Malay Gandhi’s take on Castlight Health’s IPO registration raises some interesting points about the value of price transparency and particularly, the agreements companies have to forge to obtain it.
In a blog post on Rock Health, Gandhi makes clear just how overvalued the $2 billion figure is. With projected revenues in 2014 of $40 million, it would amount to a 50x forward sales multiple to get to $2 billion, an amount that far surpasses other enterprise cloud companies, noting “the most expensive enterprise cloud companies fly below a 30X multiple.”
One of the fundamental challenges of the evolving transparency market is that Castlight could be limited by the data sharing agreements it makes with other insurers and even find itself competing with them. National health plans that cover one-third of the market are developing their own price transparency tools, Gandhi points out. Castlight’s data sharing agreements with insurers have forced the company to make at least one compromise on the agreements it seeks with other businesses.
When Investment Rhymes with Canada
Canada has a proud history of achievement in the areas of science and technology, and the field of biomanufacturing and life sciences is no exception.
For example, Gandhi notes that Castlight lacks a data sharing agreement with UnitedHealthcare, the largest insurer in the country. That’s not for lack of interest, it’s part of a contractual agreement:
“In an interesting note, Castlight states the challenges of mining the industry for data, having agreed with one health insurer to not work with UnitedHealth Group until January 1, 2015 in exchange for data access. (Our guess on the “national health plan” that demanded exclusivity? WellPoint.)
Gandhi also sees an erratic sales pattern and points out that Castlight’s sales and marketing model has yet to prove itself. Although he notes that it signed 59 customers last year (and more than 95 in the past two years, according to the S-1), he raises a question that will take some time to answer: How long will Castlight be able to hold onto these customers?
“Ultimately, as with most SaaS businesses, the churn rate (i.e., the percentage of customers canceling or choosing not to renew) and customer lifetime (the average number of months a customer is held) will move the business model in or out of long-term unit profitability. Castlight reported that there has not been enough experience with expiring contracts to forecast renewals or churn rates, leaving customer LTV unknown at this point.”
Health Benefit Consultants, Share Your Expert Insights in Our Survey
Share some of the trends you are seeing among your clients across healthcare, including chronic conditions, behavioral health, healthcare navigation, and more.
As sources I have spoken with have emphasized, a lot can happen between now and Castlight’s public debut. The company has definitely helped make price transparency a big issue and is offering tools to help improve it. But the ongoing discussion about the cost of healthcare and the active work going on at many level to make prices easier to find is a double-edged sword for Castlight as this progress creates competitors that could steal market share from the company.
