After Drought, Digital Health’s Summer of IPOs Brings Validation

Xconomy National — 

After a nearly three-year period in which not a single digital health company held an initial public stock offering, the dry spell has ended.

In recent weeks, four healthcare software and technology businesses—Change Healthcare, Health Catalyst, Livongo Health, and Phreesia—held IPOs. Taken as a whole, these public market debuts were mostly successful, and could persuade digital health companies that have been in business for years but remain private to consider an IPO, according to people who monitor investments in the industry.

“It’s very good news for the sector,” says Michael Greeley, general partner at Flare Capital Partners, a Boston-based venture capital firm that invests in healthcare technology startups. “The Wall Street machinery has kind of reawakened. Funds like ours are tracking a couple dozen other maturing, private, venture-backed companies” that could soon begin positioning themselves to go public, he says.

At least one more could go public this year: Stationary bicycle and treadmill maker Peloton, which some industry observers classify as a digital health company, said in June it had filed confidential IPO paperwork with securities regulators. Peloton has yet to set a target date for its market debut.

Nashville, TN-based Change Healthcare (NASDAQ: CHNG), which sells a variety of healthcare software products and tech-enabled services, ended the digital health IPO drought when it went public on June 27. Change Healthcare was soon followed by: Phreesia (NYSE: PHR), which is based in New York and makes patient check-in software; Salt Lake City-based Health Catalyst (NASDAQ: HCAT), which develops population health management software; and Livongo (NASDAQ: LVGO), which is headquartered in Silicon Valley and develops devices and software for people with chronic conditions.

Greeley points out that Livongo and Health Catalyst both raised the price of shares they were seeking to sell as part of their IPOs, a signal of strong investor interest.

“The reception was very strong,” he says of Livongo and Health Catalyst’s IPOs. “What I found interesting was the depth and breadth of public market interest. I think the big fund investors are excited by what they’re seeing.”

Leaders at some of Flare Capital Partners’ later-stage portfolio companies recently have been speaking with investment bankers about the possibility of going public, Greeley says, though he didn’t identify these businesses by name.

“It feels like maybe the entrepreneurs are going to be wooed more aggressively now,” he says.

Another result of this year’s digital health IPOs is that investors and executives at private companies now have a more concrete sense of how public markets value businesses in the sector, Greeley says. IPO activity tends to set valuations and benchmarks for mergers and acquisitions, he says.

One reason this level-setting matters is because acquisitions have been, and will continue to be, “the primary exit vehicle for the vast majority of these companies,” says Megan Zweig, director of research at Rock Health, an early-stage digital health venture fund.

Moreover, the recent IPOs could offer encouragement to early- and mid-stage healthtech startups trying to cement their place in the market and forge a path to an exit.

“We’ve seen venture funding ramp up over the past few years. Companies that were founded five or seven years ago are finally getting to the later stages, where they’ve validated their products,” Zweig argues. “They’re not just proving out their commercial model; they’re scaling it. It takes some time to do that in healthcare.”

Steven Wardell, a senior equity research analyst at New York-based Chardan, says the performance of digital health companies that have gone public in recent months sends a “positive signal to private, venture-backed digital health companies that the market is receptive.”

Having the IPO option on the table also presents an alternative avenue for high-growth businesses in the sector, he says.

“You might have, for example, a digital health company where there’s only four logical acquirers, and all four are low-bidding them,” Wardell says. “Now they have an option for liquidity” that may not have been as compelling a year ago. “It’s very much to the young company’s advantage to have that option available,” he adds.

Wardell says investors and analysts who follow Livongo, Health Catalyst, and other now-public healthtech firms will be looking to see whether they can meet expectations—by hitting quarterly revenue targets and other projections, for example.

“If they do, then we’ll see growing confidence from [investors] in the new wave of digital health IPOs,” he says.

Greeley says the current moment feels different from past investment cycles marked by initial hype and then the bubble bursting.

Following a spike in interest in healthcare software startups earlier this decade, the companies that today are well-positioned to eventually have a lucrative exit “have gone through three or four rounds of private funding, iterated their models, and can now tell a story [about return on investment from] their products that’s really supported with clinical data or financial data,” Greeley says. “In 1999 and 2007, some of the other bubbles, it was a lot of hype on these stories without a lot of substantive data,” he says.

The recent streak of digital health companies going public also gives venture capital investors validation of their bets, Greeley says.

The venture capital industry is “a little bit of an echo chamber,” he says. “We can tell each other how great our companies are, but until you expose it to public market investors or acquirers, we’re just talking amongst ourselves.”