Castlight Health surprised a few with its lackluster, albeit growing, revenues in its filing for an initial public offering this week. But despite what seems like a pretty big overvaluation in a leaked report that valued the digital health company at “upwards of $2 billion,” a lot could happen between now and its public debut. Here are a few challenges that the company faces.
Is transparency workable as a long-term business model? It’s a tricky question. Transparency is seen as a tool that will help transform healthcare by helping employers and consumers make more informed decisions but nobody believes it will happen overnight. It also depends on crunching many data points that inevitably won’t tell the whole story. The healthcare system is way too fragmented with data silos aplenty. Insurers hold some of the cards and are beginning to shed some light on the cost of medical procedures. CMS is making some pricing information available, but at the pace of a dripping faucet and it’s out of date by the time it’s available. States are taking on the challenge as well with new legislation. Still, there will undoubtedly be a need for companies to organize this data into a standard format that can be easily used for cost saving.
Is the transparency market crowded? There’s a certain amount of diversity in this subsector of digital health. Some companies like Castlight Health have worked with employer health plans, and PokitDok has focused on employers and consumers. Others such as GoHealth have pursued a direct-to-consumer route with price transparency for health insurance and some health IT companies have focused on the pharmaceutical industry. eLuminate Health applies its technology to bring together consumers, physicians and testing centers into the referral process. Investors I spoke with had some doubts that the demand for price transparency could support so many companies. I think there’s room for companies in each of these areas to package that information in ways that fit the needs of their customers.
What’s the value of transparency? Some of the previous questions ultimately lead to this one. One investor I spoke with saw cause for concern that despite having Walmart as its biggest customer, accounting for 13 percent of its revenues, it didn’t generate all that much for the business. But then, it has a big order backlog valued at more than $108 million. As The Street points out, even if it doesn’t add another customer it will double its revenues this year. Goldman Sachs and Morgan Stanley’s move to co-sponsor the IPO reflects the confidence these companies have in the value of price transparency. Although in its S-1 filing it sees a market opportunity of up to $5 billion, it’s performance so far suggests it could take a long time before it makes a serious major dent in that market opportunity.
What does it bode for other digital health companies? Skip Fleshman, a partner with Asset Management Ventures, expressed some surprise at the disconnect between the upwards of $2 billion valuation and the stark reality of the balance sheet. Referring to Castlight’s revenue and profitability he said, “It’s pretty anemic and pathetic.” But he was reluctant to say whether the company’s performance on the day it goes public will have much of an impact on other digital health companies, though he added, “It’s probably not the best bellwether.”
A lot remains to be seen, though. After all, there are other digital health companies that could go public later this year such as Doximity, ZocDoc and FitBit and each are very different from the others.