Disruptive Healthcare 6/28/2024 - 1H 2024 Wasn't Great for Most HC Companies
Disruptive healthcare valuation, trends and analysis weekly.
1H 2024 in Review:
The healthcare sector did not perform well in the 1st half of 2024. While the XLV traded up 7.3% over the first 6 months of 20204, it’s really not a great indicator of the overall health of the sector. The XLV’s gain was driven mostly by the top 4 performers in the broader index with 75% the XLV index’s 6 month gain coming from the performance of LLY stock alone. LLY stock is up 56% YTD. Based on its market cap, and that huge move upward, it has almost single handedly driven the entire index upward making up for the vast majority of companies that have not performed well this year.
When we focus on the earlier stage, disruptive healthcare peers we can see what’s happening to the “rest of us.” And it hasn’t been pretty so far this year. The disruptive heatlhcare peer set traded down 11.1% on the year so far compared to the XLV which is up, and the broader S&P500 which is up 14.5% YTD.
At this point, it shouldn’t surprise anyone that investors don’t love companies that lose money. Entrepreneurs who have understood this over the last year and have started making moves to get profitable will be rewarded (and the reward will be survival). Those who think frothy times will return and allow us to gloss over losses are sorely mistaken. Those times are not on the horizon any time soon.
This is a continuation of a broader trend that we’ve seen over the last 12 months:
Disruptive Healthcare Public Comps:
Our Disruptive Healthcare peer group is currently trading at 3.1x 2024E revenue and 2.8x 2025E revenue.
Top 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 multiple. This group trades at 7.1x 2024E revenue versus the broader group at 3.1x. This group also boasts an average EBITDA margin of 39.9% on 2024E projections versus the broader group at 18.1% 2024E EBITDA margin on average.
Weekly Share Price Performance by Company:
Over the last 7 days, our peers have traded down 2.1% on average while the broader S&P 500 has traded down 0.1% this week.
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: 6.5x
Today: 2.8x
Peak: 15.1x
Trough: 2.4x
Summary of top 4 EV / NTM Revenue Valuation Stats:
5 Year Average: 12.3x
Today: 7.0x
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: 38.1x
Today: 16.1x
Peak: 85.0x
Trough: 15.2x
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 6/28/2024:
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.
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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 $85mm 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