Description

MultiPlan is a healthcare information technology (HCIT) company who is coming public via a SPAC run by Michael Klein (Churchill Capital III) at a discount to the closest public comparables and private market transactions. Multiplan helps lower healthcare costs and payer costs by processing claims for their payer clients, generating revenues as a percentage of savings they earn for their customers. They have 1.2mm providers under contract in their Network offering, >700 payer customers (and via these customers >60mm consumers), have processed >$106bn claims in the LTM, have a sticky recurring revenue base with multi-year contracts and decades long relationships, and have 3.5 petabytes of structured healthcare data (and 12+ petabytes including unstructured). The business is driven by 40 years of claims data, a national reach, strong relationships with customers, impressive IP, and a modern scale technology platform. All of this allows them to drive strong and visible topline growth, huge EBITDA margins (70-80%), and strong FCF generation.

Some of the key highlights of MultiPlan as a potential investment:

• Strong Revenue Visibility & Moat: Healthcare costs are expected to increase at a rate of 5.5% a year from 2018-2027 per CMS data, providing a direct tailwind to MultiPlan who gets revenues via a percentage of savings on claims based on these costs. Their contracts are typically 3-5 years in length, they have 100% recurring revenue, they have 20+ year relationships with their largest payer customers, they are completely aligned with customers (only generate revenues if they get savings), and they are directly integrated into the payers systems and processes (high switching costs). As the “Switzerland” of claims processing for payers, they benefit from being able to work with all payers as they don’t compete with them, and stopping payers from being able to enter this business themselves.
• Data: MultiPlan has 3.5 petabytes of valuable structured financial data and >12 petabytes including unstructured data. They have 40 years of claims data making up a database of >1bn claims, and they process 370,000 new claims per day. In an era where data in general, and especially healthcare data, is considered so valuable (see all the commentary around GOOGL’s Project Nightingale).
• Massive Margins and FCF Generation: Given the high automaton in MultiPlan’s business (99.96% of  network claims completely automated; 96% of all claims returned the same day; 87% of negotiations automated; can process claims in 5 seconds), they are able to generate very large Adj EBITDA margins. 2020e Adj EBITDA margins are 75.5% at the midpoint, 2019 margins were 76.3%, and 2018 margins were 79.2%. They also generate an extremely large amount of FCF from this, with conversion to Levered FCF ~43% in 2019 by our estimates, guided to rise to ~51% by 2021, with a long-term guidance of 60-70%. This provides enormous leverage as each incremental dollar generates ~$0.93 in incremental Adj EBITDA.
• Business Model Inflecting for Growth: MultiPlan has been under 4 separate private equity owners since 2004. The large and recurring FCF nature of the business has made it a great target for loading with large amounts of debt and pulling out huge PE dividends. However, the upcoming SPAC transaction with Churchill Capital III (CCXX) run by Michael Klein will enable MultiPlan to pay down debt to more operationally flexible levels, have cash on the balance sheet to pursue organic and inorganic growth opportunities, and allow the massive amounts of FCF to be reinvested into the business to drive top line growth. The company is guiding to greatly increase MultiPlan’s growth to 11-15%, a premium to the 6% historic growth since 2013, 5.5% medical inflation rate per the CMS, and 6.0% organic projection from 2019-2021.
• Valuation Discount: MultiPlan is being brought public at a valuation discount to peers. MultiPlan currently trades at an EV/’21e EBITDA of 13.1x (fully diluted) and a FCF Yield of 6.3%. This compares to the peers they used in their investor presentation trading 21.8x EV’21e EBITDA and a 3.5% FCF yield. These peers have much lower margins on average. Competitor Cotiviti was taken private for 14.9x next year's Adj EBITDA forecast in 2018, despite having forecasted Adj EBITDA margins of 40.4% vs MultiPlan’s 77.8%. The peers used in Cotiviti’s proxy now trade at an average EV/EBITDA of 15.8x and a FCF yield of 4.9% despite on average being inferior businesses to MultiPlan. Zelis, a competitor in multiple segments for MultiPlan, realized an exit multiple of 24.0x EBITDA per Parthenon Capital in a transaction last year. If you run a regression of EV/EBITDA multiples vs EBITDA margins, EBITDA growth, and Net Debt against competitors from both the presentation and COTV’s proxy, as well as CHNG (recent HCIT peer), the R value is 0.78, with EBITDA margins unsurprisingly the most relevant variable. Using MultiPlan’s guidance for 2021, this implies an EV/EBITDA multiple of 32.1x. If you run that same regression against revenue growth, FCF as a % of revenues, and Net Debt, it has an even higher 0.83 R value, with FCF as a % of revenues even more relevant than EBITDA margins. This could point to an EV/EBITDA of 26.9x for MultiPlan. Even adjusting MultiPlan’s 2021 estimates to be equal to 2019 (just reversing COVID, no new growth), the implied multiple would be 24.0x. Looking at a DCF based on MultiPlan’s WACC and guidance out to 2025 with a 3.0% terminal growth multiple (vs 2-3% used by GS in it’s financial opinion on Cotiviti and 5.5% CMS guidance for healthcare expenditure increases) implies a stock price of $25.18 and a 25.5x EV/EBITDA multiple. 

This opportunity exists now because MultiPlan is nearing the end of it’s PE lifecycle with H&F (average PE ownership of MultiPlan has been 2-4 years), and as a result of acquisitions earlier in the decade has moved from being an entirely network business to an analytics and processing company operating in the healthcare sector. This has positioned MultiPlan and given them the technological tools and data to pursue a growth strategy, as opposed to the high-debt PE model where massive FCF generation was used to pay down debt and pull out large dividends to PE owners. The SPAC transaction will allow MultiPlan to pay down debt to a more sustainable level, and management will now be able to use cash to invest in initiatives to expand the topline growth trajectory, pushing MultiPlan into a new growth phase, and following a similar playbook used by Michael Klein in his acquisition of Clarivate (CCC) via Churchill I in 2019, which has returned >200% since the deal was announced.

History

MultiPlan was founded in 1980 as a New York hospital network. It was acquired by Carlyle in 2006 at a $1.0bn valuation. Later that same year, they acquired the largest primary PPO network in the US in PHCS. In 2009, MultiPlan announced it was acquiring Viant, itself founded in 1990, in a horizontal merger that joined two of the largest PPOs in the United States (MultiPlan had a network with 5,000 hospitals, 115,000 ancillary care facilities, and 625,000 practitioners while Viant’s network was 5,400 hospitals, 95,000 ancillary facilities, and 600,000 practitioners).

The deal was completed in early 2010 and set the stage for Carlyle to sell MultiPlan to BC Partners and Silver Lake in a deal that valued MultiPlan at $3.1bn. Under BC Partners and Silver Lake, MultiPlan transformed from being a mainly network offering to adding data analytics, launched by it’s acquisition of NCN (cost-based healthcare reimbursement) in 2011 for $55mm, whose Data iSight product helped find medical cost savings in billing using technology. NCN went from $15mm in revenue in 2011 when it was acquired to $323.7mm in 2019, growing at a 46% CAGR during that period. WSJ journal has reported, and Michael Klein also mentioned at their analyst day, that Warren Buffet tried to acquire MultiPlan in 2013 from BC and Silver Lake, although they were not interested in selling at the time. 

In early 2014, MultiPlan was acquired by Starr Investment Holdings and Partners Group in a deal valued at $4.4bn. At the time, they said MultiPlan generated >$11bn in medical cost savings on 40mm claims. MultiPlan then went on to acquire Medical Audit & Review (analytics to ID wasteful or abusive billings pre-pay) later that year, expanding it into it’s 3rd and final current business offering, Payment Integrity. They acquired Medical Audit & Review for $50mm, with their pre-payment integrity offering generating $1.5mm in revenues when it was acquired and growing at a 135% CAGR to $106.9mm in 2019 revenues.

Hellman & Friedman then acquired MultiPlan in 2016 for $7.5bn, representing it’s 4th PE owner in 10 years, all of whom made money on their investment. At this time, they disclosed MultiPlan was now generating $13bn in savings annually for clients, reducing ~40mm medical bills with the analytics and network-based cost containment strategies, as well as analyzing >300mm bills for improved claims payment integrity. 

Current Business

MultiPlan currently describes their business as a “market-leading, technology-enabled provider of end-to-end healthcare cost management solutions.” Last year they processed >135mm claims and delivered $19bn in medical cost reductions to their customers. MultiPlan generates revenues by accepting claims from payers and feeding them through their “Client Savings Engine”, which is their network of data and algorithms used to process claims under their 3 core capabilities. They then identify a number of claims with savings opportunities and the total amount of this opportunity (the $19bn mentioned above). MultiPlan then charges a fee as a small percentage of this savings number, aligning them with their customers and creating incentive for their customers to continue to utilize MultiPlan. 

(Source: MultiPlan July Investor Presentation)

10 of the top 10 payers, including UNH, AET, HUM, CI, and ANTM are their customers, as well as CNC. Their relationships span 20+ years with the top 10 largest commercial payers (e.g. UNH since 1994, CI since 1992, AET since 1994).  By aligning with their customers (they don’t make money if their customers don’t) and being embedded in their customers’ claims processing lifecycle, MultiPlan is able to generate large recurring revenues (they call it 100% recurring). They do this under 3-5 year contracts (75% of which are >3 years in contract length), providing a huge degree of visibility. And there customers will not be able to disintermediate them, as MultiPlan succeeds by being the “Switzerland” of claims processing data, and having access to claims from all of their payer customers. A single payer would not be able to replicate this claims database because competitors would not work with them, lowering the amount of data and thus the quality of the dataset and savings it is able to produce. On the last earnings call (2Q20), Michael Klein said that in doing due diligence on this transaction, they spoke to customers representing 65% of MultiPlan’s revenue who spoke to the mission-critical nature of MultiPlan for them.

MultiPlan mentions that their “value creators” come from having 40 years of claims data, national reach, an expansive provider network, and strong relationships, as well as innovative IPO and modern scale technology. As it currently stands, MultiPlan is typically engaged by clients at the point in their adjudication process where they determine the claim is out-of-network, with the exception of Payment Integrity which can also service in-network claims (more on this below). 

They have three main platform capabilities designed to save their customers (payers) money:

Network-based Services (30.1% of LTM revs for 6/30/20): This was MultiPlan’s original business, operating the largest independent preferred provider network (PPO) with 1.2mm providers under contract. They reduce healthcare costs by providing access to a national network of providers with whom MultiPlan has contracted at discounted rates. MultiPlan charges either as a percentage of savings achieved or a per employee/member per month fee. They also build customized network access for customers, which have been used especially by Medicare Advantage plans. This business benefits from network effects, where more payers = more customers = more desirable to providers = more payers. Network-based services has 3 main “configurations”, although Primary and Extended Primary are similarly used (the former being a full-time primary network and the later used to extend regional networks).

(Source: Revenue breakdown based on 1H20 revenues per Churchill Proxy; Competitors per August Presentation)

• Primary: Used when a provider does not have a network in a given area, whether MultiPlan will represent the payer’s full network (Primary) or their network in a particular region (Extended Primary). Typical Primary customers include provider-sponsored health plans, Medicare Advantage, Medicaid, Third Party Administrators, and Taft-Hartley funds. 
  • Primary: This is used by plans with inadequate or no contracted network, operating as their full-time primary network. This is charged on a Per Employee Per Member rate (PEPM). 
  • Extended Primary: Most commonly used by regional health plans to extend networks outside their local service areas, this is for plans with only limited regional networks. Charged on a percent of savings achieved rate.
  • Complementary: This is used as a wrap around a payer’s primary network to give the plan members a greater choice of providers. It is used for plans with significant out-of-network claims. Typical customers in the Complementary configuration include large commercial insurers and P&C payers.

Competitors in this segment include First Health (owned by AET), and TRPN, as well as Zelis who is an aggregator (patching together 3rd party regional networks). 

Analytics-Based Services (59.0% of LTM revs for 6/30/20): Reduce healthcare costs through comprehensive proprietary and public data, IP and algorithms. This business analyzes claims using MultiPlan’s proprietary tech platform and figures out if the provider is overcharging payers, allowing them to challenge claims and realize savings. Essentially, this business is taking claims provided by payers from their providers, using their historical database of claims data and rules-based algorithms to determine a fair reimbursement for claims. Typical customers include large commercial insurers, BCBS plans, provider-sponsored health plans, and third party administrators. It is also used by some P&C payers. It has two main approaches, both used to reduce the cost of claims that don’t have a network contract available (either because the Provider doesn’t participate in networks that the payer accesses, or because the payer doesn’t use networks):

(Source: Revenue breakdown based on 1H20 revenues per Churchill Proxy; Competitors per August Presentation)

• Negotiation Services: This gives provider sign-off prior to reimbursement. For claims from providers with whom neither the payer nor Multiplan have been able to secure a contractual discount. MultiPlan handles these claims on an individual basis and attempts to negotiate with the provider an acceptable payment amount for a specific claim. ~50% of the successfully negotiated claims are completed in a fully automated manner. For non-automated claims, MultiPlan uses a negotiation staff who relies on statistics on typically discounts per MultiPlan’s database.
• Medical Reimbursement Analysis (MRA) aka Pricing Services: This provides payers with a fair and reasonable reimbursement recommendation based on MultiPlan’s pricing methodologies and relying on data from public and private sources on a national and local level which are then analyzed using proprietary automated algorithms that deliver “consistency and defensibility”. Variables the recommendation looks at include location, provider size/type, severity of procedure, resources used, and costs/reimbursements from providers in similar situations. 

Competitors in this segment include Zelis, as well as reference-based pricing services such as Advanced Medical Pricing Solutions (AMPS), ELAP Services, PayerCompass, 6Degrees, HST and ClearHealth Strategies.

Payment Integrity Services (10.9% of LTM revs for 6/30/20):  Combines automated analytics and clinician reviews to identify and remove improper, unnecessary, and excessive charges BEFORE claims are paid. Targets “Fraud, Waste, and Abuse” in the healthcare industry. MultiPlan uses a rule set comprised of >200mm code combinations and 14 physicians and 35 certified medical coders on full-time staff. There are two main approaches in Payment Integrity as well:

(Source: Revenue breakdown based on 1H20 revenues per Churchill Proxy; Competitors per August Presentation)

• Clinical Negotiation: Targets out-of-network medical claims by leveraging analytic findings to get provider signoff for reduced payment. Payment integrity analytics score the claim, and then based on the score the claim is reviewed by a clinician and/or coder and routed to a negotiator to reach agreement for a lower reimbursement as a result of the identified billing issues. The payer reimburses under the negotiated agreement. Typical customers here include any of MultiPlan’s network or negotiation services customers.

   

   

• Claims Correction/Negotiation: Claims editing service applicable for in-network and out-of-network medical and dental claims that removes improper charges without provider sing-off. Payment integrity analytics and the clinician/coder review (if needed) lead to a recommendation to remove certain charges which is factored into the payer’s final adjudication of the claim. This segments customers also include MultiPlan’s network or negotiation services customers, as well as it’s commercial, MA, and Medicaid payers on their contracted claims.

Competitors in this segment include Cotiviti, CHNG, Optum, Discovery Health Partners, HMSY, and The Rawlings Group. 

Growth Plans

As mentioned in the intro, part of what makes MultiPlan such an attractive potential investment is its transition from a levered PE entity using cash to service debt and pay dividends to a growth company investing in it’s topline.

MultiPlan has laid out an “Enhance, Extend, and Expand” strategy that they expect to increase revenue growth from ~6% organic expectation to 11-15%. These three components represent a revenue opportunity of as much as $600mm-$1.05bn, which they say should help grow revenues “significantly” over the next 5 years (with their analyst day presentation saying these revenues should be achievable 3-5 years after starting the initiatives).

Part of what makes much of MultiPlan’s growth plan so exciting is the realistic nature of the markets and products they plan to offer. These are not pipe dream, theoretical avenues for growth. In many of these, they have either been asked specifically by customers to help service that area or are already participating. Their tools and products are a perfect fit for these adjacent categories. And not only will these have financial benefits as mentioned above, but they will help to broaden MultiPlan’s customer base and further diversify their business model. 

• Enhance: This plan is centered around enhancing the current offering they have by (1) growing their sales force, (2) modernizing their algorithms with AI/ML, and (3) combining proprietary data with 3rd party data for new use cases such as fraud detection. MultiPlan said the Enhance growth strategy could add $100mm-$150mm in revenues and $80mm-$120mm in Adj EBITDA (80% Adj EBITDA margin). This is all within their current out-of-network TAM of $6bn-$8bn. All together these plans will find more claims with savings, more savings per claim, and allow more powerful negotiation to generate further savings. 
  • Growing the sales force, which they have already been investing in, should allow MultiPlan to cross-sell existing payers and convert more to using all 3 offerings. This will grow overall claims. If they can increase their claims just 1%, they can add $10mm in revenues without any efficiency gains. 

• Increasing their AI and Machine Learning to increase discovery of claims with savings and savings amounts per claim (currently use algorithms based on rules clinicians coded after years of reviewing claims; this will create a more dynamic offering that can create new rules). It will also save time for negotiators by allowing negotiators to have their claims automatically prioritized, allowing them more time for claims negotiation to create further savings. A 1% increase in claims found with errors could increase revenues by $22mm. A 1% increase in savings per claim could create $22mm in annual revenues. 

• Partnering with 3rd party providers of healthcare data could allow MultiPlan to enhance it’s algorithms and provide more offerings. While it is hard to quantify exactly how much revenue this could create, it’s not a stretch to see how taking the above in combination with some gains from this strategy could easily help them hit their $100mm-$150mm revenue goal (2% increase inclaims, savings opportunities, and savings per claim = $113mm additional rev before other opportunities).

• Extend: This plan involves MultiPlan adding new customer segments and end markets, taking MultiPlan’s data, algorithms, and business model to adjacencies where it could generate similar benefit to customers. Initial expansion plans include: (1) extending further into in-network cost management, (2) adding new customer segments including Government, P&C (auto and workers comp), and Dental, (3) Adding a claims-editing and special investigation product, and (4) expanding Internationally. This would lift the total TAM MultiPlan targets to $10bn-$13bn. They see the incremental revenue opportunity from the above as $300mm-$500mm and $200mm-$350mm in Adj EBITDA. This market's incremental growth is also 7-10% vs the 6% organic mentioned earlier. 

• In-Network: While MultiPlan does service In-Network claims to some extent through it’s Payment Integrity division currently, they plan to further penetrate this offering. They are building out a salesforce to accelerate the capture of new in-network claims processing, and mention that volumes here are ~10x what they are in out-of-network. Michael Klein said at the Analyst Day that they have been specifically asked by customers to help serve in-network revenues as well. This also ties to some extent with new customer segments, as Government, P&C, Dental, and International don’t so much need out-of-network pricing and steerage often times, so it is more about lowering fraud, waste, and abuse on the in-network side for these (although Data iSight and custom network do have some applicability). At 10x the market size of out-of-network, even if they capture a much lower market share in Payment Integrity alone than in out-of-network, it’s easy to see how this alone could create $100mm or more in revenue opportunity.

• Government: MultiPlan entered the government market in 2010 with their acquisition of Viant and it’s Medicaid network in TX. Today, this business is largely Medicare Advantage focused. It helps serve Government customers with demand for both Network and Payment Integrity products. Plan to “aggressively” service Government customers and add a dedicated sales team for them. Per the CMS, in 2017 Medicare and Medicaid were 37% of health spending by source of funds vs 34% for private insurance. This has the ability to double MultiPlan’s revenues from Payment Integirty at a similar share (and likely higher given the larger in-network size), and also contribute to the Analytics and Network business.

• P&C: Consists of workers comp and auto-medical payers. MultiPlan also entered this market with the acquisition of Viant in 2010. They have historically worked through bill review companies in this market vs going directly to carriers. Also see opportunity in other P&C areas besides workers comp and auto. Plan to “aggressively” service P&C customers and add a dedicated sales team for them. Per the “Insurance Information Institute”, Auto Insurance Fraud accounts for 15-17% of all claims payments (citing a study by the Insurance Research Council), which they say was $5.6bn-$7.7bn in 2012. The same article mentioned P&C fraud of ~$30bn a year (from 2013-2017), again likely below current levels. nsc.org cites the National Academy of Social Insurance as estimating that $62.0bn was paid out under workers’ comp in 2017. By Net Written Premium, NAIC’s 2019 reports said the Health Insurance Industry was $745bn in 2019. The P&C market was $624bn, of which workers comp and auto was ~50% of the direct written premium. Just targeting these two areas could increase the TAM by ~50%.

• Dental: MultiPlan plans to enter the Dental market with pre-payment integrity services using clinical algos and full automation to review questionably billed charges. They mention in the proxy for the Churchill deal that the “…dental market is a low-dollar, high volume environment where automation is critical to the ROI of any payment accuracy program.” While this is a much smaller slice of the pie (~$14bn in direct written premiums per NAIC), it is another area that MultiPlan could easily expand to service with their current tools and technology.

• New Products: While MultiPlan doesn’t break out a revenue associated with new products and it is difficult to quantify how much of an impact this could have, MultiPlan mentions new offerings including Claims-Editing (rules-based, automated adjustment of claims pre-payment) and Special Investigations (leveraging analytics and data mining to identify and recover fraudulent Providers/claims).

• International: MultiPlan believes their offerings could be used internationally, where waste, fraud, and abuse are still very common (despite single payer and set prices making out-of-network offerings less relevant). MultiPlan plan to conduct a strategic review to determine the feasibility and upside of adding international markets, and if successful, plan to pilot and launch in several international markets (the investor presentation mentions Canada, UK, Germany, and the Middle East in relation to government-sponsored plans, but unclear if these are target areas).

Altogether, the areas MultiPlan is expanding into could represent an increase of claims of ~13.6x, and yet they are only targeting increasing their TAM by ~0.6x and increasing their revenues just 0.4x, showing how some of these estimates could be very conservative even if they have trouble gaining share. They show their TAM increasing just $4.5bn, and of that $4.5bn their targeted revenue opportunity is just 8.9% of that vs capturing 13.6% of their current TAM. Given how realistically applicable MultiPlan’s products should be to these markets, the fact customers have specifically asked them to provide their solutions into these markets, and the conservative targeted numbers, it’s not hard to imagine MultiPlan being able to access further growth via investment here. 

(Source: In-Network numbers per MultiPlan, citing Mckinsey; International per WHO relative to US Health Expenditures in MultiPlan presentation [citing Institute of Medicine and CMS]; Medicare & Medicaid per the CMS relative to Private; P&C [Auto/Workers Comp only] per NAIC relative to Health Insurance on a Direct Written Premium basis; Dental ] per NAIC relative to Health Insurance on a Direct Written Premium basis; Targeted TAM Increase is Increased TAM relative to Current TAM; Targeted Rev Increase is revenue increase target from Expand relative to current revenue

Expand: This is the least granular plan for growth laid out, and thus we won’t spend too much time discussing it and view it more as optionality. This plan involves MultiPlan licensing their data through partnerships with financial companies and software companies, and working to service providers and consumers through their payer customers and directly. MultiPlan could license their anonymized data and micro-services to provide detailed therapy and pricing benchmarks to help solve issues at these providers and consumers. Examples of potential solutions in this area include prior authorization support, offer denial prediction services, comprehensive and detailed invoices to consumers (explaining more, providing benchmarks for clarity and transparency), risk-assessment models to providers, enabling of 3rd party medical financing via data, consumer insights to providers (care needs, behavior, provider capacity), and consumer insights and solutions (spend management, data on benchmarks and spend patterns). MultiPlan says this could increase their TAM by $20bn-$37bn ($4bn-$7bn from providers and $20bn-$30bn from consumers). They see the incremental revenue opportunity from the above as $200mm-$400mm ($50mm-$100mm from providers and $150mm-$300mm from consumers) and $100mm-$250mm in Adj EBITDA opportunity. This market's incremental growth is also 9-20% vs the 6% organic mentioned earlier (9-11% for providers and 10-20% for consumers). 

• We do not include any benefit from this in our model, although the number could be seen as conservative as MultiPlan only show capturing ~1.0% of their incremental TAM at the midpoint vs expecting ~8.9% from the Extend Strategy and capturing 13.6% of their current TAM. 

Revenues

As mentioned, MultiPlan processed $106.3bn in claims last year, delivered $18.9bn in savings, and earned $983mm in revenues. For 2020, they currently expect revenues of $920mm on claims of $99.8bn and savings of $18.8bn.

MultiPlan’s initial 2020 budget called for $1.04bn in 2020 revenues, an increase of 5.9% over 2019 numbers. However, with the decline in claims due to halting of many elective procedures and other non-critical healthcare expenditures, they have lowered their 2020 guidance to $910mm-$930mm, -6.4% YoY at the midpoint.

Originally, MultiPlan expected that COVID-19 could have caused as much as $135mm-$150mm impact to revenues, spread across 2Q20 and 3Q20. However, 2Q20 results came in better than expectations ($49mm impact vs expectation for $65mm-$70mm impact). In August at their analyst day, MultiPlan said they are now expecting 3Q20 numbers to be “appreciably” better than the $70mm-$80mm hit they originally projected. They mention how in March, only 5-10% of providers were able to offer services due to stay-at-home orders vs almost back to 100% by June. If 3Q20 outperforms the initial expectations as much as 2Q20 did, they could show ~$207.5mm in revenues in 3Q20, and still leave room for  4Q20 numbers to come in ~6% below the budget of $269mm to hit their new 2020 guidance. Given the visibility MultiPlan sees and the number of contract wins (see below) announced on their 2Q20 earnings call, it seems that they should be in a good spot to hit their 2020 numbers. 

(Source: MultiPlan August Analyst Day Presentation, slide 48)

MultiPlan also said that they were ahead of budget, which expected 5.9% growth for the full year, in 1Q20. They see pent up demand in elective procedures (a sentiment echoed by many of the Med Tech companies). Their current 2021e claims guidance represents a 4.7% CAGR from 2019, below CMS’ 5.5% 2018-2027 long-term growth CAGR expectation. At ~43% claims with savings and ~43% savings per claim, and the same revenue take-rate as historically, MultiPlan would be on-track to do ~$1.1bn in revenue in 2021, which is what they are expecting. As long as COVID-impacted revenues rebound and normal healthcare inflation continues, this should not be a difficult number to meet, and importantly, appears to include no benefit from the increased sales force being implemented or ANY growth initiatives. They said as recently as mid-August that they are “comfortable” with their 2021 guidance.

(Source: MultiPlan August Analyst Day Presentation, slide 19)

Below are a list of the contract wins mentioned on MultiPlan’s 2Q20 earnings call:

• Large TPA w 900k members added in Jan 2020, who added 100k member group in July based on success

• Large national carrier planning to use Data iSight in Jan (20 or 21? Seems to mention planning to further expansion of the product and platform “later this month”

• “Several” BCBS plans with initiatives underway to increase the use of MultiPlan’s service. Notably a large BCBS plan is currently expanding its use of Data iSight and recently added network access inside its service area, while another BCBS plan added one large client to their program in the quarter with a plan to add another in Jan 2021.

• In contract discussion with a new plan to bring the BCBS roster to 14, further validation of working with these plans nationwide.

• A number of regional health plans deploying Data iSight initiatives later this year, including active contract discussions with 3 new plans

• Signed agreements with 3 Medicare Advantage plans for Network Build services to help with their network advocacy, compliance, and expansion opportunities.

• Discussions are underway with a number of other plans, including a large national carrier

Looking at overall healthcare expenditure increase/healthcare inflation projections to see if their claims guidance is realistic, we would note the below:

• As mentioned above, the CMS projects national healthcare expenditures will rise at a 5.5% CAGR from 2018-2027, a study McKinsey has sighted in their research in the past.

• Grandview Research forecasts the global IT market growing 10.3% from 2020-2027.

• Deloitte has forecast healthcare spending rising at a 5% CAGR from 2019-2023.

• Markets & Markets forecasts the healthcare IT market rising at a 15.8% CAGR from 2019-2024.

• Allied Market Research estimates the HCIT market growing at an 11.7% CAGR from 2017-2025.

• Per MultiPlan’s presentation (citing the Institute of Medicine and the CMS), US Healthcare Expenditures grew at a 9% CAGR since 1960, and a 3.5% CAGR since 2010. MultiPlan grew it’s revenues at a 6.6% CAGR over the later period, nearly double the broader market.

If we go out to 2025e, MultiPlan is projecting revenues of $1.66bn at the midpoint, representing an 11% revenue CAGR from 2021. If you simply take the CMS’ estimate of a 5.5% increase in healthcare expenditures in the US through 2025, MultiPlan would be on track to do $1.3bn in revenues in 2025. If they can capture ~$125mm midpoint of their “Enhance” strategy, which seems very realistic, if not conservative as mentioned above, they would be doing ~$1.47bn in revenues. That means they need to capture just ~$161mm from their “Extend” and “Expand” strategies to hit their targeted 2025 numbers. As mentioned, we view “Expand” as more of optionality, but given they expect $300mm-$500mm in potential “Extend” revenues, this number itself potential conservative relative to the size of In-Network, Government, P&C, Dental, and International claims, we feel underwriting $190mm in revenues from this strategy is potentially conservative. 

M&A Optinality

A quick note on M&A, while we do not include ANY M&A in our estimates, MultiPlan and Churchill both mention it multiple times as part of the strategic rationale for doing the deal. In fact, the background mentions part of the impetus for the deal was MultiPlan reaching out to CCXX regarding potential financing of a potential transaction between MultiPlan and a 3rd Party. And, at the analyst day, an analyst for Citi asked a question about a “large M&A transaction” that was in the works that was previously alluded to. MultiPlan also said at their analyst day that they are already building a “robust pipeline of potential targets”. MultiPlan has mentioned that they often get very accretive deals as they are able to drop claims they acquire into their automated framework, and with many peers having margins 50% those of MultiPlan, by reaching MultiPlan’s margins they can realize a 50% reduction in purchase multiple. Their M&A framework (see below) mentions that any deal must be FCF accretive.

(Source: MultiPlan August Analyst Day Presentation, slide 38)

Between Michael Klein’s previous M&A success at Clarivate (see below), MultiPlan’s strong track record with both Data iSight and Medical Audit & Review Solutions (see below), and the large amount of financial flexibility MultiPlan will have (starting with almost $1.2bn in cash on the balance sheet + no restrictive debt covenants + generating hundreds of millions in free cash flow per year + public stock currency now), we believe M&A represents a compelling and likely source of upside in the name.

(Source: Bloomberg)

(Source: MultiPlan August Analyst Day Presentation, slide 20)

Financials

Given we view management’s guidance as not only achievable, but relatively conservative (2021 = standard healthcare inflation with no growth benefits; 2025 = standard healthcare inflation + 35% of the “Enhance, Extend, Expand” opportunity, or just 23% of the “Extend, Expand” opportunity; no M&A in either estimate; no market share gains), we assume that they can grow linearly from 2021 to 2025 to hit the midpoint of management’s targeted revenues, growing at a 10.6% CAGR from 2021-2025.

MultiPlan is guiding for ~76% Adj EBITDA margins in 2025. The previous 3 years margins have averaged 77.2%. Next year's guidance is for 77.8% (2020 is taking a dip to 75.5% in-light of COVID-19 hitting claims while not expenses). The guidance is below recent levels, despite efficiency efforts underway to automate more of the business and further lower operating costs. Again, we believe this should be achievable.

Remaining financial assumptions in our model:

• Interest Rates: MultiPlan pays a 4.9% blended cash rate on their debt. We assume this stays flat (no refinancing) going forward. Assume they use ~50% of yearly levered FCF for debt paydown (the remainder builds on the balance sheet in our model, although we assume it is used towards growth + M&A + more debt paydown).

• Cash Tax: Assume 23% given MultiPlan’s US focus, although their tax rate varies and has been in the teens the previous few years.

• CapEx: We use 6.6% of revenues a year in our model, which is in line with what it has been historically. MultiPlan has actually guided to increasing CapEx from 6% to 10% to fund the aforementioned growth initiatives, but we use 6% to tie-out to FCF guidance in our model. Part of this is likely due to differences in cash taxes and changes in net working capital assumptions, but it shouldn’t impact the financials we use for valuation. Worth noting that the true number should end up moving towards 10% though, representing their increased investment

• Change in Net Working Capital: We assume 3.8% of revenues per year. It was 3.8% in 2017 and 3.6% in 2018. MultiPlan has very low net working capital as a business

• D&A: Assume 39.7% combined D&A, in line with 2019 levels. D&A has been steadily increasing (led mostly by amortization).

That gives us the following simple income statement. 

In this scenario our levered FCF is a bit below MultiPlan’s guidance in 2025 ($778mm vs est $838mm). Leverage has decreased to 1.1x. MultiPlan has spent $500mm on CapEx, paid down $1.5bn in debt, built up $2.7bn in cash on the balance sheet, and generated >$3.0bn in free cash flow since 2021.

Valuation

As mentioned in the Investor Presentation and Analyst Day Presentation, Churchill believes that they are bringing MultiPlan at a discount to public peers on both an EV/EBITDA basis and an FCF Yield basis (they present as Equity Value / LFCF). 

(Source: MultiPlan August Analyst Day Presentation, slide 58)

While normally we find selection of comps for valuation in SPAC transactions to be dubious, in this case the selection seems mostly appropriate. MultiPlan now gets ~70% of its revenues from Data Analytics and Payment Integrity and has almost 80% EBITDA margins, as well as strong, contractual, and recurring revenue.

When we looked to value MultiPlan, we also looked at competitors from the presentation. CHNG was included as a competitor in Payment Integrity, so we included them in our valuation. Cotiviti was also included, who was acquired by Veritas portfolio company Verscend for 14.9x next years EBITDA in 2018. Their listed competitors included MDRX, CERN, HMSY, INOV, IQV, EFC, EXPN LN, IT, INFO, NLSN, TRI, TRU, and VRSK. The valuation of these comps has expanded somewhat and they now trade at 15.8x EV/’21e EBITDA. We also include all of those not already in the set via the CCXX presentation in our comp group.

It is also worth noting that one of MultiPlan’s competitors in two segments (Network-based Services and Analytics-based Services), Zelis, was owned by Parthenon Capital, who mentioned in a presentation to the Retirement System of Rhode Island that they realized a 24.0x exit multiple on their investment in 2019.

We ran a multi-factor regression of EV/EBITDA multiples and FCF yield against multiple factors (margins, growth, debt, etc), and found that regressions of this comp set on an EV/EBITDA basis against EBITDA margins, EBITDA growth, and net debt, as well as against revenue growth, FCF as a % of revenues, and net debt both showed high explanation of the multiples these comps ended up with. 

• Looking at 2021 estimates from MultiPlan, the first set of variables (EV/EBITDA against EBITDA margins, EBITDA growth, and net debt), the variables described 61% of the multiple (R2). For MultiPlan, using company guidance, this implies an EV/EBITDA value of 32.1x.

• If we assume MultiPlan doesn’t actually grow at all and simply recovers the lost COVID claims, where 2021e revenue = 2019 revenue, and margins decrease from 77.8% estimate to 76%, the implied multiple is still 29.9x based on the above variables.

• The second set of variables (EV/EBITDA against revenue growth, FCF as a % of revenues, and net debt) showed an even higher correlation, with the variables explaining 69% of the multiple. For MultiPlan, using company guidance, this implies an EV/EBITDA value of 26.9x. 

• Under the same bearish scenario used above, it would imply a multiple of 24.0x.

Looking at a DCF on MultiPlan, with the financial statement we laid out previously through 2025, a 3.0% terminal growth rate and a WACC of 6.3%, we get a target price of $25.18, representing a 25.5x EV/’21e EBTIDA multiple. Using our models LFCF, which we noted is slightly lower than MultiPlan’s guidance, we get $22.60 and a 23.5x EV/’21e EBITDA multiple. Note that the terminal growth rate compares to a 2-3% terminal growth rate used in GS’ financial opinion for the Cotiviti merger; US healthcare expenditures 9% CAGR since 1960, 5.1% since 2000, and 3.5% since 2010; and the CMS’ guidance for 5.5% from 2018-2027.

Friday’s closing price of $9.90 essentially implies just 1.6% growth in revenues through 2025 and a 3.0% terminal growth rate.

No matter how you look at it, MultiPlan seems much too cheap, with the potential to greatly increase from these levels. Of the comps listed, none with >3.0x leverage trades >20.0x currently. While we believe that MultiPlan will continue to pay down debt and it’s multiple will further accrete, as well as MultiPlan having much better margins than most peers carrying debt and allowing it to handle a higher debt load, if we cap the upside at a 20.0x multiple in light of this we get a target price of $18.28. 

Risks

• Litigation: MultiPlan is involved in ongoing litigation between payers and providers over reimbursement rates. There is a chance that a judgement against MultiPlan in regards to its role in reimbursing providers could hurt their financials and business.

• MultiPlan says that these disputes have historically been minor relative to the total claims paid, and even with recent industry disputes there has not been a material impact on the industry. They said on their analyst day call that the litigation targets a “very low percentage” of claims paid.

• MultiPlan says it has not been subject to material judgments to date and thus has had no material financial impact. On the analyst day call they mentioned their “industry leading low appeals rates” from providers

• MultiPlan also says they are not currently party to any active litigation that “they believe is likely to result in a material financial impact on the company”. MultiPlan reserve for any litigation in which they believe they have material uninsured exposure, and they think the balance sheet properly reflects that

• Claims include RICO act claims (per Bloomberg Intelligence, most courts have dismissed these), state claims such as oral contract and implied-in-fact contract (could both be pre-empted by ERISA), and promissory estoppel claims.

• Most claims are either from emergency room providers or addiction-treatment providers claiming to have been reimbursed at unfair rates. Cases:

• Out of Network Substance Use Disorder Claims against UnitedHealthcare

• LD et al v. United Behavioral Health et al

• TML Recovery, LLC v. Cigna Corporation et al

• Pacific Recovery Solutions et al v. United Behavioral Health et al

• Florida Emergency Physicians Kang & Associates, M.D., Inc. et al v. United Healthcare of Florida, Inc. et al

• Legislation: The largest legislative issue that MultiPlan has often talked about is Surprise Billing. Surprise Billing targets both balance billing, as well as billing for unexpected out-of-network bills due to receiving care at an in-network facility by an out-of-network doctor. Thereis also the risk of federal legislation around healthcare and the impact of things such as a single payer system being developed, as well as a “public option” as proposed by Joe Biden.

• Regarding Surprise Billing, MultiPlan notes that it is already regulated in 30 states and has had a limited impact on MultiPlan’s business. This is because in most cases the states are not looking to interfere in commercial price negotiations and deciding on rates, but rather just trying to stop consumers from being overcharged. MultiPlan is aligned with these goals by lowering consumer costs via reimbursement. If federal legislation around Surprise Billing (discussed on both sides of the aisle) were to pass, it would depend on the ultimate language of the text in terms of its impact on MultiPlan. But in a WORST CASE scenario, MultiPlan believes that Surprise Billing would hit only 16-18% of their Data Analytics-services revenues (of $90mm-$100mm). This is because Surprise Billing is narrowly focused on ER and certain hospital-based ancillary services like anesthesiology and radiology where in-network hospitals are hitting consumers with bills for out-of-network doctors.

• Regarding a single payer option, it is clearly not something anticipated in the near-term and unlikely to be an issue for MultiPlan. Long-term, it would depend on how it was implemented, as MultiPlan products would still be applicable for reducing fraud, waste, and abuse, and if managed care had a role in implementing it then MultiPlan would still have a seat at the table.

• As for the “public option”, as discussed in the recent debate, Joe Biden’s option would essentially just auto-enroll eligible consumers who qualify for Medicaid in states that have not expanded. This is unlikely to impact MultiPlan, as people enjoy their private plans and this is not impacting those people, rather more impacting those who are uninsured.

• Leverage: MultiPlan carries significant leverage at 3.6x OpCo Net Debt/’21e EBITDA and 5.1x total net debt/’21e EBITDA. This can hurt MultiPlan in two main ways. First it could put the business into financial distress if they are unable to service their debt. And second, it could hurt the multiple MultiPlan is able to garner.

• The covenant-light structure of MultiPlan’s debt and their large FCF conversion should help alleviate these concerns. Even if MultiPlan was to have the worst outcome from Surprise Billing (-$100mm) and revenues DECREASED at a 5% annual CAGR 2021-2025, they would still be able to meet their interest obligations and pay down debt with >$275mm in FCF a year through 2025. We believe this extreme scenario is unlikely, but demonstrates the ability of Multiplan to handle it’s debt. They have regularly had 7.0x-8.0x leverage while privately owned and not run into financial trouble (in fact have flourished).

• As for the multiple, a few things give us comfort. First, leverage was by far the weakest factor in our regression in terms of the multiple. Also, MultiPlan will be generating massive amounts of FCF, some of which will be used to pay down debt. This will help the multiple accrete over time. Finally, MultiPlan will be generating enormous amounts of FCF. In our experience, while the market may often overlook this at times, at the end of the day this is the most important factor in businesses succeeding long-term.

• Contract Risk: In 3Q18, MultiPlan had a major customer group change their claims practice, which resulted in a $50mm-$60mm hit in revenues through YE19. While MultiPlan has said this was unique to that customer group, could “never” happen with other customers, that they don’t expect it to ever happen again, and that the issue is now behind them and they don’t expect it to drag on revenues going forward, it demonstrates that there is contract risk in MultiPlan.

• MultiPlan’s top 10 largest customers account for ~78% of revenues as of 2019. However, offsetting this risk for us is (1) high contract visibility, with 3-5 year contracts for the largest customers, (2) long-standing customer relationships spanning decades with the largest payers, (3) MultiPlan’s deep integration into the systems of their customers, creating high switching costs and (4) the alignment of the business model whereby MultiPlan only gets paid if they generate savings for their customers. Why terminate something that only costs you if you make more money?

Catalysts

• Closing of the merger & technical selling overhang: The vote is scheduled for 10/7/20. The merger will close 10/8/20. The redemption deadline was Friday for many investors. There has been a large amount of selling pressure above trust as those traditional SPAC players that do not want to take the risk of a company without the cash backstop have been selling down into the redemption date above trust. People who may have missed the deadline also likely were forced sellers. This technical pressure should subside next week as the merger closes and those left holding want to own MultiPlan long-term. However, there is also a short-term risk here as sometimes we see SPAC players miss the redemption deadline (for whatever reason). SPCE was a good example last year, going from $10 to $13, and then quickly to $7 with no news. It ended up going up 5x from there, and really hasn’t seen $10 since (notwithstanding the brief touch in March).

• Analyst Coverage: MultiPlan’s analyst day had 18 sell-side analysts present. Citi, Jefferies, BAML, Truist, CS, and SVB Leerink all asked questions at that analyst day. On their 2Q20 call, we also heard from Barclays, GS, Alliance Bernstein, and Cantor. This will be an $11bn company, it should see initiation from multiple sell-side analysts (although admittedly timing on this has been tough to predict with SPACs, some initiating the day of listing while other SPACs don’t get coverage for a month or more).

• M&A: As mentioned in the write-up, M&A is a focus of MultiPlan after the transaction closes, and they have already spoken to a pipeline of opportunities. Michael Klein ran a similar playbook with CCC and was very quick to implement large-scale and successful M&A transactions that helped push that stock to new highs. As mentioned, there was also some discussion of a large-scale deal that MultiPlan reached out to Churchill to help with financing in March/April. While it is unclear whether any deals are currently on the table, it seems likely that we will see M&A in the somewhat near future for MultiPlan. 

Catalyst

• Closing of the merger & technical selling overhang: The vote is scheduled for 10/7/20. The merger will close 10/8/20. The redemption deadline was Friday for many investors. There has been a large amount of selling pressure above trust as those traditional SPAC players that do not want to take the risk of a company without the cash backstop have been selling down into the redemption date above trust. People who may have missed the deadline also likely were forced sellers. This technical pressure should subside next week as the merger closes and those left holding want to own MultiPlan long-term. However, there is also a short-term risk here as sometimes we see SPAC players miss the redemption deadline (for whatever reason). SPCE was a good example last year, going from $10 to $13, and then quickly to $7 with no news. It ended up going up 5x from there, and really hasn’t seen $10 since (notwithstanding the brief touch in March).

• Analyst Coverage: MultiPlan’s analyst day had 18 sell-side analysts present. Citi, Jefferies, BAML, Truist, CS, and SVB Leerink all asked questions at that analyst day. On their 2Q20 call, we also heard from Barclays, GS, Alliance Bernstein, and Cantor. This will be an $11bn company, it should see initiation from multiple sell-side analysts (although admittedly timing on this has been tough to predict with SPACs, some initiating the day of listing while other SPACs don’t get coverage for a month or more).

• M&A: As mentioned in the write-up, M&A is a focus of MultiPlan after the transaction closes, and they have already spoken to a pipeline of opportunities. Michael Klein ran a similar playbook with CCC and was very quick to implement large-scale and successful M&A transactions that helped push that stock to new highs. As mentioned, there was also some discussion of a large-scale deal that MultiPlan reached out to Churchill to help with financing in March/April. While it is unclear whether any deals are currently on the table, it seems likely that we will see M&A in the somewhat near future for MultiPlan.