Castlight IPO Could Shape Future of Other Emerging HIT Vendors
Employer healthcare cost management software vendor Castlight Health had a very successful initial public offering of stock on March 14, which is good news for emerging healthcare information technology companies. But some tempering of enthusiasm would be wise, counsels Paul Teitelbaum, managing director of the investment banking group at Mesirow Financial in Chicago.
Employer healthcare cost management software vendor Castlight Health had a very successful initial public offering of stock on March 14, which is good news for emerging healthcare information technology companies. But some tempering of enthusiasm would be wise, counsels Paul Teitelbaum, managing director of the investment banking group at Mesirow Financial in Chicago.
Plain and simple, other young HIT companies shouldnt assume that they are the next Castlight, he cautions.
Castlight, with $13 million in revenue and a $62 million net loss in 2013, came out of the IPO with a market value north of $3 billion. Teitelbaum doesnt automatically say that the value isnt right; it could be if the company consistently shows very high growth rates for the next several years. But he worries. Anything that trades in the market at 300 times revenue, you have to ask yourself if this is the right value.
Further, it isnt reasonable to expect the value of Castlights stock, which sold at $16 per share, hit a high of $41.95 on March 14 and closed at $39.80, to maintain that level. Indeed, the stock fell 6.8 percent to $37.25 on March 17 and dropped another 9.5 percent to $33.71 on March 18.
There are other healthcare IT companies--IMS Health and Everyday Health--that have filed registration statements to go public, along with others that Teitelbaum believes are likely to consider an IPO or a sell to a private equity firm, such as Practice Fusion, Vitals, HealthGrades and MedMedia Healthcare Network. He has seen booming healthcare IT markets come and implode and hope history doesnt repeat itself. But, if some of these other companies go public in a big way and then two or three of them miss earnings four or five quarters later, that creates a problem, he adds. Then, you have a cooling off period and stocks go down and the IPO window closes. The cooling off period could affect the stock prices of any public healthcare IT company, not just the ones that missed earnings.
So, while a new period of financial opportunity for HIT companies may be dawning, Teitelbaum hopes for a more tempered response this time around compared with the dot-com bubble burst of 2000-2001. Anytime you push something to an extreme, theres a tendency for the pendulum to push in the opposite direction.
Bubbles are an exciting time and give innovative companies the capital they need, but if the bubble bursts, it will hurt the opportunity for other emerging companies to grow and spur more merger and acquisition activity, because buyers now see candidate companies with lower price tags.
For now, there could be a lull in M&A activity for a while until buyers see how the market will settle, Teitelbaum believes. At minimum, buyers will at least wait to see how IMS Health prices its stock and watch the valuations for IMS and Castlight Health for the next few quarters.
Other emerging companies would be well served by not seeing themselves as the next Castlight, he advises. Unless a company truly is the next Castlight, it will need $40-50 million in revenue before going public, he predicts. And because many companies wont reach that level and need more capital to survive, many will have to exit via a sale.
Plain and simple, other young HIT companies shouldnt assume that they are the next Castlight, he cautions.
Castlight, with $13 million in revenue and a $62 million net loss in 2013, came out of the IPO with a market value north of $3 billion. Teitelbaum doesnt automatically say that the value isnt right; it could be if the company consistently shows very high growth rates for the next several years. But he worries. Anything that trades in the market at 300 times revenue, you have to ask yourself if this is the right value.
Further, it isnt reasonable to expect the value of Castlights stock, which sold at $16 per share, hit a high of $41.95 on March 14 and closed at $39.80, to maintain that level. Indeed, the stock fell 6.8 percent to $37.25 on March 17 and dropped another 9.5 percent to $33.71 on March 18.
There are other healthcare IT companies--IMS Health and Everyday Health--that have filed registration statements to go public, along with others that Teitelbaum believes are likely to consider an IPO or a sell to a private equity firm, such as Practice Fusion, Vitals, HealthGrades and MedMedia Healthcare Network. He has seen booming healthcare IT markets come and implode and hope history doesnt repeat itself. But, if some of these other companies go public in a big way and then two or three of them miss earnings four or five quarters later, that creates a problem, he adds. Then, you have a cooling off period and stocks go down and the IPO window closes. The cooling off period could affect the stock prices of any public healthcare IT company, not just the ones that missed earnings.
So, while a new period of financial opportunity for HIT companies may be dawning, Teitelbaum hopes for a more tempered response this time around compared with the dot-com bubble burst of 2000-2001. Anytime you push something to an extreme, theres a tendency for the pendulum to push in the opposite direction.
Bubbles are an exciting time and give innovative companies the capital they need, but if the bubble bursts, it will hurt the opportunity for other emerging companies to grow and spur more merger and acquisition activity, because buyers now see candidate companies with lower price tags.
For now, there could be a lull in M&A activity for a while until buyers see how the market will settle, Teitelbaum believes. At minimum, buyers will at least wait to see how IMS Health prices its stock and watch the valuations for IMS and Castlight Health for the next few quarters.
Other emerging companies would be well served by not seeing themselves as the next Castlight, he advises. Unless a company truly is the next Castlight, it will need $40-50 million in revenue before going public, he predicts. And because many companies wont reach that level and need more capital to survive, many will have to exit via a sale.
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