In most developed countries, health care financing is based on compulsory or voluntary health insurance. This market is one of the oldest in the United States, and its major players are constantly trying to improve the service for their customers. In our time of information technology, machine learning and artificial intelligence are used to select the optimal rate for medical care.
Health insurance technology company Oscar Health On February 5, she filed an application for an IPO with the SEC in the S-1 form, with the ticker OSCR… The preliminary amount of attracted investments is USD 100 million, but after the road show it is likely to increase. The company was formed to radically reform the US health insurance system during the presidency Barack Obama… Therefore, it is very interesting to analyze its business model.
Oscar Health Business
The company was founded in 2013 in New York State as part of the health care reform of US President Barack Obama. Oscar Health is an online platform where customers can purchase personalized insurance plans directly and through health insurance marketplaces.
The company’s products cover doctor visits, nursing care services, and the purchase of proprietary and branded drugs. As a bonus, the company’s clients enjoy both free phone consultations and discounts on visits to highly specialized doctors, emergency medical care, procedures for pregnant women, and some surgical operations.
According to the S-1 data, as of January 31, 2021, 529 thousand customers used the company’s services. The CAGR has been 59% since 2017. The company mainly works with consumers from 18 states. During the COVID-19 pandemic, the Virtual Primary Care service was popular – virtual care and examination.
Oscar Health’s investors are such large companies as Fidelity Management Research, Thrive Capital, Formation8, Khosla ventures, General Catalyst and Alphabet (NASDAQ: GOOGL)… Based on the results of investment rounds, the company raised about USD 1.4 billion.
Oscar Health Market and Competitors
Health care services in the United States are among the most expensive in the world. About 66% of all personal bankruptcies of citizens of the country are caused by bills for medical services. At the same time, the average health indicators of the nation in the United States are worse than in other developed countries. Therefore, the problem has ripened a long time ago, which provoked the Obama administration to reform.
According to a study by Grand View Research, the US healthcare services market has reached 2.4 trillion USD. In the period from 2020 to 2027, it will reach 4 trillion USD, thus an average annual growth rate of 6.7%. The main reasons for the growth are inflation, the growing prevalence of chronic diseases and the aging of the nation.
At the moment, the industry is in the process of transforming the development paradigm towards digitalization. All this serves as a guarantee of rapid growth, and the capitalization of state and private companies reaches 1 trillion USD.
The main competitors of Oscar Health are:
- Centene (CNC)
- Cigna (CI)
- CVS Health (CVS)
- UnitedHealth Group (UNH)
- Humana (HUM)
- Kaiser foundation
- Clover Health (CLOV)
Oscar Health’s target market reaches 50 million US citizens who contribute $ 450 billion in insurance premiums. As you can see, huge prospects are opening up for the company, despite strong competitors.
Financial performance of the company
The company does not generate net profit at the time of application. We will focus on revenue analysis, which will allow us to assess the company’s potential and market share.
The total volume of insurance premiums received in 2020 reached USD 1.67 billion, which is 61% more than in 2019. Premiums that were transferred to reinsurers increased to USD 1.22 billion, or by 113% compared to 2019. This led to a 5% decline in total revenue in 2020 to USD 455 million. Operating loss increased in 2020 compared to 2019 by 56%, to USD 402.3 million.
As of the end of 2020, the company had USD 826.3 million in its accounts. Oscar Health’s liabilities amount to USD 1.8 billion. Free cash flow for the 12 months to 31 December 2020 reached USD 208.7 million.
It should be noted that the company’s financial results are mixed. We see a decline in revenues, an increase in operating loss and the emergence of free cash flow. Obviously, the company is focused on expanding its customer base and only then will it start increasing revenue. A perfectly valid strategy for a tech startup in the industry.
Oscar Health strengths and weaknesses
Let’s analyze the main “pros and cons” of investing in this company. We can attribute to the weak points of Oscar Health:
- The company does not make a profit and does not pay dividends.
- The company recently took out a loan in the amount of USD 150 million at a fairly high interest rate – 12.75% per annum.
- At the end of 2020, the company’s net revenue decreased by 5% compared to 2019.
- The company has many strong competitors.
- Business is highly dependent on healthcare legislation.
The advantages of the company include the following factors:
- Growth in the number of active clients – more than 50% annually.
- The healthcare market in the United States, where the company operates, will reach USD 4 trillion by 2027. The annual growth rate will be 6.7%.
- The target market for the company, with its current products, is 50 million, with a combined premium of USD 450 billion.
- The company operates in a promising and fast-growing technology segment of the US healthcare industry.
- Oscar Health’s investors include large multinationals such as Fidelity Management Research, Thrive Capital, Formation8, Khosla Ventures, General Catalyst and Alphabet (NASDAQ: GOOGL).
IPO details and Oscar Health capitalization estimate
The placement was underwritten by Siebert Williams Shank & Co., LLC, Morgan Stanley & Co. LLC, Samuel A. Ramirez & Company, Inc., Goldman Sachs & Co. LLC, Allen & Company LLC, LionTree Advisors LLC, Wells Fargo Securities, LLC, Cowen and Company, LLC, BofA Securities, Inc. and Credit Suisse Securities (USA) LLC. The application amount is USD 100 million. The price range is not yet known, as is the date of the IPO.
To assess the potential capitalization, we use the P / S (capitalization / revenue) multiplier (ratio), since the company does not generate net profit. For comparative analysis we use P / S companies Clover Health (CLOV)equal to 7.41. With comparable revenue figures, the potential capitalization of Oscar Health could reach 3.37 billion USD (0.455 * 7.41). The upper limit of the estimate in the lock-up period can be considered the level of USD 6.0 billion.
Taking into account the potential of the target market of the company and the prospects of the technology sector, I recommend this company for a long-term investment.
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