Digital health meets Wall Street: what it takes to IPO
I sat down with Peter van der Goes, Managing Director at Goldman Sachs and Head of HCIT. The bank has led several healthcare IT companies to the public markets over the years, including Athenahealth, Allscripts, BenefitFocus and Castlight. I talked with Peter about growing public market interest in digital health and what that means for companies hoping to go public one day.
How do you think about digital health and the way it compares to other sectors, like traditional tech and healthcare companies?
Healthcare IT was historically pretty sleepy because the market was a sleepy part of the economy. With things like Obamacare and inevitable cost pressures in healthcare, we’re now finally starting to see real technology innovation, real data, real analytics, and real IT solutions inside the healthcare vertical. Although it’s early, it’s really exciting.
We’ve also seen a tremendous amount of VC investment inside the vertical over the last 12 months, in contrast to biotech, where we’ve seen only a bit of a resurgence. The impact that digital health innovation can make in healthcare can be even bigger than the great innovations that the biotech industry has brought and can bear. There’s tremendous potential for efficiency, outcomes, and satisfaction improvement that can all be brought into the healthcare economy at a lower cost than what we’ve seen in the past. Before the most recent digital health companies, there have been very few publicly traded health companies that get you to a better outcome while taking cost out of the system. That is what digital health businesses are all about.
Can you elaborate more on how you think public markets evaluate revenue generated versus growth prospects?
For digital health, public investors are building a view on the long-term intrinsic value of a business. It’s very common for people to talk about those forward revenue multiples. But behind that is a much deeper set of growth metrics: the profitability that can come with that growth, how it can upsell, and how other growth parameters look. Ultimately, for public investors, it comes down to how profitable that future cash flow stream can be, and what risks exist to getting there.
Do you think digital health companies need to model themselves after established business models in order for the public markets to feel comfortable?
I do think the horizontal SaaS businesses are the right analogy for many digital health companies. I think the criteria are analogous: you have a well-characterized solution that you are serving up to an end market that is big enough to matter, and you have successful penetration of that market, even if its still in its early stages. So, you’re seeing enough adoption to really feel comfortable as an investor about getting into the mass adoption phase on the S-curve. You’re also seeing that there’s a real stickiness to your solution, and that it really is making a difference for customers.
We are also seeing more digitally-based therapeutics that are similar to the biotech industry. Traditional biotech companies tend to go public when there’s still significant development risk at stake. Their final product is often pending regulatory approval, and they need the capital to keep up with development and ultimately commercialization. De-risking points of clinical success is very important since in those instances, it’s harder to predict what the profit-and-loss will ultimately look like. Gross margin profiles need to be good enough to scale and create some operating leverage as the company drives adoption and penetration.
Can you share any broader lessons learned from recent digital health IPOs?
I have three that come to mind. First, when you’re going public with a digital health business with real health IT innovation, it’s important to remember you will be in dialogue with two different sets of investor types—tech and healthcare. Both types of investors exist inside large investment funds. You can say, “No, I just want to talk to the healthcare guys,” but they are going to bring all of their tech guys to the meeting to ask if the technology architecture really works. At the same time, the tech guys are asking the healthcare team how government reimbursement works. So there are nuances to each of their worlds, and thoughtful positioning will reflect consideration of both the technology and healthcare aspects of the company, and the importance of each.
Second, an enormously important participant in the healthcare economy is large, self-insured employers. They’re the ones footing the bill and struggling with the increasing cost associated with healthcare and healthcare reform. They’re open to using technology that will help them manage their health spend, get to lower costs, and improve dialogue with employees—not just strictly healthcare but for wellness as well. It’s important to remember that if you have an appropriate solution set to do so, orienting yourself to large employers with deep pockets can be a great way to drive commercial success.
Third, you have to be a true believer in your business and have passion for the change you’re bringing to healthcare. I think this is important because in almost every successful digital health business we’ve seen come public, there is a real commitment to what they’re doing and want to do to make a difference in the healthcare economy. You will run into challenges, you will run into unknowns, and it’s your commitment to solve them with innovation and hard work.
In your opinion, where is the most innovation happening?
Consumer engagement is really exciting. The sad commentary on the healthcare system is that consumers, patients, members, individuals—however you choose to refer to the people receiving healthcare—are sometimes the last ones that are thought of. One of the great benefits of the healthcare IT investment boom is that now a focus on the patients is becoming a hallmark dynamic that is helping to drive these SaaS-oriented businesses.
What advice would you give an entrepreneur who is hoping to bring their digital health company to the public markets?
Being public—not just going public—can put you in a very powerful position as you continue to build your toolset and maximize its importance in the world. But the process is time intensive and distracting, so always be objective and sober about it. Maintain control and don’t let the euphoria and momentum of the IPO process carry you away such that you later wish you had spent time continuing to innovate and build the business rather than focusing on the IPO. I often ask, “What’s the most valuable asset that you have?” People will say their business, technology, customers, and the team. The right answer is time. High growth, innovative companies are pushing adoption and technology development boundaries, and this is a 24-hour-a-day job. The IPO process can be long and time-consuming, and so focusing on the business and its development, first and foremost, is the most important thing prioritize.