Disruptive Healthcare 4/5/2024: Healthcare Stocks Get Crushed
Disruptive healthcare valuation, trends and analysis weekly.
Healthcare Stocks Struggled This Week:
Disruptive Healthcare stocks (and the broader Healthcare stock universe) have performed very well so far this year and over the last 12 months. However, last week was a different story. The XLV traded down 3.1% last week and our Disruptive Healthcare peer group traded down 5.3% in one week.
Why?
Two primary events are drove the move lower this week in my opinion:
CMS 2025 Rate Announcement - On April 1st, the Centers for Medicare & Medicaid Services (CMS) announced their rate plan for 2025. Rates were lower than what large insurers and Wall Street traders expected. Usually these rates are pretty easy for the market to predict, but this time, there was a big surprise and it caused investors to view future cash flows to be less certain for many payers. As such, the stocks traded down sharply with some large insurers hitting multi-year stock price lows.
Change Healthcare Fiasco - The hack of Change Healthcare put a lot of pressure on small and large care providers. With payment processing offline, many care providers saw their Accounts Receivable balances balloon at the end of Q1. Many small providers are struggling to stay afloat, and many larger providers are going to be reporting lower cash balances on their 3/31 Q1 financials. This is having a drag on how investors view the near term prospects for these companies. I spoke with the leadership team at two large publicly traded care providers last week and both told me they have a working capital issue that will require some explaining on upcoming earnings calls when Q1 results are reported. This is directly attributable to Change Healthcare and the timing of payments resulting from the hack of that platform.
Here’s how the public stocks in our space have traded over the last 12 months:
And here is what happened last week:
Here is our weekly chart showing how the peers have performed since the group bottomed on November 9th, 2023. Since that time, they had outperformed the broader market until this week. This week, the S&P finally ticked above the peers since the bottom noted above.
Disruptive Healthcare Public Comps:
The impact of the declining stock prices in the healthcare space are clearly seen in our comps. Our Disruptive Healthcare peer group traded down from 3.5x to 3.3x on a 2024E revenue basis last week.
Top Revenue Multiples:
This top 4 group is a subset of the broader disruptive healthcare peer set. These 4 currently have the largest EV / 2024 Revenue multiple. This group trades at 7.1x 2024E revenue versus the broader group at 3.3x. This group also boasts an average EBITDA margin of 39.2% on 2024E projections versus the broader group at 17.6% 2024E EBITDA margin on average.
Weekly Share Price Performance:
As discussed above, Disruptive Healthcare companies got crushed last week trading down 5.3% on average versus the S&P 500 which traded down 1.0%. It was a tough week for public markets, but it was extra rough in our sector.
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: 6.8x
Today: 3.0x
Peak: 15.1x
Trough: 2.4x
Top 4 companies include VEEV, HQY, DOCS and GDRX as of today. Why did we move from showing the top 5 to the top 4 here? We removed PHR because their margin profile doesn’t fit with the rest of the “top” group. They were a significant outlier and I think it is important to show the disparity between the true high margin businesses and everyone else.
Summary of top 4 EV / NTM Revenue Valuation Stats:
5 Year Average: 12.5x
Today: 7.2x
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.
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: 39.7x
Today: 17.0x
Peak: 85.0x
Trough: 15.3x
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 4/5/2024:
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 know the font is small, but you should be able to click on these and expand.
^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.
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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 $83mm into 72 healthcare startups since January 2020.
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 my commentary on twitter here: @hazesyah