2019 Michigan Investment Stock Pitch Competition

Fall 2019

Notre Dame Investment Club presents:

R1 RCM

NYSE: RCM

Recommendation: BUY

Analysts:Zach Margovskiy, Conor Brady, Conor Neal

1

• The hospital industry is growing steadily at 2.4% a year and as they expand and digitize, RCM is poised to

capture the market for hospital health revenue services, and they have been, growing at 11% last year

• R1 is the largest, independent, end-to-end revenue cycle provider in the U.S. with a competitive edge through

their accumulated data and expansive pipeline of existing and potential clients

• Currently undervalued due to overconcerns regarding the lack of profitability and customer concentration,

which are mitigated by a clear path to turning cash flow positive and long-term contracts with customers that

are partial owners

• We believe the market will recognize this mispricing as the RCM industry grows, R1 signs additional big-

name contracts, and analyst coverage grows, with a potential tailwind from changes in healthcare policy

Price Target: $14.84

Implied Upside: 49.76%

Recommendation:

Given R1 RCM Inc.’s (NASDAQ: RCM) market-leading position within a growing industry, it offers an

attractive equity investment opportunity with substantial 2 year upside; therefore we recommend a buy

Investment Thesis

Rationale:

2

3

Explanation of Revenue Cycle Management (RCM)

Advantages of RCM

1. Charge Capture Render Medical services

into billable charges 2. Claim

Submission Submit claims of

billable fees to insurance companies

3. Coding Properly code diagnoses and

procedures

4. Patient Collections Determine

patient balances and collect payments5. Preregistation

Collect information

before patient arrival

6. Registration Collect

subsequent patient

information during

registration

7. Remittance Processing

Apply/Reject payments

through the remittance processing

8. Third-Party Follow Up

Collect payments from third-party

insurers

9. Utilzation Review Examine the necessity of medical services

Revenue Cycle Management (RCM): financial

process, utilizing medical billing software, that

healthcare facilities use to track patient care from

registration and appointment scheduling to the final

payment of the balance

Sources: R1RCM, HeathIT.TechTarget

Efficient:

Allows healthcare

organizations to track

their collection

schedule easier

Saves Money:

Automates duties

previously handled by

employees & collects

revenue quicker

Client Focused:

Saves time for both

the healthcare

organization and

their patients

Preventative:

Healthcare groups

are able recognize

problems before they

occur

R1 has less than 3% market share with $7 billion in NPR

under management and 30 million patient encounters

Overview Revenue Collection Steps

Major Players

RCM Industry Outlook

Sources: MarketWatch, HealthIT.gov, grandview research, Yahoo Finance, CAPIQ

Increased Adoption of Healthcare RCM

Shift from Fee-for-Service to Value-Based Care

• Value-based RCM focuses on quality care at a

reasonable cost over volume-based RCM.

• Ensures physicians are rewarded for quality care.

• Better care for individuales

• Reduced healthcare costs

• Customer satisfaction and retention

Increased healthcare spending and adoption of EHRs will significantly contribute to the growth of the healthcare RCM Market.

Health IT

Secular Pressure

Investments in

infrastructure

Stress has been put on the

industry to run more efficiently

and produce more revenue

Advantages of RCM to the Client

Hospitals have begun to refocus

and invest in RCM and are

increasing focused on outsourcing

Healthcare IT is becoming a key

differentiator for players in the

healthcare industry

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Basic EHR Any EHR

$0.0

$5.0

$10.0

$15.0

$20.0

$25.0

$30.0

2017 2018 2019E 2020E 2021E 2022E 2023E 2024E 2025E

Mar

ket

Siz

e (B

illio

ns)

4

Industry Trends

Increased Adoption of Electronic Health Records

Sources: RSM 10-K, IBISWorldNote: Market Data as of 10/17/19

Overview

• R1 RCM is the largest, independent, end-to-end revenue

cycle provider in the U.S.

• R1 engages in the provision of revenue cycle management

to healthcare providers – it offers end-to-end, modular

revenue cycle, and physician advisory services

• The Company utilizes a world-class operating system

supported by a fully integrated, proprietary technology

platform

• R1 has had a relationship with Ascension Health since its

founding in 2003, and the Company did not expand to new

hospitals until 2016

Segmented Revenue Breakdown ($mm)

LTM June 30th 2019 ($M)

Sales $868.5

Gross Income 94.9

EBITDA 66.9

EBITDA Margin 7.7%

Cap Ex (33.5)

Net Income (45.3)

Total Cash 64.6

Market Cap 1,111

R1 RCM Company Overview

Revenue has been extremely variable and dependent on historical fees, but

new contracts should decrease volatility and allow consistent growth

Joseph Flanagan

•President and CEO of R1 since 2016

• Joined R1 in 2013 as COO

•Brought 20+ years of management experience

Mary Tolan

•Co-Founder and Managing Partner at Chicago Pacific

•Former CEO & Co-Founder of R1, Current Board Member

•9% shareholder

Neal Moszkowski

•Founder & Co-CEO of TowerBrook

•Board of Director Since 2016

•TowerBrook owns 60% of shares

$0

$200

$400

$600

$800

$1,000

2013 2014 2015 2016 2017 2018

Operating Fee Incentive Fees Other

5

Office Based

Physician

Hospital Based

Physicians

Medical Groups

Key StatsCustomer Groups Properly Aligned Management

Sources: RCM Lender Deck

R1 RCM Company Overview (cont’d)

6

Intermedix Acquisition

7

In February 26th 2018 R1 acquired Intermedix at a valuation of $460 million

Intermedix Overview

• Intermedix served more than 15,000 U.S healthcare providers,

including physicians in hospitals and other healthcare settings

• Healthcare represented 86% of Intermedix revenue prior to the

acquisition

• 4 Billion in net patient revenue under management and over

700 customers

• Has significant investment in data analytics and automation

• Offers a diversified physician RCM revenue profile

Advantages

• When combined the company manages ~$30 billion of annual

net patient revenue (NPR) on its customers’ behalf and has

nearly 1,000 clients in 49 states and Washington, D.C

• Acquired Intermedix’s healthcare division but not the

emergency preparedness division, which turned into an

independent company

• R1 has integrated the technology into its solution offerings and

showed signs of positive growth in recent earnings

Positive Signs of Synergy Accomplishment

• Revenue of $295 Million, up $87.1 million and 41.9% compared

to the same period last year (pre-acquisition).

• Helped R1 become one of the leaders within a fragmented

industry

Deal Overview

Increased Market

ShareFaster Growth

Newer resources

and competencies

Financial GainReduced Entry

Barriers

Loss of a

Competitor

The acquisition of Intermedix provides significant growth opportunity for R1 with both their technology and clients. R1’s revenue

and EBITDA is up in part due to the benefits received from the Intermedix acquisition

• The R1 technology, model and processes have been developed through years of experience working with healthcare organizations

on their most challenging implementations.

• R1 is the market leader in RCM, they’ve have the process and approach down, every other firm would be playing catch up right now

• Their approach and technology are based on standard structures and rigorous methods, tested and proven in multiple organizations

and environments.

• Market Leader Proven Process

Sources: R1RCM

• Comprehensive Gains

• Leveraging the customer’s data, R1’s services are designed to help ensure client economics improve which includes: revenue, profit and

scale

• Increasing EBITDA margins on signed business, 2018: 6.5%, 2019: 13.5%, 2020E:19%

• Predicting $3B in NPR in 2019, helped by $1.4B contract with Quorum

• Client Signings growing, from $30B Q4 2018, to $31B Q2 2019, to projected $33B in Q4

• Dimensional Visibility

▪ R1 enables timely defect intervention and recovery workflow by providing a clear window into revenue operations with frequent

and comprehensive reporting.

▪ Limited chance of fraud or improper use or distribution of data with everything so visible

• Proprietary Technologies

▪ R1 Hub technologies integrate across multiple host and payor systems. They are designed to scale and perform in the

largest, most complex systems to enable end-to-end process integration.

▪ No other business has the technological advantage in RCM that R1 does

• Analytics & Accountability▪ R1 uses hundreds of measurement methods to drive comprehensive daily accountability designed to identify and correct small

issues before they become organizational problems.

▪ Already have data to improve business model, been in operation for years so have competitive advantage in using and

optimizing clients data

With the R1 Performance Stack℠, the company believes that it is uniquely equipped to manage the revenue cycle from end-to-end

5 Advantages to R1’s revenue cycle management

8

Key Catalysts

Sources: S&P Capital IQ, RCM 10K, Baird Equity Research

Lack of Analyst Coverage

Growing Industry: Hospital RCM Outsourcing Survey• The market is taking time to understand RCM potential for growth

based on the size of the industry due to the concern of unprofitability

• “Wait and see approach” amongst larger investors is occurring

• Stock down over 20% mostly on non-fundamental issues, mainly due to

a sector rotation away from growth and toward value-based stocks

based on global market concern

• Capital Structure is unique – 45% of the company is represented by a

convertible note with three of their biggest clients

Expected Revenue Growth

Market Preference for Profitability

5% 6%

68%

17%

24%

59%

27%

39%35%

0%

10%

20%

30%

40%

50%

60%

70%

80%

Current OutsourceRCM

Plan to Outsource toRCM in the Future

Do Not Plan toOutsource RCM

2016 2017 2018

9

Firm Analyst TGT Price 1 Yr Return

Cantor Fitzgerald Steven P Halper $14 13.6%

Cowen Charles Rhyee $14 13.6%

KeyBanc Cap Markets Donald Hooker $14 13.6%

Baird Matthew Gillmor $14 13.6%

Chardan Cap Markets Steven Wardell $15 13.6%

($85) ($85)

$177

($59)($19)

$36 $65 $87 $106 $128 $146

($120)

($20)

$80

$180

$280

• There are currently only 5 analysts covering the stock on Bloomberg –

we believe that additional analysts will initiative coverage as the RCM

market grows and R1 wins additional contracts

• As seen below, most analysts are optimistic on the stock, so we think

this could draw-in institutional money and drive the price up over time

• Recently won contracts with Quorum Health and Amita Health, driving

up management guidance in recent quarters

• Management has hinted at a large pipeline close to signing

$869 $1,042

$1,230 $1,427

$1,641 $1,878

$2,141

0%

5%

10%

15%

20%

25%

- -

$500

$1,000

$1,500

$2,000

$2,500

2018A 2019E 2020E 2021E 2022E 2023E 2024E

Sources: RCM 10k, S&P Capital IQ, Morningstar, Baird Research

⮚ R1 is the Lead Provider in the RCM Space

▪ They are distinguished by their larger source of data

through a long history within the industry

▪ The management team is world-class and will ensure

the Company continues to grow through new

relationships

⮚ The Company Will Turn Cash Flow Positive in FY’19▪ Historical losses were driven by fixed costs that are

dwindling due to economies of scale as the Company

wins new contracts

▪ Concerns regarding integration of Intermedix are

overblown, as recent earnings have shown an ability to

easily integrate this acquisition

⮚ Clients Share Aligned Interests

▪ Customer concentration is expected to come down as the

Company wins new contracts

▪ These clients are also locked up in 10-year contracts, with

limited ability to exit said contracts

▪ Ascension owns an equity stake in R1

⮚ Unable to Win New Contracts

▪ Risk if customers begin to cancel or not re-up their

subscriptions

▪ Also, if R1 cannot secure more contracts, they risk

their growth suffering

⮚ Lack of Profitability▪ Incurred losses most years besides 2016, mainly

in acquisition and integration costs

▪ Intend to increase services in next year to expand,

will also increase operating revenues by attracting

more businesses with increased offerings

▪ Path to profitability involves adding more clients

which will come with increased service

⮚ High Client Concentration

UpsideRisks

▪ Ascension, Intermountain, and Presence Health will

represent the vast majority of revenue through 2020

▪ These firms have signed exclusive 10 year agreements

with R1, however, so recontract risk is not an issue

Key Risks & Mitigants

10

Notre Dame Investment Club recommends a BUY for R1 RCM, with the expectation that as the

Company continues to grow earnings and eliminate losses behind new customer contracts

FinalPrice Target: $14.84

Upside: 49.76%

Final Recommendation

11

• The hospital industry is going to grow steadily over coming years and RCM demand, specifically, will be bolstered

by the implementation of IT Healthcare

• R1 has a competitive advantage over competitors driven by its accumulation of data, which will only grow and

create a flywheel as the Company expands

• The Company is expected to turn cash flow positive in FY’19 driven by economies of scale and limited

integration costs

• The market will recognize R1’s success as the industry grows and contracts continue to funnel in, leading to

increased analyst coverage, higher institutional ownership, and stock price appreciation

APPENDIX

12

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NASDAQ:RCM 1 Year Stock Chart

Comparable Companies

14

Market Cap Enterprise Value Projected 1-Year Growth Margins Turnover

(USDmm) (USDmm) Revenue EBITDA EPS Gross EBIT EBITDA Net Income Asset Inv.

Allscripts Healthcare Solutions, Inc. $1,845 $2,669 6.6% 185.8% (1,326.7%) 47.6% 1.6% 6.6% (0.6%) 0.5x 3.2x

HCA Healthcare, Inc. 41,873 77,435 9.7% 8.8% 47.9% 37.8% 14.3% 19.3% 5.4% 1.2x 7.1x

Tivity Health, Inc. 802 1,915 55.2% 46.2% 19.0% 35.0% 19.3% 21.0% 9.6% 0.6x 10.6x

Cigna Corporation 62,219 98,479 43.0% 29.3% 54.1% 20.3% 6.8% 8.7% 3.7% 0.9x 34.1x

NextGen Healthcare, Inc. 1,063 1,095 2.5% 156.4% 306.3% 58.4% 4.6% 7.2% 2.6% 1.0x 5.5x

R1 RCM Inc. $1,111 $1,730 24.6% 165.1% 4,585.9% 14.7% 4.0% 8.7% 0.1% 1.3x 14.2x

75th Percentile $41,873 $77,435 43.0% 156.4% 54.1% 47.6% 14.3% 19.3% 5.4% 1.0x 10.6x

Mean 21,560 36,318 23.4% 85.3% (179.9%) 39.8% 9.3% 12.6% 4.1% 0.8x 12.1x

Median 1,845 2,669 9.7% 46.2% 47.9% 37.8% 6.8% 8.7% 3.7% 0.9x 7.1x

25th Percentile 1,063 1,915 6.6% 29.3% 19.0% 35.0% 4.6% 7.2% 2.6% 0.6x 5.5x

Protifability Ratios EV / Revenue EV / EBIT EV / EBITDA P/E

ROA ROE ROC LTM FY'20 LTM FY'20 LTM FY'20 LTM FY'20

Allscripts Healthcare Solutions, Inc. 0.5% (14.0%) 6.6% 1.5x 1.4x 94.7x 13.3x 22.9x 8.0x NM 14.5x

HCA Healthcare, Inc. 10.5% NM 9.6% 1.6x 1.4x 11.1x 10.2x 8.2x 7.6x 16.0x 10.8x

Tivity Health, Inc. 7.6% 18.0% 7.2% 2.2x 1.4x 11.6x 8.2x 10.6x 7.3x 8.7x 7.3x

Cigna Corporation 4.0% 12.6% 7.1% 1.0x 0.7x 14.1x 11.0x 11.1x 8.6x 13.6x 8.8x

NextGen Healthcare, Inc. 2.7% 6.4% 5.6% 2.1x 2.0x 45.2x 38.4x 28.6x 11.2x NM 19.1x

R1 RCM Inc. 3.2% (10.8%) (3.8%) 1.6x 1.3x 40.2x 11.1x 18.4x 6.9x NM 16.9x

75th Percentile 7.6% 14.0% 7.2% 2.1x 1.4x 45.2x 13.3x 22.9x 8.6x 14.8x 14.5x

Mean 5.1% 5.7% 7.2% 1.7x 1.4x 35.3x 16.2x 16.3x 8.5x 12.7x 12.1x

Median 4.0% 9.5% 7.1% 1.6x 1.4x 14.1x 11.0x 11.1x 8.0x 13.6x 10.8x

25th Percentile 2.7% 1.3% 6.6% 1.5x 1.4x 11.6x 10.2x 10.6x 7.6x 11.1x 8.8x

Implied EV (75th Percentile) $2,248 $1,953 $1,943 $2,063 $2,161 $2,139

Implied EV (Mean) 1,816 1,893 1,519 2,518 1,535 $2,126

Implied EV (Median) 1,719 1,942 605 1,704 1,043 $2,004

Implied EV (25th Percentile) 1,652 1,931 498 1,581 1,000 $1,890

Implied Share Price (75th Percentile) $14.83 $12.15 $12.05 $13.15 $14.04 $13.84 $8.67 $8.53

Implied Share Price (Mean) $10.90 $11.60 $8.19 $17.29 $8.34 $13.72 $7.47 $7.10

Implied Share Price (Median) $10.02 $12.04 ($0.12) $9.88 $3.87 $12.61 $7.96 $6.34

Implied Share Price (25th Percentile) $9.41 $11.95 ($1.10) $8.76 $3.47 $11.57 $6.53 $5.17

Company Name

Company Name

WACC

15

Capital Structure

Debt-to-Total Capitalization 64.02%

Equity-to-Total Capitalization 35.98%

Cost of Debt

Cost of Debt 6.04%

Tax Rate 21.00%

After-tax Cost of Debt 4.77%

Cost of Equity

Risk-free Rate(1) 3.00%

Market Risk Premium(2) 8.00%

Levered Beta 0.86

Cost of Equity 9.88%

WACC 6.61%

Valuation DCF

16

FYE December 31, FYE December 31,

($ in millions) 2014A 2015A 2016A 2017A 2018A 2019E 2020E 2021E 2022E 2023E 2024E

Total Revenue $210.1 $117.2 $592.6 $449.8 $868.5 $1,042.2 $1,229.8 $1,426.6 $1,640.5 $1,878.4 $2,141.4

Revenue Growth -- (44.2%) 405.6% (24.1%) 93.1% 20.0% 18.0% 16.0% 15.0% 14.5% 14.0%

Expenses

COGS 182.1 169.0 199.7 416.3 770.6 812.9 934.6 1,069.9 1,230.4 1,399.4 1,595.3

Gross Profit $28.0 ($51.8) $392.9 $33.5 $97.9 $229.3 $295.2 $356.6 $410.1 $479.0 $546.1

Gross Margin 13.3% (44.2%) 66.3% 7.4% 11.3% 22.0% 24.0% 25.0% 25.0% 25.5% 25.5%

SG&A 74.9 75.0 74.1 56.3 97.9 130.3 147.6 171.2 188.7 216.0 246.3

Other 86.8 9.3 20.8 4.7 30.4 52.1 61.5 71.3 82.0 93.9 107.1

Operating Expenses 161.7 84.3 94.9 61.0 128.3 182.4 209.1 242.5 270.7 309.9 353.3

Operating Income (EBIT) ($133.7) ($136.1) $298.0 ($27.5) ($30.4) $46.9 $86.1 $114.1 $139.4 $169.1 $192.7

EBIT Margin (63.6%) (116.2%) 50.3% (6.1%) (3.5%) 4.5% 7.0% 8.0% 8.5% 9.0% 9.0%

Income Tax Expense (24%) -48.7 -51.6 121.1 31.5 -11.4 11.3 20.7 27.4 33.5 40.6 46.3

EBIAT ($85.0) ($84.5) $176.9 ($59.0) ($19.0) $35.6 $65.4 $86.7 $106.0 $128.5 $146.5

Cash Flow

Plus: D&A 6.0 8.5 10.2 16.3 38.8 62.5 73.8 85.6 98.4 112.7 128.5

Discretionary Cash Flow -79.0 -76.0 187.1 -42.7 19.8 98.2 139.2 172.3 204.4 241.2 275.0

Less: Increase in NWC 84.0 33.0 (99.0) (60.0) (16.0) (11.2) 1.9 2.8 4.3 3.9 5.1

Less: CapEx 0.0 (20.0) (8.0) (33.0) (74.0) (82.6) (97.5) (113.1) (130.1) (148.9) (169.8)

Free Cash Flow $5.0 ($63.0) $80.1 ($135.7) ($70.2) $4.4 $43.6 $62.0 $78.6 $96.1 $110.3

Free Cash Flow Growth -- (1363.4%) (227.1%) (269.4%) (48.3%) (106.3%) 894.1% 42.0% 26.9% 22.3% 14.8%

Unlevered Free Cash Flow

WACC 6.61%

Discount Period 0.2 2 3 4 5 6

Discount Factor 0.99 0.88 0.83 0.77 0.73 0.68

Present Value of Free Cash Flow $4.3 $38.4 $51.2 $60.9 $69.8 $75.1

Valuation DCF- (Base)

17

DCF Sensitivity Analysis

WACC

15.50 4.6% 5.6% 6.6% 7.6% 8.6%

6.0x $13.24 $12.39 $11.60 $10.86 $10.16

7.0x $15.42 $14.46 $13.55 $12.70 $11.90

EV/EBITDA 8.0x $17.61 $16.52 $15.50 $14.54 $13.65

9.0x $19.79 $18.58 $17.45 $16.39 $15.39

10.0x $21.98 $20.65 $19.40 $18.23 $17.14

Enterprise Value DCF Sensitivity Analysis

Cumulative Present Value of FCF $299.7

Terminal Value

Terminal Year EBITDA $321.2

Exit Multiple 8.0x

Terminal Value $2,577.9

Discount Factor 68.12%

Present Value of Terminal Value $1,756.0

% of Enterprise Value 85.4%

Enterprise Value $2,055.7

DCF Implied Equity Value and Share Price

Enterprise Value $2,055.7

Less: Total Debt $396.6

Plus: Cash & Cash Equivalents $80.1

Implied Equity Value $1,739.2

Implied Share Price $15.50

Shares Outstanding 112

Method Weight Price

Comparable Companies 50% $14.18

DCF 50% $15.50

Fair Value Estimate $14.84