Healthcare Tech: Q2/F23 Preview
Fundamentals Remain Solid, but Some Challenges Persist
TD Investment Conclusion
Healthcare spending expected to remain strong. CMS is projecting U.S. health spending to increase at a 5.4% CAGR over 2022-31, faster-than-projected GDP growth of ~4.6%, and reaching ~20% of GDP in 2031. Meanwhile, the Canadian government plans to inject an incremental >$46B into the healthcare system over the next 10 years. We believe the expected solid growth in healthcare spending is needed to address a system already under significant strain, highlighted by long wait lists, ER closures, cost inflation, labour shortages, and millions of people without a family doctor in Canada alone. Furthermore, demographics (aging baby boomers) and immigration could place additional pressure on the already-fragile system.
Increased private sector involvement could help address key issues (e.g., expanded role of private clinics in Ontario) as could greater adoption of technology, including GenAI, which at the very least should help reduce the administrative burden of healthcare professionals. We believe our Top Pick, WELL Health, should be a key beneficiary of these trends, as well as the attractive M&A environment.
WELL Health (WELL-T; BUY; C$8.50 target price) – We expect WELL to continue its near-four-year streak of meeting/beating consensus, as we believe expectations properly reflect some near-term revenue and margin headwinds. Our Q2/F23 forecasts are in line with consensus, and imply flattish growth/margins vs. Q1/F23. In line with management's commentary last quarter, we expect a deceleration in organic growth from the very impressive 21% in Q1/F23 and flat margins, due to expected slowdowns at Circle (distractions from its rapid clinic expansion) and Wisp (re-tooling its offering), non-recurring tailwinds in Q1/F23 (cybersecurity, one-time O'Regan promotion), increased growth investments, and cost inflation. Finally, we believe more details on the CarePlus/MCI clinic acquisitions could be provided.
Dialogue (CARE-T; TENDER; C$5.15 target price) – Given the announcement this week that Dialogue has agreed to be acquired by Sun Life, the Q2/F23 release appears moot. That said, our Q2/F23 estimates are in line with consensus/guidance and imply a continued deceleration in organic growth but also a narrowing of losses, with positive adjusted EBITDA still expected in Q4/F23. Our forecasts do not include the recent Sun Life U.S. platform licensing deal (we estimate >US$2mm-US$3mm in ARR with related professional services revenue, commencing in Q3/F23).
LifeSpeak (LSPK-T; HOLD; C$0.65 target price) – Our Q2/F23 estimates are in line with consensus and imply flattish sequential growth and margins. Although management has done a good job of realizing post-acquisition cost synergies, organic growth remains challenging while its debt levels remain high, with neither issue likely to improve significantly until F2024, in our view.