The B-Word: Is the Health IT Market in the Midst of a Bubble?

April 3, 2014
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The B-Word: Is the Health IT Market in the Midst of a Bubble?

IMS Health, a Danbury, Conn.-based company that offers analytics, consulting, and healthcare data to pharmaceutical companies, providers, payers, and other entities, is seeking to raise $1.4 billion in an initial public offering (IPO) this week.

If that goes down as planned, it would give IMS Health the second biggest IPO of the year, according to The Wall St. Journal. Another company that did well in an IPO this year is Castlight Health, a San Francisco-based provider of an application that allows consumers of healthcare to compare doctors. The company traded in its first day at more than $40 per share, which gives it a valuation of more than $3 billion. In total, it raised more than $100 million.

Castlight is trading currently at a more reasonable $23 per share. Still, considering the company has yet to post a profit, it’s doing well for itself on the market. So well that some said it might have had the most “overvalued IPO of the century.

Imprivata (Lexington, Mass.) is a third health IT vendor that will file for an IPO in 2014. The company, which offers security software such as single sign-on, is seeking a $115 million IPO.

While the three companies operate on different planes, they all illustrate the potential IPO boom period for healthcare IT-focused companies. And if not IPOs then there is the possibility of getting sold for a pretty penny, such as Franklin, Tenn.-based revenue cycle management company, Passport Health Communications, which got bought for $850 million by Experian.  Already, in the last few years, venture capital (VC) money has been pouring into health IT startups at a record rate.

Of course, with this boom, there is just as likely of a chance that it could all burst.  After the Castlight IPO soared, Healthcare Informatics Senior Editor Gabriel Perna spoke with Paul Teitelbaum, managing director and medical device / healthcare IT mergers & acquisitions (M&A) expert at Mesirow Financial, a Chicago-based investment banking firm. Teitelbaum spoke about the possibility that there is a health IT bubble, why the IPO market has been kind thus far to these companies, what other companies he will be watching for possible IPOs or sales, and how long can we expect money to be going into these companies.

Below are excerpts from that interview.

Why are valuations so high for these health IT IPOs?

There are a few factors driving it. Number one, given healthcare reform and the Affordable Care Act, and pressures to reduce costs, increase efficiency, and increase price transparency for employers as well as patients, there’s a strong demand for better healthcare IT systems. There is a strong belief some of these companies, which have innovative solutions and advanced technology, have the potential to provide software that will greatly benefit the efforts towards cost containment.

Number two, healthcare IT companies that have pretty strong growth are desirable from an investment perspective because of their high growth, high margins, and potential for recurring revenues. IT companies in general get pretty high valuations. What really magnifies these to the crazy levels we’ve been seeing is that if someone wants to play in healthcare IT space…there are not many ways for an investor to participate. There are really six or seven publicly traded, pure play healthcare IT companies out there (ed: Cerner, Allscripts, athenahealth are a few mentioned). There are not many. People want to participate and there are not many ways to do it, so a new healthcare IT IPO comes along and it gets significantly bid up.

Plus, we have a pretty strong IPO market in general right now.

Why did Castlight’s IPO do so well?

What I would go back to is pricing transparency and solutions from employers to choose benefit plans for employees to be able to select benefit plans and select specific services based on what they cost is extremely important. There is a trend toward having employers and employees bare a significantly greater proportion of their healthcare costs, their premiums, co-pays, deductibles. Out-of-pocket maximums have gone up. If you are consumer of healthcare services and you will be increasingly paying for these things, as opposed to a third-party payer, it becomes increasingly important to understand what the services and benefits will cost and what you will get out of each plan. There is an enormous need for valuable information that can help you make these decisions.

Will Castlight’s IPO be a bellwether for the rest of the industry in 2014 – do you expect more of these companies to file and get high valuations?

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