SVB Securities
I spoke with him about what the next wave of healthcare IPOs could bring — and which healthcare startups are in the best position to test the public markets.
The following has been edited for clarity and length.
In the past few years there have been a number of take-privates and near-delistings in healthcare, as well as plenty of healthcare companies that have otherwise struggled in the public markets. What can we learn from those companies’ challenges, and how might they impact the next round of healthcare IPOs?
The whipsaw of the public markets over the last five years has created a challenging backdrop, even with the overall market improving.
From 2019 through 2021, nearly 20 companies went public through IPOs or SPACs in healthtech. At its peak, the total market cap for healthtech and digital health was over $300 billion. Through both take-privates and declines in share prices, that’s down to just about $90 billion.
Large take-privates like Change Healthcare, Nuance, Cerner, Inovalon, and others are part of the story. The other part is that, on average, the companies that went public or were already public are down by about 80% — names like Teladoc, Accolade, and Health Catalyst.
The enthusiasm that supported the last wave, with respect to the positive and innovative business models in healthtech and digital health, is not gone. It’s just that these companies haven’t been able to achieve growth with profitability. When there’s a next set, there’s going to be more of a focus on growth and profitability.
You see that in the IPOs that happened this year: Waystar and Tempus. Waystar is large-scale, profitable, with growth, and Tempus has the promise of AI, high growth, and emerging profitability. Both have performed since their public debut.
In the private sphere, many investors have leaned away from healthcare services and into healthcare AI. What models do you expect the healthcare market to favor in this next round of IPOs?
There are three general categories that are investible in healthtech and digital healthcare. One is simply data and then technology and healthcare. Healthcare is arguably two decades behind every other industry in the adoption of technology. Whether it’s software, tech-enabled models, or, importantly, the data opportunity and AI opportunity, tech and data infrastructure for healthcare is No. 1.
No. 2 is consumer-centric models, such as some B2B2C models, the employer and payer digital-health models, or even direct-to-consumer models. Look at the performance of Hims, which has emerged from its post-SPAC purgatory.
Consumer-centric healthcare is the future of healthcare, and it’s becoming more of our collective reality. The companies with consumer-centric business models that deliver longitudinal engagement and outcomes, financial and clinical, for consumers and the payers of healthcare, both employers and insurance companies, are certainly on the list.
No. 3 is value-based care. Much has been made of that as a category, tying together costs and outcomes. And while some of the brick-and-mortar value-based care companies have had their own challenges, support for the adoption of value-based care by providers will continue to be where healthcare is going.
Are there models in healthcare that you think are perhaps not the best fit for the public markets right now?
The less complex the elevator pitch, the better. While I can’t say there’s a model that’s not a fit, what we heard from investors as things were bending in the wrong direction last boom cycle was: “Wait, what did I just buy? I’m not sure I fully understand this company’s business model.”
Now you have to juxtapose that against the reality of healthcare, which is complex. So it’s companies that can articulate a clear and simple story while also navigating the layers of the healthcare ecosystem in executing on their business model.
That includes riding the existing rails. In the last five-plus years we’ve seen companies figuring out how to work with the payers and providers that make up the healthcare ecosystem to bring innovation and disruption to how we experience healthcare.
Given the major slowdown in SPAC deals in the past few years and Nuvo’s poor performance (and bankruptcy) this year, could we see more SPAC deals for healthcare startups next year?
It’s a four-letter word for the foreseeable future. I imagine there will be SPACs created, and there are still others that haven’t run out of time, but it’s unlikely that we see companies using that vehicle that could go public the regular way.
For startups that don’t go public, will we see M&A pick up in 2025? With large retailers like Walmart pulling away from healthcare, who are the potential buyers?
M&A is picking up already, as evidenced by volume this year, and it will continue to, particularly in an easing financing environment and macro backdrop where bid-ask spreads are narrowing.
The consolidation activity is in three categories. First, there are the large-cap consolidators including retailers, payers, and Big Tech. There will be deals there, but there are only so many that will be done by that group, which is not much more than a dozen companies.
The next is large-cap, and often private-equity-backed, healthtech consolidators. A number of them are private and will continue to be buyers.
The third category is just smaller mergers of equals. Especially for enterprise sales, selling into payers or selling to providers, scale matters, and so size matters. We’ll see small companies merge with other small companies to get there.
Anything else startups should know that might impact this next cycle of IPOs?
While these companies that went public in the last cycle may not have fulfilled their promises, they set the stage for an attractive IPO market by going public the right way — executing on the business and growing it, and increasing awareness around the company well in advance of an IPO.
At the back end of the last boom wave there was a rush to go public, and SPACs were examples of that. I think that in the 2025, 2026, and 2027 IPO classes, there will be a number of companies that think about it the right way, not rushing to get to the public market.