Almost three years is a long time to wait for the public markets to open up to the developing digital health sector but when they do corporate venturing portfolio companies have been first through the flotation exit doors.

This summer has seen four well-received initial public offerings (IPO) of digital healthcare companies, increasing the chances others will follow over the next year. And the delay has perhaps been even more surprising with the performance of IRhythm Technologies, a Novo, St. Jude and Kaiser Permanente-backed cardiac diagnostics technology developer that floated in October 2016 above its range at $17 per share and has continued to see a broadly steady rise in value to $75 each by mid-August this year and a market capitalisation of almost $2bn.

Of the more recent IPOs, Livongo Health, a US-based digital health company to manage chronic diseases backed by local healthcare group Merck’s corporate venturing unit, floated on Nasdaq stock exchange towards the end of July at $28 per share.

Almost a month later its share price is up more than a fifth to giveIPO evolution 2011-19 a market capitalisation of $3.1bn but Merck had already agreed to lock in its gains.

Livongo, whose venture capital backers included General Catalyst, Kinnevik and Kleiner Perkins Caufield & Byers (KPCB) sold 12.7 million shares, raising $355m in the IPO.

Merck’s Global Health Innovation Fund agreed to sell effectively its holding of just more than six million shares to a Kinnevik-led group at the IPO price in a secondary sale, according to the regulatory filing. Merck invested just about $24.9m in Livongo’s series C, D and E rounds, according to the filing, indicating a profit of more than $140m from its investment.

As William Taranto, head of Merck GHIF, said: “One could look at these IPOs as validation from public markets that digital health has the potential to deliver enormous value to both society as well as shareholders and Livongo is the perfect example of a company that does just that.”

Similarly successful performance has been seen by Health Catalyst, another US-based healthcare software company backed this time by healthcare systems UPMC, an academic medical centre affiliated with the University of Pittsburgh, and Partners Healthcare, similarly affiliated with universities around Boston.

Health Catalyst started trading in late July, after pricing its IPO at $26 a share. The stock immediately jumped 51% and closed at $39.17 a share on the first day and has continued to trend up over the past few months to about $43 per share, valuing the company at $1.5bn. The company raised $182m in the offering by selling seven million shares and in its regulatory filing was quick to point to the support its customers gave it. “UPMC utilized our solution to more deeply understand their cost and clinical variation, realising $38m in clinical, financial and operational improvements over a multiyear period. As of March 31, 2019, our customers, in the aggregate, own 17.5% of our outstanding common stock on as as-converted basis.”

UPMC owned 6.3% pre-IPO dilution having invested about $32.8m in Health Catalyst’s series E and F rounds, according to the regulatory filing.

This point about having customers as investors was reinforced by Sakshi Chhabra Mittal, investment director at SoftBank’s near-$100bn Vision Fund. In an interview with WTF Health, Chhabra Mittal said it was important to find strategic investors from the main healthcare spaces – payers, providers, patients and pharmaceuticals – on the capital table as it “gives us as investors huge comfort”.

The third of the corporate venture-backed listings, by size order, was for Phreesia, backed by Blue Cross Blue Shield and Ascension’s corporate venturing units.

Phreesia started trading at $18 per share earlier in July, after raising $167m in its IPO, with shareholders selling a further $24.7m in stock at the offer price. After a first day jump in price, Phreesia is now trading at about $26.55 giving it a market cap of almost $1bn.

Ascension Ventures owned 10.76% pre-IPO, Echo Health Ventures, an investment joint venture for Cambia Health Solutions and Blue Cross Blue Shield of North Carolina, owned 8.99% and Blue Cross Blue Shield Venture Partners owned 7.79%. And all agreed to sell a little more than 10% of its holding in the flotation, according to its regulatory filing.

Rob Coppedge, CEO of Echo Health, said: “The companies entering the public market are proven category creators that have carved unique niche, sustainable markets for their products… we are excited that they opening up the public markets for quality tech enabled health care companies by proving the value they create for the broader health care ecosystem.”

John Banta, managing director at Blue Cross Blue Shield Venture Partners, said: “The emergence of the public market as a more viable exit strategy for the technology-enabled health sector is very meaningful, particularly after a long stretch of increasing levels of investment in the space. That opportunity will likely be afforded only to strong performing companies with well demonstrated value in terms of patient experience and/or outcomes, of which Phreesia is an excellent example.”

And Matt Hermann, senior managing director at Ascension Ventures, added: “I think the success of the recent IPOs of PHR, LVGO, and HCAT [the ticker names for the three companies] highlight the following points:

  1. It is nice validation of digital health from an investment perspective given all three companies trade at market caps (more than $900m) that are multiples of venture dollars invested ($100-400m);
  2. The upside for HCIT [healthcare information technology] is higher than previously thought, as investors used to think about a good exit at more than $125m;
  3. Impressive to see the size and scale of these platform companies, as 10 years ago there were only a handful of HCIT companies with more than $50m of revenue and all three of these companies have LTM [last 12 months] revenues [of] more than $70m;
  4. Given each of these companies was formed more than 10 years ago, healthcare is still different from other industries, and success requires patient capital with domain knowledge;
  5. These three companies are solving such different problems (chronic care management, analytics guided decision making, and optimizing patient intake experience) showcasing the diversity of healthcare problems that need to be solved and the wide range of approaches to solve them;
  6. These companies are all platforms that are solving big problems vs. best-of-breed solutions; [and]
  7. Opportunity for unconventional approaches to create exponential change remains high.”

The final one of the four is perhaps more unusual. Change Healthcare, a US-based revenue-cycle-management software company, spun out of the healthcare group McKesson in June in a public offering but McKesson retained control through its holding of at least 60% of the stock through a tax-efficient structure, according to the regulatory filing. It’s currently trading at about $15 a share, after pricing its offering at $13, and giving it a market cap of almost $1.9bn.

And industry investor Rock Health predicted other corporate venture-backed companies, such as ZocDoc, 23andMe, and Modernizing Medicine, could also come to the public markets.

Bill Evans, CEO of healthcare investor and analysts Rock Health, in a blog said: “The public markets are beginning to understand that these companies are transforming healthcare. They’re realising that there’s a lot of value to unlock.”

Rock Health added in its review of the first half of 2019, Exits Are Heating Up, digital health companies had raised as much as $4.2bn over 180 deals and, since 2011, $36.3bn has been invested in digital health startups. Of those investments, $4.1bn has been realised in the form of mergers and acquisitions (M&As), with $1.3 bn for IPOs.

Some of this activity has come through consolidation ahead of public filing. In the past two years, Livongo acquired privately held Diabeto for $2.6m, weight-loss company Retrofit for $18.6m and behavioural-health app MyStrength for $33.5m.

Other deals have been affected by regulatory and geopolitical concerns over the use of the data. In April, China’s iCarbonX (backed by Tencent) was forced to unwind its majority stake purchase of PatientsLikeMe’s by the Committee on Foreign Investment in the United States (CFIUS). This meant PatientsLikeMe was forced to find a buyer and landed UnitedHealth in June.

The Financial Times in June reported Tencent-backed WeDoctor was “backpedalling on plans to list overseas… [as] China’s data sovereignty rules call for all Chinese personal data to be held onshore, and industry insiders say there is increasing squeamishness about overseas listings by companies that store such data — in a mirror image of US regulators’ concerns about Chinese companies acquiring personal data in the US.”

And while the recent return of US-based digital health IPOs is welcome private and public market there has been perhaps even greater interest in other markets, particularly China.

WeDoctor, which has a tie-up with insurer AIA, raised $500m at a valuation of $5.5bn in May 2018, just weeks before rival Good Doctor, which is backed by insurance company Ping An, launched a $1.1bn IPO in Hong Kong, the FT added.

Galen Growth Asia in its annual report for 2018 said China closed the year at a record $5.9bn.

In the first half of this year, Galen noted $1.9bn of venture investment in healthtech deals in China, compared to the $3.7bn tracked in the US by Rock Health. With some double counting as digital health companies overlap with traditional biopharma, device, and diagnostics (dx) and tools financings, bank SVB’s review of the first half identified $716m of investment in Europe, led by the UK which has set up the £35m ($40m) Digital Health Technology Catalyst to support startups, such as University of Oxford Ufonia and Star Trek-like scanner OpusVL.

The resurgence of digital healthcare exits has helped boost the overall number and value of IPOs towards the last peak back in 2014 when healthcare was also hot for the public market investors. (See charts)

IPO evolution 2011-19

Healthcare.Time to IPO Analysis