Brian Goffenberg, left, and Dan Matlow bought Toronto startup VitalHub and took it public in a reverse takeover of a TSXV-listed shell company in 2016. Now, Mr. Goffenberg is the company’s CFO and Mr. Matlow is the CEO.Cole Burston/The Globe and Mail
When Dan Matlow was trying to raise money for his fledgling company, he jokingly asked his wife if he came home smelling like weed.
It was mid-2017 and the cannabis craze was in full swing on Canada’s public markets. Mr. Matlow was trying to finance something totally different: a digital health startup called VitalHub Corp. VHI-T He had a strategy to buy up other small health care IT companies, cross-sell their products to each other’s clients and offshore software development. He’d even struck deals to buy two companies, including one with a low-cost development shop in Sri Lanka.
But as investors poured into cannabis stocks, Mr. Matlow struggled to raise $10-million. Trading in VitalHub’s TSX Venture Exchange-listed penny stock was halted for six months. “It was a tough slog,” he said in an interview. “We had some pissed-off shareholders.” VitalHub raised one-third of its target that October and had to defer one acquisition for a few months.
It wasn’t the most auspicious start, but VitalHub wasn’t blowing smoke. Eight years and 21 acquisitions later, Toronto-based VitalHub is one of Canada’s strongest-performing tech companies. Its stock has appreciated by 25 per cent this year and quintupled in the past 24 months, giving VitalHub a $775-million market capitalization.
The company, now listed on the Toronto Stock Exchange, has built a reputation as a disciplined health care IT consolidator, specializing in software that organizations in single-payer markets such as Canada, Britain, Australia and the Middle East use to manage the flow of patients from admission to discharge. It has steadily grown annual recurring revenues and delivered 11 straight quarters of operating-earnings growth. Analysts liken it to Descartes Systems Group Inc., which is worth $12.5-billion. “If you’re an investor that already owns Descartes there’s no reason why you don’t look at VitalHub,” said National Bank of Canada financial markets analyst John Shao.
VitalHub is now 70 per cent owned by institutional investors, including Mawer Investment Management and Burgundy Asset Management, and has doubled its analyst coverage in the past year. “They fit with our philosophy and tagline, which is, ‘Be boring, make money,’” said Samir Taghiyev, portfolio manager of Mawer’s Canadian small-cap fund, which owns 14 per cent of VitalHub stock.
League growing rapidly as digital health care company seeks to raise US$100-million
Now, investors hope VitalHub can continue that streak after a slew of big deals. Having previously paid $10-million or less for most acquisitions, it has made its four largest deals in the past 10 months, shelling out $30-million-plus apiece for three of them. That includes $43.6-million last month for Kingston-based Novari Health, a vendor of referral and wait-time-management software. The four deals have doubled VitalHub’s ARR to $90-million-plus in 18 months and account for most of the $175-million it has spent on deals.
Mr. Matlow expects to face questions when VitalHub reports results Thursday about its two most recent deals, Novari and Britain-based Induction Healthcare Group PLC, which boosted ARR by a combined 25 per cent. Both were losing money and are expected to drag on VitalHub’s operating profitability. “I think the big discussion points will be Induction, Novari, how much will it hurt your bottom-line profile, how long will it take to clean it up,” he said.
Like other successful consolidators, VitalHub has a playbook it follows closely. It targets companies within its core markets that generate between $2-million and $20-million in revenue, of which at least 60 per cent must be recurring. It prefers owner-operated businesses that are breaking even or profitable, paying between 1 and 2.5 times revenue. VitalHub then works to increase operating profitability to 20 per cent of revenues, primarily by shifting development to its Sri Lankan operation, which houses 200 of its 500 employees. VitalHub has a pipeline of 400 potential deals and believes it is competing for a potential market of $10-billion of revenues. Its main rivals are DrDoctor in Britain and Wellstar Technologies, a Canadian-focused subsidiary of TSX-listed Well Health Technologies Corp.
But VitalHub also sets itself apart from other consolidators such as Constellation Software Inc. and OpenText Corp. by not just bulking up sales through acquisitions but also driving robust organic growth from existing businesses. Its organic revenue growth typically runs at around 15 per cent, and its adjusted operating margin has been above 25 per cent of revenues since 2023.
That makes it similar to Descartes, which also acquires in a core area – transportation and logistics – while generating organic growth. A key driver of VitalHub’s revenue growth is its deep relationship with Britain’s National Health Service. The company also counts Nova Scotia Community Services, the Ontario correctional system and Toronto’s Hospital for Sick Children among its 1,000-plus customers.
Mr. Matlow, 62, is a born hustler from Kitchener, Ont., who regularly won sales contests starting with chocolate-bar drives during his school years. After earning a business degree from York University, he sold education software, then got his first exposure to the health care system while working for a Boston startup that was bought by OpenText in 2003. He led OpenText’s health care division before leaving a year later to join TSXV-listed health care IT startup Medworxx, staying until 2016, a year after Vista Equity Partners bought it for $20-million.
Influenced by his experiences at OpenText and Vista, he set out in 2016 with Medworxx chief financial officer Brian Goffenberg – now CFO of VitalHub – to build their own consolidator. They bought VitalHub, a Toronto startup, and took it public in a reverse takeover of a TSXV-listed shell company in 2016.