Disruptive Healthcare 8/16/2024 - Healthcare Macro Charts
Disruptive healthcare valuation, trends and analysis weekly.
Healthcare Macro Overview:
Healthcare stocks have been bounced around as the markets can’t really figure out if a recession is coming or not. Goldman Sachs published a chart this week that really tells the sector story perfectly relative to the broader S&P500. This chart explains it better than I can by graphing the relative performance of the XLV versus the S&P 500 this year with explanations at key turning points.
If you believe that Fed rate cuts are coming, then that’s a great sign for the stock prices in the healthcare sector according to how the sector has performed in past Fed rate reduction envionments. The table below from Goldman Sachs breaks down healthcare subsector performance versus the S&P500 in past rate cutting periods.
Separately, for those who are following politics closely and wondering how the presidential elections will impact healthcare, this chart is fascinating. Humana is broadly seen as a company that will benefit if Trump wins while HCA is seen as a company that will do better with a Democrat in the White House. This chart below shows the relative performance of Humana’s stock price to HCA’s stock price (blue line) compared to the betting odds of Trump winning over the last 3 months.
Now back to our normal Disruptive Healthcare charts…
Disruptive Healthcare Public Comps:
Our Disruptive Healthcare peer group is currently trading at 3.3x 2024E revenue and 2.9x 2025E revenue.
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 7.8x 2024E revenue versus the broader group at 3.3x. This group also boasts an average EBITDA margin of 40.1% on 2024E projections versus the broader group at 17.9% 2024E EBITDA margin.
Disruptive Healthcare Stock Price Performance:
1-Week Stock Price Performance:
This week our peers traded positively on the whole with a 1.6% move up on the week while the broader markets also performed well. The S&P 500 was up 3.9% this week while the 10-year rate dropped 1.4%. Healthcare still seems to lage the broader markets as the XLV is also lagging the S&P500, not just our peer group.
1-Year Stock Price Performance:
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: 6.4x
Today: 2.9x
Peak: 15.1x
Trough: 2.4x
Summary of top 4 EV / NTM Revenue Valuation Stats:
5 Year Average: 12.1x
Today: 7.4x
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: 37.4x
Today: 15.4x
Peak: 85.0x
Trough: 14.4x
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 8/16/2024:
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 $90mm into 75 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