This weeks featured SPAC is Owlet, makers of a smart sock for babies that has aspirations to become the digital platform for parenting. Owlet is being taken public at a $1.1 billion valuation. Link.
The story they tell in this deck is brilliantly intuitive - Owlet makes the best baby sock, which is the key to opening up a number of adjacent markets and to own the in-home digital nursery. When you look at healthcare utilization in the first year of life, there is obviously a lot of opportunity for Owlet to add in telehealth components here (slide 31). This will theoretically allow Owlet to cross-sell a whole bunch of new products to the same parents. From a financial perspective, one can craft a really compelling narrative around those numbers, as we’ll discuss more below. And it’s certainly a nice story about giving parents peace of mind, and obviously they have found an audience that have bought in to the vision. Heck, if you’re really drinking the kool-aid here, the comparison of the baby smart sock to the iPhone as a platform opportunity should seem quite exciting!! (slide 54)
But while the story sure sounds nice, this is now a public company and with that comes - from my perspective at least - an expectation that the story has some basis in reality. This is a company that did $45 million in revenue in 2019 and estimates $75 million in 2020 - a solid 51% growth rate - with EBITDA margins of (33%) and (11%), respectively (slide 44). The projections further out are where things start to feel a bit amiss. In 2023, apparently Owlet is going to kick the business into another gear and start growing at 80%+ revenue each year through 2025, reaching $1 billion of revenue in 2025. Somewhat miraculously, Owlet also expects to become EBITDA positive over that same period, increasing its EBITDA margin to 16% in 2025. That projected 80%+ revenue growth and 16% EBITDA margin allows them to place themselves in rarified territory on this chart below, which is in the early lead for my imaginary yet quite prestigious award for Most Ridiculous SPAC Chart of the Year:
While Owlet claims to be a “financial outlier”, it’s easy to miss that Owlet is comparing itself to a whole bunch of companies constrained by axes that are based in some semblance of near term reality (note the axes are 2021E EBITDA Margin and 2020E-2022E Revenue CAGR). Meanwhile, Owlet plops itself down on the chart based on… the growth and profitability expectation in… 2025?! Huh? If you instead actually plot it on the same axes it uses for the other companies - Owlet would fall somewhere in the neighborhood of Hims and Inspire. Not exactly a financial outlier. It’s a really nice story to tell, sure, but not exactly based in reality here.
Meanwhile, Owlet also claims that it expects its customer Life Time Value (LTV) to increase from $547 in 2020 to $3,296 in 2025, while it’s Customer Acquisition Cost (CAC) decreases from $30 to $22. The LTV:CAC ratio in 2020 was quite solid at 18.2, the 2025 ratio is a mind-boggling 149.8. There is no detailed explanation anywhere for how they’re going to drive that insane growth in customer LTV - while simultaneously decreasing CAC - over the next few years, and no historical data to understand or support the trend here. Presumably the LTV growth will come from the four growth pillars Owlet articulates - increased market penetration, an expanded product suite, entry into telehealth / medical devices, and international expansion. But it seems pretty far-fetched to me that this company is going to be able to execute on all that while getting to profitability over the next few years.
In Owlet you’ve got a company that has built a nice business selling a relatively straightforward product in a smart baby sock with a solid brand around it. The 75+ NPS they’ve hit is certainly a lot to be proud of for the team. But, Owlet is also eight years in to this journey and it hasn’t been able to get even close to profitability yet even with a relatively straightforward product offering. That seems like a major underlying issue given the product here. Yet somehow you’re going to add in the complexity of FDA regulation, medical devices, telehealth, and international expansion, and you expect to get to profitability in the midst of all that? I don’t buy it.
The fact that companies such as Owlet are able to go public at massive valuations without seemingly any rigor in the SPAC process feels quite worrisome for the state of the public markets. Instead of getting companies that are being judged on historical data and their ability to execute on their projections, we’re getting VC-style pitches from companies selling visions of grandeur (and meanwhile, the SPAC Sponsors, VCs, and founders are getting a very nice exit). That seems deeply problematic for everyone aside from the VCs, founders, and SPAC Sponsors who are making a mint on these deals. Of course, not every SPAC is necessarily going to be like this, but this is getting out of hand.
CVS reported earnings this week and announced it is joining the ACA exchanges re-entry party in 2022, although it offered little detail on how broad of a re-entry it is planning. They’re at 650 HealthHUBs at the end of 2020. Interesting to see that they launched virtual-first primary care product, and the first question they got from an analyst was wanting details about that virtual-first primary care product. Of all the questions CVS could be asked about the many businesses under its umbrella, the first one is wanting more details about the virtual primary care pilot? Just a small reminder of how much excitement and interest there is in this space at the moment. Of course, CVS’s answer to the question also highlights the reality of the space at the moment - they’re in a pilot of the offering with one large employer and aren’t offering up any real details on the program. We’re still in the very early innings here. Link.
Eden Health, a bricks & mortar + virtual primary care startup for employers, raised $60 million. Revenue increased 800% last year and covered members are up to 40,000 (although I can never tell if that number means if Eden has contracted with employers with 40k lives or if Eden is getting paid to serve 40k members). I continue to think their approach of leveraging commercial real estate partners as a go-to-market strategy is really smart. Will be interesting to watch how their in-person / virtual model shifts over time. Link.
Circulo raised $50 million dollars to build a Medicaid plan on top of Olive’s AI platform. This will be a rather interesting play to watch unfold as Medicaid insurance has historically been a hard space to consistently do well in, even for the largest insurers. Circulo will have close relationship with Olive - they share the same CEO - which is best known as a robotic process automation platform that has been targeted at automating the back office of health systems. Olive has also indicated its interest previously in getting into the payer market. And if you have access to capital like the Olive leadership team apparently does, why not “dogfood” your platform on a friendly startup to see how it goes? It feels like we’re going to see a lot of VC activity in the Medicaid space this year. Link.
CareVive raised $18 million for its oncology tech platform. Link.
Cohort, a care management platform that leverages EHR free text to help providers close gaps in care, raised $11 million. Link.
Talkiatry raised $5 million to build a tele-psychiatry practice that is in network with major insurers. Link.
Nest Collaborative raised $2.1 million for its virtual lactation consultation platform. Link.
Pattern Health raised $1.5 million to build a no-code platform for clinicians and researchers to build digital health apps. Link.
How Women Invest announced it closed a fund and invested in Grey Matter Analytics and Hitch. Link.
SCAN Health Plan, a Medicare Advantage plan in Southern California, invested in Monogram Health, a kidney care startup. It looks as though this is part of a broader strategy for SCAN to begin investing and diversify it’s businesses, joining the gaggle of insurers following the Optum diversification journey. Link.
IBM is considering selling Watson Health, which is apparently doing $1 billion of revenue a year but still is not profitable. I smell a SPAC coming! Link.
98point6 is launching a behavioral health offering. Link.
This article on Walmart’s retreat from their healthcare strategy this week is worth the price of admission alone over at Business Insider. It’s excellent reporting on the dynamics inside of the organization that many (myself included) have pegged as the biggest potential healthcare disruptor. Walmart appears to be pulling back from its ambitions in the space for all the run-of-the-mill corporate strategy reasons one might expect - leadership changes, competing internal priorities, a Board not fully committed to the concept, an unclear tie back to their core business, etc. This effort felt different than other retailer attempts in the past - both given the early successes they shared publicly and the boldness of the vision. While disappointing, it’s a good reminder that despite the hype around disruption at the moment, retailers have been attempting and failing to disrupt healthcare for years. Check out this statement from the article that shines a light on the rather mundane business challenges at hand:
One former employee who attended budget meetings said money to build new clinics dried up in favor of things like cooking devices that more directly boosted in-store sales.
Sums up pretty neatly the challenges of a retailer investing in healthcare, right? It’s a rather large strategic leap to start building clinics when your entire organization knows how to make money selling “cooking devices”. I can only imagine the level of pushback internally from Walmart’s non-healthcare leaders asking why dollars are being diverted from their core business to this pie-in-the-sky healthcare exploration. Walmart certainly still has a huge opportunity in front of it to disrupt healthcare, but it’s hard to read something like this and remain convinced that they have the organizational desire to do so. Link.
Brendan Keeler offered some advice for new digital platforms on how they should think about building vs buying EHRs and the challenges associated with each option. He offers up the concept of a potential future ‘Headless EHR’, which I’m quite sure has VC’s around the country drooling at the thought of investing in. Link.
Two quite interesting reads this week on value based care:
This is a nice summary of how value based care payments work from Maitreyee Joshi, focusing in particular on the mechanics of Bundled Payments for Care Improvement-Advanced and Direct Contracting. It’s a nice summary of both programs for those interested in learning the basics of where and how money is flowing in these programs. Link.
Here’s a perspective on where value based care should head over the next decade. This table below does a good job describing where value-based payments are at today by insurance type. You can see pretty quickly how Medicare Advantage is an outlier in “APMs using population-based payments”, which of course has been driving the investment interest in the space - what investor doesn’t like seeing a global cap payment as revenue? The paper also provides some thoughtful goals for value-based care over the next decade - simplifying admin, getting provides to take more risk, and better integrating health equity as a goal of value-based care. Definitely worth checking out. Link.
There were also two reads this week on how Medicaid might be transformed:
This is an interesting look at a handful of suggested Medicaid reforms to improve the program: more stability of coverage, better infrastructure, supporting Medicaid state leaders, alignment with public programs, and more value based care incentives. Hard to argue with any of this. Link.
Here’s a really good piece looking at how technology innovation might change the Medicaid market over the next decade. Link.
The Tradeoffs podcast provides for a good look at the state of employer-sponsored health insurance in this country, how it can potentially reduce healthcare costs, and the many challenges associated with doing so. Link.
This article accompanying the podcast does a nice job highlighting the work of Marilyn Bartlett, who let the efforts in Montana to negotiate a referenced-based pricing agreement for the state employee plan with all the health systems in the state. It’s quite exciting to read about how that got done and the positive impacts it has had financially for the state employee plan. It’s also quite depressing to read about how hard it has been to scale to other states. Link.
This is a good read from Christina Farr on the navigation space and why it is taking off as a market. The points raised around how insurers work with navigation companies will continue to be an interesting one - do the insurance companies seek to build navigation into their core DNA, i.e. Oscar, or are they willing to outsource it to companies like Accolade, Grand Rounds, etc? This chart below is a helpful market map of the space. Link.
Here are a couple interesting perspectives on Oscar’s S-1 from the week:
In the event you’re in the mood for reading the bear case on Oscar’s financials, this article provides a very good critical view on the losses Oscar has sustained. The fact about their most recent $150 million term loan was issued at 12.75% rate is a bit worrisome in the current macro environment. Link.
This is a good Oscar 101 if you’re looking for a quick overview of the business. Link.
This Medium post from Divesh Aidasani provides for a good overview of the state of consumer price transparency. Link.
Clover’s CEO apparently did not take too well to the Forbes article last week about SeekMedicare and its ties to Walgreens / Clover and demonstrated some bizarre behavior for a public company CEO as highlighted in the article. It is also something to read about Garipalli claims to be acting in the best interest of consumers, when his track record in both at Clover and prior to Clover demonstrates quite the opposite. I have to imagine Garipalli’s tenure as Clover’s CEO will be coming to an end in short order here. Link.
Here’s an interesting report from RAND on hospital prices and how three leading policy proposals may decrease pricing. The three proposlas discussed are: capping commercial rates at a % of Medicare, improved price transparency, and increasing competition / reduced consolidation. The report finds that setting commercial rates at 100% - 150% of Medicare could reduce national healthcare spending by 1.7% to 6.5%. Which, as we’ve seen with the Montana example above, shouldn’t be a surprise. But good luck getting that done politically. Link.
This is an interesting tweetstorm about a recent report highlighting how the differences in payments to hospital-owned versus physician-owned practices encourages consolidation: