'Transaction Risk' Leaves Tabula Rasa HealthCare Shares With Little Upside, Stock Downgraded

Tabula Rasa HealthCare Inc TRHC shares are slumping Thursday following the company's announcement that it has consummated the purchase of SinfoniaRx, a provider of Medication Therapy Management technology and services, for $35 million in cash and 520,883 shares of Tabula Rasa.

Reacting to the announcement, Wells Fargo Securities downgraded shares of the company from Outperform to Market Perform but hiked its price target from $17 to $21.

At the time of writing, shares of Tabula Rasa were plunging 8 percent to $20.51.

Analyst Peter Costa attributed the downgrade to his view that the shares of Tabula Rasa are now fairly valued when the transaction risk associated with the SinfoniaRx acquisition is weighed in.

Costa believes the purchase would help diversify Tabula Rasa's customer base and generate synergies, given that it relates to business development and cross-selling opportunities. That said, the analyst expressed caution, as the deal would take the company outside of its core business.

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While Tabula Rasa is into the business of optimizing medication safety by deploying new medication risk mitigation digital software solutions and providing medication decision support tools, SinfoniaRx is predominantly into offering solutions already required by the CMS.

Additionally, Wells Fargo believes SinfoniaRx has almost fully penetrated into its target markets, leaving less scope for growth relative to Tabula Rasa's potential growth profile.

"While some of this risk may have been addressed through the higher earn-outs versus the upfront purchase price, we are now more cautious of the overall growth outlook for TRHC," the firm added (see Costa's track record here).

The firm opted to leave its 2017 adjusted earnings per share estimate unchanged at 38 cents but raised its 2018 and 2019 estimates by 2 and 4 cents, respectively, to 58 and 72 cents. To reflect the acquisition, the firm raised its 2017 EBITDA estimate to $18 million and that for 2018 to $28 million. However, the firm sees risk to this accretion, given the earn-outs, which could represent up to almost double the original purchase price.

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