DH - Definitive Healthcare: Leading The Healthcare Commercial Intelligence Market

2023-06-14 00:58:59 ET

Summary

• Definitive Healthcare Corp. is a leader in the healthcare commercial intelligence market, providing comprehensive data and insights for the industry with a potential market opportunity of $10 billion.
• The company uses Microsoft Azure infrastructure and DataBricks technology to manage its 20 terabytes of raw data, including 300 million patient profiles and 2 million healthcare providers/facilities.
• The stock is currently trading at an attractive valuation, trading at an EV/sales multiple of 6.5x.

Thesis

In today's digital landscape, successful sales programs require robust data access. Definitive Healthcare Corp. ( DH ) has tapped into this opportunity by providing specialized and comprehensive data specifically tailored for the healthcare industry. The company is a leader in the healthcare commercial intelligence market, which has the potential to be worth $6-10 billion annually. Moreover, the stock is trading at an attractive valuation, with shares currently trading at ~6x 2023 EV/sales. I derive an end-of-year price target of $15 on the stock based on an EV/sales multiple of 6.5x and an FY24 revenue estimate of $295 million.

Extensive Data Mapping History Drives MOAT

Definitive Healthcare considers itself as the leading source for comprehensive insights into the healthcare industry, leveraging its Atlas dataset that has been developed over a period of ten years. The company believes it is in the early stages of a significant market opportunity worth $10 billion. Currently, Definitive Healthcare has around 3,000 customers, but the company sees a potential customer base of 100,000. The company serves three primary segments: Life Sciences, Hospitals & Providers, and Diversified. The Life Sciences segment comprises biopharmaceutical and medical device companies that are interested in understanding purchasing decisions within their target market and gathering information about the payers involved. The Provider segment includes hospitals and health systems that utilize Definitive Healthcare's data for purposes such as mergers and acquisitions, staffing, and analyzing patient flow within their networks. The Diversified segment encompasses customers from non-healthcare industries who sell their products or services to the healthcare market, such as consulting firms and healthcare IT companies.

Powerful Tech Infrastructure Hosts 20 TB of Data

Definitive Healthcare utilizes Microsoft Azure infrastructure and leverages DataBricks technology to support its commercial intelligence software platform. The use of DataBricks, built on Apache Spark, enables efficient querying and analysis of both structured and unstructured data. The healthcare industry poses challenges in extracting insights due to the diverse and voluminous nature of the data, including a substantial amount of unstructured data. Definitive Healthcare's platform contains over 20 terabytes of raw data, encompassing 300 million patient profiles and 2 million healthcare providers/facilities. To manage this data, the company employs "Definitive IDs," unique identifiers assigned to each participant in the healthcare ecosystem, such as hospitals, physicians, payers, and group purchasing organizations. These Definitive IDs facilitate the creation of a comprehensive network of affiliations and relationships among the various players. By mapping out these relationships, the platform can derive valuable insights, such as patient referrals by physicians or claims processing by payers. Given the complexity and scale of this mapping and analysis, the choice of the right technology infrastructure is crucial for Definitive Healthcare's product functionality.

Valuation

The two companies that I believe represent the best peer comparison are Veeva Systems Inc. ( VEEV ) and ZoomInfo Technologies Inc. ( ZI ). Definitive Healthcare has a small amount of competitive overlap with Veeva, which also maintains a dataset and analytics that it sells into healthcare companies. That dataset is a fraction of the breadth of what we see from Definitive Healthcare. I expect Definitive Healthcare to be a faster grower over the next couple of years while Veeva maintains a better margin profile. ZoomInfo is a major disruptor among data and analytics providers because it sells horizontally to all industries rather than focusing on a particular vertical segment.

DH shares currently trade at ~6x 2023 EV/sales estimate which is the lowest multiple in its comp group and well ahead of the peer averages. My target multiple is derived by a comparable analysis of the current valuation of DH's closest peers, where I use ZoomInfo and Veeva, where many people seem to see DH as "ZoomInfo for healthcare" and Veeva, which develops business collaboration software and tools. I derive an end-of-year price target of $15 on the stock based on an EV/sales multiple of 6.5x and an FY24 revenue estimate of $295 million.

Investment Risks

When evaluating alternative data and analytics companies, ongoing access to data sources is crucial for their success. In the case of Definitive Healthcare, the company's ability to maintain access to a wide range of data sources without utilizing personally identifiable information ((PII)) or HIPAA data is considered essential for long-term viability. While the risk to data sources is generally low, any regulatory changes or unforeseen actions that restrict future data access are still a significant concern. Moreover, Definitive Healthcare faces competition from horizontal data analytics and data providers such as ZoomInfo. These instances typically arise when companies outside the healthcare industry aim to enter the healthcare market by offering generic services that require a simpler level of data to create initial targeted lists. ZoomInfo, with its substantial resources and successful go-to-market strategy, has the potential to focus more extensively on specific vertical industries and their key datasets, thereby intensifying the competitive landscape for Definitive Healthcare.

Conclusion

Definitive Healthcare gathers various types of data, including medical and pharmacy claims, patient information, provider details, health system data, financial data, clinical data, and their own internal proprietary data. Definitive Healthcare carefully cleans and analyzes this data using artificial intelligence and machine learning techniques. The company then presents the information on a user-friendly web platform, making it easily accessible and convenient to use. DH has identified a significant market opportunity estimated at $10 billion and aims to expand its customer base from around 3,000 to 100,000. I am optimistic about the long-term prospects of the company, and the stock's compelling valuation is the reason I view the stock as a buy at current levels. I have an end-of-year price target of $15 on the stock.

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