Disruptive Healthcare 10/15/2024 - #HLTH

Disruptive healthcare valuation, trends and analysis weekly.

I feel bad that I’ve been MIA on updating these numbers for almost 2 months. I’ve been swamped with kids being back in school, and a few deals we’ve been working on that consumed all of my time.

I wanted to get an update on these numbers out there before HLTH next week - so we have some updated numbers to discuss when we run into each other at the event! If you’ll be at HLTH and want to say hi - let me know!

Also, from a personal perspective, I recently eclipsed 6 years of sobriety in my own personal journey. I wrote a little blog post about the journey so far here.

Disruptive Healthcare Public Comps:

Our Disruptive Healthcare peer group is currently trading at 3.7x 2024E revenue and 3.3x 2025E revenue. For those who aren’t familiar with how public markets price assets, everything is trading on 2025 estimates at this point. We will roll the columns forward soon and stop showing 2024E b/c it isn’t as relevant for stock prices as much any longer.

Top 4 Revenue Multiples:

This top 4 group is a subset of the broader disruptive healthcare peer set. These 4 currently have the greatest EV / 2024 Revenue multiples of the broader group. These 4 companies as a group trade at 9.0x 2024E revenue versus the broader group at 3.7x. This group also boasts an average EBITDA margin of 40.3% on 2024E projections versus the broader group at 18.0% 2024E EBITDA margin.

Why does this matter to startups?

These comps aren’t perfect. They are public companies, and most startups are several years away from being public. But, when I look at how early-stage startup funding rounds are pricing in the healthcare sector, the ARR multiples aren’t too far off of these high growth “top 4” peers. Tracking these valuation metrics is a decent proxy for tracking capital flows, and investor sentiment in the sector. As the public markets trade up, and yield is difficult to find in a sector, investors often start seeking yield in more illiquid assets. This drives capital down to the private markets and drives valuations up. Tracking this flow of capital in the broader capital markets helps us think about what to expect for our portfolio in terms of when to access the markets and when to wait for better days to raise money.

Disruptive HC Stock Price Performance:

Peer performance vs. broader market over the last 12 months:

Disruptive healthcare peers struggled versus the broader market from March through late summer. Since July, the peers have closed the gap on the S&P 500 and the XLV. As the interest rate environment improves, our high growth disruptive peers will benefit and see multiple expansion. We’re already seeing it and expect that to continue.

Stock Price Performance by Company:

Valuation — EV / NTM Revenue:

Mature healthcare comps are generally valued based on their earnings (see the broader comps at the bottom of this post). However, earlier stage businesses such as startups, and to an extent these younger, disruptive healthcare public companies often don’t have positive earnings yet or they may have positive earnings, but they haven’t reached the margin profile they will achieve upon maturity as a business. As a result, it’s harder to compare these companies on an apples-to-apples basis using EV to earnings. So, we use EV/NTM revenue to triangulate valuation for these companies and for startups in similar markets.

Summary of EV / NTM Revenue Valuation Stats:

• 5 Year Average: 6.2x

• Today: 3.2x

• Peak: 15.1x

• Trough: 2.4x

Summary of top 4 EV / NTM Revenue Valuation Stats:

• 5 Year Average: 12.0x

• Today: 8.4x

• Peak: 26.4x

• Trough: 5.8x

Valuation — EV / NTM EBITDA:

We were previously only looking at 8 companies from the perspective of EV/NTM EBITDA, but since Q1 earnings have reported, more analysts are projecting positive EBITDA in 2024 and beyond for more of the peers so we have expanded the index here to include 11 of the 16 companies. Based on what I’m seeing in equity research I think we will be adding a few names to this list soon as more of our peer group is starting to approach profitability.

To create an index, I only include the peers who have a substantial believable positive NTM EBITDA forecast based on the average of Wall Street equity research reports. The comps with barely positive EBITDA yield EBITDA multiples that aren’t realistic (so we consider them not meaningful “NM”).

The included companies are: VEEV, HQY, DOCS, RCM, PGNY, TDOC, GDRX, GOCO, HIMS, LFST, and PRVA. That’s not to say the other Companies won’t have positive EBITDA in 2024, but the multiples are relevant right now. Here’s how the chart looks.

Summary EV / NTM EBITDA Valuation Stats:

• 5 Year Average: 36.7x

• Today: 16.5x

• Peak: 85.0x

• Trough: 14.7x

As these companies mature and begin to trade on EBITDA multiples or even P/E multiples (much like the hospital facilities and MCO peers) then this chart will tell us more. This is certainly a data point we can look at for profitable growth equity stage private companies. I’d expect those companies to be valued closer to the 5-year average or slightly lower. Some of that data in 2019 and 2020 is elevated because the EBITDA estimates back then were very small or barely positive for some of these companies driving an artificially high multiple that wasn’t driving valuation but rather was a dependent variable.

Broader Healthcare Comps as of 10/15/2024:

This newsletter is mostly focused on the disruptive healthcare comps and how their performance drives valuation for our private market portfolio at What If Ventures. However, we do keep a much broader set of comps that includes Healthcare Facilities and Managed Care Organizations.

^I realize this is too small to read, but if you double click on the image it should expand. Or you can just email me and I’ll send you the backup.

If you would like to receive weekly updates on this data and our outlook on the Disruptive Healthcare market, then please subscribe and share our work with a friend.

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About What If Ventures — What If Ventures invests in mental health and digital health startups from seed stage to growth equity. To date, we have invested over $95mm into 80 healthcare startups since January 2020. The firm is actively managed by Stephen Hays.

If you have questions about any of this analysis or want to collaborate with What If Ventures, please reach out via info@whatif.vc. We’d love to connect with entrepreneurs and investors in the space.

You can follow more of Stephen’s commentary on twitter here: @hazesyah