Author was NOT COMPENSATED in any way for the following article.

What if I told you that there is a company that is currently EBITDA and Cash Flow positive which reported higher revenues than WELL Health Technologies, but is trading for 1/10th of the market cap. Would you believe me?

Introducing…. Neupath Health (TSXV:NPTH).

Neupath is Canada’s largest operator of chronic pain management clinics with 12 locations in 11 cities throughout Eastern Canada. NeuPath’s 100+ specialized healthcare providers serve approximately 11,000 patients annually, assisting in the management of their chronic pain and the improvement of their overall quality of life. NeuPath’s mission is to provide patients with the care and tools they need to live a complete and fulfilled life; to reclaim the daily life activities that have been taken by injury or illness. Neupath was recently formed in June, 2020, through a reverse take-over (RTO) transaction with “Klinik Health Ventures Corp”.

The RTO deal price resulted in a post-money valuation of $38.9 million and a fully diluted share count of 51.4 million.

Why Do We Like It?

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• $50 million revenue in 2019 and a 3-year CAGR more than 23%;
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• Potential to double revenue organically in their existing footprint, with growth opportunities through acquisition and virtual visits;
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• A multimodal approach to chronic pain management that includes interventions, opioid reduction, mindfulness, and a chronic pain self-management program;
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• EBITDA positive, cash flow positive, a strong balance sheet and high insider ownership (>50%)
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• Attractive valuation – at the RTO deal price, NeuPath is valued at $38.9 million. Currently trading at 0.7x EV/SALES’19 compared with the peer group average of 11.5x EV/SALES’19.
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Chronic Pain: The Silent Epidemic

Chronic pain has been called the ‘silent epidemic’; it gets very little attention despite the fact that its economic cost is greater than the cost of cancer, HIV, and heart disease combined. Given the cost of chronic pain – estimated to be $43 billion annually – it should be no surprise that its impact is far-reaching – affecting 1 in 5 Canadian adults. There is no known cure for chronic pain. Only treatments that can help manage condition. Thus, patients seeking treatment for chronic pain are not going to be visiting the clinic for a one time appointment. Customer retention is basically already built into the chronic pain clinic model.

A Fragmented Market

With chronic pain affecting 1 in 5 Canadian adults, the market for chronic pain treatment is staggeringly large, yet fragmented. There is no single company which dominates the space. At current, there are more than 60 multidisciplinary clinics in Ontario alone. Many of these clinics operate out of one single location without broad programs, scale efficiencies, or exit strategies. Fragmented markets can often present opportunities for growth through M&A. With a cash balance of $2.5 million and a positive EBITDA, it is unlikely the company will need to dilute much in order to finance any potential acquisitions.

Growth Opportunities

While Neupath does plan to acquire new clinics and create efficiencies by integrating them with NeuPath’s existing infrastructure, they are not as heavily reliant on M&A in their growth strategy as other companies like WELL and DOC. From 2017 to 2019, Neupath has increased its capacity utilization rate from 29% to 56% organically, due to on-boarding of new doctors and improved patient throughput. At 56% capacity utilization, there is significant room for revenue growth without the need to build/acquire new clinics.

There are also opportunities for Neupath to grow which are line with the digital trends in healthcare. Grant Connelly, CEO of Neupath, recently commented, “Our ability to shift patients, physicians, and staff to other clinics in our network, combined with our success in converting 10% of our total visits to virtual visits, allowed us to continue to provide essential care to chronic pain patients in Ontario. We saw an increase in patient demand for treatments in late April that allowed us to re-open the clinics that we closed in March and we saw improved business performance in May and June.” It is clear that the management team at Neupath understands the need for telehealth and virtual care in the COVID-era and they have reacted accordingly. Given that the company is already well positioned in the clinic market, I would not be surprised to see them start to leverage the power of technology even further in order to start increasing the profitability and efficiency of their assets. Currently, Neupath’s main brand [CPM] has geographic coverage in 9 cities from Southwestern to Eastern Ontario. Given that the company is doing $50 million in revenues and is only operating in one province, there is significant expansion potential in other provinces.

‘Attractive’ Valuation

‘Attractive’ is an understatement. A better word to describe the valuation here would be ‘ludicrous’.

When I was first introduced to this company and read the most recent financial statements, I honestly couldn’t believe my eyes. I had to re-read the investor deck, news release, and financial statements three times before finally admitting that these numbers are the real deal.

First let’s take a look at the company’s financial performance:

We can see that revenues are increasing steadily at an adjusted CAGR of 23%. We can also see that EBITDA is trend upwards and has recently turned from negative to positive. Neither WELL or DOC is currently reporting a positive EBITDA.

Now to understand the undervaluation, let’s do a brief comparison of the latest financials from NPTH and WELL.

First, let’s look at market capitalization. The current fully diluted market capitalization of WELL sits at a whopping $575 million, while the market cap for NPTH is just $37 million. Next let’s look at the revenue and EBITDA figures. In the 2019 fiscal year, Neupath reported revenues of $49.6 million and EBITDA of $1.8 million compared to WELL’s 2019 revenues of $32.8 million and EBITDA of -$995,000.

As you can see, NPTH is currently trading at a multiple of 0.7x EV/SALES’19. To put this into perspective, WELL is currently trading for 17.2x EV/SALES’19 and another player in the space, CloudMd, is currently trading for 16.6x EV/SALES’19. The peer group average is 11.5X. If you were to take the industry average EV/SALES’19 of 11.5x and multiply it by NPTH’s revenues, you would end up with a valuation of around $570 million, which is equivalent to $11.10 per share.

Ridiculous? Ok, maybe the multiple of 11.5x is a bit high. So to make the valuation model more conservative we will adjust the EV/sales multiple all the way down to 4.5x. Plugging this into our model will still result in a valuation of around $223 million, which is equivalent to $4.35 per share or a 496% gain from current prices (THIS IS OUR CONSERVATIVE ESTIMATE).

You might be asking yourself why we used 2019 revenues rather than expected revenues in 2021, like we did with $DOC in our last article and valuation model. The reason for this is because there is no available revenue projection data for FY2021 for NPTH, as no one has modelled it out yet. NPTH has only been a publicly traded company for about 2 months, so there is very limited information available.

I can understand how this might be off-putting for some, but it also begs the question: Is the absurd undervaluation simply due to the fact that there are virtually no eyes on the story? It seems the only thing missing is exposure. When referring to the message boards on this community as well other online stock communities, you can see that there is dead silence. And for what it’s worth, I have often found that the most lucrative deals on the street are the one’s that nobody’s talking about.

Neupath will be releasing quarterly financials in the coming weeks which should give us some more clues as to the reasons for this huge undervaluation.