Whatever skepticism might have greeted health IT company Castlight Health’s (NYSE: CSLT) S-1 filing for its IPO last month is being replaced by a kind of bewilderment. Although the digital health startup had been rumored to be valued at $2 billion, it managed to outdo that with a $3.4 billion valuation — 265 times its revenues for 2013. It didn’t jibe with the relatively modest revenues being generated by the health IT company.
But with the close of trading, the company’s share price roared to a 149 percent increase from $16 to $39. Even with a significant backlog of orders, it gave it a valuation out of proportion to its $13 million revenue. It also successfully raised $178 million. Here are four things to think about in the context of Castlight Health and the future of healthcare.
Castlight Health is not your typical IPO: “I don’t think Castlight is the only healthcare IT company that’s going to go out in 2014 with a high valuation, but I do think that valuations like those of Castlight are rare.” That’s Paul Teitelbaum’s thinking. He’s managing director at Mesirow Financial’s investment banking group and his specialty is medical device and healthcare IT M&A.
Did someone say bubble? Teitelbaum added: “We have seen other hefty valuations in healthcare, as well as in other industries, and despite the drop in the market over the past couple days, the equity markets are strong and we could see robust valuations from other companies soon. The general fear is that if we see too many more valuations in the triple digit multiple of revenues, the bubble could burst.”
Castlight Health is designed to change behavior: Say what you want about value-based care, the challenge lies in delivering it. Just because a company identifies hospitals with cheaper and better outcomes, who is to say people will give up a preferred hospital or physician? But Castlight’s CMO Dena Bravata thinks it can convert these patients. “I’m not sure that I know that patients are unwilling to change. I think the value of providing more information could change all kinds of decisions. Some seek high-cost specialists and don’t have a primary care provider. All of those folks benefit from the kind of platform that Castlight Health has.”
Validation for consumerism in healthcare: The success of Castlight’s market debut is partly due to the fact that Castlight’s platform gives consumers a more influential role in their healthcare decisions. Healthcare frequently gets derided for being so technologically sophisticated when it comes to biotech and medical device development. Yet when it comes to the use of computer technology for transactions, it falls behind other industries such as the hospitality industry and airline industry, among others.
