I believe that many have faced the problem of drawing up a sick leave, when for examination it is necessary to go to the hospital with a fever and cough. In addition, a number of chronic diseases or domestic injuries also require a visit to a doctor in not very good condition. While all of the above can be treated at home, there are a number of problems with paying for these services in the US and EU. Signify Health has decided to simplify the process of home treatment and payment for doctor’s services.
Signify Health Inc. will conduct an IPO on the NYSE on February 10, 2021. Trading will begin the next day, February 11, under the ticker SGFY… The company showed outstanding results even before the COVID-19 pandemic, the more interesting it is to talk about its business model in more detail.
Signify Health Business
Signify Health, Inc. was founded in 2017 and now employs over 2,100 people. The company has become a leading medical platform that applies the most effective analytics and technologies to help patients: determine the need to go to the hospital and find the most effective and cheapest doctor for the patient. Signify works with nationwide networks of healthcare providers to help patients stay at home when sick when there is no urgent need for hospitalization. The structure of the company after the public offering is shown in the block diagram below.
The company’s clients include several state governments, private companies, healthcare systems and private practice groups. According to Signify Health, they have emerged as a leader in two dynamic healthcare market segments: home care (single treatment episodes) and health assessment (IHE). In particular, the company manages the Medicare Bundled Payment for Care Improvement Advanced (“BPCI-A”) medical comprehensive examination program with a budget of $ 6.1 billion.
Thanks to the Signify platform, the number of home discharges from emergency departments increased by 15% in 2019, and the number of referrals decreased by 10%. Thus, the government is able to effectively optimize the health sector throughout the country. In 2019, more than 1 million households connected to the company’s platform through 47 managed health programs.
Signify Health comprehensively analyzes clinical, social and behavioral factors that maximize customer satisfaction and minimize potential costs. The company will generate income if it attracts clients for the health care program, and the patient himself saves on the services of the provider. Thus, Signify works for the result.
The company is increasing its market share by expanding partnerships with insurance companies, community organizations and accountable care organizations. Of course, Signify Health competes with other companies in this market given its solid size.
Market and Competitors Signify Health
The total spending on healthcare in the United States in 2019 was about USD 3.8 trillion. The company estimates that by 2025 60-70% of this amount will be directed to improving and optimizing the quality and cost of medical services. In 4 years, Signify will operate in the US $ 2 trillion market alone.
The company’s business model has demonstrated the ability to scale quickly. Since 2015, the number of annual surveys scheduled through the company’s platform has grown from 390,000 to 1.1 million in 2019. The average annual growth rate was 28.9%. Signify operates 26 of the Top 50 Medicare Advantage Programs. In terms of the number of treatment episodes, the growth is even more rapid: from 24 thousand BPCI episodes in 2014 to 215 thousand BPCI-A episodes by 2019.
The main competitors of the company are:
- UnitedHealth (UNH)
- Change Healthcare (CHNG)
- Humana (HUM)
- Matrix Medical Network
Financial performance of the company
As part of the latest round of financing, the company raised about USD 960 million from New Mountain Capital. Signify Health is not generating net income at the time of IPO. Therefore, we will turn our attention primarily to the analysis of the dynamics of revenue.
The company’s revenue for the last 12 months from the date of the report amounted to USD 550.4 million. The projected revenue for 2020 is USD 568.04 million. For the three quarters of 2020, the company’s revenue amounted to USD 417.1 million, which is 13.2% more than in the same period in 2019. For the whole of 2019, Signify’s revenue reached $ 501.8 million, which is 48.5% more than in 2018. As you can see, the growth rates began to slow down last year. But on average, the annual growth rate exceeds 30%. Such dynamics is acceptable for young companies that have been on the market for less than 5 years.
Note that Signify Health’s net loss is on a downward trend. For the three quarters of 2019, this figure amounted to USD 20.5 million, which is 25.8% less than in the same period in 2020. Which indicates a decrease in expenses while maintaining revenue growth. If the company’s management maintains such a rate of loss reduction, then in 3-4 years the company will fix its net profit.
The company has 88 million USD in cash on its accounts, the total liabilities of the company amount to 413 million USD. The company’s assets are estimated at USD 1.5 billion.
In general, we note an increase in revenue, gross profit and an increase in cash flow from operating activities.
Strengths and weaknesses of Signify Health
We now turn to the analysis of the arguments “for” and “against”. The strengths of the company include:
- An experienced management team.
- A trusted brand and long-term customer relationships.
- The company operates in the medical services market with a volume of more than USD 2 trillion.
- An analytical platform based on advanced technologies.
- Successful cases of collaboration in Medicare and Medicaid medical programs.
- Positive experience in scaling a business model.
The risk factors when investing in this company can include the following:
- The company’s income depends on a small number of large clients.
- The company is dependent on government contracts for key medical programs such as BPCI-A.
- The company does not generate net income and does not pay dividends.
- The revenue growth rate is slowing down and there is a risk that it will remain at the same level.
- The company depends on the legal framework in the healthcare sector, and if it has difficulties adapting to the changed rules, there is a risk of growing losses.
IPO Details and Signify Health Capitalization Estimates
The underwriters of the placement were JP Morgan Securities LLC, Robert W. Baird & Co. Incorporated, William Blair & Company, LLC, Goldman Sachs & Co. LLC, Barclays Capital Inc., Deutsche Bank Securities Inc., BofA Securities, Inc., UBS Securities LLC and Piper Sandler & Co .. Signify Health plans to sell 23.5 million shares for 423 million USD. The price of one share will be from 17 to 19 USD per share.
The company plans to use the proceeds from the IPO to expand its market share by acquiring smaller companies. Details on possible deals were not disclosed. The company’s capitalization after the IPO will amount to USD 4.2 billion.
To assess the upside potential of Signify Health shares, we use the P / S (capitalization / revenue) multiple (ratio). As of the date of placement, it is 7.63 (4200 / 550.5). For the medical technology sector, the P / S can reach 10, so the upside for shares reaches 32% in the Lock-up period.
Considering the current financial position and market potential of the company, we can recommend Signify Health shares for investment in the medium term.
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