Description

After many years of losses in a hyper-competitive space, Hooper Holmes (HH) is a languishing nanocap stock. However, HH finally expects to be adjusted EBITDA positive for 2016. If HH can achieve its growth plan, HH has tremendous upside potential (5-10x) by 2018.

With much-hyped Theranos on ice for a couple years (or longer) and with a continued blood testing “pricing umbrella” due to the duopoly of LabCorp and Quest Diagnostics (with operating margins of 12% and 19%, respectively), there seems to be an opportunity for a few companies with the right strategy and lower costs to profitably gain market share in the growing corporate wellness/biometric screening space.  

BUSINESS

Hooper Holmes’ Health & Wellness segment started in 2007. HH divested non-core businesses in 2013 and 2014 to focus on Health & Wellness. Health & Wellness has grown at a 23% CAGR from 2007 (sales of $5 m) to 2015 (sales of $32.1 m). Sales have a 18% CAGR over the last five years, still impressive.

Hooper Holmes (HH) acquired Accountable Health Services (AHS) in April 2015 for $7 m in cash and stock. AHS provided the wellness portal and telephonic coaching. It also provided some staff and customers. With the acquisition, Hooper Holmes has now been focused for more than a full year on a triple play of:

1.    Employee Engagement Portal that currently reaches 750,000+ employees (SaaS, customers pay per employee; the portal is customized for each company and branded with that company’s info/logo; the portal includes recipes and personalized wellness report with recommendations; the portal also includes a Rewards Mall and team challenges, etc.)

2.    Biometric screening performed on 500,000+ employees (customers pay about $50 per individual screening consisting of a lipid panel, glucose, liver, kidney, blood pressure, height/weight, etc.; information is entered into tablets (no paper); a call center in Kansas schedules screenings; screenings are done by independent health professionals at a “flat rate across the country”; has a contract with blood lab CRL, based in Kansas); HH recently announced adding flu shots starting August 2016

3.    Telephonic Coaching/Education (customers pay ~$100 per 4 phone sessions; call center is in Kansas)

HH now has 3,000 customers, including 200 direct customers. A typical direct customer has 2,000-4,000 employees, and a typical contract is 3 years. All employees get access to the wellness portal, with about 50% of employees getting free screening and 10-50% of those screened getting telephonic coaching 1-4 months later (based on having risk factors). In addition to selling directly to mid-sized corporations, HH has 95 Channel Partners and sells to Clinical Research Organizations (CROs). Importantly, each of the three market areas (direct customers, Channel Partners, CROs) are seeing ~8% annual industry growth. Hooper Holmes has about 200 employees, and it’s a seasonal business with 60-70% of revenue in the 2H of year (screenings are generally once a year and usually in the fall as the company can then make changes to health benefits for year-end). 

The 2015 survey on wellness programs from Fidelity Investments and the National Business Group on Health (NBGH) reveals that almost 80 percent of employers are offering wellness and health improvement programs, spending on average a record $693 per worker.  Per the survey, the three most popular incentive-based health improvement programs for 2015 are biometric screenings (72% of employers plan to offer this program), health risk assessments (70%), and physical activity programs (54%). Per a PWC 2015 survey, about 73% of employers now offer a Wellness program (44% through an external vendor, 28% through their medical vendor/insurer and 28% through in-house services). Corporate wellness programs are becoming more popular each year, and there is a continued shift to using external vendors like HH.

Not only are corporate wellness programs becoming the norm but they also generally have a positive ROI. Interactive Health (a competitor) states that its customers spend 20% less on medical costs and experience reduced health-related employee absences. Similarly, HH has highlighted in-house studies which showed HH delivered a 7-9% improvement in employee health (in terms of improved wellness, lowered metabolic syndrome, lowered smoking, lower risk factors). One client experienced a ~6% reduction ($1.5 million) in their overall health costs (lower insurance costs, lower worker’s compensation/disability) plus improvement in employee morale and productivity (e.g. fewer sick days).

It’s unclear (to me) whether HH has a special, winning culture (like Whole Foods did in its early days) to be a home run investment. The company “eats its own cooking” with employees doing their own annual screenings (in the spring, outside the busy season), has healthy meals at the company office, displays health information posters in the office and has some thoughts leaders as advisors (including a medical director, some experienced board members and a relationship with the University of Michigan). HH appears to be executing well in terms of sales growth and quality of service. HH’s “quality of service” has 99% satisfaction scores (seems like many peers are in the low-90s).  

COMPETITION

HH faces hyper-competition from divisions of LabCorp and Quest, national screening players, regional/local screening players and venture-backed corporate wellness startups.

A national player is Interactive Health (founded in 1992; based in Chicago; has 624 employees), which acquired similar-sized Health Solutions in 2014 for 1.2x trailing sales. Interactive Health now has over 2,000 customers, serves over 750,000 employees and has annual sales growth of 30% over the last decade. A second national player is Wellness Corporate Solutions (2004; Washington D.C.; 440 employees). A third national player is Summit Health (acquired by Quest in 2014). Summit did over 400,000 screenings in 2013, but HH “usually beats them head-to-head recently due to Summit’s poor quality of service” (per CEO Henry Dubois). Regional/local players include eHealthScreenings (2007; San Antonio, TX; 44 employees), which did 120,000 screenings in 2013, and Kadalyst (2008; Portland, OR; 9 employees).

There are many venture-backed corporate wellness startups, and it seems like most/all are losing money. For example, Limeaid (Bellevue, WA) has raised $33 m in VC funding yet is still unprofitable after ten years of operations. There are a bunch of venture-backed corporate wellness startups, such as EveryMove (Seattle), Omada Health (SF), Pact (SF), Keas (SF), LifeDojo (SF), Zipongo (SF), LifeHub (Santa Monica), ThrivePass (Denver), Restore Health (Palo Alto), ShapeUp (Boston), Provata Health (Portland), Validic (Durham), Noom (NYC), and Retrofit (Chicago). Most focus on corporate wellness tools/portals and don’t offer biometric screenings (but they could in the future).

The biggest immediate risk for HH seems to be regional/local screening companies who are trying to underprice HH. CEO Henry Dubois confirmed that there is local competition underpricing HH in screenings in several markets. A significant risk is that this aggressive pricing could depress HH’s gross margin long-term (gross margin was 26% in F13, 24% in F14 and 20% in F15 – a very poor trend). However, by being based in Olathe, Kansas, and using its partner lab in Kansas, HH should eventually benefit from scale and have lower operating costs than virtually all competitors, especially venture-backed startups in SF and NYC.

MANAGEMENT AND 2016 GUIDANCE

Management salaries are high for a nanocap (CEO Henry Dubois, who joined in April 2013, enjoys pay above $400k), but management seems competent. Much of the investment thesis comes down to whether you believe management can meet 2016 guidance (sales of $42+ m and positive adjusted EBITDA) and then continue to grow in 2017 and 2018. Note that 2016 screening growth looks weak (104k for 1Q16 versus 108k for 1Q15) but screenings are 60-70% weighted to the 2H of year. Note that 2015 screening growth also appears weak: 515k in 2015 (90k from AHS) but that’s due to the loss of 47k from clinical contract and one large client not screening. HH screened 474k in 2014 and 416k in 2013. Despite the uninspiring recent screening numbers, HH had commitments for $6 m in new sales entering 2016 and has won $3.9 m in new sales so far in 2016 (as of 5/12/16). That implies that the 2016 sales guidance (for $11 m in sales growth) looks very achievable. The bigger concern appears to be if HH can reach its target of positive adjusted EBITDA for the full year 2016. Adjusted EBITDA was -$6.9 m in F14, -$4.5 m in F15 and -$1.4 m in 1QF16.

BALANCE SHEET

After a $3.5 m rights offering in January and a $1.2 private placement in March, HH’s last stated cash was $2.0 m (March 31).

HH had a 2013 loan of $2.6 m and $4.5 m toxic loan (with revenue-based principal payments of up to $600k a quarter) due to SWK (HH plans to retire $2.3 m of it in 2016) as of March 31. On April 29, HH signed a new $7 m credit facility with SCM for Prime plus 5.5%. For the new credit facility with SCM, last reported credit outstanding was $3.1 m (which replaced the 2013 loan) and credit availability was $1.1 m (May 11). That implies total debt of $7.6 m, so net debt of $5.6 m.

VALUATION

 With another two years of $11 m in sales growth (similar to the 2016 goal), 2018 sales would be at $64 m, with gross margin targeted “above 35%” (per CEO) and SG&A around $16 m (“under 25% of sales”). That would imply EBIT of $6.4+ m and NI (after interest expense but no taxes due to a large NOL of $64+ m) of ~$6 m. 15x would put the market cap at $90 m, or a $10+ stock, 7x today’s level. CEO Henry Dubois has repeatedly highlighted a long-term goal of $100 m in sales. 

Catalyst

Sales growth continues leading to significant EPS profitability in 2018

Potential acquisition target (comparable transactions at 1.3x sales)