMA SERVICES
Everyday Health EVDY OP $7.46 $13.00 (14.7%) - $245 15.5 8.3 15.4 7.3x 5.3 1.3x 1.1x 13% 88% 0.2 (2%) 1%
IMS Health IMS OP $25.81 $31.00 0.2% $75b 8,662 16.2 14.6 18.7 13.4 12.4 4.0 3.8 6% 11% 1.5 12% 1%
Medidata Solutions MDSO MP $47.56 $47.00 (0.8%) $10-12b 2,681 47.2 38.7 41.5 24.4 19.6 5.7 4.7 19% 22% 2.1 7% 10%
Model N MODN - $13.75 - - - 375 NM NM NM NM NM 2.7 2.2 22% NM NM (10%) 3%
Quintiles Q - $66.80 - - - 8,112 17.7 16.0 19.8 10.9 10.1 2.1 2.0 7% NM NM 16% 5%
Veeva Systems VEEV MP $35.14 $32.00 (0.2%) $5b 5,120 62.1 49.0 72.7 33.3 25.6 9.1 7.5 21% 27% 2.3 27% 10%
WebMD WBMD OP $64.53 $70.00 2.8% - 3,377 34.5 30.0 35.0 15.2 13.3 4.9 4.5 9% 15% 2.3 20% 15%
Median - - - - - - - 26.1 23.0 27.4 14.3 12.8 4.0 3.8 13% 22% 2.1 12% 5%
NEXT-GEN HEALTHCARE IT
Advisory Board Company ABCO - $35.17 - - - 2,075 20.6 18.5 34.4 13.5 12.3 3.1 2.9 8% NM NM (6%) 6%
Evolent Health EVH OP $16.46 - - - 971 NM NM NM NM NM 4.9 3.8 28% NM NM (25%) 5%
HealthStream HSTM - $26.58 - - - 850 92.0 63.1 72.3 18.5 15.3 3.0 2.7 11% 46% 2.0 10% 2%
Imprivata IMPR OP $13.38 $17.00 NM $3b 336 NM NM NM NM NM 2.1 1.8 16% NM NM (16%) 5%
Inovalon INOV - $18.41 - - - 2,805 33.6 26.3 34.9 13.6 11.1 4.5 3.9 16% 28% 1.2 28% 10%
Nuance Communications NUAN OP $17.48 $22.00 (0.5%) - 5,209 11.2 10.3 13.1 10.2 10.1 3.5 3.4 3% 8% 1.4 27% 5%
Omnicell OMCL - $34.15 - - - 1,221 21.9 18.8 20.4 12.8 11.1 2.0 1.8 8% 16% 1.3 10% 4%
Philips PHG - $26.88 - - - 24,856 16.0 13.5 13.8 7.8 7.0 1.0 1.0 3% NM NM 9% 0%
Press Ganey PGND MP $36.66 $33.00 0.1% $3b 1,953 33.4 29.9 29.6 15.1 13.6 5.7 5.3 9% 12% 2.9 (5%) 2%
Vocera VCRA OP $12.53 - - - 331 NM NM NM NM 36.7 1.8 1.7 9% NM NM (16%) 6%
Median - - - - - - - 27.6 22.6 25.0 13.2 11.1 3.0 2.7 9% 16% 1.4 9% 5%
CONSUMER HEALTH
Care.com CRCM - $9.15 - - - 307 58.8 31.6 44.7 24.0 15.2 1.6 1.4 13% NM NM (22%) 4%
Everyday Health EVDY OP $7.46 $13.00 (14.7%) - 245 15.5 8.3 15.4 7.3 5.3 1.3 1.1 13% 88% 0.2 (2%) 1%
Fitbit FIT MP $14.10 $18.00 (0.1%) - 3,428 12.0 10.0 NA 5.9 4.8 1.0 0.9 17% 20% 0.6 20% 23%
Mindbody MB - $13.65 - - - 538 NM NM NM NM NM 3.4 2.6 28% NM NM (26%) 9%
Philips PHG - $26.88 - - - 24,856 16.0 13.5 13.8 7.8 7.0 1.0 1.0 3% NM NM 9% 0%
Press Ganey PGND MP $36.66 $33.00 0.1% $3b 1,953 33.4 29.9 29.6 15.1 13.6 5.7 5.3 9% 12% 2.9 (5%) 2%
WebMD WBMD OP $64.53 $70.00 2.8% - 3,377 34.5 30.0 35.0 15.2 13.3 4.9 4.5 9% 15% 2.3 20% 15%
Weight Watchers WTW - $15.24 - - - 968 16.2 12.7 14.0 10.7 10.0 2.4 2.3 6% NM NM 16% 27%
Median - - - - - - - 16.2 13.5 22.5 10.7 10.0 2.0 1.8 11% 18% 1.4 4% 6%
S&P 500 SP50 - $2,046 - - - - 17.3 15.2 14.4 - - - - 6% 14% 1.3 15% -
S&P 600 HC SP568 - $1,628 - - - - 28.3 21.8 24.5 - - - - 9% 30% 0.9 9% -
NASDAQ Biotech 63109R10 $3,349 - - - - 27.7 22.7 24.9 - - - - 10% 22% 1.3 37% -
Median - - - - - - - 27.7 21.8 24.5 - - - - 9% 22% 1.3 15% -
P/E (b) EV / EBITDA EV / Revenue
FOR INSTITUTIONAL USE ONLY
5
Source: Company data and Leerink Partners estimates
DIGITAL HEALTH SECTOR
Online Health Media
Consumer Digital Tools
Consumer Empowerment
Healthcare Automation
Big Data Analytics
Population Health
Connected Health Healthcare IT
• Definition
• Why it matters to Wall Street: Disruptive, Proprietary, and Durable
• Sectors of covered companies
FOR INSTITUTIONAL USE ONLY
Consumer Empowerment
LEERINK DIGITAL HEALTH LANDSCAPE
Healthcare Smart Systems and Workflow Automation
Connected Health
Big Data
Healthcare IT: EMR, RCM, HIE, Other
Digital Tools: Health Transparency Digital Tools: Benefits
Reimbursed
Online Media & Community
Payer
Physician
Community
Platform Analytics
Population Health Corporate / MCHealthcare System
PharmaProvider
Denotes public company Denotes acquired companyv1.8 Refer comments to: [email protected] Source: Leerink Partners
FOR INSTITUTIONAL USE ONLY
We identified 48 public pure-play stocks of the Digital Health sector and created the Leerink Digital
Health EW48 Index (LDH48).
7
DIGITAL HEALTH SECTOR REVENUE UP 25% IN 2016E, STOCKS UP 7%
Returns, past 12 months:
S&P 500 Health Care: -2%
NASDAQ Biotech: -23%
LDH48 index: +7%
However, average revenue growth
across the LDH48 is projected to
be 25% in 2016 and 18% 2017
We believe Digital Health stocks are gaining favor in the biotech decline.
Note: A list of constituent companies is included in the Appendix of this document. The Leerink Digital Health EW48 Index is comprised of 48 pure-play Digital Health stocks with equal weighting. IPOs added
during the year are treated in the Digital Health Index through rebalancing (includes Fitbit, Inovalon, Press Ganey, Teladoc). Index is last twelve months as of 6/8/2016.
Source: Latest twelve month performance per FactSet 6/8/2016.
FOR INSTITUTIONAL USE ONLY
SUB-SECTOR LIFECYCLES
8
PM PROFILE: DIGITAL HEALTH
COVERED COMPANIES: 22% ’16E REV. GROWTH
• Average 22% 2016E top-line growth
• Wide valuation range: consensus EV/Sales (’16E) revenue
range 1.0x (FIT) to 9.2x (VEEV)
• Average 17% potential gain, 28% for OP rated names
• 4 of 13 IPO’d in last 12 months
THEMATIC VIEW: PERFECT STORM OF MEGATRENDS
(+) Demographics: consumers and physicians have shifted
their time online; we think advertisers will follow, creating a
boom for online health media companies.
(+) Employers are shifting healthcare costs onto employees,
creating opportunities for consumer digital tools companies
in healthcare; 2016 will be a big year for more cost shifting.
(+) Healthcare Reform has put IT at the center of how
healthcare gets done and paid for; hospitals are now
seeking to optimize their EMRs and workflows
CATALYSTS: Earnings, Cadillac Tax, MU3, CAHPS
• Earnings are report cards on usage and revenue growth
• Cadillac Tax effective Jan. 1, 2020, drives employer cost
shifting and healthcare consumerism in 2016-19
• Meaningful Use Stage 3 deadlines (ongoing) demand use of
HIT
• 2016 employee benefits season
• Growing CMS CAHPS requirements tie the patient experience
to payment
Source: FactSet data and Leerink Partners estimates
FOR INSTITUTIONAL USE ONLY
9
CASTLIGHT HEALTH, INC. (CSLT)(CSLT – RATING: MARKET PERFORM; PRICE TARGET: $4.30)
INVESTMENT THESIS• Castlight has built a leading health transparency information
platform that helps employers reduce health benefit costs.
• We believe that there will be strong healthcare cost-shifting by
employers onto employees in 2016 across the board.
• In our view, this shift will directly benefit Consumer Digital Tools
companies such as Castlight. These tools are often used by
employers with cost shifting.
COMPARATIVE STATS• 2016E Sales growth: 33% (in line with consensus)
• Trading at trough levels, near 52-week low
Source: Company data, Leerink Partners estimates, FactSet Research Systems, and NBGH August 2014 survey
$-
$5.00
$10.00
$15.00
$20.00
$25.00
$30.00
Price Performance Since IPO
$4.77 Avg Daily Volume ('000s) 289
$10 Short Interest (% of float) 18.9%
$3 Float as % of Total 56.31%
$462
2015 2016E 2017E 2015 2016E 2017E
Leerink Partners $75 $100 $125 4.1x 3.1x 2.5x
Consensus $75 $101 $128 4.1x 3.1x 2.4x
$101 $128
2015 2016E 2017E 2015 2016E 2017E
Leerink Partners 252% 33% 25% ($65) ($42) ($12)
Consensus 252% 34% 27% ($65) ($39) ($13)
*Consensus estimates represent GAAP EBITDA.
2015 2016E 2017E
Leerink Partners ($0.68) ($0.41) ($0.11)
Consensus ($0.68) ($0.41) ($0.13)
($0.41) ($0.13)
Stock Performance: MTD YTD L12M L3Y
CSLT 13% 12% -49% N/a
S&P 500 Healthcare 1.7% 0.4% -2.0% 49.2%
NASDAQ Biotech -0.4% -17.7% -23.1% 55.7%
Top 10 Holders ~ Shares Held % Out.
Fidelity Management & Research Co. 6,267,450 14.8%
M&G Investment Management Ltd. 3,212,979 7.6%
The Vanguard Group, Inc. 2,638,280 6.2%
Morgan Stanley Investment Management, Inc. 2,614,122 6.2%
Wellington Management Co. LLP 1,859,298 4.4%
Baillie Gifford & Co. 1,794,878 4.2%
Eventide Asset Management LLC 1,708,418 4.0%
BlackRock Fund Advisors 1,685,532 4.0%
Alyeska Investment Group LP 1,149,824 2.7%
Maverick Capital Ltd. 1,144,314 2.7%
EV/Sales
Price on 06/08/16
52-Week High
52-Week Low
Market Cap (mil)
Sales (mil)
Revenue Growth Adj. EBITDA*
Non-GAAP Diluted Pro-Forma EPS
FOR INSTITUTIONAL USE ONLY
10
Source: Leerink Partners LLC, company documents
Castlight Health, Inc. CSLT
Income Statement Model for FYE Dec. Mar-16 Jun-16 Sep-16 Dec-16
($MM except per share) 2013A 2014A 2015A 1Q:16A 2Q:16E 3Q:16E 4Q:16E 2016E 2017E
Revenue:
Subscription 11.7 41.6 70.4 21.0 21.2 23.6 27.1 93.0 116.2
Growth % q/q 5.5% 1.0% 11.0% 15.0%
Growth % y/y 243.3% 256.9% 69.1% 41.1% 23.0% 29.4% 36.1% 32.2% 25.0%
% of revenue 89.8% 91.2% 93.4% 92.6% 92.3% 92.7% 93.2% 92.7% 93.0%
Professional services 1.3 4.0 5.0 1.7 1.76 1.9 2.0 7.3 8.8
Growth % q/q 21.6% 5.0% 6.0% 6.0%
Growth % y/y 73.6% 203.7% 24.0% 60.8% 43.2% 43.2% 43.4% 46.9% 20.0%
% of revenue 10.2% 8.8% 6.6% 7.4% 7.7% 7.3% 6.8% 7.3% 7.0%
Total Revenue $13.0 $45.6 $75.3 $22.7 $23.0 $25.5 $29.1 $100.3 $125.0
Growth % q/q 7% 1% 11% 14%
Growth % y/y 212% 252% 65% 42% 24% 30% 37% 33% 25%
Adj. Cost of revenue:
Cost of subscription 6.2 10.3 11.9 3.8 3.8 4.1 4.6 16.3 19.8
Cost of professional services 10.9 16.1 19.2 4.6 4.7 4.7 4.6 18.5 18.0
Total cost of revenue 17.2 26.4 31.2 8.4 8.5 8.8 9.2 34.9 37.8
Growth % y/y 104% 54% 18% 26% 10% 11% 4% 12% 8%
Non-GAAP Gross Profit:
Subscription Gross Profit 5.4 31.3 58.4 17.3 17.4 19.5 22.5 76.6 96.5
% margin 46.5% 75.3% 83.0% 82.0% 82.0% 82.5% 83.0% 82.4% 83.0%
Professional Services Gross Profit (9.6) (12.1) (14.3) (3.0) (2.9) (2.8) (2.6) (11.2) (9.3)
% margin (729.9%) (301.7%) (287.5%) (176.0%) (165.0%) (150.0%) (130.0%) (154.2%) (105.8%)
Total non-GAAP Gross profit (loss) ($4.2) $19.2 $44.1 $14.3 $14.5 $16.7 $19.9 $65.4 $87.2
Growth % y/y (1%) (557%) 129% 54% 34% 44% 60% 48% 33%
% gross margin (32.4%) 42.2% 58.6% 62.9% 63.1% 65.4% 68.5% 65.2% 69.8%
Adj. Operating expenses:
Sales and marketing 32.7 53.5 59.7 14.0 14.3 13.2 12.2 53.8 44.4
% of revenue 252.0% 117.3% 79.3% 61.8% 62.0% 52.0% 42.0% 53.6% 35.5%
y/y 11.6% (9.9%) (17.5%)
Research and development 14.6 20.7 28.8 8.7 8.7 8.4 8.4 34.3 36.9
% of revenue 112.7% 45.3% 38.3% 38.2% 38.0% 33.0% 29.0% 34.2% 29.5%
y/y 39.6% 18.8% 7.6%
General and administrative 8.3 14.7 20.1 4.5 4.6 4.8 5.2 19.2 18.1
% of revenue 63.7% 32.2% 26.7% 20.0% 20.0% 19.0% 18.0% 19.2% 14.5%
y/y 36.8% (4.4%) (5.7%)
Total operating expenses 55.6 88.8 108.6 27.3 27.6 26.5 25.9 107.3 99.4
y/y 60% 22% (1.3%) (7.3%)
Non-GAAP Operating Income (loss) (59.8) (69.6) (64.5) (13.0) (13.1) (9.8) (6.0) (41.9) (12.2)
D&A 0.6 1.4 2.0 0.8 0.8 0.8 0.8 3.1 3.1
Adj. EBITDA (59.1) (68.3) (62.5) (12.188) (12.3) (9.0) (5.2) (38.7) (9.0)
Growth % y/y 76.1% 15.4% (8.5%) (22.3%) (28.0%) (41.6%) (63.5%) (38.0%) (76.7%)
% EBITDA margin (455.9%) (149.7%) (83.0%) (53.7%) (53.5%) (35.5%) (17.8%) (38.6%) (7.2%)
Other income, net 0.2 0.2 0.3 0.1 0.1 0.1 0.1 0.2 0.2
Pre-tax income (EBT) (59.6) (69.4) (64.2) (12.9) (13.1) (9.8) (5.9) (41.6) (12.0)
Income tax (benefit) 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0
Tax rate 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%
Net Income (loss) Non-GAAP (59.6) (69.4) (64.2) (12.9) (13.1) (9.8) (5.9) (41.6) (12.0)
Non-GAAP EPS - diluted pro-forma ($0.80) ($0.93) ($0.68) ($0.13) ($0.13) ($0.10) ($0.06) ($0.41) ($0.11)
Non-GAAP EPS - Diluted ($6.03) NM NM NM NM NM NM NM NM
Adjustments (2.6) (16.5) (16.2) (8.5) (5.7) (5.7) (5.7) (25.7) (25.0)
GAAP Net Income (62.2) (85.9) (80.4) (21.4) (18.8) (15.5) (11.7) (67.3) (36.9)
GAAP EPS - diluted ($6.28) ($1.16) ($0.86) ($0.22) ($0.18) ($0.15) ($0.11) ($0.67) ($0.35)
Pro-forma GAAP EPS ($0.84)
Basic WASO 9.9 74.4 93.7 96.3 101.8 102.8 103.8 101.1 106.3
Diluted WASO 9.9 74.4 93.7 96.3 101.8 102.8 103.8 101.1 106.3
Pro-forma Diluted shares 74.4 NM NM NM NM NM NM NM NM
FOR INSTITUTIONAL USE ONLY
11
Note: Diluted shares outstanding includes treatment of stock options using the treasury method.
Source: Leerink Partners LLC, company documents
Castlight Health, Inc. -2 -1 0 1 2 3 4 5 6 7 8 9
DCF Model Year -2 Year -1 Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9
($ MM) FY2013 2014 2015A 2016E 2017E 2018E 2019E 2020E 2021E 2022E 2023E 2024E
Revenue $13.0 $45.6 $75.3 $100.3 $125.0 $150.0 $174.0 $196.6 $222.2 $248.8 $273.7 $301.1
% change - 251.5% 65.1% 33.2% 24.6% 20.0% 16.0% 13.0% 13.0% 12.0% 10.0% 10.0%
Adj. EBIT (59.8) (69.6) (64.5) (41.9) (12.2) 7.5 17.4 29.5 40.0 49.8 54.7 60.2
% Margin (460.8%) (152.6%) (85.7%) (41.7%) (9.7%) 5.0% 10.0% 15.0% 18.0% 20.0% 20.0% 20.0%
% change 16% (7%) (35%) (71%) (162%) 132% 70% 36% 24% 10% 10%
Taxes @ 40% 0.0 0.0 0.0 0.0 0.0 3.0 7.0 11.8 16.0 19.9 21.9 24.1
Net Oper. Profit after Tax (59.8) (69.6) (64.5) (41.9) (12.2) 4.5 10.4 17.7 24.0 29.9 32.8 36.1
Deprec. & Amort. 0.6 1.4 2.0 3.1 3.3 3.5 3.7 4.0 4.2 4.6 4.9 5.3
% of revenue 4.9% 3.0% 2.7% 3.1% 2.6% 2.3% 2.1% 2.0% 1.9% 1.8% 1.8% 1.8%
CapX (2.6) (1.9) (5.4) (1.9) (1.9) (3.0) (3.5) (3.9) (4.4) (5.0) (5.5) (6.0)
% of revenue 19.9% 4.1% 7.1% 1.9% 1.5% 2.0% 2.0% 2.0% 2.0% 2.0% 2.0% 2.0%
Change in WC 9.7 2.1 3.8 5.7 6.7 7.8 8.8 10.0 11.2 12.3 13.5
% of revenue 0.0% (21.3%) (2.8%) (3.8%) (4.6%) (4.5%) (4.5%) (4.5%) (4.5%) (4.5%) (4.5%) (4.5%)
Free cash flow (61.7) (60.4) (65.7) (36.8) (5.0) 11.7 18.5 26.6 33.8 40.7 44.6 49.0
Terminal value 573.7
Total value of cash flows (61.7) (60.4) (65.7) (36.8) (5.0) 11.7 18.5 26.6 33.8 40.7 44.6 622.7
Model Assumptions NPV at start of: 2016E 2017E
Terminal Growth Rate 4.0% DCF value of unl. FCF $257.3 $327.3
Future borrowing rate 5.0% DCF value of NOLs 20.5 23.2
Less: Net Debt (129.3) (117.7)
Discount Rate Components Equity Value 407.1 468.2
Risk Free Rate 1.9% Diluted SHOS 102.9 106.9
+ Beta 1.6 Implied value per share $3.96 $4.38
x Equity Risk Premium 7.2%
= Cost of Equity 13.4% Valuation Sensitivity ($/share)
+ After Tax Cost of Debt 3.0%
x Target Debt-to-Cap Ratio 5.0% $4.38 2.5% 3.0% 3.5% 4.0% 4.5% 5.0% 5.5%
DISCOUNT RATE 12.9% 10.0% $5.45 $5.67 $5.93 $6.23 $6.59 $7.02 $7.54
Cash Tax Rate 40% 10.5% 5.13 5.32 5.54 5.79 6.08 6.43 6.84
CapX as % of sales 2.0% 11.0% 4.86 5.02 5.20 5.41 5.66 5.94 6.27
Depreciation Rate 15 11.5% 4.61 4.75 4.91 5.09 5.29 5.53 5.80
Change in net WC / sales (4.5%) 12.0% 4.39 4.51 4.65 4.80 4.98 5.17 5.40
12.5% 4.20 4.30 4.42 4.55 4.70 4.87 5.06
Diluted SHOS at Start of: 2016E 2017E 13.0% 4.02 4.11 4.22 4.33 4.46 4.60 4.76
Basic SHOS 101.8 105.8 13.5% 3.86 3.94 4.03 4.13 4.24 4.36 4.50
Stock options (treasury) 1.2 1.2 14.0% 3.71 3.79 3.86 3.95 4.05 4.16 4.27
Diluted SHOS 102.9 106.9 14.5% 3.58 3.64 3.71 3.79 3.88 3.97 4.07
15.0% 3.46 3.51 3.58 3.64 3.72 3.80 3.89
15.5% 3.34 3.40 3.45 3.51 3.58 3.65 3.73
16.0% 3.24 3.29 3.34 3.39 3.45 3.51 3.58
Growth Rate
Dis
co
un
t R
ate
FOR INSTITUTIONAL USE ONLY
12
EVERYDAY HEALTH, INC. (EVDY)(EVDY – RATING: OUTPERFORM; PRICE TARGET: $13)
INVESTMENT THESIS• Everyday Health is a leading online health media company
providing health content to both consumers and physicians. Each
month it reaches approximately 53m people and 2/3 of all US
physicians.
• MEDACorp checks and market research indicate physicians and
consumers have moved strongly online
• We see the company poised to take advantage of three key Digital
Health growth drivers:
1. Pharma ad spend coming back strong after weakness in
past few years
2. Consumers taking charge of their healthcare
3. Consumers and physicians shifting content consumption
from offline to online sources
COMPARATIVE STATS• 2016E Sales growth: 11% (inline with consensus)
Source: Company data, Leerink Partners estimates, and FactSet Research Systems
$-
$5.00
$10.00
$15.00
$20.00
$25.00
Price Performance Since IPO
$7.46 Avg Daily Volume ('000s) 134
$14 Short Interest (% of float) 1.9%
$4 Float as % of Total 70.26%
$248
2015 2016E 2017E 2015 2016E 2017E
Leerink Partners $232 $258 $292 1.4x 1.3x 1.1x
Consensus $232 $257 $290 1.4x 1.3x 1.1x
$257 $290
2015 2016E 2017E 2015 2016E 2017E
Leerink Partners 18% 11% 13% $46 $46 $55
Consensus 18% 11% 13% $46 $45 $61
2015 2016E 2017E
Leerink Partners $0.79 $0.41 $0.68
Consensus $0.79 $0.48 $0.90
$0.48 $0.90
Stock Performance: MTD YTD L12M L3Y
EVDY 11% 24% -41% N/a
S&P 500 Healthcare 1.7% 0.4% -2.0% 49.2%
NASDAQ Biotech -0.4% -17.7% -23.1% 55.7%
Top 10 Holders ~ Shares Held % Out.
Wellington Management Co. LLP 3,444,894 10.4%
BlackRock Fund Advisors 910,097 2.7%
Bow Street LLC 830,439 2.5%
Acuta Capital Partners LLC 824,464 2.5%
JPMorgan Investment Management, Inc. 717,258 2.2%
The Vanguard Group, Inc. 710,287 2.1%
Teachers Advisors, Inc. 649,216 2.0%
Westw ood Management Corp. (Texas) 601,089 1.8%
Putnam Investment Management LLC 591,132 1.8%
TFS Capital LLC 528,069 1.6%
52-Week High
Price on 06/08/16
52-Week Low
Market Cap (mil)
Sales (mil) EV/Sales
Revenue Growth Adj. EBITDA
Non-GAAP Diluted Pro-Forma EPS
FOR INSTITUTIONAL USE ONLY
13
Source: Leerink Partners LLC, company documents
Everyday Health, Inc. (EVDY)
Income Statement for FYE December, GAAP Mar-16 Jun-16 Sep-16 Dec-16
($MM) FY2013A FY2014A FY2015A 1Q:16A 2Q:16E 3Q:16E 4Q:16E FY2016E FY2017E
Revenue:
Advertising and sponsorship revenues 134.9 166.5 209.1 51.3 55.2 55.6 81.6 243.8 280.3
Growth % y/y 22.7% 23.4% 25.6% 41.1% 10.0% 12.0% 12.0% 16.6% 15.0%
% of revenue 86.6% 90.3% 90.1% 92.9% 94.5% 94.8% 94.9% 94.4% 96.0%
Premium services revenues 21.0 17.9 22.9 3.9 3.2 3.0 4.4 14.6 11.6
Growth % y/y (11.0%) (14.8%) 28.2% (19.3%) (30.0%) (35.0%) (50.0%) (36.5%) (20.0%)
% of revenue 13.4% 9.7% 9.9% 7.1% 5.5% 5.2% 5.1% 5.6% 4.0%
Total Revenue $155.9 $184.3 $232.0 $55.2 $58.5 $58.6 $86.0 $258.3 $292.0
Growth % q/q (32.5%) 5.9% 0.3% 46.8%
Growth % y/y 12.5% 18.3% 25.9% 34.0% 6.7% 7.9% 5.3% 11.3% 13.0%
Cost of revenues 43.3 49.3 66.9 19.1 15.8 17.0 22.4 74.2 79.0
% of revenue 27.8% 26.7% 28.8% 34.6% 27.0% 29.0% 26.0% 28.7% 27.0%
Gross Profit - GAAP 112.5 135.0 165.1 36.1 42.7 41.6 63.7 184.1 213.0
Growth % y/y 14.9% 20.0% 22.2% 33.3% 4.4% 7.6% 9.0% 11.5% 15.7%
% margin 72.2% 73.3% 71.2% 65.4% 73.0% 71.0% 74.0% 71.3% 73.0%
Sales and marketing 44.4 51.0 74.8 21.1 23.7 20.5 21.5 86.8 89.6
% of revenue 28.5% 27.7% 32.2% 38.2% 40.5% 35.0% 25.0% 33.6% 30.7%
y/y 14.9% 46.6% 16.1% 3.3%
Product development 44.5 42.3 55.9 16.2 14.6 14.1 17.2 62.1 66.0
% of revenue 28.6% 23.0% 24.1% 29.3% 25.0% 24.0% 20.0% 24.0% 22.6%
y/y (4.9%) 32.1% 11.0% 6.3%
General and administrative 26.7 29.9 39.5 12.7 12.9 11.7 12.0 49.3 50.2
% of revenue 17.1% 16.2% 17.0% 22.9% 22.0% 20.0% 14.0% 19.1% 17.2%
y/y 11.7% 32.3% 24.8% 2.0%
Total operating expenses 115.6 123.2 170.2 49.9 51.1 46.3 50.8 198.1 205.9
Operating Income - GAAP ($3.1) $11.8 ($5.1) ($13.8) ($8.5) ($4.7) $12.9 ($14.0) $7.1
% margin (2.0%) 6.4% (2.2%) (25.0%) (14.5%) (8.0%) 15.0% (5.4%) 2.4%
Other Income (expense), net (0.4) (4.1) 0.0 0.0 0.0 0.0 0.0 0.0 0.0
Interest expense, net (8.4) (3.7) (5.2) (1.7) (1.7) (1.7) (1.7) (6.8) (4.0)
GAAP Pre-tax Income (Loss) (11.9) 4.0 (10.3) (15.5) (10.2) (6.4) 11.2 (20.8) 3.1
Benefit (provision) for Income taxes (1.1) 8.7 (1.3) (0.6) (0.6) (0.6) (1.0) (2.9) (4.0)
Tax rate % 9.3% 215.7% 12.6% 4.0% 6.1% 9.7% (8.9%) 13.7%
Income (loss) from cont ops., net of tax (13.0) 12.7 (11.6) (16.1) (10.8) (7.0) 10.2 (23.7) (0.9)
Loss from discont. op., net of tax (5.2) 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0
GAAP Net Income (loss) ($18.2) $12.7 ($11.6) ($16.1) ($10.8) ($7.0) $10.2 ($23.7) ($0.9)
Series G preferred stock deemed dividend 0.0 (8.1) 0.0 0.0 0.0 0.0 0.0 0.0 0.0
GAAP net income (loss) attr. to common (18.2) 4.6 (11.6) (16.1) (10.8) (7.0) 10.2 (23.7) (0.9)
Non-GAAP Net Income ($7.8) $16.0 $26.5 ($5.7) ($1.8) $2.0 $19.2 $13.7 $23.1
Non-GAAP EPS Diluted (pro-forma) ($0.33) $0.59 $0.79 ($0.17) ($0.05) $0.06 $0.57 $0.41 $0.68
Growth % y/y NA NA 33.6% NA (120.0%) (12.8%) (3.9%) (48.0%) 63.7%
Diluted Pro-Forma WASO 23.7 26.9 33.3 32.8 32.8 33.3 33.8 33.2 34.2
y/y 14% 24% (0%) 3%
FOR INSTITUTIONAL USE ONLY
14
Source: Leerink Partners LLC, company documents
EVDY Fair Value In 12 Months 2017E
Forward EV/Adj. EBITDA multiple 10.0x
Adj. EBITDA $55.1
Enterprise Value $551
Less debt 1Q17E $123
Plus cash 1Q17E $41
Equity value $469
Dil. shares outstanding 1Q17E 33.8
Price Target $13.87
upside 164.5%
EVDY Fair Value In 12 Months 2017E
Forward P/E multiple 18.0x
Adj. EPS $0.68
Price Target $12.16
upside 131.8%
Average Price Target (12 mo.) $13.02
upside 148.1%
FOR INSTITUTIONAL USE ONLY
15
FITBIT, INC. (FIT)(FIT – RATING: MARKET PERFORM; PRICE TARGET: $18)
INVESTMENT THESIS• Riding multiple US and global megatrends: (1) social trend toward
greater health and fitness behaviors among consumers, (2) economic
trend with consumers increasingly willing to take charge of their
healthcare and willing to pay out-of-pocket dollars for products that
help them manage their health, (3) corporate wellness programs
adopting activity trackers
• Revenue upside potential in Corporate Wellness channel (<10% of
sales today)
• Valuation upside potential in social network
COMPARATIVE STATS• 2016E Sales growth: 39% (vs. consensus 38%)
• IPO in June 2015 at $20
Source: Company data, Leerink Partners estimates, and FactSet Research Systems
$14.10 Avg Daily Volume ('000s) 9,109
$52 Short Interest (% of float) 29.2%
$12 Float as % of Total 79.37%
$3,815
2015 2016E 2017E 2015 2016E 2017E
Leerink Partners $1,858 $2,588 $2,989 1.7x 1.2x 1.0x
Consensus $1,858 $2,572 $3,020 1.7x 1.2x 1.0x
$2,572 $3,020
2015 2016E 2017E 2015 2016E 2017E
Leerink Partners 13% 39% 16% $390 $451 $521
Consensus 13% 38% 17% $390 $446 $543
2015 2016E 2017E
Leerink Partners $1.08 $1.17 $1.28
Consensus $1.08 $0.91 $1.12
Stock Performance: MTD YTD L12M L3Y
FIT -1% NA NA NA
S&P 500 Healthcare 1.7% 0.4% -2.0% 49.2%
NASDAQ Biotech -0.4% -17.7% -23.1% 55.7%
Top 10 Holders ~ Shares Held % Out.
Fidelity Management & Research Co. 30,456,792 12.0%
The Vanguard Group, Inc. 11,122,403 4.4%
BlackRock Advisors LLC 4,483,410 1.8%
Shannon River Fund Management LLC 3,999,607 1.6%
BlackRock Fund Advisors 3,206,778 1.3%
Bloom Tree Partners LLC 3,183,981 1.3%
Morgan Stanley Smith Barney LLC 2,608,990 1.0%
12 West Capital Management LP 2,396,218 0.9%
Coatue Management LLC 2,203,710 0.9%
BlackRock Investment Management (UK) Ltd. 2,142,918 0.8%
52-Week Low
Market Cap (mil)
Sales (mil) EV/Sales
Revenue Growth Adj. EBITDA
GAAP Diluted EPS, Cont. Ops
Price on 06/08/16
52-Week High
$10.00
$15.00
$20.00
$25.00
$30.00
$35.00
$40.00
$45.00
$50.00
$55.00
Price Performance Since IPO
FOR INSTITUTIONAL USE ONLY
16
Fitbit, Inc. (FIT)Income Statement for FYE Dec. 31, GAAP Mar-16 Jun-16 Sep-16 Dec-16
$ in Thousands FY2013A FY2014A FY2015A 1Q:16A 2Q:16E 3Q:16E 4Q:16E FY2016E FY2017E
Revenue:
Total revenue 271,087 745,433 1,857,998 505,356 579,600 492,660 1,009,953 2,587,569 2,988,714
Growth % y/y 175.0% 149.3% 50.1% 44.8% 20.4% 41.9% 39.3% 15.5%
Cost of revenue: 210,836 387,776 956,935 271,601 303,710 250,764 512,046 1,338,122 1,531,191
% of revenue 77.8% 52.0% 51.5% 53.7% 52.4% 50.9% 50.7% 51.7% 51.2%
Gross profit 60,251 357,657 901,063 233,755 275,890 241,896 497,907 1,249,447 1,457,522
% margin 22.2% 48.0% 48.5% 46.3% 47.6% 49.1% 49.3% 48.3% 48.8%
Operating expenses:
Research and development 27,873 54,167 150,035 72,248 95,634 100,995 104,025 372,902 462,205
% of revenue 10.3% 7.3% 8.1% 14.3% 16.5% 20.5% 10.3% 14.4% 15.5%
y/y 72% 94% 177% 149% 24%
Sales and marketing 26,847 112,005 332,741 107,051 130,410 66,509 108,065 412,035 453,241
% of revenue 9.9% 15.0% 17.9% 21.2% 22.5% 13.5% 10.7% 15.9% 15.2%
y/y 162% 317% 197% 24% 10%
General and administrative 14,485 33,556 77,793 35,702 36,515 37,442 39,388 149,047 166,764
% of revenue 5.3% 4.5% 4.2% 7.1% 6.3% 7.6% 3.9% 5.8% 5.6%
y/y 265% 132% 132% 92% 12%
Change in contingent consideration (7,704) - -
Total operating expenses 69,205 199,728 552,865 215,001 262,559 204,947 251,478 933,985 1,082,210
43%
Income from operations (8,954) 157,929 348,198 18,754 13,331 36,950 246,429 315,463 375,312
% margin -3.3% 21.2% 18.7% 3.7% 2.3% 7.5% 24.4% 12.2% 12.6%
y/y 120.5% -9.4% 19.0%
Total other income (expense) (4,731) (18,156) (60,249) 2,150 200 200 200 2,750 800
Pre-tax Income (loss) (13,685) 139,773 287,949 20,904 13,531 37,150 246,629 318,213 376,112
Income tax expense (benefit) 37,937 7,996 112,272 9,869 4,059 11,145 73,989 99,062 112,834
Tax rate (277.2%) 5.7% 39.0% 47.2% 30.0% 30.0% 30.0% 31.1% 30.0%
GAAP net income (loss) (51,622) 131,777 175,677 11,035 9,472 26,005 172,640 219,151 263,279
% margin (19.0%) 17.7% 9.5% 2.2% 1.6% 5.3% 17.1% 8.5% 8.8%
Diluted EPS - GAAP ($1.32) $0.63 $0.75 $0.05 $0.04 $0.10 $0.68 $0.88 $1.00
Diluted EPS - Adjusted - 0.56 1.08 0.10 0.10 0.18 0.77 1.17 1.28
Diluted shares (non-GAAP, pro forma) 39,179 202,608 236,341 242,009 247,091 250,798 254,560 248,614 264,250
Net income and comprehensive income reconciliation to Adjusted EBITDAFY2013A FY2014A FY2015A 1Q:16A 2Q:16E 3Q:16E 4Q:16E FY2016E FY2017E
GAAP net income (51,622) 131,777 175,677 11,035 9,472 26,005 172,640 219,151 263,279
Impact of Fitbit Force recall 84,650 22,840 (10,171) 11 - - - 11 -
Stock-based compensation expense 620 6,804 41,024 17,770 22,000 28,000 32,000 99,770 106,000
Revaluation of redeemable convertible preferred stock warrant liability3,370 13,272 56,655 - - - - - -
Depreciation and amortization 3,012 6,131 21,107 7,008 8,008 9,008 10,008 34,032 40,032
Change in contingent consideration - - (7,704) - - - - - -
Interest expense, net 1,082 2,222 1,019 (582) (200) (200) (200) (1,182) (800)
Income tax expense (benefit) 37,937 7,996 112,272 9,869 4,059 11,145 73,989 99,062 112,834
Total adjustments 130,671 59,265 214,202 34,076 33,867 47,953 115,797 231,693 258,066
Adjusted EBITDA 79,049 191,042 389,879 45,111 43,339 73,958 288,437 450,844 521,344
Margin % 29.2% 25.6% 21.0% 8.9% 17.4% 17.4%
y/y NM 141.7% 104.1% 15.6% 15.6%
Source: Company reports, Leerink Partners LLC estimates
FOR INSTITUTIONAL USE ONLY
17
Fitbit, Inc. (FIT)Revenue Build Mar-16 Jun-16 Sep-16 Dec-16 Mar-17 Jun-17 Sep-17 Dec-17
Units in thousands FY2013A FY2014A FY2015A 1Q:16A 2Q:16E 3Q:16E 4Q:16E FY2016E 1Q:17E 2Q:17E 3Q:17E 4Q:17E FY2017E
Total Devices sold (000) 4,476 10,904 21,324 4,800 5,520 4,692 9,619 24,631 5,964 6,560 5,904 10,037 28,464
q/q -41.5% 15.0% -15.0% 105.0% -38.0% 10.0% -10.0% 70.0%
y/y 250.0% 143.6% 95.6% 24.2% 23.8% -2.3% 17.3% 15.5% 24.2% 18.8% 25.8% 4.3% 15.6%
ASP $60.56 $68.36 $87.13 $105.28 $105.00 $105.00 $105.00 $105.06 $105.00 $105.00 $105.00 $105.00 $105.00
q/q 21.3%
y/y 1.4% 12.9% 27.5% 20.9% 20.6% -0.1%
Active users 2,570 6,700 16,900
Growth % y/y 360.6% 160.7% 152.2%
Total revenue (000) 271,087 745,433 1,857,998 505,356 579,600 492,660 1,009,953 2,587,569 626,171 688,788 619,909 1,053,846 2,988,714
q/q -29% 15% -15% 105% -38% 10% -10% 70%
y/y 255.0% 175% 149% 50% 45% 20% 42% 39% 24% 19% 26% 4% 16%
% of full year 100% 20% 22% 19% 39% 100% 21% 23% 21% 35% 100%
Revenue per user $105.48 $111.26 $109.94
Other Data:
Geographic Sales FY2013A FY2014A FY2015A 1Q:16A 2Q:16E 3Q:16E 4Q:16E FY2016E 1Q:17E 2Q:17E 3Q:17E 4Q:17E FY2017E
US 562,553 1,381,152 351,685
% of total 75% 74% 70%
y/y 146% 33%
Americas ex US 38,576 92,252 23,394
% of total 5% 5% 5%
y/y 139% 74%
EMEA 60,699 208,767 74,724
% of total 8% 11% 15%
y/y 244% 113%
APAC 83,605 175,827 55,553
% of total 11% 9% 11%
y/y 110% 142%
Total 745,433 1,857,998 505,356
Market share ($, NPD Group):
connected activity trackers 59% 70%
GPS fitness watches 0% 3%
Registered Users on Platform 4,500 14,600 29,000
% active 57% 46% 58%
Fortune 500 Corporate Wellness clients over 50
"Works With Fitbit" partners ~35
Source: Leerink Partners LLC, company documents
FOR INSTITUTIONAL USE ONLY
18
HEALTHEQUITY, INC. (HQY)(HQY – RATING: OUTPERFORM; PRICE TARGET: $33)
INVESTMENT THESIS• Poised to benefit from a number of key Digital Health growth drivers:
(1) employers shifting healthcare benefit expenses onto employees,
especially in the lead-up to the Cadillac Tax, which goes into effect in
2018; (2) the concurrent rise in employer provisioning of Consumer
Directed Benefit (CDB) accounts such as Health Saving Accounts
(HSAs); and (3) the resulting rise in consumer use of these tax-
advantaged accounts in response to both employer cost-shifting and
growing consumerism in healthcare.
• HQY’s broad network of existing partners as a company-specific
asset, giving it access to ~30% (company estimate) of the under-65
privately insured population in the US.
COMPARATIVE STATS• CY16/FY17E Sales growth: 40% (vs. Street 39%)
Source: Company data, Leerink Partners estimates, and FactSet Research Systems
$29.12 Avg Daily Volume ('000s) 313
$36 Short Interest (% of float) 7.3%
$16 Float as % of Total 93.11%
$1,687
2014A 2015A 2016E 2014A 2015A 2016E
Leerink Partners $88 $127 $178 17.2x 11.9x 8.5x
Consensus $88 $127 $176 17.2x 11.9x 8.6x
$127 $176
2014A 2015A 2016E 2014A 2015A 2016E
Leerink Partners 35% 44% 40% $25.5 $40.6 $58.2
Consensus 35% 44% 39% $25.5 $40.6 $59.4
2014A 2015A 2016E
Leerink Partners $0.21 $0.34 $0.49
Consensus $0.21 #N/A $0.48
Stock Performance: MTD YTD L12M L3Y
HQY 13% 16% 7% NA
S&P 500 Healthcare 1.7% 0.4% -2.0% 49.2%
NASDAQ Biotech -0.4% -17.7% -23.1% 55.7%
Top 10 Holders ~ Shares Held % Out.
W.R. Berkley Corp. (Investment Portfolio) 11,969,699 20.7%
Wells Capital Management, Inc. 3,326,622 5.7%
BlackRock Fund Advisors 3,299,968 5.7%
Janus Capital Management LLC 2,622,011 4.5%
The Vanguard Group, Inc. 2,493,953 4.3%
Wasatch Advisors, Inc. 2,121,366 3.7%
BAMCO, Inc. 1,659,545 2.9%
Stephens Investment Management Group LLC 1,413,279 2.4%
Invesco Advisers, Inc. 1,405,746 2.4%
Next Century Grow th Investors LLC 1,397,633 2.4%
Price on 06/08/16
52-Week High
52-Week Low
Market Cap (mil)
Sales (mil) EV/Sales
Revenue Growth Adj. EBITDA
Diluted Pro-Forma EPS
$10.00
$15.00
$20.00
$25.00
$30.00
$35.00
$40.00
Price Performance Since IPO
FOR INSTITUTIONAL USE ONLY
19
Source: Leerink Partners LLC, company documents
HealthEquity, Inc. (HQY)Income Statement for FYE Jan. 31, GAAP Apr-16 Jul-16 Oct-16 Jan-17
$ in Thousands FY2014A FY2015A FY2016A 1Q:17A 2Q:17E 3Q:17E 4Q:17E FY2017E FY2018E
Revenue:
Total revenue 62,015 87,855 126,786 44,013 43,751 42,985 46,714 177,463 215,023
Growth % y/y 34.6% 41.7% 44.3% 47.4% 43.5% 40.7% 30.2% 40.0% 21.2%
Cost of services:
Account costs 21,473 29,760 39,155 11,207 11,015 12,233 16,105 50,560 56,289
Custodial costs 3,487 4,141 6,522 2,356 2,537 2,593 3,175 10,660 13,789
Card costs 4,137 5,899 8,248 2,719 2,990 2,749 2,853 11,310 12,924
Other costs 116 82 263 50.0 49.7 48.8 53.1 202 246
Total cost of services 29,213 39,882 54,188 16,332 16,592 17,624 22,185 72,733 83,248
% of revenue 47.1% 45.4% 42.7% 37.1% 37.9% 41.0% 47.5% 41.0% 38.7%
Gross profit 32,802 47,973 72,598 27,681 27,159 25,361 24,529 104,730 131,775
% margin 52.9% 54.6% 57.3% 62.9% 62.1% 59.0% 52.5% 59.0% 61.3%
Operating expenses:
Sales and marketing 8,602 10,619 13,302 4,183 4,375 4,298 5,839 18,696 21,502
% of revenue 13.9% 12.1% 10.5% 9.5% 10.0% 10.0% 12.5% 10.5% 10.0%
Technology and development 7,142 10,501 16,832 4,625 5,688 6,147 6,306 22,766 26,912
% of revenue 11.5% 12.0% 13.3% 10.5% 13.0% 14.3% 13.5% 12.8% 12.5%
General and administrative 3,897 8,343 14,113 4,574 5,250 4,728 5,139 19,691 23,222
% of revenue 6.3% 9.5% 11.1% 10.4% 12.0% 11.0% 11.0% 11.1% 10.8%
Amortization of acquired intangible assets 1,637 1,637 2,208 1,049 1,049 1,049 1,049 4,196 4,196
% of revenue 2.6% 1.9% 1.7% 2.4% 2.4% 2.4% 2.2% 2.4% 2.0%
Total operating expenses 21,278 31,100 46,455 14,431 16,362 16,223 18,333 65,349 75,833
y/y 25% 46% 49% 41% 16%
Income from operations 11,524 16,873 26,143 13,250 10,797 9,139 6,196 39,382 55,943
% margin 18.6% 19.2% 20.6% 30.1% 24.7% 21.3% 13.3% 22.2% 26.0%
62.5% 46.4% 54.9%
Total other income (expense) (6,150) (1,109) (589) (641) (168) (168) (168) (1,145) (672)
Pre-tax Income (loss) 5,374 15,764 25,554 12,609 10,629 8,971 6,028 38,237 55,271
Income tax provision 4,141 5,598 8,941 4,536 3,824 3,227 2,168 13,755 19,883
Tax rate 77.1% 35.5% 35.0% 36.0% 36.0% 36.0% 36.0% 36.0% 36.0%
GAAP net income and comprehensive income 1,233 10,166 16,613 8,073 6,806 5,743 3,859 24,481 35,387
% margin 2.0% 11.6% 13.1% 18.3% 15.6% 13.4% 8.3% 13.8% 16.5%
GAAP net income per share attributable to common stockholders:
Basic ($1.26) $0.31 $0.29 $0.14 $0.12 $0.10 $0.06 $0.42 $0.58
Diluted ($1.26) $0.20 $0.28 $0.14 $0.11 $0.09 $0.06 $0.40 $0.56
% growth Na 40.0% 57.8% 50.5% 36.8% 19.2% 43.3% 38.7%
GAAP weighted-average number of shares used in computing net income per share attributable to common stockholders:
Basic 5,651 31,181 56,719 57,820 58,687 59,274 59,867 58,912 61,379
Diluted 5,651 51,856 58,863 59,399 60,290 60,893 61,502 60,521 63,055
Net income per share reconciliation to pro forma non-GAAP EPSFY2014A FY2015A FY2016A 1Q:17A 2Q:17E 3Q:17E 4Q:17E FY2017E FY2018E
GAAP net income 10,166 16,613 8,073 6,806 5,743 3,859 24,481 35,387
Non-cash charge from performance-based stock options 1,565 3,647 1,130 1,409 1,409 1,409 5,356 5,634
Pro forma non-GAAP net income 11,238 20,260 9,203 8,214 7,152 5,268 29,837 41,022
Pro forma weighted average shares used in computing non-GAAP diluted earnings per share (1)51,856 58,863 59,399 60,290 60,893 61,502 60,521 63,055
Pro forma non-GAAP earnings per diluted share 0.22$ 0.34$ 0.15$ 0.14$ 0.12$ 0.09$ 0.49$ 0.65$
y/y 58.8% 43.2% 32.0%
FOR INSTITUTIONAL USE ONLY
20
Source: Leerink Partners LLC, company documents
HealthEquity, Inc. (HQY)Revenue Build for FYE Jan. 31, GAAP Apr-16 Jul-16 Oct-16 Jan-17 Apr-17 Jul-17 Oct-17 Jan-18
Units in thousands, except members FY2014A FY2015A FY2016A 1Q:17A 2Q:17E 3Q:17E 4Q:17E FY2017E 1Q:18E 2Q:18E 3Q:18E 4Q:18E FY2018E
Revenue:
Account fee revenue 30,575 45,010 61,035 18,882 18,770 18,897 19,798 76,347 21,131 20,924 20,984 21,984 85,022
Revenue per member 10.57$ 41.35$ 38.23$ 8.54$ 8.35$ 8.25$ 8.05$ 33.19$ 7.77$ 7.60$ 7.51$ 7.33$ 30.20$
y/y fee change NM (7.5%) (13.5%) (13.6%) (13.3%) (12.3%) (13.2%) (9.0%) (9.0%) (9.0%) (9.0%) (9.0%)
% of total revenue 49.3% 51.2% 48.1% 42.9% 42.9% 44.0% 42.4% 43.0% 40.5% 39.6% 39.4% 38.7% 39.5%
Growth % y/y 38.3% 47.2% 35.6% 31.2% 28.5% 25.6% 16.5% 25.1% 11.9% 11.5% 11.0% 11.0% 11.4%
Custodial fee revenue 18,955 24,374 37,755 13,811 14,641 14,817 16,468 59,737 18,390 19,101 19,275 20,846 77,612
% of avg. daily cash AUM fee 1.71% 1.63% 1.71% 0.39% 0.40% 0.40% 0.42% 1.65% 0.40% 0.41% 0.41% 0.42% 1.64%
Revenue per member 6.02$ 22.40$ 23.56$ 6.24$ 6.51$ 6.47$ 6.70$ 25.92$ 7.15$ 7.02$ 6.94$ 7.20$ 28.31$
% of total revenue 30.6% 27.7% 29.8% 31.4% 33.5% 34.5% 35.3% 33.7% 35.3% 36.2% 36.2% 36.7% 36.1%
Growth % y/y 24.9% 28.6% 54.9% 64.0% 62.1% 62.1% 47.5% 58.2% 33.2% 30.5% 30.1% 26.6% 29.9%
Card fee revenue 11,931 17,746 27,423 11,208 10,228 9,162 10,329 40,927 12,512 12,667 12,857 13,805 51,841
Revenue per member 3.58$ 16.35$ 17.20$ 5.07$ 4.55$ 4.00$ 4.20$ 17.82$ 4.60$ 4.60$ 4.60$ 4.60$ 18.40$
% of total revenue 19.2% 20.2% 21.6% 25.5% 23.4% 21.3% 22.1% 23.1% 24.0% 24.0% 24.1% 24.3% 24.1%
Growth % y/y 40.0% 48.7% 54.5% 64.4% 51.1% 47.5% 35.5% 49.2% 11.6% 23.8% 40.3% 33.6% 26.7%
Other revenue 554 725 573 112 111 109 119 452 133 134 136 144 547
Revenue per member 0.77$ 0.70$ 0.38$ 0.05$ 0.05$ 0.05$ 0.05$ 0.20$ 0.05$ 0.05$ 0.05$ 0.05$ 0.20$
% of total revenue 0.9% 0.8% 0.5% 0.3% 0.3% 0.3% 0.3% 0.3% 0.3% 0.3% 0.3% 0.3% 0.3%
Growth % y/y 94.4% 30.9% -21.0% -48.4% 26.5% -31.2% 9.1% -21.2% 18.5% 20.7% 23.9% 21.5% 21.2%
Total revenue 62,015 87,855 126,786 44,013 43,751 42,985 46,714 177,463 52,165 52,826 53,252 56,780 215,023
Revenue per member 86.82$ 84.84$ 83.55$ 19.90$ 19.78$ 18.94$ 19.73$ 78.35$ 20.29$ 19.40$ 19.18$ 19.62$ 78.49$
Growth % y/y 41.7% 44.3% 47.4% 43.5% 40.7% 30.2% 40.0% 18.5% 20.7% 23.9% 21.5% 21.2%
HSA Members:
HSA Members 2,228,041 2,267,821 2,313,178 2,660,155 2,739,959 2,767,359 2,822,706 3,246,112
Growth % q/q 4.1% 1.0% 2.0% 15.0% 3.0% 1.0% 2.0% 15.0%
Growth % y/y 51.1% 47.5% 44.4% 24.3% 23.0% 22.0% 22.0% 22.0%
Average HSA Members (YTD) 2,211,860 2,212,164 2,269,680 2,367,299 2,571,097 2,722,491 2,776,675 2,894,034
Growth % y/y 51.5% 49.0% 49.6% 47.9% 16.2% 23.1% 22.3% 22.3%
Growth % q/q 38.2% 0.0% 2.6% 4.3% 8.6% 5.9% 2.0% 4.2%
Average HSA Members (QTD) 2,211,860 2,247,931 2,290,500 2,459,359 2,720,060 2,753,659 2,795,032 3,001,087
% discount factor 99.3% 100.0% 100.0% 98.9% 99.3% 100.0% 100.0% 98.9%
Growth % y/y 51.5% 48.8% 44.9% 32.9% 23.0% 22.5% 22.0% 22.0%
Growth % q/q 19.5% 1.6% 1.9% 7.4% 10.6% 1.2% 1.5% 7.4%
HSA Members with investments 49,761
Growth % y/y 39.4%
Assets under management
Cash AUM 3,597,111 3,700,553 3,756,062 4,507,274 4,687,565 4,781,316 4,829,129 5,794,955
Growth % q/q 9.7% 2.0% 1.5% 20.0% 4.0% 2.0% 1.0% 20.0%
Growth % y/y 63.6% 63.7% 62.7% 37.5% 30.3% 29.2% 28.6% 28.6%
% of total AUM 88.0% 86.0% 85.7% 89.0% 87.0% 86.0% 85.5% 89.0%
Investment AUM 488,343 602,416 626,741 557,079 700,441 778,354 818,975 716,230
Growth % y/y 41.2% 61.9% 62.7% 37.3% 43.4% 29.2% 30.7% 28.6%
% of total AUM 12.0% 14.0% 14.3% 11.0% 13.0% 14.0% 14.5% 11.0%
Total AUM 4,085,454 4,302,969 4,382,802 5,064,353 5,388,005 5,559,670 5,648,104 6,511,185
Growth % y/y 60.6% 63.5% 62.7% 37.4% 31.9% 29.2% 28.9% 28.6%
Average daily cash AUM (YTD) 1,107,308 1,499,764 2,212,713 3,518,081 3,525,431 3,583,088 3,890,250 3,629,213 4,597,419 4,658,718 4,701,321 5,023,241 4,745,175
Growth % y/y 64.4% 61.9% 62.3% 67.2% 30.7% 32.1% 31.2% 29.1%
Average daily cash AUM (QTD) 3,518,081 3,624,007 3,704,215 3,968,304 4,704,685 4,702,229 4,774,171 5,102,008
% discount factor 102.3% 99.3% 99.4% 96.0% 102.3% 99.3% 99.4% 96.0%
Growth % y/y 64.4% 63.7% 63.2% 47.9% 33.7% 29.8% 28.9% 28.6%
Cash AUM per HSA member 1,590.55$ 1,593.66$ 1,578.68$ 1,643.33$ 1,788.12$ 1,711.20$ 1,693.15$ 1,735.72$
Growth % y/y 8.5% 8.7% 8.5% 13.0% 12.4% 7.4% 7.3% 5.6%
FOR INSTITUTIONAL USE ONLY
21
IMPRIVATA, INC. (IMPR)(IMPR – RATING: OUTPERFORM; PRICE TARGET: $17)
INVESTMENT THESIS• Healthcare reform has put IT at the center of how healthcare is
provided and paid for, but traditional IT systems slow clinicians
down the more they need to use them.
• An enterprise single sign-on system (SSO), which speeds clinicians
back up, is increasingly becoming a software product that hospital
CIOs “need to have” on their network.
• This trend benefits Imprivata which has developed the leading SSO
in the hospital marketplace, growing rapidly over the past several
years, taking share from competitors and earning high rankings in
the SSO category from KLAS, a hospital IT rating firm.
• Security is a rising priority for hospital CIOs and Imprivata is well
positioned with its two new products, Patient Secure and Confirm ID,
which can boost topline growth.
COMPARATIVE STATS• 2016E Sales growth: 17% (inline with consensus)
• Trading near 52-week low
Source: Company data, Leerink Partners estimates, and FactSet Research Systems
$8.00
$10.00
$12.00
$14.00
$16.00
$18.00
$20.00
$22.00
$24.00
Price Performance Since IPO
$13.38 Avg Daily Volume ('000s) 69
$22 Short Interest (% of float) 7.2%
$9 Float as % of Total 62.46%
$339
2015 2016E 2017E 2015 2016E 2017E
Leerink Partners $119 $140 $163 2.5x 2.1x 1.8x
Consensus $119 $139 $162 2.5x 2.1x 1.8x
$139 $162
2015 2016E 2017E 2015 2016E 2017E
Leerink Partners 36% 17% 17% ($12) ($9) ($0)
Consensus 36% 17% 16% ($12) ($9) ($1)
2015 2016E 2017E
Leerink Partners ($0.69) ($0.48) ($0.14)
Consensus ($0.69) ($0.52) ($0.20)
($0.52) ($0.20)
Stock Performance: MTD YTD L12M L3Y
IMPR -2% 18% -12% N/a
S&P 500 Healthcare 1.7% 0.4% -2.0% 49.2%
NASDAQ Biotech -0.4% -17.7% -23.1% 55.7%
Top 8 Holders ~ Shares Held % Out.
Wellington Management Co. LLP 3,482,600 13.8%
Tamarack Advisers LP 1,709,893 6.8%
RGM Capital LLC 1,610,861 6.4%
Deerfield Management Company LP 983,486 3.9%
Paradigm Capital Management, Inc. 803,404 3.2%
Broadw ood Capital, Inc. 737,805 2.9%
Emerald Advisers, Inc. 630,414 2.5%
Emerald Mutual Fund Advisers Trust 597,994 2.4%
The Vanguard Group, Inc. 484,018 1.9%
BlackRock Fund Advisors 448,812 1.8%
-- #VALUE! --
Market Cap (mil)
Price on 06/08/16
52-Week High
52-Week Low
Sales (mil) EV/Sales
Revenue Growth Adj. EBITDA
Non-GAAP Diluted EPS
FOR INSTITUTIONAL USE ONLY
22
Source: Leerink Partners LLC, company documents
Imprivata, Inc. (IMPR)
Income Statement for FY ending December Mar-16 Jun-16 Sep-16 Dec-16 Mar-17 Jun-17 Sep-17 Dec-17
($MM) 2012A 2013A 2014A 2015A 1Q:16A 2Q:16E 3Q:16E 4Q:16E 2016E 1Q:17E 2Q:17E 3Q:17E 4Q:17E 2017E
Revenue:
Product 30.0 39.1 52.2 64.9 16.0 17.9 18.6 23.5 76.1 18.7 21.0 21.8 27.5 89.0
Growth % y/y 31% 30% 33% 24% 24% 10% 18% 18% 17% 17% 17% 17% 17% 17%
% of revenue 56% 55% 54% 55% 51% 53% 54% 59% 54% 51% 53% 55% 59% 55%
Maintenance and Service 24.0 32.0 44.8 54.2 15.5 15.8 15.6 16.6 63.6 18.0 18.4 18.1 19.3 73.8
Growth % y/y 30% 33% 40% 21% 22% 16% 16% 16% 17% 16% 16% 16% 16% 16%
% of revenue 44% 45% 46% 45% 49% 47% 46% 41% 46% 49% 47% 45% 41% 45%
Total Revenue 54.0 71.1 97.0 119.1 31.5 33.8 34.3 40.1 139.7 36.7 39.4 40.0 46.8 162.8
Growth % q/q -8% 7% 1% 17% -8% 7% 1% 17%
Growth % y/y NA 32% 36% 23% 23% 13% 17% 17% 17.3% 17% 17% 17% 17% 16.5%
Cost of Revenues:
Product COGS 6.9 7.8 12.3 16.9 4.7 5.1 4.9 6.0 20.7 5.2 5.2 5.5 6.6 22.5
Maintenance & Service COGS 6.6 11.0 17.7 21.2 5.3 5.5 5.5 5.8 22.1 6.2 6.3 6.3 6.6 25.5
Total cost of revenue 13.4 18.9 30.0 38.1 10.0 10.7 10.4 11.8 42.8 11.5 11.6 11.7 13.2 48.0
% of revenue 24.8% 26.5% 30.9% 31.9% 31.6% 31.5% 30.4% 29.4% 30.7% 31.2% 29.4% 29.3% 28.3% 29.5%
Gross Profit:
Product Gross Profit 23.1 31.3 39.9 48.1 11.3 12.8 13.7 17.5 55.3 13.5 15.7 16.4 20.9 66.5
% margin 77.1% 79.9% 76.4% 74.0% 70.6% 71.5% 73.5% 74.5% 72.7% 72.0% 75.0% 75.0% 76.0% 74.7%
y/y margin change (377) +279 (354) (239) (286) (343) +161 (78) (128) +137 +350 +150 +150 +194
Maintenance & Service 17.5 21.0 27.1 33.0 10.3 10.3 10.2 10.8 41.5 11.8 12.0 11.9 12.6 48.4
% margin 72.7% 65.5% 60.6% 60.9% 66.1% 65.0% 65.0% 65.0% 65.3% 65.5% 65.5% 65.5% 65.5% 65.5%
y/y margin change (324) (714) (500) +36 +482 +376 +548 +342 +436 (59) +50 +50 +50 +23
Total Gross Profit (GAAP) 40.6 52.2 67.0 81.1 21.6 23.1 23.9 28.3 96.9 25.3 27.8 28.2 33.5 114.8
% margin 75.2% 73.5% 69.1% 68.1% 68.4% 68.5% 69.6% 70.6% 69.3% 68.8% 70.6% 70.7% 71.7% 70.5%
y/y margin change (353) (170) (439) (103) +97 (24) +343 +101 +128 +41 +211 +106 +111 +118
Research and development 12.3 19.6 25.8 31.6 8.7 9.1 9.1 9.2 36.1 9.5 9.8 10.0 10.1 39.4
% of revenue 22.8% 27.6% 26.6% 26.5% 27.6% 27.0% 26.5% 23.0% 25.9% 26.0% 25.0% 25.0% 21.5% 24.2%
y/y 59.1% 31.5% 22.6% 14.3% 9.2%
Sales and marketing 22.5 30.5 45.0 52.4 14.2 14.9 14.1 14.4 57.6 14.3 15.2 15.2 16.1 60.8
% of revenue 41.6% 42.9% 46.4% 44.0% 45.1% 44.0% 41.0% 36.0% 41.2% 39.0% 38.5% 38.0% 34.5% 37.3%
y/y 35.9% 47.4% 16.4% 9.9% 5.6%
General and administrative 4.6 7.6 12.1 18.7 5.4 5.4 5.5 5.5 21.8 5.7 5.7 5.7 5.8 23.0
% of revenue 8.4% 10.7% 12.4% 15.7% 17.2% 16.0% 16.0% 13.6% 15.6% 15.5% 14.5% 14.3% 12.5% 14.1%
y/y 66.9% 58.2% 55.4% 16.3% 5.5%
Total operating expenses $39.4 $57.8 $82.8 $102.7 $28.3 $29.4 $28.6 $29.1 $115.5 $29.6 $30.7 $30.9 $32.0 $123.2
y/y 46.8% 43.4% 24.0% 12.4% 6.7%
EBIT (GAAP) 1.2 (5.5) (15.8) (21.7) (6.8) (6.3) (4.8) (0.8) (18.6) (4.3) (2.9) (2.6) 1.5 (8.4)
% margin 2.3% (7.8%) (16.3%) (18.2%) (21.5%) (18.5%) (13.9%) (2.0%) (13.3%) (11.7%) (7.4%) (6.6%) 3.2% (5.1%)
Adjusted EBITDA 2.3 (3.4) (11.5) (12.3) (4.5) (3.9) (2.4) 1.5 (9.3) (2.3) (0.9) (0.6) 3.5 (0.4)
Growth % y/y (44%) (243%) 243% 7% (0%) 76% (43%) (214%) (24%) (49%) (76%) (73%) 129% (96%)
% margin 4.3% (4.7%) (11.9%) (10.4%) (14.3%) (11.6%) (7.1%) 3.8% (6.7%) (6.2%) (2.4%) (1.6%) 7.5% (0.2%)
Other income (expense) (0.1) 0.1 (0.7) (0.6) 0.2 0.0 0.0 0.0 0.2 0.0 0.0 0.0 0.0 0.0
Income (loss) before taxes (GAAP) 1.2 (5.4) (16.6) (22.2) (6.5) (6.3) (4.8) (0.8) (18.4) (4.3) (2.9) (2.6) 1.5 (8.4)
Income taxes 0.1 0.1 0.2 0.8 0.1 0.0 0.0 0.0 0.1 0.0 0.0 0.0 0.1 0.1
Tax rate 9.4% (2.0%) (1.0%) (3.8%) (2.1%) 0.0% 0.0% 0.0% (0.8%) 0.0% 0.0% 0.0% 10.0% (1.8%)
Net Income (loss) (GAAP) $1.0 ($5.5) ($16.7) ($23.1) ($6.7) ($6.3) ($4.8) ($0.8) ($18.5) ($4.3) ($2.9) ($2.6) $1.3 ($8.5)
% margin 1.9% (7.8%) (17.3%) (19.4%) (21.2%) (18.5%) (13.9%) (2.0%) (13.3%) (11.7%) (7.4%) (6.6%) 2.9% (5.2%)
Accretion of redeemable convertible preferred stock (5.0) (5.0) (2.4) 0.0 - - - - 0.0 0.0 0.0 0.0 0.0 0.0
Net inc. (loss) attrib. to com. stockholders (3.9) (10.5) (19.2) (23.1) (6.7) (6.3) (4.8) (0.8) (18.5) (4.3) (2.9) (2.6) 1.3 (8.5)
GAAP EPS ($1.36) ($3.12) ($1.37) ($0.94) ($0.27) ($0.25) ($0.19) ($0.03) ($0.73) ($0.17) ($0.11) ($0.10) $0.05 ($0.33)
Non-GAAP Net Income (loss) NA NA (15.0) (16.8) (5.2) (4.7) (3.2) 0.8 (12.2) (3.1) (1.7) (1.4) 2.6 (3.6)
Non-GAAP EPS - Diluted NA NA ($1.08) ($0.69) ($0.21) ($0.19) ($0.12) $0.03 ($0.48) ($0.12) ($0.07) ($0.05) $0.09 ($0.14)
Basic shares 2.9 3.4 14.0 24.4 25.1 25.2 25.4 25.6 25.3 25.8 26.0 26.2 26.4 26.1
Diluted shares 2.9 3.4 14.0 24.4 25.1 25.2 25.4 25.6 25.3 25.8 26.0 26.2 27.8 26.1
FOR INSTITUTIONAL USE ONLY
23
Source: Leerink Partners LLC, company documents
Imprivata, Inc. (IMPR) -2 -1 0 1 2 3 4 5 6 7 8 9
DCF Model Year -2 Year -1 Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9
($ MM) FY2013A 2014A 2015A 2016E 2017E 2018E 2019E 2020E 2021E 2022E 2023E 2024E
Revenue $71.1 $97.0 $119.1 $139.7 $162.8 $185.6 $207.9 $228.7 $251.5 $274.2 $296.1 $319.8
% change - 36.4% 22.8% 17.3% 16.5% 14.0% 12.0% 10.0% 10.0% 9.0% 8.0% 8.0%
EBIT (GAAP) (5.5) (15.8) (21.7) (18.6) (0.4) 7.4 18.7 27.4 35.2 43.9 53.3 57.6
% Margin (7.8%) (16.3%) (18.2%) (13.3%) (0.2%) 4.0% 9.0% 12.0% 14.0% 16.0% 18.0% 18.0%
% change 186.8% 36.7% -14.1% -98.0% -2059.4% 152.0% 46.7% 28.3% 24.6% 21.5% 8.0%
Taxes 40% 0.0 0.0 0.0 0.0 0.0 3.0 7.5 11.0 14.1 17.5 21.3 23.0
Net Oper. Profit after Tax (3.3) (9.5) (13.0) (11.2) (0.2) 4.5 11.2 16.5 21.1 26.3 32.0 34.5
Deprec. & Amort. 2.4 3.1 3.8 3.9 4.1 4.3 4.5 4.7 5.0 5.2 5.5 5.8
% of revenue 3.4% 3.2% 3.2% 2.8% 2.5% 2.3% 2.2% 2.1% 2.0% 1.9% 1.9% 1.8%
CapX (3.4) (3.2) (2.9) (3.2) (2.4) (2.8) (3.1) (3.4) (3.8) (4.1) (4.4) (4.8)
% of revenue 4.8% 3.3% 2.4% 2.3% 1.5% 1.5% 1.5% 1.5% 1.5% 1.5% 1.5% 1.5%
Change in WC 3.7 2.1 (12.5) 3.5 4.1 4.6 5.2 5.7 6.3 6.9 7.4 8.0
% of revenue 5.2% 2.1% -10.5% 2.5% 2.5% 2.5% 2.5% 2.5% 2.5% 2.5% 2.5% 2.5%
Free cash flow (0.7) (7.5) (24.6) (7.0) 5.5 10.6 17.8 23.5 28.6 34.3 40.5 43.6
Terminal value 703.8
Total value of cash flows (0.7) (7.5) (24.6) (7.0) 5.5 10.6 17.8 23.5 28.6 34.3 40.5 747.4
Model Assumptions 2015E 2016E
Terminal Growth Rate 4.0% DCF value of unl. FCF $330.2 $389.3
Average Borrowing Rate 5.0% DCF of NOLs 6.4 7.1
Discount Rate Components Net Debt (53.8) (51.2)
Risk Free Rate 1.8% Market cap (diluted) 390.4 447.5
+ Beta 1.2 Diluted SHOS 26.5 26.5
x Equity Risk Premium 7.2% DCF Value Per share $14.73 $16.88
= Cost of Equity 10.4%
+ After Tax Cost of Debt 3.0% Valuation Sensitivity ($/share)
x Target Debt-to-Cap Ratio 0.0% At 2Q Growth Rate
= WACC (Discount Rate) 10.44% $16.88 3.25% 3.50% 3.75% 4.0% 4.25% 4.50% 4.75%
Cash Tax Rate 40% 7.4% $28.05 $29.45 $31.05 $32.87 $34.98 $37.45 $40.37
CapX as a % of sales 1.5% 7.9% 24.87 25.94 27.14 28.49 30.02 31.78 33.81
Depreciation rate 15 8.4% 22.30 23.14 24.07 25.10 26.26 27.56 29.04
Change in net WC / sales 2.5% 8.9% 20.20 20.87 21.60 22.41 23.31 24.30 25.41
9.4% 18.44 18.99 19.58 20.22 20.93 21.71 22.57
Diluted SHOS Calculation 9.9% 16.95 17.40 17.88 18.41 18.98 19.60 20.28
Basic SHOS 25.1 10.4% 15.68 16.05 16.45 16.88 17.35 17.85 18.40
Stock options (treasury) 1.4 10.9% 14.58 14.89 15.22 15.58 15.97 16.38 16.83
Diluted SHOS 26.5 11.4% 13.61 13.88 14.16 14.46 14.78 15.13 15.50
11.9% 12.76 12.99 13.23 13.49 13.76 14.05 14.36
12.4% 12.01 12.20 12.41 12.63 12.86 13.11 13.37
12.9% 11.34 11.51 11.69 11.87 12.07 12.29 12.51
13.4% 10.73 10.88 11.04 11.20 11.37 11.56 11.75
Dis
c.
Rate
FOR INSTITUTIONAL USE ONLY
24
IMS Health, INC. (IMS)(IMS – RATING: OUTPERFORM; PRICE TARGET: $31)
INVESTMENT THESIS• Well-positioned to capitalize on pharma growth driven by the
relatively high number of new molecular entities projected to be
approved by the FDA in coming years, and from overall pharma
cost-cutting and outsourcing trends as IMS's Technology Solutions
substitute for pharma IT spend and headcount.
• Beyond pharma, IMS is well-positioned to benefit from the shift by
payers and providers toward value-based care as an important
source of pricing and outcome data.
• With a 63% of revenue recurring, a diverse global client base,
steady growth, and reasonable valuation we believe IMS
represents one of the more defensive names in the Digital Health
sector.
COMPARATIVE STATS• 2016E Sales growth: 9% (vs. Street 8%)
• Pulled in 24% from 2015 peak
Source: Company data, Leerink Partners estimates, and FactSet Research Systems
$25.81 Avg Daily Volume ('000s) 1,452
$34 Short Interest (% of float) 1.1%
$22 Float as % of Total 59.74%
$8,514
2015 2016E 2017E 2015 2016E 2017E
Leerink Partners $2,921 $3,221 $3,454 4.3x 3.9x 3.7x
Consensus $2,921 $3,221 $3,407 4.3x 3.9x 3.7x
$3,221 $3,407
2015 2016E 2017E 2015 2016E 2017E
Leerink Partners 13% 10% 7% $886 $967 $1,091
Consensus 13% 10% 6% $886 $959 $1,039
2015 2016E 2017E
Leerink Partners $1.52 $1.60 $1.79
Consensus $1.52 $1.60 $1.77
Stock Performance: MTD YTD L12M L3Y
IMS -1% 1% -14% NA
S&P 500 Healthcare 1.7% 0.4% -2.0% 49.2%
NASDAQ Biotech -0.4% -17.7% -23.1% 55.7%
Top 10 Holders ~ Shares Held % Out.
Canada Pension Plan Investment Board 46,512,657 14.1%
GIC Pte Ltd. (Investment Management) 30,678,561 9.3%
Wellington Management Co. LLP 21,112,128 6.4%
The Vanguard Group, Inc. 8,906,679 2.7%
T. Row e Price Associates, Inc. 8,576,802 2.6%
Lateef Investment Management LP 7,917,048 2.4%
Harding Loevner LP 7,587,171 2.3%
Valinor Management LP 5,278,032 1.6%
Steadfast Capital Management LP 5,278,032 1.6%
BlackRock Fund Advisors 4,948,155 1.5%
EV/Sales
Revenue Growth Adj. EBITDA
Non-GAAP Diluted EPS
Price on 06/08/16
52-Week High
52-Week Low
Market Cap (mil)
Sales (mil)
$10.00
$15.00
$20.00
$25.00
$30.00
$35.00
$40.00
Price Performance Since IPO
FOR INSTITUTIONAL USE ONLY
25
Source: Leerink Partners LLC, company documents
IMS Health - standaloneIncome Statement - FY end December ($MM) Mar-16 Jun-16 Sep-16 Dec-16
2013A 2014A 2015A Q1A Q2E Q3E Q4E 2016E 2017E
Information Revenue $1,525.7 $1,515.0 $1,483.0 $376.0 $381.5 $374.9 $376.3 $1,508.6 $1,527.5
Grow th y/y 0.3% -0.7% -2.1% 6.0% 2.0% 0.5% -1.5% 1.7% 1.3%
% Total 60% 57% 51% 49% 48% 48% 44% 47% 44%
Technology Services Revenue $1,018.6 $1,126.0 $1,438.0 $398.0 $419.5 $409.1 $485.9 $1,712.5 $1,926.5
Grow th y/y 10.5% 10.5% 27.7% 43.6% 14.0% 13.0% 13.0% 19.1% 12.5%
% Total 40% 43% 49% 51% 52% 52% 56% 53% 56%
Total Revenue $2,544.3 $2,641.0 $2,921.0 $774.0 $801.0 $783.9 $862.2 $3,221.1 $3,454.1
Grow th y/y 4.2% 3.8% 10.6% 22.5% 8.0% 6.7% 6.2% 10.3% 7.2%
Costs of Information revenue 645.6 665.0 666.0 160.0 171.7 167.2 169.7 668.6 673.6
% of information revenue 42.3% 43.9% 44.9% 42.6% 45.0% 44.6% 45.1% 44.3% 44.1%
Information Revenue Gross Profit 880.1 850.0 817.0 216.0 209.8 207.7 206.6 840.1 853.9
Information Gross Margin 57.7% 56.1% 55.1% 57.4% 55.0% 55.4% 54.9% 55.7% 55.9%
Costs of Tech svcs 517.5 573.0 750.0 222.0 226.5 216.8 252.7 918.0 1,028.0
% of tech svcs revenue 50.8% 50.9% 52.2% 55.8% 54.0% 53.0% 52.0% 53.6% 53.4%
Tech Gross Profit 501.1 553.0 688.0 176.0 193.0 192.3 233.2 794.5 898.6
Tech Gross Margin 49.2% 49.1% 47.8% 44.2% 46.0% 47.0% 48.0% 46.4% 46.6%
Total Costs of Revenue 1,163.1 1,238.0 1,416.0 382.0 398.2 384.0 422.4 1,586.6 1,701.6
Total Gross Profit 1,381.2 1,403.0 1,505.0 392.0 402.8 399.9 439.8 1,634.5 1,752.5
gross margin % 54.3% 53.1% 51.5% 50.6% 50.3% 51.0% 51.0% 50.7% 50.7%
SG&A 570.9 690.0 712.0 177.0 188.2 184.2 202.6 752.1 773.7
% of revenue 22.4% 26.1% 24.4% 22.9% 23.5% 23.5% 23.5% 23.3% 22.4%
Grow th y/y 2.5% 20.9% 3.2% 29.2% 4.6% 1.8% -5.3% 5.6% 2.9%
Equity comp 22.0 31.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0
Restructuring Cost 16.3 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0
Other Operating Expenses 7.9 33.0 88.0 15.0 15.0 15.0 15.0 60.0 0.0
Depreciation & Amortization 410.2 441.0 341.0 87.0 87.0 87.0 87.0 348.0 352.0
Operating Income $353.9 $208.0 $364.0 $113.0 $112.6 $113.7 $135.2 $474.5 $626.7
Operating margin % 13.9% 7.9% 12.5% 14.6% 14.1% 14.5% 15.7% 14.7% 18.1%
Grow th y/y 48.1% -41.2% 75.0% 24.2% 17.2% 27.8% 53.6% 30.3% 32.1%
Non-Operating Income (74.4) (276.0) 19.0 (5.0) 0.0 0.0 0.0 (5.0) 0.0
EBIT $279.5 ($68.0) $383.0 $108.0 $112.6 $113.7 $135.2 $469.5 $626.7
Interest Income (Expense), net (327.8) (217.0) (166.0) (45.0) (43.0) (43.0) (43.0) (174.0) (160.0)
Pretax Income (48.3) (285.0) 217.0 63.0 69.6 70.7 92.2 295.5 466.7
Pretax Margin % -1.9% -10.8% 7.4% 8.1% 8.7% 9.0% 10.7% 9.2% 13.5%
Taxes Benefit (Expense) 130.1 96.0 200.0 (20.0) (22.1) (22.4) (29.3) (93.8) (144.7)
Tax Rate % 269.4% 33.7% -92.2% 31.7% 31.7% 31.7% 31.7% 31.7% 31.0%
Net (Loss) Income 81.8 (189.0) 417.0 43.0 47.5 48.3 62.9 201.7 322.1
Non-controlling Interest 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0
Net Income Attributable to IMS Health $81.8 ($189.0) $417.0 $43.0 $47.5 $48.3 $62.9 $201.7 $322.1
Growth y/y 293.4% -331.1% 320.6% -85.6% 1.0% 12.2% 117.0% -51.6% 59.7%
GAAP EPS $0.29 ($0.59) $1.22 $0.13 $0.14 $0.14 $0.19 $0.60 $0.95
Adjusted EPS $1.34 $1.37 $1.52 $0.42 $0.38 $0.37 $0.43 $1.60 $1.79
Growth y/y 29.5% 2.0% 11.1% 5.9% 2.6% -2.4% 16.3% 5.2% 12.5%
(Unadjusted) Basic Shares 280.0 318.9 331.1 328.6 324.6 324.6 324.6 325.6 327.1
(Adjusted) Diluted Shares 287.0 328.6 339.4 335.6 335.6 335.6 335.6 335.6 338.1
FOR INSTITUTIONAL USE ONLY
26
IMS Fair Value in 12 Months 2017E
Forward P/E multiple 17.0x
Diluted Adj. EPS $1.79
Price Target $30.51
upside 18%
Source: Leerink Partners estimates
FOR INSTITUTIONAL USE ONLY
27
MEDIDATA SOLUTIONS, INC. (MDSO)(MDSO – RATING: MARKET PERFORM; PRICE TARGET: $47)
INVESTMENT THESIS• Market leading position in clinical trial management software
• A good play on pharma outsourcing trend to tech enabled vendors
• Heavy opex spending likely to weigh on estimates in 2016/17
• Cautious on the stock due to high valuation, and limited visibility on
large platform deals which now drive revenue upside
COMPARATIVE STATS• 2016E Sales growth: 17% (vs. consensus at 18%)
• Public since 2009, trading at 36x FY17 EPS vs. historical avg of 33x
Source: Company data, Leerink Partners estimates, and FactSet Research Systems
$47.56 Avg Daily Volume ('000s) 355
$61 Short Interest (% of float) 10.2%
$30 Float as % of Total 94.78%
$2,725
2015 2016E 2017E 2015 2016E 2017E
Leerink Partners $393 $461 $548 6.8x 5.8x 4.8x
Consensus $393 $461 $551 6.8x 5.8x 4.8x
$461 $551
2015 2016E 2017E 2015 2016E 2017E
Leerink Partners 13% 17% 19% $886 $951 $1,053
Consensus 13% 18% 19% $886 $105 $131
2015 2016E 2017E
Leerink Partners $0.90 $1.00 $1.20
Consensus $0.90 $1.01 $1.23
Stock Performance: MTD YTD L12M L3Y
MDSO 4% -4% -13% 42%
S&P 500 Healthcare 1.7% 0.4% -2.0% 49.2%
NASDAQ Biotech -0.4% -17.7% -23.1% 55.7%
Top 10 Holders ~ Shares Held % Out.
Brow n Capital Management LLC 6,205,838 10.8%
Fidelity Management & Research Co. 5,994,412 10.5%
BlackRock Fund Advisors 4,857,067 8.5%
The Vanguard Group, Inc. 4,235,967 7.4%
Sands Capital Management LLC 4,140,854 7.2%
Columbia Wanger Asset Management LLC 1,863,871 3.3%
ClearBridge Investments LLC 1,711,461 3.0%
Champlain Investment Partners LLC 1,412,371 2.5%
Apex Capital Management, Inc. 1,160,837 2.0%
SSgA Funds Management, Inc. 1,153,962 2.0%
Price on 06/08/16
52-Week High
52-Week Low
Market Cap (mil)
Sales (mil) EV/Sales
Revenue Growth Adj. EBITDA
Non-GAAP Diluted EPS
$20.00
$25.00
$30.00
$35.00
$40.00
$45.00
$50.00
$55.00
$60.00
$65.00
$70.00
Price Performance Past 3 Years
FOR INSTITUTIONAL USE ONLY
28
Medidata Solutions, Inc. (MDSO)Income Statement for FYE Dec. 31, GAAP Mar-16 Jun-16 Sep-16 Dec-16
$ in Thousands FY2012A FY2013A FY2014A FY2015A 1Q:16A 2Q:16E 3Q:16E 4Q:16E FY2016E FY2017E
Total revenues 218,347 276,849 335,071 392,506 104,238 111,935 119,106 125,495 460,774 548,270
q/q 5.4% 7.4% 6.4% 5.4%
y/y 26.8% 21.0% 17.1% 12.8% 14.1% 15.5% 26.9% 17.4% 19.0%
Total cost of revenues 62,662 69,909 84,920 89,788 24,668 25,458 25,919 26,446 102,491 117,366
% of revenue 28.7% 25.3% 25.3% 22.9% 23.7% 22.7% 21.8% 21.1% 22.2% 21.4%
Gross profit 155,685 206,940 250,151 302,718 79,570 86,477 93,187 99,049 358,283 430,904
% margin 71.3% 74.7% 74.7% 77.1% 76.3% 77.3% 78.2% 78.9% 77.8% 78.6%
Operating costs and expenses: 2.2%
Research and development 42,276 51,202 71,757 92,319 28,228 28,543 30,372 31,374 118,517 142,550
% of revenue 19.4% 18.5% 21.4% 23.52% 27.1% 25.5% 25.5% 25.0% 25.7% 26.0%
y/y 40.1% 28.7% 28.4% 20.3%
Sales and marketing 47,739 66,337 83,435 103,153 25,458 29,103 29,657 34,135 118,353 138,528
% of revenue 21.9% 24.0% 24.9% 26.3% 24.4% 26.0% 24.9% 27.2% 25.7% 25.3%
y/y 25.8% 23.6% 14.7% 17.0%
General and administrative 37,777 65,513 69,111 78,014 19,246 22,947 21,439 20,079 83,711 86,696
% of revenue 17.3% 23.7% 20.6% 19.9% 18.5% 20.5% 18.0% 16.0% 18.2% 15.8%
y/y 5.5% 12.9% 7.3% 3.6%
Litigation settlement / Wire transaction loss - - 5,784 - - - - - - -
% of revenue 1.7% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%
Total operating costs and expenses 127,792 183,052 230,087 273,486 72,932 80,593 81,468 85,588 320,581 367,774
y/y 43% 26% 19% 17% 15%
Operating income (loss) 27,893 23,888 20,064 29,232 6,638 5,884 11,719 13,461 37,702 63,130
% margin 12.8% 8.6% 6.0% 7.4% 6.4% 5.3% 9.8% 10.7% 8.2% 11.5%
y/y -14.4% (16%) 45.7% 29.0% 67.4%
Total interest and other expense, net 176 (5,506) (13,550) (13,457) (3,259) (3,392) (3,442) (3,492) (13,585) (14,068)
Income (loss) before income taxes 28,069 18,382 6,514 15,775 3,379 2,492 8,277 9,969 24,117 49,062
Provision for income taxes 10,049 1,721 422 2,608 (2,469) 872 2,897 3,489 4,789 17,172
Tax rate 35.8% 9.4% 6.5% 16.5% -73.1% 35.0% 35.0% 35.0% 19.9% 35.0%
Net income (loss) 18,020 16,661 6,092 13,167 5,848 1,620 5,380 6,480 19,328 31,890
% margin 8.3% 6.0% 1.8% 3.4% 5.6% 1.4% 4.5% 5.2% 4.2% 5.8%
GAAP earnings per share:
Basic $0.73 $0.33 $0.12 $0.25 $0.11 $0.03 $0.10 $0.11 $0.34 $0.55
Diluted $0.71 $0.31 $0.11 $0.23 $0.10 $0.03 $0.09 $0.11 $0.34 $0.54
y/y (56%) (64%) 111% 45% 60%
Weighted avg. common shares outstanding
Basic 24,546 51,060 52,561 53,717 55,119 55,819 56,419 56,919 56,069 57,769
Diluted 25,469 54,118 55,247 56,540 56,365 57,065 57,665 58,165 57,315 59,015
Reconciliation of GAAP to Non-GAAP FY2012A FY2013A FY2014A FY2015A 1Q:16A 2Q:16E 3Q:16E 4Q:16E FY2016E FY2017E
Net income:
GAAP net income 18,020 16,661 6,092 13,167 5,848 1,620 5,380 6,480 19,328 31,890
Stock-based compensation 10,914 36,143 37,953 48,987 10,250 14,000 12,700 12,000 48,950 49,200
Amortization 1,792 804 628 636 103 180 130 130 543 520
Non-cash interest expense on convertible senior notes - 4,715 12,458 13,180 3,408 3,450 3,500 3,550 13,908 14,700
Tax impact on add-back items (4,689) (16,760) (22,729) (25,121) (5,504) (7,052) (6,532) (6,272) (25,360) (25,768)
Adj. non-GAAP net income 26,356 41,802 40,186 50,849 14,105 12,198 15,178 15,888 57,369 70,542
Adj. non-GAAP basic EPS $1.07 $0.82 $0.76 $0.95 $0.26 $0.22 $0.27 $0.28 $1.02 $1.22
Adj. non-GAAP diluted EPS $1.03 $0.77 $0.73 $0.90 $0.25 $0.21 $0.26 $0.27 $1.00 $1.20
Source: Company reports, Leerink Partners LLC estimates
FOR INSTITUTIONAL USE ONLY
29
Medidata Solutions, Inc.FYE Dec. 31, GAAP Mar-16 Jun-16 Sep-16 Dec-16 Mar-17 Jun-17 Sep-17 Dec-17
thousands of $ FY2012A FY2013A FY2014A FY2015A 1Q:16A 2Q:16E 3Q:16E 4Q:16E FY2016E 1Q:17E 2Q:17E 3Q:17E 4Q:17E FY2017E
Revenues:
Application Services 171,647 227,921 280,041 336,195 89,968 97,165 103,967 110,205 401,306 113,511 119,187 125,146 127,649 485,493
% of total revenue 78.6% 82.3% 83.6% 85.7% 86.3% 86.8% 87.3% 87.8% 87.1% 88.1% 88.4% 88.7% 88.9% 88.5%
q/q 6.3% 8.0% 7.0% 6.0% 3.0% 5.0% 5.0% 2.0%
y/y 32.8% 22.9% 20.1% 14.2% 15.8% 17.0% 30.2% 19.4% 26.2% 22.7% 20.4% 15.8% 21.0%
Professional Services 46,700 48,928 55,030 56,311 14,270 14,769 15,139 15,290 59,468 15,290 15,672 15,907 15,907 62,777
% of total revenue 21.4% 17.7% 16.4% 14.3% 13.7% 13.2% 12.7% 12.2% 12.9% 11.9% 11.6% 11.3% 11.1% 11.5%
q/q 0.3% 3.5% 2.5% 1.0% 0.0% 2.5% 1.5% 0.0%
y/y 4.8% 12.5% 2.3% 4.2% 4.3% 6.3% 7.4% 5.6% 7.1% 6.1% 5.1% 4.0% 5.6%
Total revenues 218,347 276,849 335,071 392,506 104,238 111,935 119,106 125,495 460,774 128,801 134,859 141,054 143,556 548,270
q/q 5.4% 7.4% 6.4% 5.4% 2.6% 4.7% 4.6% 1.8%
y/y 26.8% 21.0% 17.1% 12.8% 14.1% 15.5% 26.9% 17.4% 23.6% 20.5% 18.4% 14.4% 19.0%
Cost of revenues:
Subscription 32,600 37,053 45,576 47,795 14,329 14,380 14,867 15,208 58,785 18,079 17,640 17,896 17,616 71,230
% of total costs 52.0% 53.0% 53.7% 53.2% 58.1% 56.5% 57.4% 57.5% 57.4% 62.0% 60.0% 60.6% 60.1% 60.7%
y/y 13.7% 23.0% 4.9% 24.9% 16.4% 19.0% 32.5% 23.0% 26.2% 22.7% 20.4% 15.8% 21.2%
Professional services 30,062 32,856 39,344 41,993 10,339 11,077 11,051 11,238 43,706 11,078 11,754 11,612 11,692 46,137
% of total costs 48.0% 47.0% 46.3% 46.8% 41.9% 43.5% 42.6% 42.5% 42.6% 38.0% 40.0% 39.4% 39.9% 39.3%
y/y 9.3% 19.7% 6.7% -3.4% 4.9% 7.3% 7.8% 4.1% 7.1% 6.1% 5.1% 4.0% 5.6%
Total cost of revenues 62,662 69,909 84,920 89,788 24,668 25,458 25,919 26,446 102,491 29,157 29,394 29,508 29,308 117,366
y/y 11.6% 21.5% 5.7% 11.2% 11.1% 13.7% 20.7% 14.1% 18.2% 15.5% 13.9% 10.8% 14.5%
Margins:
Subscription gross income 139,047 190,868 234,465 288,400 75,639 82,785 89,100 94,997 342,520 95,433 101,547 107,250 110,033 414,263
% gross margin 81.0% 83.7% 83.7% 85.8% 84.1% 85.2% 85.7% 86.2% 85.4% 84.1% 85.2% 85.7% 86.2% 85.3%
Professional services gross income 16,638 16,072 15,686 14,318 3,931 3,692 4,087 4,052 15,763 4,212 3,918 4,295 4,215 16,641
% gross margin 35.6% 32.8% 28.5% 25.4% 27.5% 25.0% 27.0% 26.5% 26.5% 27.5% 25.0% 27.0% 26.5% 26.5%
Total gross income 155,685 206,940 250,151 302,718 79,570 86,477 93,187 99,049 358,283 99,645 105,465 111,545 114,249 430,904
% gross margin 71.3% 74.7% 74.7% 77.1% 76.3% 77.3% 78.2% 78.9% 77.8% 77.4% 78.2% 79.1% 79.6% 78.6%
Source: Company reports, Leerink Partners LLC estimates
FOR INSTITUTIONAL USE ONLY
30
NUANCE COMMUNICATIONS, INC. (NUAN)(NUAN – RATING: OUTPERFORM; PRICE TARGET: $22)
INVESTMENT THESIS• Healthcare IT leader with dominant position in speech recognition
technology, a key enabler of workflow automation
• Turnaround story with new product growth in Healthcare and
Mobile & Consumer segments offset by legacy business declines
and revenue model transition toward subscription
• Double-digit earnings growth potential driven by expense reduction
and stock buyback programs
• Longer term, stock provides call options on post-Meaningful Use
hospital spend and on Internet of Things.
COMPARATIVE STATS• 2016E Sales growth: 2% (vs. consensus at 1%)
• At 10x FY17 EPS, a rare value stock in Digital Health
Source: Company data, Leerink Partners estimates, and FactSet Research Systems
$17.48 Avg Daily Volume ('000s) 3,048
$22 Short Interest (% of float) 5.5%
$14 Float as % of Total 98.84%
$4,881
2015 2016E 2017E 2015 2016E 2017E
Leerink Partners $1,979 $1,992 $2,029 3.4x 3.4x 3.3x
Consensus $1,979 $1,990 $2,045 3.4x 3.4x 3.3x
$1,990 $2,045
2015 2016E 2017E 2015 2016E 2017E
Leerink Partners 13% 1% 2% $519 $558 $591
Consensus 13% 1% 3% $519 $560 $596
2015 2016E 2017E
Leerink Partners $1.27 $1.52 $1.64
Consensus $1.27 $1.53 $1.66
Stock Performance: MTD YTD L12M L3Y
NUAN 5% -12% 0% -8%
S&P 500 Healthcare 1.7% 0.4% -2.0% 49.2%
NASDAQ Biotech -0.4% -17.7% -23.1% 55.7%
Top 10 Holders ~ Shares Held % Out.
Icahn Associates Holding LLC 30,068,879 10.8%
ClearBridge Investments LLC 25,922,506 9.3%
The Vanguard Group, Inc. 17,275,156 6.2%
PRIMECAP Management Co. 13,963,642 5.0%
FIL Investment Advisors (UK) Ltd 9,822,854 3.5%
BlackRock Fund Advisors 9,278,381 3.3%
Fairpointe Capital LLC 5,902,647 2.1%
Columbia Management Investment Advisers LLC 5,023,114 1.8%
SSgA Funds Management, Inc. 4,872,337 1.7%
Columbus Circle Investors 4,255,267 1.5%
EV/Sales
Revenue Growth Non-GAAP EBIT
Non-GAAP Diluted EPS
Price on 06/08/16
52-Week High
52-Week Low
Market Cap (mil)
Sales (mil)
$10.00
$12.00
$14.00
$16.00
$18.00
$20.00
$22.00
$24.00
Price Performance Past 3 Years
FOR INSTITUTIONAL USE ONLY
31
Source: Leerink Partners LLC, company documents
Nuance CommunicationsIncome Statement for FYE Sept (non-GAAP) Dec-15 Mar-16 Jun-16 Sep-16
($m) FY2012A FY2013A FY2014A FY2015A 1Q:16A 2Q:16A 3Q:16E 4Q:16E FY2016E FY2017E
Revenue Components (Non-GAAP)
Product and licensing (non-GAAP) 814.8$ 823.8$ 748.3$ 729.2$ 185.0$ 164.3$ 163.0$ 185.0$ 697.3$ 700.0$
q/q -5.3% -11.2% -0.8% 13.5%
y/y NA 1.1% (9.2%) (2.5%) 2.6% -10.5% -4.1% -5.3% (4.4%) 0.4%
% of revenue 46.9% 42.1% 37.7% 36.8% 37.4% 33.7% 33.2% 35.7% 35.0% 34.5%
Professional services and hosting (non-GAAP) 679.8 859.6 934.0 932.6 229.7 243.1 245.0 250.0 967.8 993.0
y/y NA 26.4% 8.7% (0.2%) -0.1% 6.7% 3.2% 5.3% 3.8% 2.6%
% of revenue 39.1% 43.9% 47.0% 47.1% 46.4% 49.9% 49.8% 48.3% 48.6% 48.9%
Maintenance and support (non-GAAP) 243.5 274.3 304.8 317.2 80.2 80.0 83.5 83.0 326.7 336.0
y/y NA 12.7% 11.1% 4.1% 1.8% 4.4% 2.7% 3.0% 3.0% 2.9%
% of revenue 14.0% 14.0% 15.3% 16.0% 16.2% 16.4% 17.0% 16.0% 16.4% 16.6%
Total revenues (non-GAAP) 1,738.1 1,957.6 1,987.1 1,979.1 494.9 487.4 491.5 518.0 1,991.8 2,029.0
q/q -3.6% -1.5% 0.8% 5.4%
y/y NA 12.6% 1.5% -0.4% 1.2% -0.1% 0.6% 0.9% 0.6% 1.9%
Cost of Revenues (non-GAAP)
Product and licensing 83.0 105.5 99.7 92.9 23.3 20.7 19.6 21.6 85.2 83.4
% margin 89.8% 87.2% 86.7% 87.3% 87.4% 87.5% 88.0% 88.3% 87.8% 88.1%
Professional services and hosting 398.8 534.7 602.4 590.1 146.0 147.2 153.1 155.0 601.2 619.1
% margin 41.3% 37.8% 35.5% 36.7% 36.4% 36.8% 37.5% 38.0% 37.9% 37.7%
Maintenance and support 44.4 49.2 49.1 50.5 12.3 12.7 12.5 12.3 49.8 50.1
% margin 81.8% 82.1% 83.9% 84.1% 84.7% 84.7% 85.0% 85.2% 84.8% 85.1%
Total cost of revenues (non-GAAP) 526.1 689.4 751.3 733.5 181.5 180.6 185.2 188.9 736.2 752.6
% cost of revenues / rev. 30.3% 35.2% 37.8% 37.1% 36.7% 37.0% 37.7% 36.5% 37.0% 37.1%
Gross profit (non-GAAP) 1,212.0 1,268.2 1,235.8 1,245.5 313.4 306.8 306.3 329.1 1,255.6 1,276.4
% margin 69.7% 64.8% 62.2% 62.9% 63.3% 63.0% 62.3% 63.5% 63.0% 62.9%
Operating expenses (non-GAAP)
Research and development 195.9 257.1 294.4 271.3 61.1 59.3 68.3 71.5 260.2 263.8
% of revenue 11.3% 13.1% 14.8% 13.7% 12.4% 14.1% 13.9% 13.8% 13.1% 13.0%
Sales and marketing 314.9 361.733 371.1 360.6 87.8 82.4 85.0 88.6 343.7 334.8
% of revenue 18.1% 18.5% 18.7% 18.2% 17.7% 17.5% 17.3% 17.1% 17.3% 16.5%
General and administrative 100.1 133.0 125.5 130.5 29.0 35.0 27.5 28.5 120.0 111.6
% of revenue 5.8% 6.8% 6.3% 6.6% 5.9% 5.9% 5.6% 5.5% 6.0% 5.5%
Restructuring and other charges (gains), net (21.0) (30.3) (26.9) (35.4) (5.9) (8.0) (5.9) (6.2) (26.0) (24.3)
% of revenue (1.2%) (1.5%) (1.4%) (1.8%) (1.2%) (1.2%) (1.2%) (1.2%) (1.3%) (1.2%)
Total operating expenses (non-GAAP) 589.9 721.5 764.1 726.9 172.1 168.6 175.0 182.3 698.0 685.8
y/y (4.9%) (4.0%) (1.7%)
Income from operations (EBIT) (Non-GAAP) 622.1 546.7 471.7 518.6 141.3 138.2 131.3 146.7 557.6 590.6
% margin 35.8% 27.9% 23.7% 26.2% 28.6% 28.4% 26.7% 28.3% 28.0% 29.1%
Interest and other expense, net (47.1) (97.7) (94.1) (87.6) (22.151) (18.0) (19.3) (19.3) (78.7) (79.6)
Income (loss) before income taxes (EBT) (non-GAAP) 575.0 449.0 377.6 431.0 119.2 120.2 112.0 127.5 478.8 511.0
Provision (benefit) for income taxes 19.1 21.0 17.5 19.3 6.2 5.2 6.7 7.6 25.7 28.1
% income tax / EBT 3.3% 4.7% 4.6% 4.5% 5.2% 4.3% 6.0% 6.0% 5.4% 5.5%
Net income (loss) (non-GAAP) 555.927$ 428.0$ 360.1$ 411.7$ 113.0$ 115.0$ 105.3$ 119.8$ 453.1$ 482.9$
Net income per share (non-GAAP):
Diluted WASO EPS $1.73 $1.33 $1.12 $1.27 $0.36 $0.38 $0.37 $0.40 $1.52 $1.64
y/y (23.5%) (15.5%) 13.6% 19.4% 7.7%
FOR INSTITUTIONAL USE ONLY
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Nuance Communications Dec-14 Mar-15 Jun-15 Sep-15 Dec-15 Mar-16 Jun-16 Sep-16 Dec-16 Mar-17 Jun-17 Sep-17
Revenue Build ($MM) FY2012A FY2013A FY2014A 1Q:15A 2Q:15A 3Q:15A 4Q:15A FY2015A 1Q:16A 2Q:16A 3Q:16E 4Q:16E FY2016E 1Q:17E 2Q:17E 3Q:17E 4Q:17E FY2017E
Healthcare
GAAP Revenue $668.6 $873.8 925.4 247.7 240.2 247.0 255.0 989.9 245.4 242.1 250.1 259.1 996.7 248.7 245.5 260.1 268.1 1,022.4q/q 5.4% (3.0%) 2.8% 3.2% (3.8%) (1.3%) 3.3% 3.6% (4.0%) (1.3%) 5.9% 3.1%
Growth y/y NA 30.7% 5.9% 11.8% 3.3% 4.6% 8.5% 7.0% -0.9% 0.8% 1.3% 1.6% 0.7% 1.4% 1.4% 4.0% 3.5% 2.6%% of total 40% 47% 48% 52% 51% 52% 51% 51% 50% 51% 52% 51% 51% 51% 51% 52% 51% 51%
Adjustment 0.8 37.7 17.3 3.1 3.1 2.4 2.1 10.7 2.7 2.3 2.3 2.1 9.3 2.0 2.0 2.1 2.1 8.2% of GAAP 1.3% 1.3% 1.0% 0.8% 1.1% 1.0% 0.9% 0.8% 0.8% 0.8% 0.8% 0.8%
Non-GAAP Revenue 669.4 911.5 942.7 250.8 243.3 249.4 257.1 1,000.6 248.1 244.4 252.3 261.2 1,006.0 250.7 247.5 262.2 270.3 1,030.6
Growth y/y NA 36.2% 3.4% 10.3% 2.7% 3.9% 7.9% 6.1% -1.1% 0.5% 1.2% 1.6% 0.5% 1.0% 1.2% 3.9% 3.5% 2.4%
% of total 39% 47% 47% 51% 50% 51% 50% 51% 50% 50% 51% 50% 51% 51% 50% 52% 51% 51%
y/y Organic - stated 11% 1% 1% -3% -5% -2% -1% -2% -1% 1%
Mobile & Consumer
GAAP Revenue 482.9 467.7 438.8 85.7 100.2 94.3 104.1 384.3 95.0 89.9 94.3 104.1 383.3 90.3 89.3 99.0 107.7 386.3
q/q (23.7%) 16.9% (5.9%) 10.4% (8.7%) (5.4%) 5.0% 10.4% (13.3%) (1.1%) 10.9% 8.8%
Growth y/y NA -3.1% -6.2% -23.8% -6.4% -11.9% -7.3% -12.4% 10.9% -10.3% 0.0% 0.0% -0.3% -5.0% -0.7% 5.0% 3.5% 0.8%
% of total 29% 25% 23% 18% 21% 20% 21% 20% 20% 19% 20% 20% 20% 19% 18% 20% 20% 19%
Adjustment 25.3 11.5 9.7 1.8 1.7 1.7 1.6 6.8 1.4 2.0 0.9 0.9 5.2 0.7 0.7 0.7 0.8 2.9
% of GAAP 2.1% 1.7% 1.8% 1.5% 1.5% 2.2% 1.0% 0.9% 0.8% 0.8% 0.7% 0.7%
Non-GAAP Revenue 508.2 479.2 448.5 87.5 101.9 96.0 105.7 391.1 96.4 91.8 95.2 105.0 388.5 91.0 90.0 99.7 108.5 389.2
Growth y/y NA -5.7% -6.4% -24.1% -7.2% -12.0% -7.5% -12.8% 10.2% -9.9% -0.8% -0.6% -0.7% -5.6% -2.0% 4.7% 3.3% 0.2%
% of total 29% 24% 23% 18% 21% 20% 21% 20% 19% 19% 19% 20% 20% 18% 18% 20% 20% 19%
y/y Organic - stated 23% -8% -5% 5% 15% -5% 3% 4% 0% -16%
Enterprise
GAAP Revenue 315.0 320.2 352.3 89.8 82.6 86.4 87.9 346.7 88.3 93.7 87.3 88.8 358.0 89.2 95.5 89.9 90.6 365.1q/q (7.3%) (8.0%) 4.6% 1.7% 0.5% 6.1% (6.8%) 1.7% 0.5% 7.1% (5.9%) 0.7%
Growth y/y NA 1.7% 10.0% 3.7% -3.2% 3.5% -9.3% -1.6% -1.7% 13.4% 1.0% 1.0% 3.3% 1.0% 2.0% 3.0% 2.0% 2.0%% of total 19% 17% 18% 19% 17% 18% 17% 18% 18% 20% 18% 17% 18% 18% 20% 18% 17% 18%
Adjustment 17.0 3.3 7.3 0.9 0.7 0.6 0.5 2.7 0.5 0.8 0.3 0.3 1.9 0.3 0.3 0.3 0.3 1.1% of GAAP 1.0% 0.8% 0.7% 0.6% 0.6% 0.8% 0.4% 0.3% 0.3% 0.3% 0.3% 0.3%
Non-GAAP Revenue 332.0 323.5 359.6 90.7 83.3 87.0 88.4 349.4 88.8 94.4 87.6 89.0 359.9 89.5 95.8 90.2 90.8 366.2Growth y/y NA -2.6% 11.2% 1.7% -4.5% 2.2% -9.9% -2.8% -2.1% 13.3% 0.7% 0.7% 3.0% 0.7% 1.5% 2.9% 2.0% 1.8%% of total 19% 17% 18% 19% 17% 18% 17% 18% 18% 19% 18% 17% 18% 18% 19% 18% 17% 18%
y/y Organic - stated 7% -2% -6% -4% -7% 0% -10% -5% -2% 13%
Imaging
GAAP Revenue 184.9 193.6 207.0 50.8 52.0 50.2 57.0 210.0 57.4 53.1 51.2 58.1 219.8 58.3 54.4 52.7 59.6 225.0
q/q (12.4%) 2.4% (3.5%) 13.5% 0.7% (7.5%) (3.6%) 13.5% 0.2% (6.6%) (3.1%) 13.0%
Growth y/y NA 4.7% 6.9% 3.0% 2.2% 2.9% -1.7% 1.4% 13.0% 2.1% 2.0% 2.0% 4.7% 1.5% 2.5% 3.0% 2.5% 2.4%
% of total 11% 10% 11% 11% 11% 11% 11% 11% 12% 11% 11% 11% 11% 12% 11% 11% 11% 11%
Adjustment 43.5 49.8 29.3 9.2 7.5 6.1 4.9 27.7 4.2 3.6 5.1 4.7 17.6 4.7 4.4 4.2 4.8 18.0
% of GAAP 18.1% 14.4% 12.2% 8.6% 7.3% 6.8% 10.0% 8.0% 8.0% 8.0% 8.0% 8.0%
Non-GAAP Revenue 228.4 243.4 236.3 60.0 59.5 56.3 61.9 237.7 61.6 56.7 56.3 62.8 237.4 62.9 58.8 57.0 64.4 243.0
Growth y/y NA 6.6% -2.9% 2.9% 6.3% 7.2% -10.9% 0.6% 2.7% -4.7% 0.0% 1.4% -0.1% 2.1% 3.7% 1.1% 2.5% 2.4%
% of total 13% 12% 12% 12% 12% 12% 12% 12% 12% 12% 11% 12% 12% 13% 12% 11% 12% 12%
y/y Organic - stated 7% -5% -5% -9% -7% -8% -11% -9% 3% -5%
Total Revenue
GAAP Revenue 1,651.4 1,855.3 1,923.5 474.0 475.0 477.9 504.0 1,930.9 486.1 478.7 482.9 510.1 1,957.8 486.4 484.7 501.7 526.0 1,998.9q/q (5.6%) 0.2% 0.6% 5.5% (3.6%) (1.5%) 0.9% 5.6% (4.6%) (0.3%) 3.5% 4.8%
Growth y/y NA 12.3% 3.7% 0.9% -0.1% 0.5% 0.3% 0.4% 2.6% 0.8% 1.0% 1.2% 1.4% 0.1% 1.3% 3.9% 3.1% 2.1%
% of total 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100%
Adjustment 86.6 102.3 63.6 15.0 13.0 10.8 9.1 47.9 8.8 8.6 8.7 7.9 34.0 7.6 7.3 7.3 7.9 30.2
Non-GAAP Revenue 1,738.0 1,957.6 1,987.1 489.0 488.0 488.7 513.1 1,978.8 494.9 487.3 491.5 518.0 1,991.7 494.0 492.0 509.0 534.0 2,029.0
Growth y/y NA 13% 2% -0.2% -0.4% 0.4% -1.4% 0% 1.2% -0.1% 0.6% 1.0% 0.7% -0.2% 1.0% 3.6% 3.1% 1.9%
% of total 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100%
y/y Organic - stated 13% -3% -2% -2% -2% -3% -3% -2% -1% -1%
Source: Leerink Partners LLC, company documents
FOR INSTITUTIONAL USE ONLY
33
PRESS GANEY (PGND)(PGND – RATING: MARKET PERFORM; PRICE TARGET: $33)
INVESTMENT THESIS• Pure play on patient experience measurement which is increasingly
tied to hospital reimbursement through CMS mandated CAHPS
programs. As commercial payers shift to value-based care, quality
measures as reported by the patient will become more important,
benefitting Press Ganey.
• Market leader with longstanding customer relationships, 94%
recurring revenue and stable margins.
• Stock appears fairly valued relative to 7-9% organic topline and 10-
15% bottom line growth rates. Some upside potential from
acquisitions.
COMPARATIVE STATS• 2016E Sales growth: 14% (in line with consensus)
• IPO in May 2015 at $25
Source: Company data, Leerink Partners estimates, and FactSet Research Systems
$36.66 Avg Daily Volume ('000s) 191
$37 Short Interest (% of float) 4.3%
$24 Float as % of Total 37.64%
$1,938
2015 2016E 2017E 2015 2016E 2017E
Leerink Partners $319 $363 $393 6.6x 5.8x 5.3x
Consensus $319 $363 $395 6.6x 5.8x 5.3x
$363 $395
2015 2016E 2017E 2015 2016E 2017E
Leerink Partners 13% 14% 8% $117 $138 $154
Consensus 13% 14% 9% $117 $138 $153
2015 2016E 2017E
Leerink Partners $0.94 $1.10 $1.23
Consensus $0.94 $1.10 $1.23
Stock Performance: MTD YTD L12M L3Y
PGND 8% 16% NA NA
S&P 500 Healthcare 1.7% 0.4% -2.0% 49.2%
NASDAQ Biotech -0.4% -17.7% -23.1% 55.7%
Top 10 Holders ~ Shares Held % Out.
BAMCO, Inc. 2,394,785 4.5%
Goldman Sachs & Co. (Private Banking) 1,552,645 2.9%
TimesSquare Capital Management LLC 1,392,464 2.6%
Lord, Abbett & Co. LLC 1,314,753 2.5%
The Vanguard Group, Inc. 1,172,017 2.2%
William Blair & Co. LLC (Investment Management) 1,082,675 2.0%
Brow n Advisory LLC 659,227 1.2%
Loomis, Sayles & Co. LP 607,419 1.1%
Capital Research & Management Co. (World Investors) 600,018 1.1%
Fidelity Management & Research Co. 595,789 1.1%
EV/Sales
Revenue Growth Adj. EBITDA
Non-GAAP Diluted EPS
Price on 06/08/16
52-Week High
52-Week Low
Market Cap (mil)
Sales (mil)
$10.00
$15.00
$20.00
$25.00
$30.00
$35.00
$40.00
Price Performance Since IPO
FOR INSTITUTIONAL USE ONLY
34
Source: Leerink Partners LLC, company documents
Press Ganey (PGND)Income Statement for FYE Dec. 31, GAAP Mar-16 Jun-16 Sep-16 Dec-16
$ in Thousands FY2014A FY2015A 1Q:16A 2Q:16E 3Q:16E 4Q:16E FY2016E FY2017E
Revenue 281,612 318,694 86,731 88,899 92,011 95,691 363,332 392,459
y/y 8.1% 13.2% 15.8% 14.8% 14.0% 11.8% 14.0% 8.0%
Operating expenses:
Cost of revenue, excluding D&A 121,807 149,235 36,469 38,227 39,565 41,147 155,408 166,795
Gross Margin % 56.7% 53.2% 58.0% 57.0% 57.0% 57.0% 57.2% 57.5%
% of revenue 43.3% 46.8% 42.0% 43.0% 43.0% 43.0% 42.8% 42.5%
y/y 7% 23% 4% 7%
General and administrative 70,432 143,561 22,644 23,114 23,923 24,880 94,560 98,115
% of revenue 25.0% 45.0% 26.1% 26.0% 26.0% 26.0% 26.0% 25.0%
y/y -2% 104% -34% 4%
Depreciation and amortization 35,102 41,224 11,572 11,735 11,961 12,153 47,421 50,712
% of revenue 12.5% 12.9% 13.3% 13.2% 13.0% 12.7% 13.1% 12.9%
Loss (gain) on disposal of property and equipment 1,719 307 18 - - - 18 -
% of revenue 0.6% 0.1% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%
Total operating expenses 229,060 334,327 70,703 73,075 75,449 78,180 297,407 315,622
y/y 4% 46% -11% 6%
Income (loss) from operations 52,552 (15,633) 16,028 15,824 16,562 17,511 65,925 76,837
Operating Margin % 18.7% -4.9% 18.5% 17.8% 18.0% 18.3% 18.1% 19.6%
Interest expense, net (19,832) (11,163) (1,230) (1,150) (1,150) (1,150) (4,680) (4,500)
Extinguishmnet of debt (2,894) (1,750) - - - - - -
Management fee of related party (1,047) (553) - - - - - -
Total other income (expense) (23,773) (13,466) (1,230) (1,150) (1,150) (1,150) (4,680) (4,500)
Income (loss) before taxes 28,779 (29,099) 14,798 14,674 15,412 16,361 61,245 72,337
Income tax (benefit) provision 13,196 7,528 6,680 6,624 6,957 7,386 27,647 32,552
Tax rate 45.9% (25.9%) 45.1% 45% 45% 45% 45.1% 45.0%
GAAP Net Income (loss) 15,583 (36,627) 8,118 8,050 8,455 8,976 33,599 39,785
Basic EPS - GAAP $0.36 ($0.75) $0.15 $0.15 $0.16 $0.17 $0.63 $0.73
Diluted EPS - GAAP $0.36 ($0.75) $0.15 $0.15 $0.16 $0.17 $0.63 $0.73
Weighted-average shares outstanding:
Basic 43,313 48,891 52,806 53,552 53,820 54,089 53,567 54,496
Diluted 43,313 48,891 53,286 53,552 53,820 54,089 53,687 54,496
Diluted Pro-forma EPS $0.74 $0.94 $0.27 $0.27 $0.28 $0.28 $1.10 $1.23
y/y 28% 21% 20% 12% 18% 17% 12%
Reconciliation to EBITDA and Adj. EBITDA (Non-GAAP)
GAAP Net Income (loss) 15,583 (36,627) 8,118 8,050 8,455 8,976 33,599 39,785
Interest expense, net 19,832 11,163 1,230 1,150 1,150 1,150 4,680 4,500
Provision for (benefit from) income taxes 13,196 7,528 6,680 6,624 6,957 7,386 27,647 32,552
Depreciation and amortization 35,102 41,224 11,572 11,735 11,961 12,153 47,421 50,712
EBITDA 83,713 23,288 27,600 27,559 28,523 29,664 113,346 127,549
Adjustments:
Equity-based compensation 8,034 86,746 6,001 6,001 6,001 6,001 24,004 26,000
Adjusted EBITDA 102,559 117,485 33,791 33,750 34,714 35,855 138,110 154,309
margin % 36.4% 36.9% 39.0% 38.0% 37.7% 37.5% 38.0% 39.3%
y/y 16% 15% 24% 18% 12%
FOR INSTITUTIONAL USE ONLY
35
Source: Leerink Partners LLC, company documents
Valuation Table PGND
Last closing price: $31.47
Press Ganey Fair Value In 12 Months 2017E
Forward EV/Adj. EBITDA multiple 10.5x
Adj. EBITDA $154,309
Enterprise Value $1,620,246
Less debt 4Q16E $175,284
Plus cash 4Q16E $134,758
Equity value $1,579,720
Dil. shares outstanding 4Q16E 54,089
Price Target $29.21
upside (7.2%)
Press Ganey Fair Value In 12 Months 2017E
Forward P/E multiple 30.0x
Non-GAAP EPS $1.23
Price Target $36.98
upside 17.5%
Average Price Target (12 mo.) $33.09
upside 5.2%
FOR INSTITUTIONAL USE ONLY
36
TELADOC, INC (TDOC)(TDOC – RATING: OUTPERFORM; PRICE TARGET: $21)
INVESTMENT THESIS• Telehealth is moving into the mainstream, seeing rapid adoption by
employers and insurers seeking ways to provide care more
efficiently and consumers seeking low cost and convenience.
• As nation’s largest provider of telehealth services, TDOC is leading
the penetration of a ~$17 billion TAM which could expand even
further if telehealth is adopted beyond acute care.
• At an estimated 60% topline 3-yr CAGR, TDOC is one of the fastest
growers in the Digital Health sector with mostly recurring
subscription revenues, strong gross margins and long-term profit
potential at scale.
COMPARATIVE STATS• 2016E sales growth: 55% (inline with consensus)
• 74% of large employers expect to add telehealth benefit in 2016 vs.
48% in 2015*
• IPO in July 2015 at $19
Source: Company data, Leerink Partners estimates, and FactSet Research Systems, *NBGH survey 8/2015
$12.62 Avg Daily Volume ('000s) 272
$35 Short Interest (% of float) 18.3%
$9 Float as % of Total 49.64%
$489
2015 2016E 2017E 2015 2016E 2017E
Leerink Partners $77 $120 $174 5.0x 3.2x 2.2x
Consensus $77 $121 $175 5.0x 3.2x 2.2x
$121 $175
2015 2016E 2017E 2015 2016E 2017E
Leerink Partners 13% 55% 44% ($48) ($36) ($6)
Consensus 13% 56% 45% ($48) ($39) ($7)
2015 2016E 2017E
Leerink Partners ($1.53) ($1.35) ($0.61)
Consensus ($1.53) ($1.35) ($0.54)
Stock Performance: MTD YTD L12M L3Y
TDOC 10% -30% NA NA
S&P 500 Healthcare 1.7% 0.4% -2.0% 49.2%
NASDAQ Biotech -0.4% -17.7% -23.1% 55.7%
Top 10 Holders ~ Shares Held % Out.
Wellington Management Co. LLP 2,501,505 6.5%
The Vanguard Group, Inc. 1,064,553 2.8%
Sectoral Asset Management, Inc. 975,517 2.5%
Marble Arch Investments LP 948,807 2.5%
Brow n Advisory LLC 821,060 2.1%
Wells Capital Management, Inc. 689,443 1.8%
Elk Creek Partners LLC 642,603 1.7%
Fidelity Management & Research Co. 573,310 1.5%
Peregrine Capital Management, Inc. 543,890 1.4%
T. Row e Price Associates, Inc. 519,115 1.3%
EV/Sales
Revenue Growth GAAP EBITDA
Non-GAAP Diluted EPS
Price on 06/08/16
52-Week High
52-Week Low
Market Cap (mil)
Sales (mil)
$5.00
$7.00
$9.00
$11.00
$13.00
$15.00
$17.00
$19.00
$21.00
$23.00
$25.00
Price Performance Since IPO
FOR INSTITUTIONAL USE ONLY
Teladoc (TDOC)Income Statement for FYE Dec. 31, GAAP Mar-16 Jun-16 Sep-16 Dec-16
$ in Thousands FY2013A FY2014A FY2015A 1Q:16A 2Q:16E 3Q:16E 4Q:16E FY2016E FY2017E
Revenue 19,906 43,528 77,384 26,888 28,294 29,485 35,476 120,143 173,515
q/q 18.8% 5.2% 4.2% 20.3%
y/y 118.7% 77.8% 63.1% 54.8% 47.6% 56.7% 55.3% 44.4%
Cost of revenue: 4,186 9,929 21,041 7,943 8,064 7,076 10,288 33,371 49,443
% of revenue 21.0% 22.8% 27.2% 29.5% 28.5% 24.0% 29.0% 27.8% 28.5%
Gross profit 15,720 33,599 56,343 18,945 20,230 22,409 25,188 86,771 124,071
% margin 79.0% 77.2% 72.8% 70.5% 71.5% 76.0% 71.0% 72.2% 71.5%
Advertising and marketing 4,090 7,662 20,236 8,050 7,922 7,371 7,450 30,793 32,884
% of revenue 20.5% 17.6% 26.2% 29.9% 28.0% 25.0% 21.0% 25.6% 19.0%
y/y 87% 164% 52% 7%
Sales expenses 4,441 11,571 17,976 5,270 5,376 5,897 5,321 21,864 26,996
% of revenue 22.3% 26.6% 23.2% 19.6% 19.0% 20.0% 15.0% 18.2% 15.6%
y/y 161% 55% 22% 23%
Technology and development 3,532 7,573 14,210 5,225 5,376 4,423 4,612 19,635 20,822
% of revenue 17.7% 17.4% 18.4% 19.4% 19.0% 15.0% 13.0% 16.3% 12.0%
y/y 114% 88% 38% 6%
General and administrative 8,772 19,623 54,843 13,607 14,430 14,743 15,255 58,034 59,222
% of revenue 44.1% 45.1% 70.9% 50.6% 51.0% 50.0% 43.0% 48.3% 34.1%
y/y 124% 179% 6% 2%
EBITDA (5,115) (12,830) (50,922) (13,207) (12,874) (10,025) (7,450) (43,555) (15,853)
% margin (25.7%) (29.5%) (65.8%) (49.1%) (45.5%) (34.0%) (21.0%) (36.3%) (9.1%)
Stock based compensation 533 3,075 1,288 1,800 2,000 2,200 7,288 10,000
Adjusted EBITDA (12,297) (47,847) (11,919) (11,074) (8,025) (5,250) (36,267) (5,853)
Depreciation and amortization 754 2320 4,863 1,508 1,600 1,600 1,600 6,308 6,700
Total operating expenses 21,589 48,749 112,128 33,660 34,704 34,034 34,238 136,635 146,624
y/y 126% 130% 22% 7%
Income (loss) from operations (5,869) (15,150) (55,785) (14,715) (14,474) (11,625) (9,050) (49,863) (22,553)
% margin -29.5% -34.8% -72.1% 54.7%) 51.2%) 39.4%) 25.5%) -41.5% -13.0%
Interest income (expense) (56) (1,499) (2,199) (427) (427) (427) (427) (1,708) (1,708)
Pre-tax Income (loss) (5,925) (16,649) (57,984) (15,142) (14,901) (12,052) (9,477) (51,571) (24,261)
Income tax (benefit) provision 94 388 36 162 671 - - 833 -
Tax rate (1.6%) (2.3%) (0.1%) -1.1% -4.5% 0.0% 0.0% (1.6%) 0.0%
GAAP Net Income (loss) (6,019) (17,037) (58,020) (15,304) (15,571) (12,052) (9,477) (52,404) (24,261)
Preferred stock dividend (3,821) (3,088) - - - - - - -
GAAP Net Income (loss) available to common (9,840) (20,125) (58,020) (15,304) (15,571) (12,052) (9,477) (52,404) (24,261)
Basic EPS - GAAP ($8.05) ($10.25) ($2.91) ($0.40) ($0.40) ($0.31) ($0.24) ($1.35) ($0.61)
Diluted EPS - GAAP ($8.05) ($10.25) ($2.91) ($0.40) ($0.40) ($0.31) ($0.24) ($1.35) ($0.61)
GAAP weighted-average shares:
Basic 1,222,268 1,962,845 19,917,348 38,584,345 38,746,399 38,940,131 39,134,832 38,851,427 39,626,469
Diluted 1,222,268 1,962,845 19,917,348 38,584,345 38,746,399 38,940,131 39,134,832 38,851,427 39,626,469
37
Source: Leerink Partners LLC, company documents
FOR INSTITUTIONAL USE ONLY
38
Teladoc (TDOC)Revenue Build Mar-15 Jun-15 Sep-15 Dec-15 Mar-16 Jun-16 Sep-16 Dec-16 Mar-17 Jun-17 Sep-17 Dec-17
in thousands FY2013A FY2014A 1Q:15A 2Q:15A 3Q:15A 4Q:15A FY2015A 1Q:16A 2Q:16E 3Q:16E 4Q:16E FY2016E 1Q:17E 2Q:17E 3Q:17E 4Q:17E FY2017E
Subscription fees revenue $13,190 $15,100 $17,000 $18,000 $63,290 $20,700 $23,334 $24,508 $27,761 $96,303 $31,323 $32,262 $34,198 $37,276 $135,059
q/q NA 14% 13% 6% 15% 13% 5% 13% 13% 3% 6% 9%
y/y NA 70% 78% 71% 57% 55% 44% 54% 52% 51% 38% 40% 34% 40%
% of total 80% 83% 85% 80% 82% 77% 82% 83% 78% 80% 76% 79% 81% 76% 78%
Visit fees revenue $3,298 $3,183 $2,973 $4,640 $14,094 $6,188 $4,960 $4,977 $7,715 $23,840 $9,798 $8,426 $8,258 $11,974 $38,456
q/q NA -3% -7% 56% 33% -20% 0% 55% 27% -14% -2% 45%
y/y NA 127% 122% 94% 88% 56% 67% 66% 69% 58% 70% 66% 55% 61%
% of total 20% 17% 15% 20% 18% 23% 18% 17% 22% 20% 24% 21% 19% 24% 22%
Total revenue $19,906 $43,528 $16,488 $18,283 $19,973 $22,640 $77,250 $26,888 $28,294 $29,485 $35,476 $120,143 $41,121 $40,689 $42,456 $49,250 $173,515
q/q 28% 11% 9% 13% 19% 5% 4% 20% 16% -1% 4% 16%
y/y 119% 75% 78% 83% 75% 77% 63% 55% 48% 57% 56% 53% 44% 44% 39% 44%
Revenue Metrics:
Members (000) 6,200 7,667 10,600 11,500 12,600 12,200 12,200 15,100 15,402 16,018 17,460 17,460 20,079 20,681 21,922 23,895 23,895
q/q 31% 8% 10% -3% 24% 2% 4% 9% 15% 3% 6% 9%
y/y 24% 49% 47% 56% 51% 59% 42% 34% 27% 43% 43% 33% 34% 37% 37% 37%
Avg implied PMPM fee $0.00 $0.41 $0.44 $0.45 $0.49 $0.450 $0.46 $0.51 $0.51 $0.53 $0.502 $0.52 $0.52 $0.52 $0.52 $0.52
Visits (000) 127.1 298.8 148.7 125.3 117.2 184.3 575.5 239.9 187.2 184.3 285.7 897.2 362.9 312.1 305.8 443.5 1,424.3
q/q 35% -16% -6% 57% 30% -22% -2% 55% 27% -14% -2% 45%
y/y 135% 128% 104% 89% NA 93% 61% 49% 57% 55% 56% 51% 67% 66% 55% 59%
Avg implied visit fee $0.00 $0.00 $22.18 $25.40 $25.36 $25.18 $24.49 $25.79 $26.50 $27.00 $27.00 $26.57 $27.00 $27.00 $27.00 $27.00 $27.00
Qly engagement (qtly visits/members) 1.4% 1.1% 0.9% 1.5% - 1.6% 1.2% 1.2% 1.6% - 1.8% 1.5% 1.4% 1.9% -
Ann. engagement (ann. visits/members) 4.7% 5.1% 6.0%
Other Data:
certified physicians in network 1,350+ 2,650
US telehealth visits (000) 250 415 800 1,240
y/y 66% 93% 55%
Teladoc implied mkt share 51% 72% 72% 72%
Headcount 407 537 600+ 600+
Total Clients 6000+ 6000+
Fortune 1000 Clients 200+ 200+
Hospitals and Health Systems 60+ 60+
Health Plan Clients 26 26
Source: Leerink Partners LLC, company documents
FOR INSTITUTIONAL USE ONLY
39
VEEVA SYSTEMS, INC. (VEEV)(VEEV – RATING: MARKET PERFORM; PRICE TARGET: $32)
INVESTMENT THESIS• The life-sciences industry lags other sectors in cloud adoption
across productivity systems, but Veeva represents a strong cloud-
based entrant achieving near 50% market share in the large US
pharma Customer Relationship Management (CRM) market.
• Veeva is pursuing growth through new cloud-based productivity
products in the life sciences industry and global expansion.
• Veeva’s life-sciences industry knowledge helps it build specialized
solutions and serves as a barrier to entry to other cloud
competitors.
COMPARATIVE STATS• CY16/FY17E Sales growth: 27% (inline with consensus)
Source: Company data, Leerink Partners estimates, and FactSet Research Systems
$15.00
$20.00
$25.00
$30.00
$35.00
$40.00
$45.00
$50.00
Price Performance Since IPO
$35.14 Avg Daily Volume ('000s) 1,290
$35 Short Interest (% of float) 11.0%
$20 Float as % of Total 88.47%
$5,023
CY2015 CY2016E CY2017E CY2015 CY2016E CY2017E
Leerink Partners $409 $518 $624 10.6x 8.3x 6.9x
Consensus $409 $519 $629 10.6x 8.3x 6.9x
$409 $519 $629
CY2015 CY2016E CY2017E CY2015 CY2016E CY2017E
Leerink Partners 65% 27% 20% $105 $131 $186
Consensus 65% 27% 21% $105 $139 $176
CY2015 CY2016E CY2017E
Leerink Partners $0.51 $0.57 $0.75
Consensus $0.51 $0.57 $0.73
Stock Performance: MTD YTD L12M L3Y
VEEV 7% 22% 34% N/a
S&P 500 Healthcare 1.7% 0.4% -2.0% 49.2%
NASDAQ Biotech -0.4% -17.7% -23.1% 55.7%
Top 10 Holders ~ Shares Held % Out.
T. Row e Price Associates, Inc. 11,317,018 11.7%
Brow n Capital Management LLC 7,246,956 7.5%
Wellington Management Co. LLP 6,560,870 6.8%
JPMorgan Investment Management, Inc. 5,159,670 5.3%
The Vanguard Group, Inc. 4,921,620 5.1%
Wells Capital Management, Inc. 4,300,370 4.4%
Federated Global Investment Management Corp. 3,892,977 4.0%
BlackRock Advisors LLC 2,814,981 2.9%
BlackRock Fund Advisors 2,607,898 2.7%
First Trust Advisors LP 2,302,111 2.4%
EV/Sales
Price on 06/08/16
52-Week High
52-Week Low
Market Cap (mil)
Sales (mil)
Revenue Growth Adj. EBITDA
Non-GAAP Diluted EPS
FOR INSTITUTIONAL USE ONLY
40
Source: Leerink Partners LLC, company documents
Veeva Systems Inc. (VEEV)
Income Statement for FYE January, Non-GAAP CY2013A CY2014A CY2015E Apr-16 Jul-16 Oct-16 Jan-17 CY2016E CY2017E
($MM) FY2014A FY2015A FY2016A 1Q:17A 2Q:17E 3Q:17E 4Q:17E FY2017E FY2018E
Revenues:
Subscription services 146.6 233.1 316.3 96.0 99.9 107.2 113.8 416.9 517.0
Growth % y/y 100.1% 59.0% 35.7% 39.4% 22.0% 22.0% 21.0% 31.8% 24.0%
% of revenue 69.8% 74.4% 77.3% 80.2% 80.1% 79.7% 81.6% 80.4% 82.9%
Professional services and other 63.5 80.2 92.9 23.7 24.9 27.3 25.6 101.5 106.6
Growth % y/y 12.9% 26.2% 15.9% 12.9% 5.0% 5.0% 5.0% 9.2% 5.0%
% of revenue 30.2% 25.6% 22.7% 19.8% 19.9% 20.3% 18.4% 19.6% 17.1%
Total Revenue $210.2 $313.2 $409.2 $119.8 $124.8 $134.4 $139.4 $518.4 $623.5
Growth % y/y 62.2% 49.0% 30.6% 33.2% 27.2% 25.7% 22.0% 26.7% 20.3%
Cost of Revenues: 23% 24% 26% 27%
Cost of subscription services 34.7 52.4 67.1 20.3 18.3 19.2 19.6 77.3 73.4
Cost of professional services and other 45.5 58.4 67.2 18.2 19.7 20.6 21.1 79.6 79.1
Total Cost of Revenue 80.2 110.8 134.3 38.4 38.0 39.8 40.7 156.9 152.5
% growth y/y 40.9% 38.2% 21.1% 25.7% 20.2% 14.2% 9.3% 16.9% (2.8%)
% of revenue 38.1% 35.4% 32.8% 32.1% 30.4% 29.6% 29.2% 30.3% 24.5%
Non-GAAP Gross Profit:
Subscription services Gross Profit 112.0 180.6 249.2 75.8 79.0 84.8 90.2 329.7 408.8
% margin 76.4% 77.5% 78.8% 78.9% 79.0% 79.1% 79.3% 79.1% 79.1%
Professional services and other Gross Profit 18.0 21.8 25.7 5.6 6.0 6.8 5.9 24.3 26.6
% magin 28.4% 27.2% 27.7% 23.5% 24.0% 25.0% 23.0% 23.9% 25.0%
Gross Profit (Non-GAAP) 130.0 202.4 275.0 81.3 84.9 91.6 96.1 354.0 435.4
Growth % y/y 78.9% 55.7% 35.9% 37.1% 27.7% 27.1% 24.7% 28.7% 23.0%
% gross margin 61.9% 64.6% 67.2% 67.9% 68.0% 68.1% 69.0% 68.3% 69.8%
Operating Expenses:
Research and development 25.7 37.7 59.1 19.7 20.5 21.5 21.6 83.4 93.5
% of revenue 12.3% 12.0% 14.4% 16.5% 16.5% 16.0% 15.5% 16.1% 15.0%
15.0% Sales and marketing 39.6 52.8 72.6 23.3 25.0 25.5 27.9 101.7 113.9
% of revenue 18.9% 16.9% 17.7% 19.5% 20.0% 19.0% 20.0% 19.6% 18.3%
General and administrative 18.0 25.5 35.0 8.9 9.4 10.2 10.7 39.2 45.1
% of revenue 8.6% 8.1% 8.6% 7.4% 7.5% 7.6% 7.7% 7.6% 7.2%
Total operating expenses 83.3 116.1 166.7 51.9 54.9 57.3 60.2 224.2 252.6
Growth % y/y 97.5% 39.3% 43.6% 57.0% 45.0% 30.4% 16.1% 34.6% 12.6%
% of revenue 39.7% 37.1% 40.7% 43.3% 44.0% 42.6% 43.2% 43.3% 40.5%
Operating Income (Non-GAAP) 46.7 86.3 108.3 29.5 30.1 34.3 35.9 129.7 182.8
% operating margin 22.2% 27.6% 26.5% 24.6% 24.1% 25.5% 25.8% 25.0% 29.3%
EBITDA (Non-GAAP) 47.7 85.5 104.9 28.3 30.9 35.2 36.8 131.1 186.2
Other income (expense), net (0.8) (2.8) 0.0 2.7 0.0 0.0 0.0 2.7 0.0
Pre-tax Income (loss) (Non-GAAP) 45.9 83.6 108.3 32.2 30.1 34.3 35.9 132.5 182.8
Provision for income taxes 15.7 30.4 34.2 11.0 11.1 12.7 13.3 48.1 67.6
Tax rate 34.3% 36.3% 31.5% 34.2% 37.0% 37.0% 37.0% 36.3% 37.0%
Net Income (Non-GAAP) 30.1 53.2 74.2 21.2 18.9 21.6 22.6 84.3 115.2
% growth y/y 56.2% 76.6% 39.4% 23.5% 4.2% 27.9% 3.1% 13.7% 36.5%
Non-GAAP EPS - Diluted $0.23 $0.37 $0.51 $0.15 $0.13 $0.15 $0.15 $0.57 $0.75
% growth y/y 45.6% 58.6% 38.4% 22.6% 2.5% 24.7% (0.3%) 11.4% 32.3%
Basic shares 51.1 127.7 132.1 134.0 135.5 137.0 138.5 136.2 141.0
Diluted shares 129.3 143.8 145.0 145.7 147.2 148.7 150.2 148.0 152.7
FOR INSTITUTIONAL USE ONLY
41
Source: Leerink Partners LLC, company documents
Valuation Table VEEV
Last closing price: $29.76
VEEV Fair Value In 12 Months FY18E
Forward P/E multiple 42.0x
Non-GAAP EPS $0.75
Price Target $31.67
upside 6.4%
FOR INSTITUTIONAL USE ONLY
42
WAGEWORKS, INC. (WAGE)(WAGE – RATING: OUTPERFORM; PRICE TARGET: $59)
INVESTMENT THESIS• We believe that there will be strong healthcare cost-shifting by
employers onto employees in 2016 across the board.
• In our view, this shift will directly benefit the Consumer-Directed-
Benefits sector in general and WageWorks in particular.
• MEDACorp channel check finds CDB is important to bundle with
cost shifting.
COMPARATIVE STATS• 2016E Sales growth: 10% (above consensus at 8%)
• Remains within on year trading range
Source: Company data, Leerink Partners estimates, and FactSet Research Systems
$5.00
$15.00
$25.00
$35.00
$45.00
$55.00
$65.00
$75.00
Price Performance Past 3 Years
$59.23 Avg Daily Volume ('000s) 231
$59 Short Interest (% of float) 4.2%
$38 Float as % of Total 99.12%
$2,146
2015 2016E 2017E 2015 2016E 2017E
Leerink Partners $334 $366 $416 5.0x 4.6x 4.0x
Consensus $334 $362 $403 5.0x 4.6x 4.2x
$362 $403
2015 2016E 2017E 2015 2016E 2017E
Leerink Partners 22% 10% 14% $97 $112 $138
Consensus 22% 8% 11% $97 $110 $129
2015 2016E 2017E
Leerink Partners $1.26 $1.45 $1.76
Consensus $1.26 $1.41 $1.67
$1.41 $1.67
Stock Performance: MTD YTD L12M L3Y
WAGE 6% 31% 37% N/a
S&P 500 Healthcare 1.7% 0.4% -2.0% 49.2%
NASDAQ Biotech -0.4% -17.7% -23.1% 55.7%
Top 10 Holders ~ Shares Held % Out.
Fidelity Management & Research Co. 5,392,409 14.9%
BlackRock Fund Advisors 3,139,140 8.7%
The Vanguard Group, Inc. 2,728,270 7.5%
TimesSquare Capital Management LLC 2,394,935 6.6%
D. F. Dent & Co., Inc. 2,060,514 5.7%
Wellington Management Co. LLP 1,964,499 5.4%
Ranger Investment Management LP 1,151,091 3.2%
Stephens Investment Management Group LLC 827,177 2.3%
Wells Capital Management, Inc. 683,336 1.9%
SSgA Funds Management, Inc. 676,089 1.9%
52-Week High
Price on 06/08/16
52-Week Low
Market Cap (mil)
Sales (mil) EV/Sales
Revenue Growth Adj. EBITDA
Non-GAAP Diluted EPS
FOR INSTITUTIONAL USE ONLY
43
Source: Leerink Partners LLC, company documents
WageWorks, Inc. (WAGE)Income Statement for FYE December, Non-GAAP Mar-16 Jun-16 Sep-16 Dec-16 382.5 426.8
($MM) FY2012A FY2013A FY2014A FY2015A 1Q:16A 2Q:16E 3Q:16E 4Q:16E FY2016E FY2017E
Revenue:
Healthcare 112.9 135.1 156.0 176.6 50.4 49.9 50.2 51.5 202.0 230.3
Growth % y/y NA 19.7% 15.4% 13.2% 10.0% 14.0% 19.0% 19.0% 14.4% 14.0%
% of revenue 63.7% 61.6% 58.2% 52.8% 57.9% 55.8% 53.7% 53.6% 55.2% 55.3%
Commuter 51.8 59.6 61.8 63.9 17.4 17.6 19.0 19.0 73.1 80.4
Growth % y/y NA 15.0% 3.7% 3.4% 3.0% 10.0% 19.0% 19.0% 14.3% 10.0%
% of revenue 29.2% 27.2% 23.1% 19.1% 20.0% 19.7% 20.4% 19.8% 19.9% 19.3%
COBRA 32.0 51.3 15.4 19.0 21.0 22.2 77.7 91.8
Growth % y/y NA 60.3% 22.6% 54.3% 71.7% 56.8% 51.4% 18.2%
% of revenue 11.9% 15.3% 17.7% 21.2% 22.4% 23.2% 21.2% 22.1%
Other 12.6 20.5 18.1 42.5 3.9 3.0 3.3 3.3 13.5 13.7
Growth % y/y NA 63.3% NA 135.5% (59.6%) (71.7%) (74.1%) (65.9%) (68.4%) 2.0%
% of revenue 7.1% 9.4% 6.7% 12.7% 4.4% 3.3% 3.5% 3.4% 3.7% 3.3%
Total Revenue $177.3 $219.3 $267.8 $334.3 $87.0 $89.6 $93.6 $96.0 $366.2 $416.2
Growth % q/q 4.7% 3.0% 4.5% 2.6%
Growth % y/y NA 23.7% 22.1% 24.8% 2.0% 8.2% 12.5% 15.6% 9.5% 13.7%
Cost of revenues (ex. software amort & stock comp, non-GAAP) 64.4 80.9 98.0 113.3 30.1 30.5 27.6 31.7 119.9 136.7
% of revenue 36.3% 36.9% 36.6% 33.9% 36.5% 34.0% 29.5% 33.0% 32.7% 32.9%
Gross profit (Non-GAAP) 112.9 138.3 169.8 221.0 56.9 59.1 66.0 64.3 246.3 279.5
% margin 63.7% 63.1% 63.4% 66.1% 65.4% 66.0% 70.5% 67.0% 67.3% 67.1%
Operating Expenses (ex. Stock comp):
Technology and development 18.5 20.6 26.5 41.9 9.3 12.1 12.6 11.5 45.6 49.9
% of revenue 10.5% 9.4% 9.9% 12.5% 12.5% 13.5% 13.5% 12.0% 12.5% 12.0%
Sales and marketing 29.9 33.6 42.5 47.8 13.2 12.5 13.1 13.0 51.8 52.0
% of revenue 16.8% 15.3% 15.9% 14.3% 14.0% 14.0% 14.0% 13.5% 14.2% 12.5%
General and administrative 26.2 31.3 34.2 41.2 11.0 10.7 11.2 11.0 44.0 47.9
% of revenue 14.8% 14.3% 12.8% 12.3% 12.0% 12.0% 12.0% 11.5% 12.0% 11.5%
Total operating expenses 74.6 85.5 103.2 130.9 33.5 35.4 37.0 35.5 141.4 149.8
y/y 20.7% 26.8% 8.0% 6.0%
Non-GAAP amortization 6.7 7.9 8.7 11.7 3.1 3.6 3.8 4.2 14.7 18.3
Operating Income (Non-GAAP) $31.6 $44.8 $57.9 $78.4 $20.2 $20.1 $25.2 $24.6 $90.2 $111.3
% margin 17.8% 20.4% 21.6% 23.5% 23.2% 22.5% 26.9% 25.6% 24.6% 26.8%
EBITDA (Non-GAAP) $41.4 $56.5 $71.7 $96.6 $25.1 $25.5 $30.8 $30.7 $112.2 $137.9
Growth % y/y NA 37% 27% 35% 25% 25% 25% 25% 16% 23%
% margin 23.3% 25.7% 26.8% 28.9% 28.9% 28.5% 32.9% 32.0% 30.6% 33.1%
Interest income 0.0 0.0 0.0 0.2 0.1 0.1 0.1 0.1 0.3 0.1
Interest expense (1.8) (1.3) (1.6) (1.9) (0.4) (0.4) (0.4) (0.4) (1.6) (1.6)
Other income 0.0 0.2 0.7 (0.2) (0.0) 0.0 0.0 0.0 (0.0) 0.0
Pre-tax Income (loss) (Non-GAAP) 29.9 43.7 57.0 76.5 19.9 19.8 24.9 24.3 88.8 109.8
Income tax provision (12.2) (17.5) (22.5) (30.3) (8.0) (7.9) (9.9) (9.7) (35.6) (43.9)
Tax rate 40.9% 40.0% 39.2% 39.7% 40.0% 40.0% 40.0% 40.0% 40.0% 40.0%
Non-GAAP Net Income to common $17.4 $26.2 $34.5 $46.1 $11.9 $11.9 $14.9 $14.6 $53.3 $65.9
Non-GAAP EPS - Diluted $0.58 $0.74 $0.95 $1.26 $0.33 $0.32 $0.40 $0.39 $1.45 $1.76
% growth NA 28.1% 27.8% 32.5% 13.6% 15.3% 12.5% 18.4% 15.0% 21.9%
GAAP Net Income to common $7.9 $21.6 $18.2 $23.2 $5.8 $5.7 $8.8 $8.4 $28.8 $43.7
GAAP EPS - Diluted $0.33 $0.62 $0.50 $0.63 $0.16 $0.16 $0.24 $0.23 $0.78 $1.17
Diluted shares pro forma 30.0 35.3 36.3 36.6 36.5 36.6 36.9 37.1 36.8 37.4
FOR INSTITUTIONAL USE ONLY
44
Source: Leerink Partners LLC, company documents
Valuation Table (millions except EPS) WAGE
Last closing price: $52.82
WAGE Fair Value In 12 Months 2017E
Forward EV/Adj. EBITDA multiple 12.0x
Adj. EBITDA $137.9
Enterprise Value $1,655
Less debt 1Q17E $79
Plus excess cash 1Q17E* $114
Equity value $1,690
Dil. shares outstanding 1Q17E 37.2
Price Target $45.44
upside (14.0%)
WAGE Fair Value In 12 Months 2017E
Forward P/E multiple 41.0x
Adj. EPS $1.76
Price Target $72.35
upside 37.0%
Average Price Target (12 mo.) $58.89
upside 11.5%
*Excess cash = cash minus Customer Obligations
FOR INSTITUTIONAL USE ONLY
45
WEBMD HEALTH CORP. (WBMD)(WBMD – RATING: OUTPERFORM; PRICE TARGET: $70)
INVESTMENT THESIS• WebMD is the leading online health media brand; 148m visitors per
month and 2/3 of US physicians
• MEDACorp checks and market research indicate physicians and
consumers have moved strongly online
• We see the company poised to take advantage of three key Digital
Health growth drivers:
1. Pharma ad spend following physicians and consumers
online
2. Consumerism in healthcare
3. Increasing use of Population Health Management (PHM)
tools by payers to bend the cost curve.
COMPARATIVE STATS• 2017E Sales growth: 11.2% (vs. consensus at 10.5%)
• Strong outperformance YTD: 35% vs. S&P 500 at 3%
Source: Company data, Leerink Partners estimates, and FactSet Research Systems
$10.00
$20.00
$30.00
$40.00
$50.00
$60.00
$70.00
Price Performance Past 3 Years
$64.53 Avg Daily Volume ('000s) 894
$68 Short Interest (% of float) 16.1%
$38 Float as % of Total 95.38%
$2,497
2015 2016E 2017E 2015 2016E 2017E
Leerink Partners $636 $707 $776 4.1x 3.7x 3.3x
Consensus $636 $703 $770 4.1x 3.7x 3.4x
$703 $770
2015 2016E 2017E 2015 2016E 2017E
Leerink Partners 13% 11% 10% $193 $231 $276
Consensus 13% 11% 9% $193 $229 $263
2015 2016E 2017E
Leerink Partners $1.48 $1.92 $2.31
Consensus $1.48 $1.87 $2.16
Stock Performance: MTD YTD L12M L3Y
WBMD -2% 34% 42% 115%
S&P 500 Healthcare 1.7% 0.4% -2.0% 49.2%
NASDAQ Biotech -0.4% -17.7% -23.1% 55.7%
Top 10 Holders ~ Shares Held % Out.
Kensico Capital Management Corp. 5,104,504 13.2%
The Vanguard Group, Inc. 2,615,125 6.8%
BlackRock Fund Advisors 1,847,495 4.8%
Fidelity Management & Research Co. 1,256,684 3.2%
Lord, Abbett & Co. LLC 995,519 2.6%
Eagle Asset Management, Inc. 895,697 2.3%
Renaissance Technologies LLC 855,845 2.2%
Janus Capital Management LLC 849,267 2.2%
Dimensional Fund Advisors LP 802,838 2.1%
Goldman Sachs & Co. (Private Banking) 669,354 1.7%
Market Cap (mil)
Price on 06/08/16
52-Week High
52-Week Low
Sales (mil) EV/Sales
Revenue Growth Adj. EBITDA
GAAP Diluted EPS, Cont. Ops
FOR INSTITUTIONAL USE ONLY
46
Source: Leerink Partners LLC, company documents
Note: quarterly EPS does not necessarily add up to annual EPS in forward projections due to independent treatment of convertible preferred in each period.
WebMD Health Corp.Income Statement Model for Fiscal Year Ending December
($MM) FY2013A FY2014R FY2015A 1Q:16A 2Q:16E 3Q:16E 4Q:16E FY2016E FY2017E
Revenue Components
Ad & spon: biopharma (formerly Public Port.) $433.2 $329.3 $371.2 $88.7 $100.8 $105.3 $140.1 $434.9 $495.7
% of revenue 84.1% 56.7% 58.3% 55.9% 61.3% 62.0% 65.3% 61.5% 63.9%
Ad & spon: OTC, CPG, and other (new line) $124.6 127.8 $33.8 $30.2 $29.4 $39.5 133.0 138.3
% of total revenue inside period 21.5% 20.1% 21.3% 18.4% 17.3% 18.4% 18.8% 17.8%
vPrivate portal services 82.1 103.2 110.4 28.3 27.2 28.3 28.0 111.8 114.0
% of revenue 15.9% 17.8% 17.4% 17.8% 16.6% 16.7% 13.1% 15.8% 14.7%
Information services revenue 23.3 26.9 7.9 6.2 6.7 7.0 27.7 28.3
% of revenue 4.0% 4.2% 5.0% 3.7% 4.0% 3.2% 3.9% 3.6%
Net revenue 515.3 580.4 636.4 158.6 164.4 169.8 214.6 707.4 776.4
Growth % y/y 9.7% 12.6% 9.6% 10.6% 10.8% 11.3% 11.7% 11.2% 9.8%
Cost of operations (GAAP) 209.7 224.1 247.3 62.5 63.3 64.5 77.0 267.4 282.4
% adj. cost of operations / rev. 40.7% 38.6% 38.9% 39.4% 38.5% 38.0% 35.9% 37.8% 36.4%
Gross profit 305.6 356.4 389.1 96.0 101.1 105.3 137.6 440.0 494.0
% margin 59.3% 61.4% 61.1% 60.6% 61.5% 62.0% 64.1% 62.2% 63.6%
Sales and marketing 128.0 136.2 138.0 33.8 34.5 34.8 42.9 146.0 151.4
% of revenue 24.8% 23.5% 21.7% 21.3% 21.0% 20.5% 20.0% 20.6% 19.5%
General and administrative 93.2 94.1 91.6 23.8 24.2 24.4 25.8 98.1 104.0
% of revenue 18.1% 16.2% 14.4% 15.0% 14.7% 14.4% 12.0% 13.9% 13.4%
Operating Income (GAAP) 84.3 126.1 159.5 38.5 42.4 46.0 68.9 195.8 238.6
% margin 16.4% 21.7% 25.1% 24.3% 25.8% 27.1% 32.1% 27.7% 30.7%
Non-cash comp & other 38.6 32.5 33.7 8.5 8.8 8.8 8.8 35.0 37.0
Other 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0
Adj. EBITDA 122.9 158.6 193.2 47.1 51.3 54.8 77.7 230.9 275.6
Growth % y/y 68.0% 29.1% 21.8% 20.9% 26.4% 18.3% 15.4% 19.5% 19.4%
% margin 23.8% 27.3% 30.4% 29.7% 31.2% 32.3% 36.2% 32.6% 37.7%
Depreciation & amortization 26.6 29.8 30.5 7.5 8.2 8.2 8.2 32.0 34.0
% of revenue 5.2% 5.1% 4.8% 4.7% 5.0% 4.8% 3.8% 4.5% 4.4%
EBIT (GAAP) 57.7 96.3 129.0 31.0 34.3 37.8 60.7 163.9 204.6
% margin 11.2% 16.6% 20.3% 19.6% 20.8% 22.3% 28.3% 23.2% 26.4%
Net Interest and Other (29.0) (25.7) (29.1) (4.9) (4.1) (4.1) (4.1) (17.4) (16.5)
GAAP earnings before taxes from cont. ops. 28.8 70.5 99.9 26.1 30.1 33.7 56.6 146.6 188.1
Income tax provision (benefit) 13.6 30.7 35.8 10.4 11.8 13.2 22.1 57.4 73.4
% income tax / EBT 47.4% 43.5% 35.9% 41.0% 39.0% 39.0% 39.0% 39.2% 39.0%
Income from discontinued operations, net of tax 1.1
GAAP net income for period 15.1 40.9 64.0 15.7 18.4 20.6 34.5 89.2 114.8
y/y growth NM 171% 56% 57% 37% 56% 26% 39% 29%
Conversion adj. to net income (net of tax) 0.0$ 3.5 $ 14.1 $ 3.2 $ 3.1 $ 3.1 $ 3.1 $ 11.3 $ 11.3 $
Numerator for Diluted EPS calc. 15.1 44.4 78.1 18.9 21.5 23.7 37.6 100.5 126.1
GAAP Diluted EPS (cont. oper.) $0.31 $0.97 $1.48 $0.36 $0.41 $0.45 $0.70 $1.92 $2.31
Diluted Shares (MM) 48.4 45.6 52.7 52.3 52.0 52.7 53.4 52.4 54.7
FOR INSTITUTIONAL USE ONLY
47
Source: Leerink Partners LLC, company documents
Valuation Table (millions except EPS) WBMD
Last closing price: $62.07
WBMD Fair Value In 12 Months 2017E
Forward EV/Adj. EBITDA multiple 11.0x
Adj. EBITDA $275.6
Enterprise Value $3,032
Less debt 1Q17E $0
Plus cash 1Q17E $760
Equity value $3,792
Dil. shares outstanding 1Q17E 53.9
Price Target $70.33
upside 13.3%
Source: Leerink Partners estimates
FOR INSTITUTIONAL USE ONLY
48
RISKS & VALUATION
Source: Leerink Partners
Castlight (CSLT)
Date of Valuation: 5/18/2016
Valuation: According to our DCF analy sis, w e v alue shares in the range of $3.79-$5.17 in 12 months. Our 10-y ear DCF is based on the follow ing assumptions: it applies our 2016E rev enue grow th rate of 33%, w ith grow th slow ing to 10% resulting in a 17% CAGR ov er the period. We forecast
slow Adj. EBIT margin improv ement, first turning positiv e in 2018, assume capital ex penditures at the rate of 2% of sales ov er the long term, assume a 4% terminal grow th rate and apply a 13% discount rate to reflect uncertainty and risk around grow th. Our price target is ~$4.30, or roughly the
midpoint of the DCF range.
Risks: Risks to v aluation include (1) Grow th of the Enterprise Healthcare Cloud Marketplace is Unknow n: While Castlight can lev erage its early -mov er adv antage, it must also inv est heav ily in raising aw areness related to the benefits of its platform. The company has stated that one of the most
common reasons that potential customers decide not to implement Castlight’s solutions is a reluctance to mov e to an enterprise-w ide platform. Our model assumes that Castlight’s ability to prov e the benefits of its enterprise healthcare cloud to large employ ers w ill take time. The amount of time it
w ill take for large US employ ers to realize the benefits of Castlight’s technology for reducing healthcare costs also remains uncertain. (2) Rev enue Dependent on Large Customers: Castlight generated 16% (~$2 million) of its rev enue from its contract w ith Wal-Mart Associates’ Health and
Wellness Plan. Although the terms of the deal w ere not disclosed, w e believ e that CSLT has penetrated only a portion of Wal-Mart’s estimated 650,000 employ ees w ith health insurance. Castlight’s continued success at Wal-Mart depends on the adoption and continuing engagement of Wal-Mart’s
employ ees w ith Castlight’s tools and the deliv ering of a real ROI to Wal-Mart. (3) Pricing Pressure Is Uncertain: Castlight is an early mov er in a grow ing market w ith increasing competition. The company faces both the opportunity to sustain and raise its prices for its platform-based offerings and
also the risk that it w ill hav e to cut pricing in the face of competition. (4) Rev enue Stream Subject to Seasonality : Castlight’s rev enues are lumpy . Many employ ee benefit plans are launched at the beginning of the y ear, so the majority of Castlight’s new subscription agreements are signed in the
third and fourth quarters of the y ear. These agreements generally take three to 12 months to implement. As a result, rev enue is highest in 1Q and declines sequentially throughout the y ear.
Ev ery day Health (EVDY)
Date of Valuation: 5/5/2016
Valuation: We believ e an achiev able price target for Ev ery day Health in the nex t 12 months is $13, w hich is an av erage of our P/E and EV/EBITDA methodologies. We apply 18x to our 2017E non-GAAP earnings estimate and 10x to our 2017E Adj. EBITDA estimate. In our v iew , the shares
remain inex pensiv e.
Risks: Risks to v aluation include (1) The Need for Strong Healthcare Content: The primary w ay that Ev ery day Health deliv ers a v aluable audience of healthcare consumers and professionals to adv ertisers is by producing a continuous stream of strong and current healthcare content. Ev ery day
Health must continuously deliv er to and be responsiv e to its audience. This poses a challenge on many lev els, including technology , human resources, and data analy sis. In addition to content, online and mobile tools must be kept up-to-date in order to continue to engage ex isting users and
attract new users. Writers and other content creators must remain interesting and original w ith content and ideas. Lastly , the company must be able to sy nthesize indiv idualized consumer data to deliv er the most customized and relev ant content. (2) Search Engine Dependence: Visibility for
w eb/mobile based products is highly dependent on the algorithms of major search engines such as Google, Yahoo, and Bing. Ev ery day Health must stay competitiv e v ersus other healthcare content companies in major search engine rankings through a combination of strong content and
successful search engine optimization w ork. (3) Security of Consumer Data and Risk of Law suit: As a publisher of original content, there is inherent risk in the intellectual property rights of published articles. Litigation costs for claims of copy right v iolation can be v ery costly . On top of the liability
risk ov er IP, Ev ery day Health also faces the challenge of ensuring the integrity of patient data security . Breaches in security or unauthorized release of sensitiv e personal information can also result in ex pensiv e litigation and can damage Ev ery day Health’s brand w ith consumers and
adv ertisers. Such problems could also deter users from prov iding personal and credit card information. (4) Ev olv ing Landscape of Healthcare Regulation: Recent changes to the healthcare industry regulatory standards pose serious uncertainties for Ev ery day Health’s business. Changes in
digital adv ertisement regulations are the most direct potential threat. With some 90% of rev enue based on adv ertisements, FDA and FTC policies and guidance on those policies can change the stability of Ev ery day Health’s rev enue stream. Neither agency has been fully clear on the ex act
restrictions regarding internet and mobile adv ertisement, partly due to the nov el differences betw een online and traditional offline adv ertising. It is difficult to predict w hen and if there w ill be changes to the current policies, w hich means that any increase in regulation in the adv ertisement of
healthcare products could negativ ely affect Ev ery day Health’s business.
Fitbit (FIT)
Date of Valuation: 5/5/2016
Valuation: Our 12-month price target of $18 is based on apply ing a 14x multiple to our 2017 non-GAAP EPS estimate. While w e believ e strong top line grow th w ill be achiev ed, w e ex pect deceleration and heav ier inv estment in R&D and Sales & Marketing w hich w eighs on our earnings
estimates. Giv en uncertainty around new product sales and a slow er projected earnings CAGR of 9% ov er the nex t tw o y ears, w e believ e FIT is likely to receiv e a multiple more in-line w ith other consumer electronics companies ( (AAPL, DGII, GRMN, GPRO, Samsung, SKUL, TomTom)
rather than a premium.
Risks: Risks to v aluation include: (1) Company Success Driv en by Hit Products: Today , Fitbit's rev enue is deriv ed almost entirely from sales of its connected fitness dev ices. In addition, strong grow th is frequently driv en by new product launches that are competitiv e w ith those of riv als. If
Fitbit is not able to continue to launch products that are hits w ith consumers, then the company may see a decline in its stock price. (2) Outstanding Litigation: In March 2014, the Fitbit Force product w as recalled after some users ex perienced allergic reactions to adhesiv es in the w ristband.
Sev eral law suits hav e also been brought against the Fitbit Flex product. (3) Data Security : Fitbit collects, stores and uses personal, health and fitness-related data. Any breach of Fitbit’s sy stems or sy stems of their third-party serv ice prov iders, business partners or third-party apps w here Fitbit
data are shared could ex pose sensitiv e customer data. Such an incident could result in legal or regulatory proceedings, decrease in product and serv ice use and damage to the Fitbit brand. (4) Connected Health Is a New Market: The grow th in the connected health and fitness dev ices market
may not be sustainable if demand does not remain high. Adoption of Fitbit's products and serv ices relies on the continuation of current health and fitness trends. (5) Dependence on Retail Market: Fitbit products are primarily sold through retailers and distributors. Any disruption to serv ices,
financial difficulties or loss of retail market share incurred by their third parties could negativ ely impact sales. (6) Single Contract Manufacturer and Limited Supply Sources: Each of the Fitbit products is manufactured by a single contract manufacturer. Any delay or disruption in the manufacturing
process may affect Fitbit's ability to deliv er that product. Additionally , many of Fitbit's key manufacturing components come from limited or sole sources of supply , making the production process particularly susceptible to component shortages or supply interruptions. (7) Fluctuating Results:
Fitbit's results v ary from quarter to quarter reflecting seasonal demand, such as the demand around the holiday shopping season and the New Year's resolution season. It also fluctuates around demand for new ly -launched products, trends in new categories of connected fitness dev ices, and the
product popularity of competitors. Fitbit's fluctuating operating results may be penalized by the financial market. (8) Third Party Suppliers: Fitbit relies on a limited number of contract manufacturers and other suppliers for the production of its dev ices. Fitbit has limited control ov er these suppliers.
An interruption in their contract fulfillment could lead to Fitbit being unable to meet market demand.
FOR INSTITUTIONAL USE ONLY
49
RISKS & VALUATION
Source: Leerink Partners
HealthEquity (HQY)
Date of Valuation: 6/7/2016
Valuation: We arriv e at our 12-month price target of $33 by apply ing 50x to our FY18E EPS of $0.65. We believ e that HQY should be v alued on a comparables basis in comparison w ith healthcare grow th stocks. Our multiple assumption is based on a premium to HQY's peer group (w hich is
currently trading at a median FY1 P/E of 44x ) due to its leading market position, strong profitability , and higher earnings CAGR that w e ex pect the company to demonstrate ov er the nex t 2 y ears. In particular w e believ e that HQY should trade at a premium to WAGE (OP) (w hich is trading at 41x
'16E EPS) due to HQY's higher 2-y ear forw ard earnings CAGR (37% v . 20%) and HQY's greater ex posure to the HSA market segment, w hich w e believ e has the most attractiv e grow th characteristics in the Consumer Directed Benefits sector.
Risks: Risks to v aluation include: (1) The Healthcare Industry Is Rapidly Ev olv ing, and Mismanagement of Rapid Grow th Could Yield High Ex penses: The market for technology -enabled consumer-empow erment tools has been grow ing, but is still relativ ely unprov en. Grow th is contingent on
successful marketing of the company ’s products and serv ices, and it remains to be seen w hether high demand and grow th ex pectations are achiev ed. On the other hand, rapid grow th could strain company resources if not managed properly . Rapid ex pansion comes w ith high cost, and if the
company is not scaled efficiently the company may not be able to respond to increasing demand w hile incurring significantly higher operating costs. (2) Security Breaches Could Meaningfully Hinder Reputation, Reduce Customer Demand, and Generate Litigation Costs: The company holds
proprietary data and other sensitiv e customer information in its technology platforms, and unauthorized access, security breaches, or hacking could cause the company to incur fines, reduced demand, increase customer hesitancy in prov iding pay ment and personal information, and harm the
brand’s reputation. Fraudulent use of pay ment information on file by hackers or third-party transaction processing serv ices could result in additional damages. (3) Competition Is Robust, and Grow ing: There are a number of ex isting competitors in the HSA custodian market including state or
federally chartered banks in addition to non-bank custodians, many of w hich hav e greater resources and a history of successful operations. In addition, the company ’s competitiv e edge depends heav ily on successful brand dev elopment, w hich is relativ ely un-dev eloped compared to
competitors’. (4) Federal and State Legislation Around Tax -Adv antaged Accounts May Change in the Turbulent Regulatory Env ironment: The company ’s business model is dependent on tax benefits made av ailable through HSA's and FSA’s, and a change in the tax -adv antaged nature of these
accounts could materially affect operating results. Legislativ e proposals at both the federal and state lev el could seek to reduce tax deductions or restructure the tax benefits av ailable through HSA's. (5) Reliance on Third-Party Vendors To Operate: The company relies on third-party v endors for
banking (cash AUM deposits), fraud management, customer v erification, transaction processing, card production, and softw are to maintain its operations. A change in contracts w ith one or more of these v endors could result in a change in operating costs, and replacement of a v endor could be
disruptiv e to normal operations. (6) Berkley Capital Inv estors’ Controlling Interest Giv es Them Influence ov er Management Decisions and Company Operations: Berkley Capital Inv estors has been an inv estor in the company since October 2006, and as of the IPO it ow ned ~30% of the
company ’s common shares outstanding. In addition, current board members Frank Medici and Thomas Ghegan are Berkley officers and hold sole v oting and dispositiv e pow er ov er Berkley ’s shares. (7) Intangible Asset Write-Dow ns Could Adv ersely Affect Operations: The company holds
significant intangible assets – including $4.7m goodw ill and $25.4m intangible assets, or 54% of the company ’s assets as of April 30, 2014. Impairment of these assets could negativ ely impact the balance sheet and associated financial metrics.
Impriv ata (IMPR)
Date of Valuation: 5/16/2016
Valuation: We project a price target for Impriv ata in the nex t 12 months of $17, w hich is the av erage of our EV/Sales and DCF methodologies. For our EV/Sales v aluation w e apply 2.5x our 2017 sales estimate of $162.8m, w hich w hen rounded up y ields $18. Considering healthcare IT
comps, such as ATHN, CERN, EVH, HSTM, NUAN, OMCL and others, trade at an FY1 EV/Sales multiple range of 1.4x to 5x , w e believ e our multiple assumption is conserv ativ e. According to the DCF analy sis w e conducted, the v alue range of the shares in tw elv e months is ~$13-20 w ith a
midpoint around $16-17. The 10-y ear DCF is based on the follow ing assumptions: It starts w ith a 2016E grow th rate of 17%. In y ear 5, the company reaches $229m in rev enue, as the rev enue grow th rate slow s dow n to 10%, EBIT margin ex pands to 12%, and the terminal grow th rate is 4%.
We determined the Weighted Av erage Cost of Capital (WACC) to be 10.4% based on a stock beta assumption of 1.2.
Risks: Risks to v aluation include: (1) Dependence on OneSign as Key Rev enue Driv er: Sales from the OneSign product are a key driv er of company rev enue, and healthcare organizations are facing budget constraints that could negativ ely impact implementation of the SSO solution. Ov erall
consolidation in healthcare may also result in losing potential healthcare customers. Rev enue stability depends on Impriv ata’s ability to both retain and acquire customers, and to ensure implementation is smooth. The relativ ely lengthy and unpredictable education time after installation can
negativ ely affect the company ’s rev enue stream as it is possible for new customers to reject the product after this ev aluation process. (2) Unpredictable Healthcare Env ironment w ith Incoming Competitors: The healthcare env ironment has been in upheav al for quite a few y ears now . Federal
regulation poses many unpredictable risks to Impriv ata, especially due to the immature nature of Digital Health. As time goes on, the law s around IT w ill stabilize, prov iding an easier env ironment to nav igate for the company . Conv ersely , more mature regulations around Digital Health and
Healthcare IT w ill encourage more competitors to enter the fray , eroding Impriv ata’s first-mov er adv antage and cutting into its market share. One solution to address new entrants w ould be increased M&A activ ity to acquire smaller competitors threatening business. (3) Supply Side Constraints:
Impriv ata’s dependence on hardw are manufacturers poses significant risks to the rev enue and health of the company . Fingerprint readers are purchased from DigitalPersona and prox imity cards from RF Ideas. The contracts do not contain supply commitments, meaning any change in
inv entory for the dev ice manufacturer could sev erely constrain Impriv ata’s ability to conduct business. The best w ay to hedge this risk is to find other v endors for these tw o products, but few such products of satisfactory quality ex ist. (4) Liability Risks Related to Storing and Accessing Primary
Health Information: The softw are and hardw are contained in the Impriv ata OneSign solution is highly complex and must integrate w ith a w ide range of complex dev ices and IT sy stems. As a result, Impriv ata may be held responsible for any defects or errors that could cause harm to patients or
clinicians. The company also faces potential liability related to accessing or collecting health information. Impriv ata must be sure to implement all required or addressable health data priv acy and security safeguards and breach notification procedures to ensure that there is compliance by its
customers.
IMS Health (IMS)
Date of Valuation: 5/3/2016
Valuation: IMS currently trades at 16.2x our CFY16 estimate of $1.60. This compares to its historical FY1 P/E range of 15-23x and an av erage of 19x putting the stock close to trough lev els in its ~2 y ear history as a public company . We compare IMS to Digital Pharma peers (MDSO [MP],
VEEV [MP], WBMD [OP] and others) w hich sell primarily into the budgets of pharmaceutical and life science companies. These companies hav e a median CY16 v aluation of 38.4x . The second comp group w e consider is Business Outsourcing w hich has a median CY16 P/E of 16.6x . The
ov erall median v aluation across both groups on CY16 is a P/E 17.4x . We believ e IMS Health's highly recurring business w ill continue to prov ide stable high-single-digit rev enue grow th w ith the potential for double-digit earnings grow th. Our 12 month price target of $31 is based on apply ing a
17x multiple to our 2017 EPS estimate of $1.79.
Risks: Risks to v aluation include: (1) Reliance on Data Suppliers and Data Priv acy . For its Information offerings business, IMS relies on sourcing its data from numerous third-party entities including manufacturers, w holesalers, pharmacies, prescribers, hospitals, EMR v endors, labs, CROs,
and health plans. If IMS is unable to license or access data due to data supplier restrictions, it could adv ersely impact the company ’s product offerings and serv ices. If there are changes to security or priv acy law s, it could also restrict the access or av ailability of data. (2) Large ex posure to
pharma/biotech trends and budgets. IMS Health's grow th is dependent on trends in the pharmaceutical sector such as the continued strength of on-patent drug pipelines, the outsourcing of IT spend, and the shift tow ard high-priced targeted therapeutics. The interruption of these trends could
adv ersely affect IMS's rev enue. (3) Significant Financial Lev erage. IMS Health holds a substantial amount of debt on its balance sheet w hich could at times affect the company 's ability to raise additional capital, inv est in its ow n business, or make acquisitions w hich are a component of its
grow th strategy . The high lev el of indebtedness could also w eigh on the company 's v aluation especially during periods of adv erse economic or industry conditions. (4) Foreign Ex change, Legal and Tax . IMS deriv es ~60% of its rev enue from outside the United States, and therefore has
significant ex posure to fluctuations in foreign currencies relativ e to the U.S. dollar. With operations in ov er 100 countries, the company also must nav igate v astly different legal and tax jurisdictions w hich hav e the potential to change. (5) Client Industry Consolidation. Consolidation in the v arious
life science industries that make up IMS's client base could result in a loss of rev enue because as companies merge or consolidate, ov erlapping serv ices prev iously purchased separately are ty pically purchased only once. A w av e of consolidation in pharma, biotechnology , or the pay er or
prov ider space could result in customer attrition, pricing renegotiations, or rev enue loss. Currently IMS' customer concentration is low w ith its largest customer approx imately 5% of total gross rev enue. (6) Acquisition Risks. As a component of its business strategy , IMS ex pects to routinely
make acquisitions. These opportunities may not alw ay s be av ailable at the best terms or reasonable prices, may prov e costly or difficult to integrate, and may not meet grow th or financial ex pectations. (7) Security and Data Protection. Data protection and priv acy law s may hinder IMS’ ability to
w in new customers. Breaches or misuse of data or partners’ data also poses a potential risk.
FOR INSTITUTIONAL USE ONLY
50
RISKS & VALUATION
Source: Leerink Partners
Medidata Solutions (MDSO)
Date of Valuation: 4/25/2016
Valuation: Our 12 month price target is based on an av erage of EV/EBITDA and P/E methodologies using non-GAAP operating income (EBITDAO) and Adj. non-GAAP EPS respectiv ely w hich both ex clude stock-based compensation, amortization of intangible assets, and non-cash interest
ex pense. We apply a 38x multiple to our FY17 EPS estimate of $1.20 and a 20x multiple to our EBITDAO estimate of $130m and av erage the tw o results to arriv e at our target of $47 and our Market Perform rating.
Risks: Risks to v aluation include: (1) Pharma Decision Makers Hav e Traditionally Been Conserv ativ e. Medidata's product represents cutting-edge softw are technology applied to pharma clinical trial w orkflow s. How ev er, pharma clinical leaders hav e traditionally tended to be conserv ativ e
about adopting new technology and take long and unpredictable periods of time to make decisions. To the ex tent that they stay w ith traditional methods of clinical trial support technology , Medidata's grow th may disappoint. (2) Industry Consolidation. Medidata sells in to the life sciences industry
including to pharmaceutical companies, to biotech companies, to CROs, and in partnership w ith CROs to life sciences companies. Consolidation in these sectors may affect the company 's sales and market pow er. A continuation of the pharma trend tow ard consolidation may lead to a
cancelled clinical trial or a reduced R&D budget at affected companies w hich could adv ersely affect Medidata.(3) Concentration of Rev enue in Top Customers. Medidata has some rev enue concentration w ith approx imately 25% of rev enue coming from its top 5customers.(4) Highly Competitiv e
Industry .The clinical trial softw are industry is highly competitiv e. Medidata offers a premium suite of products at a premium price. The company must constantly remain competitiv e and may be v ulnerable to low -cost competitors and other competitors. Customers may also accept a less
effectiv e solution w ith other larger v endors that may hav e other complimentary products. (5)Trend Tow ards Larger Enterprise and Platform Deals Has Inherent Risks. Enterprise platform deals are becoming increasingly important to the company 's long-term future grow th. For instance, Medidata
closed tw o enterprise platform deals in 4Q15, Celgene and Boehringer Ingelheim. Medidata's future grow th w ill increasingly come from larger enterprise platform deals w hich may be slow er and more challenging to w in and may cause lumpiness in financial results.
Nuance (NUAN)
Date of Valuation: 5/11/2016
Valuation: Our 12-month price target of $22 is based on the stock attaining a P/E of 13.5x on our FY17 EPS estimate of $1.64, a P/E multiple slightly below the stock's 5-y ear FY1 av erage of 14.1x . We see potential for modest multiple ex pansion as the company ex ecutes its ex pense
reduction and stock buy back programs and driv es double-digit earnings grow th.
Risks: Risks to v aluation include: (1) Medical Transcription business erosion: Nuance’s flat rev enue grow th is partly driv en by erosion in its core traditional (human-mediated) medical transcription business. If this line of business erodes more quickly than it can be offset by other grow th,
Nuance’s total rev enue grow th w ould be adv ersely affected. (2) Rapidly Ev olv ing EMR Sy stems at Hospitals: Nuance is a leading v endor to hospitals, and its speech recognition and other products are integrated into EMR sy stems at many hospitals. The EMR sector is ev olv ing rapidly , many
new capabilities are being added to EMR sy stems and old capabilities are being sunsetted. Nuance must remain competitiv e and innov ativ e in this rapidly ev olv ing market. For ex ample, some traditional medical transcription (w hich inv olv es human transcriptionists) is being cannibalized by
speech recognition technologies. Nuance must w in new speech recognition business in the new EMR env ironment ev en as its medical transcription business is eroded. In addition, hospitals hav e a grow ing need for clinical documentation improv ement solutions, and Nuance has dev eloped
sophisticated solutions for this market segment. How ev er, Nuance w ill need to w in business in this new , competitiv e, and ev olv ing area in order to support a healthy future healthcare segment grow th rate. (3) Competitiv e market: Nuance faces competition from the healthcare IT segment. The
company must ensure that its products implement new technologies w ell ahead of its competitors w hile also remaining compliant w ith changing healthcare regulations. (4) Adoption of v oice interface technology : Many of Nuance's products rely on speech recognition features. The success of
these products is reliant upon Nuance dev eloping tools that consistently and accurately utilize v oice, speech and language. Customers must be able to understand the benefits of these tools in order to increase their usage of v oice interface technologies. Some of Nuance’s recent grow th has
come from contracts signed w ith global automobile manufacturers for the use of Nuance speech recognition technologies by driv ers in high-end automobiles. If driv ers of high-end cars w orldw ide do not utilize speech recognition features of their cars at lev els satisfactory to automobile
manufacturers, then manufacturers may abandon this capability in plans for future cars, adv ersely affecting Nuance. (5) Data security : Nuance collects, stores and transmits patient data. A breach of Nuance's sy stems or any of their third-party prov iders could ex pose sensitiv e customer
information and result in legal or regulatory proceedings. (6) Variable implementation and sales cy cle timelines: Nuance’s rev enue is affected by the timing betw een securing a client and ex ecuting and implementing their contract, w hich may v ary w idely based on a client’s specific
customization requirements.
Press Ganey (PGND)
Date of Valuation: 5/4/2016
Valuation: Our 12-month $33 price target is based on an av erage of P/E and EV/Adj. EBITDA methodologies giv en that both line items are a focus of company reports. Based on our ex pected rev enue and earnings grow th rates of 10-12% and 12-14% ov er the nex t tw o y ears, and after
ex amining PEG ratios for PGND’s peer group (ABCO, ATHN, CERN, CPSI, EVH, HSTM, IMPR, IMS, NUAN, MDRX, NRCIB, QSII, BCRA)w e apply 30x to our 2017E non-GAAP earnings estimate and 10.5x to our 2017E Adj. EBITDA estimate.
Risks: Risk to v aluation include (1) New Entrants: As regulations grow that require prov ider organizations to collect patient ex perience data and prov ide it to CMS, the market may attract additional play ers interested in a market w here buy ing is driv en by gov ernment regulations. National
consumer surv ey companies and hospital information sy stem companies are tw o categories of companies that could enter the market w ith an ex isting base of relev ant ex pertise. (2) Changes in Healthcare Industry Regulations: Press Ganey 's clients are primarily in the healthcare industry and
thus influenced by conditions of that industry . The healthcare env ironment may see changes in the practices of healthcare prov iders and pay ers that w ill affect the purchase of Press Ganey 's products. For ex ample, consolidation among prov iders may affect purchasing budgets or cause
ov erlapping serv ices to be eliminated. Legislativ e initiativ es such as the Affordable Care Act hav e introduced and may continue to implement updated pay ment policies and healthcare deliv ery reforms that w ill affect the use of Press Ganey 's products. (3) Rapid Pace of Technological
Dev elopments: Press Ganey must be able to dev elop new products, solutions and/or enhancements and implement these w ithin a timely manner in order to outpace competitors in a quick and cost-effectiv e manner. (4) Safety /Security of Data: Press Ganey solutions collect, store and transmit
a v ast amount of personal data. Any failure to properly secure this data or handle the data in a compliant w ay may lead to the ex posure of sensitiv e information and/or legal action that may cause material damage to the company .
FOR INSTITUTIONAL USE ONLY
51
RISKS & VALUATION
Source: Leerink Partners
Teladoc (TDOC)
Date of Valuation: 5/11/2016
Valuation: We believ e Teladoc's large addressable market and rapid grow th potential w arrant a premium grow th multiple. The company is one of the fastest grow ers in the digital health subsector and in our v iew , its v aluation should be in line w ith other high grow th companies (including ATHN,
CSLT, EVH, FIT, HQY, IMPR, NVTA, and WAGE). Our 12 month price target of $21 reflects 4.5x EV/FY1 sales (in 12 months) based on 2017E rev enue w hich w e feel is appropriate for a company w e estimate to grow its rev enue at a 50% CAGR ov er the nex t tw o y ears. We forecast sales in
2017 to reach $174m.
Risks: Risks to v aluation include: (1) Telehealth is an emerging field: The telehealth industry may not reach a high lev el of client demand or w idespread consumer adoption or may take y ears to do so. Teladoc's success depends on clients and members recognizing the benefits of and
increasing the utilization of its telehealth platform. The company must also be able adapt to rapid technological change inherent in its industry . (2) Reliant on a netw ork of phy sicians w ho serv e as consultants to Teladoc: Teladoc must be able to maintain a netw ork of qualified healthcare
professionals as the company cannot directly employ or direct the clinical practice of phy sicians. An inability to sustain and grow these phy sician relationships w ill affect Teladoc's ability to deliv er its product and scale the business. Ex ternal pressures on phy sician groups and healthcare
prov iders outside of Teladoc's control may also affect these relationships. (3) Competition among specialized softw are and solution prov iders: Teladoc's competitors sell similar products, often at low er prices w ith longer operating histories and more consumer facing brands. Large, w ell-financed
health plans also hav e the capacity to dev elop their ow n telehealth tools that they could offer their customers at discounted prices. (4) Variable sales cy cle duration / implementation timelines: Teladoc's sales cy cles range from a number of day s to ~24 months based on a w ide v ariation in the
time it takes to secure a client and ex ecute and implement its contract. Some clients hav e a prolonged ev aluation process or demand ex tensiv e customization. (5) Significant upfront costs in client relationships: Teladoc's costs associated w ith entering into client contracts are incurred upfront,
w hile rev enue is generally recognized ov er the term of the contract, causing quarterly results to fluctuate significantly . (6) Outstanding Litigation: In June 2015, American Well Corporation filed suit against Teladoc in Massachusetts District Court claiming patent infringement. Separately , Teladoc
has tw o outstanding law suits against the Tex as Medical Board w hich is seeking to block telehealth v isits in the state w hich currently comprises approx imately 20% of total rev enue. (7) Security of personal information: Customer data stored in third-party data centers are subject to compromise
through security breaches that remain outside of Teladoc's control. Many customers remain concerned ov er the priv acy and patient confidentiality afforded by digital technologies such as teleheath.
Veev a (VEEV)
Date of Valuation: 5/26/2016
Valuation: We arriv e at our 12-month price target of $32 by apply ing 42x to our FY18 EPS estimate of $0.75. Our multiple assumption is based on a premium to VEEV's peer group (ATHN, BNFT, BOX, CNXR, CRM, CSLT, CSOD, DWRE, EVH, FIT, FNGN, HQY, HSTM, IMPR, INOV, MB,
MDSO, MMS, MODN, N, NUAN, NVTA, STRM, TDOC, WAGE, WDAY, ZEN) median FY1 multiple of 40x due to the high recurring nature of the business and the stronger profitability and earnings CAGR w e ex pect the company to demonstrate ov er the nex t tw o y ears.
Risks: Risks to v aluation include: (1) Rev enue Ramp Reliance on Subscriptions and New Product Grow th, (2) Long, Unpredictable Sales Cy cle, (3) Industry -Specific Risks: Due to the narrow focus of the company ’s customers, sector specific mov ements can adv ersely affect the performance
of the company , (4) Dependence on Salesforce Platform and Third-Party Data Centers, (5) Attacks on Intellectual Property , (6) Miscellaneous Adv erse Ev ents and Database Security Breaches.
WageWorks (WAGE)
Date of Valuation: 5/5/2016
Valuation: Our 12-month price target is based on an av erage of P/E and EV/Adj. EBITDA methodologies giv en that both line items are a focus of WAGE reports and peer v aluations utilize both metrics. We believ e an appropriate peer group for WAGE consists of other healthcare cloud and
emerging grow th companies such as ATHN, BNFT, CSLT, CNXR, EVH, HQY, HSTM, IMPR, INOV, NVTA, MMS, MDSO, MB, MODN, STRM, TDOC, and VEEV. We v alue WAGE at a slight discount to its peer group on a PE and a EV/Adj. EBITDA basis because of its low er-than-median top-
line grow th rate (10% v s. comp group at 22%). We apply 41x to our 2017E non-GAAP earnings estimate and 12x to our 2017E EV/Adj. EBITDA estimate, v s. 45x and 12.7x , respectiv ely , for the peer group, and av erage the results to arriv e at our $59 target.
Risks: Risks to v aluation include: (1) Tax Adv antaged Status: Consumer Directed Benefits (CDBs) enjoy a tax adv antaged status in the US tax code. CDBs allow consumers to direct spending on qualified ex penses out of pre-tax dollars instead of spending post-tax income on those same
ex penses. If CDBs lose their tax adv antaged status, or if employ ers no longer choose to longer offer CDBs, or if healthcare reform changes the w ay that Americans receiv e their healthcare, the demand for WageWorks’ product could be adv ersely affected. (2) Future Acquisitions: Management
has stated that future acquisitions are an important part of its grow th strategy . Since 2007 the company has made 8 acquisitions. If the company is not able to locate good candidates for acquisition, or if it is not able to acquire candidates at reasonable prices and successfully integrate those
companies into its operations, the grow th of the company could be negativ ely affected. (3) Complex Marketing: In order for participants to successfully take adv antage of tax -adv antaged Consumer Directed Benefits, WageWorks’ employ er-clients must deploy the benefits to employ ees, and
employ ees must engage in the use of the products. CDB products are complex , and the marketing of the products to employ ers and employ ees is complex . If employ ers and employ ees do not understand and make use of the benefits and do not sav e money relativ e to non-tax -adv antaged
alternativ es, then clients may not renew their CDB product purchases. WageWorks makes ex tensiv e efforts to educate employ ers and employ ees about their products and to market use of the products in order to reduce client churn. (4) Healthcare Reform: WageWorks’ core customer base is
comprised of small, medium, and large enterprises that offer benefits, including health insurance plans, to their employ ees. The Affordable Care Act w as signed in 2010; the rollout of the Act’s prov isions is still occurring; regulatory details are still ev olv ing; and the impact of changes is still being
felt. To the ex tent that the ACA encourages employ ers to stop offering direct benefits to employ ees, directing their employ ees instead to state health insurance ex changes, the sales of CDB products could be adv ersely affected. (5) Long Sales Cy cles: The market for Consumer Directed Benefits
is subject to long sales cy cles. Av erage sales cy cles range from tw o months for small and medium-sized businesses to 6 or more months for enterprises. These long sales cy cles make the prediction of sales to new customers difficult. Long sales cy cles are due to a number of factors
including lengthy purchase-approv al cy cles at clients, the discretionary nature of CDB purchases, the need to educate employ ers about CDBs, and the long term (1 y ear or more) nature of a prospectiv e client’s ex isting administration contracts. (6) Regulation: The Healthcare and Employ ee
Benefit sectors are heav ily regulated, and the regulations are continually changing. Relev ant regulations include IRS, ERISA, HIPAA, and labor regulations. On the one hand, this regulation forces industry participants to dev elop specialized capabilities that become a barrier to entry for other
potential industry participants, including the employ ers themselv es. On the other hand, regulation poses a risk to WageWorks’ business – WageWorks must continually maintain compliance or be subject to actions by regulators that could affect its business.
FOR INSTITUTIONAL USE ONLY
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RISKS & VALUATION
Source: Leerink Partners
WebMD (WBMD)
Date of Valuation: 5/4/2016
Valuation: We believ e an achiev able price target for WebMD in the nex t 12 months is $70, w hich w e arriv e at using a forw ard EV/Adj. EBITDA multiple of 11x applied to our 2017 estimate of $276m. We base our multiple assumption on a discount to the median of WBMD's peer group (EVDY,
FB, GOOG, LNKD, TWTR, YHOO, YELP) for FY1.
Risks: Risks to v aluation include: (1) Ex posure to Pharmaceutical Industry Risks: A substantial portion of WebMD’s rev enue comes from the adv ertising and sponsorship budgets of brands at pharmaceutical manufacturers. If the pharmaceutical industry is adv ersely affected through drug patent
ex piration, failures of drugs in clinical trials, restrictions on drug promotion to phy sicians and consumers, and other factors, then WebMD’s rev enue from this channel could be reduced. (2) Constant Need to Prov ide Content, Attract Users, and Recruit Adv ertisers and Sponsors: WebMD’s major
line of business is as an online publisher that prov ides content to consumers and healthcare professionals, and sells ads and sponsorships to pharmaceutical manufacturers and other life-science clients. WebMD must continue to prov ide competitiv e content to consumers that attracts the right
kind of v iew ers and offers competitiv e products to adv ertisers and sponsors. (3) Ex posure to Changes in Search Engine Algorithms: WebMD benefits from high rankings of its content in popular internet search engines such as Google. When WebMD ranks high in search engine results, it benefits
from additional traffic of w ebsite v isitors referred by the search engine. From time to time, search engines change the algorithms by w hich they rank the results on search engine results pages. If WebMD does not continue to rank highly in search engine results, its internet traffic numbers could
be adv ersely affected. (4) Consumers Adopting Mobile Dev ices, Which Represents a Discontinuity to Content Prov iders: Just as online content represents a marketplace discontinuity w ith offline content and creates an opening for new competitors to enter the marketplace and compete for
consumers and clients, so too mobile content represents a marketplace discontinuity w ith online content. WebMD is the leading health information publisher in the online content marketplace and it is inv esting heav ily to ex tend its brand in the mobile content marketplace. How ev er, WebMD is by
no means guaranteed to maintain its leading position in the mobile content marketplace.(5) Intense Competition in the Healthcare Information Marketplace: There is intense competition in the health information marketplace. WebMD ex periences intense competition in its Public and Priv ate Portal
lines of business. Ex isting competitors in the Public Portal segment include Yahoo! Health, Ev ery day Health, Health.com, About.com, and others. The company competes w ith offline as w ell as online sources of health information.
DIGITAL HEALTH June 9, 2016
Disclosures AppendixAnalyst CertificationI, Steven Wardell, certify that the views expressed in this report accurately reflect my views and that no part of mycompensation was, is, or will be directly related to the specific recommendation or views contained in this report.
Distribution of Ratings/Investment Banking Services (IB) as of 03/31/16IB Serv./Past 12
Mos.Rating Count Percent Count PercentBUY [OP] 156 69.3 55 35.3HOLD [MP] 69 30.7 3 4.3SELL [UP] 0 0.0 0 0.0
Explanation of Ratings
Outperform (Buy): We expect this stock to outperform its benchmark over the next 12 months.
Market Perform (Hold/Neutral): We expect this stock to perform in line with its benchmark over the next 12months.
Underperform (Sell): We expect this stock to underperform its benchmark over the next 12 months.The degreeof outperformance or underperformance required to warrant an Outperform or an Underperform rating shouldbe commensurate with the risk profile of the company.
For the purposes of these definitions the relevant benchmark will be the S&P 600® Health Care Index forissuers with a market capitalization of less than $2 billion and the S&P 500® Health Care Index for issuers witha market capitalization over $2 billion.
DIGITAL HEALTH June 9, 2016
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This information (including, but not limited to, prices, quotes and statistics) has been obtained from sourcesthat we believe reliable, but we do not represent that it is accurate or complete and it should not be reliedupon as such. All information is subject to change without notice. This is provided for information purposesonly and should not be regarded as an offer to sell or as a solicitation of an offer to buy any product to whichthis information relates. The Firm, its officers, directors, employees, proprietary accounts and affiliates mayhave a position, long or short, in the securities referred to in this report, and/or other related securities, andfrom time to time may increase or decrease the position or express a view that is contrary to that containedin this report. The Firm's salespeople, traders and other professionals may provide oral or written marketcommentary or trading strategies that are contrary to opinions expressed in this report. The Firm's proprietaryaccounts may make investment decisions that are inconsistent with the opinions expressed in this report.The past performance of securities does not guarantee or predict future performance. Transaction strategiesdescribed herein may not be suitable for all investors. Additional information is available upon request bycontacting the Editorial Department at One Federal Street, 37th Floor, Boston, MA 02110.
Like all Firm employees, analysts receive compensation that is impacted by, among other factors, overall firmprofitability, which includes revenues from, among other business units, Institutional Equities, and InvestmentBanking. Analysts, however, are not compensated for a specific investment banking services transaction orcontributions to the Firm's investment banking activities.
MEDACorp is a network of healthcare professionals, attorneys, physicians, key opinion leaders and otherspecialists accessed by Leerink and it provides information used by its analysts in preparing research.
For price charts, statements of valuation and risk, as well as the specific disclosures for covered companies,client should refer to https://leerink2.bluematrix.com/bluematrix/Disclosure2 or send a request to LeerinkPartners Editorial Department, One Federal Street, 37th Floor, Boston, MA 02110.
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