The big time IPOs add to a bubblier bath. Rock Health’s mid-year digital health market update continues its frothy way with a topline of $4.2 bn across 180 deals invested in digital health during the first half of 2019. 2019 is tracking to last year’s spending rate across fewer deals and is projected to end the year at $8.4 bn and 360 deals versus 2018’s $8.2 bn and 376 deals.
This year has been notable for Big IPOs, which have been absent from the digital health scene for three years. Exits come in three flavors: mergers and acquisitions (43 so far), IPOs, and shutdowns (like Call9). IPOs are a reasonable outcome of last year’s trend of mega deals over $100 million and a more direct way for VCs to return their money to investors. So far in 2019, 30 percent of venture dollars went to these mega deals. (Rock Health tracks only US digital health deals over $2 million, not a global picture.)
Reviewing the IPOs and pending IPOs to date:
- Practice intake and patient management system Phreesia closed its NYSE IPO of 10.7 million shares at $18 per share on 22 July. The company earned approximately $140.6 million and the total gross proceeds to the selling stockholders were approximately $51.6 million for a value over $600 million. The market cap is as of today over $887 million with shares rising to $25. Not bad for a company that raised a frugal $92.6 million over seven rounds since 2005. Yahoo Finance, Crunchbase
- Chronic condition management company Livongo’s picture is frothier. Their 22 July SEC filing has their IPO at 10.7 million shares at $24 to $26 per share offered on NASDAQ. This would total a $267.5 million raise and a $2.2 bn valuation. This is a stunning amount for a company with reportedly $55 million at the end of its most recent reporting period, increasing losses, and rising cash burn. Crunchbase Livongo raised $235 million since 2014 from private investors.
- Analytics company Health Catalyst’s IPO, which will probably take place this week on NASDAQ with Livongo’s, expects to float 7 million shares. Shares will be in a range of $24 to $25 with a raise in excess of $171 million. Their quarterly revenue is above $35 million with an operating loss of $9.8 million. Since 2008, they’ve raised $377 million. IPO analysts call both Livongo’s and Health Catalyst’s IPOs ‘essentially oversubscribed’. Investors Business Daily, Crunchbase
- Change Healthcare is also planning a NASDAQ IPO at a recently repriced $13 per share, raising $557.7 million from 42.8 million shares. With the IPO, Change is also offering an equity raise and senior amortizing note to pay off its over $5 bn in debt. The excruciating details are here.
- Connected fitness device company Peloton, after raising $900 million, is scheduled to IPO soon after a confidential SEC filing. Forbes
Rock Health itself raised the ‘bubble’ question in considering 2018 results. Their six points of a bubble are:
- Hype supersedes business fundamentals
- High cash burn rates
- High valuations decoupled from fundamentals
- Surge of cash from new investors
- Fraud or misuse of funds
- Unclear exit pathways
This Editor’s further analysis [TTA 21 Jan] wasn’t quite as reassuring as Rock Health’s. As in 2018, #2, #3, and #6 are rated ‘moderately bubbly’ with even Rock Health admitting that #2 had some added froth. #3–high valuations decoupled from fundamentals–is, in this Editor’s experience, the most daunting, as as it represents the largest divergence from reality and is the least fixable. The three new ‘digital health unicorns’ they cite are companies you’ve likely never heard of and in ‘interesting’ niches in health tech: Zipline (medicine via drone to clinics in Rwanda and Ghana), Gympass (corporate employee gym passes), and Hims (prescription service and delivery).
In this Editor’s opinion, when there are too many companies with high valuations paired with a high ‘huh?’ quotient–that one is slightly incredulous at the valuation granted ‘for that??’–it’s time to take a step back. Having observed bubbles since 1980 in three industries– post-deregulation airlines in the 1980s, internet (dot.com) in the 1990s, and healthcare today (Theranos/Outcome Health), a moderate bubble never diminishes–it expands, then bursts.
Rock Health also downplayed #5, fraud and misuse of funds. It’s hard to tell why with uBiome, Nurx, and Cleo in the news. Teladoc isn’t mentioned, but their lack of disclosure for a public company around critical NCQA accreditation and their accounting problems in 2018 make for an interesting omission [TTA 16 May]. (And absurdly, they excluded Theranos from 2018’s digital health category.)
Rock Health’s analysis goes deeper on the private investment picture, particularly their concept of ‘net liquidity overhang’, the amount of money where investors have yet to realize any return, as an indicator of the pressure investors have to exit. There’s also a nifty annual IPO Watch List which includes the five above and why buying innovation works for both early-stage and mature healthcare companies.