Digital Health Goes to Market-Story A Year After
TL; DR
About a year ago, I reviewed 13 digital health firms entering the public market, by analyzing the data they published to support their IPO. After about a year in the public market, I looked at their progress and through that lens, I have tried looking at the different facets of healthcare innovation in the play.
Background and Introduction
While there are not many structural differences in the way digital healthcare start-ups raise money as compared to the broader start-up cohort of any year, very few are able to successfully exit the market and very few amongst those go through the IPO hoop successfully. Some of the main reasons cited for this higher failure rate include complexities of the healthcare system, fragmentated markets, and conflicting interests of various players.
With this background, I analyzed digital health firms going ‘mainstream’ through the IPO route. These were the firms-
For this review, I used the 10-k filings of these companies, as submitted to the US SEC as well as other information available on their websites as well as in the general media.
Some of my key observations from the review were-
- Time to exit: The median time from a firm’s founding to IPO filing is 10 years. The longest time for filing is for Schrodinger with 30 years to reach market while the shortest is 3 years for Change Healthcare and Progyny. This is quite typical of the general time to markets, considering firms that have longer R&D cycles take longer to enter public market.
- Business model: Given the highly fragmented nature of global healthcare, especially the US healthcare systems and the fact that these firms are filing for the US markets, Business-to-Business models are bound to be more favorable. It is no surprise then that of the 13 firms, only two can be considered as B2C (Outset and Peloton). The rest have models which are more straight-forward B2B or in some cases B2B2C.
- I also had some fun with visualizing some of the word clouds!
Then and Now…
So, one year down the road, how are these companies progressing? Here are some major updates-
- Livongo merged with Teladoc for $18.5 billion, a move welcomed well by the investors. Livongo is a digital health innovator for diabetes care while Teladoc is a behemoth in virtual care/telehealth. By merging with Teladoc, Livongo would be able to consolidate their position in the Diabetes market and explore further in other chronic care conditions. I see this as a definite marker of how a mature digital health offering can look like, if offered with the right evidence that supports its usage in the patient journey.
- Another company on the list, Change Healthcare, is being acquired by OptumInsights, belonging to the United Health Group for $8 billion. Although not as big as the Livongo-Teladoc deal, this is a sizeable sum for a company in business only for a few years, once again showing the growing importance of these cogs in the digital health juggernaut.
- Collaboration, partnerships and mergers/acquisitions is definitely a flavor for all the remaining companies, actively managing all these tasks, right from GoodRx’s partnership with Top 20 pharmaceutical companies, to Google’s $ 100million investment in Amwell, to One Medical acquiring Iora Health for $1.4 billion.
Before we dive into the financials, let’s see some fun facts that emerge from the 10-ks.
Mission Statements
One of the things that comes with being a public company is that you got to have a mission statement! Can you guess the actual business model of these companies, by looking at their mission statements?
Revenue sources and realization
Most of the firms continue to have dependence to a larger degree to a select few customer base, making them dependable on these customers for their revenues.
Platforms, Buzzwords and more
Like their S-1s, All of the firms continue to call themselves platforms! All take pride in thinking about themselves as a perfect, end-to-end platform solution in the ever-fragmented healthcare world. GoodRx seems to be taking it up a notch from Amwell, mentioning the word close to 200 times!
These companies heavily rely on technology and it is quite evident from the frequent use of technology/related words as compared to words like patients.
A bunch of other buzzwords appear throughout, including the regulars like healthcare and innovation. Of particular interest to this group is the mentions on Covid, pricing and collaboration.
What does the markets say?
After all these word games, how have these companies fared on their market positions? Here’s their market cap as of today; as is evident, three firms have already qualified to be called large cap.
R&D expenses to Sales ratio is a useful indicator about how firms think about investing in future. Considering the nature of biotech/pharma research business, it is not surprising that Relay Therapeutics and Schrodinger currently top this chart however there are some outliers who lie below the typically quoted 15% threshold of R&D expenses as compared to sales.
Finally, one of the often-used metrics of financial performance value creation for public listed firms is Return on Capital (ROC) and its relation to the firm’s Cost of Capital as measured by weighted average cost of capital (WACC). Simply put, it is the amount of money a company makes that is above the average cost it pays for its debt and equity capital. Before we look at the ROCs for our basket of firms, note that average ROC for Biotech is ~6% while for Healthcare Information & Technology is ~16%. Since return on invested capital is said to measure the ability of a firm to generate a return on its capital, and since WACC is said to measure the minimum expected return demanded by the firm’s capital providers, the difference between ROIC and WACC is sometimes referred to as a firm’s “excess return”, or “economic profit”. By this measure, only Change Healthcare and Progyny seem to be creating value for their investors!
Looking into the future…
While closing the article last year, I had talked about two things, which are still relevant-
- Map is not the territory- Tools like 10-Ks or financial metrics may provide some clues about the firms’ performance however that should not mean we ignore clues in the short- or mid-term. Also important is not to assume that due to the low fidelity lenses we use for long-term thinking, the future is all clear and with only the ups and downs we have predicted so far.
- Is there a ‘happily ever after’?- Some of the high rates of adaption seen towards digital health is already waning so it will be fascinating to watch how these firms chart their paths in the near future- Will they stay the course of their original value proposition or continue investing in new capacities for a post-COVID reality? Will they prove true to the buzz they created in their first year? And finally which unseen risks will emerge in the coming years that will test these firms to their mettle?
