IPO Report: Evolent Health (EVH)

Francis Gaskins |

evolent_health.jpgEvolent Health (EVH) is a market leader and a pioneer in the new era of healthcare delivery and payment, in which leading providers are taking on increasing clinical and financial responsibility for the populations they serve. It is based in Arlington, VA.

Three other companies are scheduled for the week of June 1.  The full IPO calendar is available at IPO Premium.

SEC Documents

Manager, Joint-managers: J.P. Morgan, Goldman Sachs
Co-managers: Wells Fargo Securities, William Blair, SunTrust Robinson Humphrey, Leerink Partners

EVH scheduled a $150 million IPO with a market capitalization of $837 million at a price range midpoint of $15 for Friday, June 5, 2015 on NYSE.

Summary

EVH is a market leader and a pioneer in the new era of healthcare delivery and payment, in which leading providers are taking on increasing clinical and financial responsibility for the populations they serve.

EVH’s purpose-built platform, powered by its technology, proprietary processes and integrated services, enables providers to migrate their economic orientation from FFS reimbursement to value-based payment models.

Valuation

Glossary

Retained earnings, on the reorganization ($mm)

.

.

$278

     

Per share dilution, 88.5% of mid-range

.

.

-$13.28

     

------------------------------------

       

Valuation Ratios

Mrkt Cap ($mm)

Price /Sls

Price /Erngs

Price /BkVlue

Price /TanBV

% offered in IPO

Evolent Health (EVH)

$837

5.7

-10.0

1.0

8.7

18%

             

Conclusion

Value-based health care payment platform

Positive

Recurring revenue, market expanding

Long sell & installation cycle

85% rev growth rate to $37mm for Q1 vs Q1 '14

.  +111% for platform & operations

.  +40% for transformation

101% gross margin growth rate Q1 vs Q1 '14

29% gross margin, which is low

P/E of -10 indicating fairly heavy cash burn relative to market cap

Per share dilution 88.5%

Price-to-tangible book of 8.7

5.7 price-to-sales

Business

EVH is a market leader and a pioneer in the new era of healthcare delivery and payment, in which leading providers are taking on increasing clinical and financial responsibility for the populations they serve.

EVH’s purpose-built platform, powered by its technology, proprietary processes and integrated services, enables providers to migrate their economic orientation from FFS reimbursement to value-based payment models.

By partnering with providers to accelerate their path to value-based care, EVH enable its provider partners to expand their market opportunity, diversify their revenue streams, grow market share and improve the quality of the care they provide.

Marketing

EVH markets and sell its services primarily to major providers throughout the United States.

Transformation Phase

In the transformation phase, EVH initially works with partners to develop a strategic plan for their transition to a value-based care model.

During the first portion of the transformation phase, which typically takes four months to complete, EVH  sizes the market opportunity for the partner and creates a Blueprint for executing that opportunity.

During the second portion of the transformation phase, which typically lasts twelve to fifteen months, EVH  generally works with partners to implement the Blueprint by establishing the resources necessary to launch its strategy and capitalize on the opportunity.

During the transformation phase, EVH seeks to enter into long-term agreements with partners.

Platform & Operations Phase

During the term of such long-term agreement, which EVH calls the platform and operations phase and which typically is in place for three to ten years, EVH delivers a wide range of services that support the  partner in the execution of its new strategy.

In the platform and operations phase EVH establishs a local market presence and embeds resources alongside partners.

Revenue from these long-term contracts is not guaranteed because certain of these contracts are terminable for convenience by partners after a notice period has passed, and certain partners would be required to pay us a termination fee in certain circumstances.

Market

While approximately 10% of healthcare payments are paid through value-based care programs today, including through models created by systems like UPMC, Kaiser Permanente and Intermountain Healthcare, it is estimated that this number will grow to over 50% by 2020.

There were 120 provider-owned health plans as of 2010 and this number continues to grow.

The number of ACOs constructed to manage capitated or value-based arrangements with existing insurance companies or government payers grew to 742 by the end of 2014.

Value-based Care

EVH considers value-based care to be the necessary convergence of healthcare payment and delivery. EVH believes the pace of this convergence is accelerating, driven by price pressure in traditional FFS healthcare, a regulatory environment that is incentivizing value-based care models, a rapid expansion of retail insurance driven by the emergence of the health insurance exchanges and innovation in data and technology.

EVH believes providers are positioned to lead this transition to value-based care because of their control over large portions of healthcare delivery costs, their primary position with consumers and their strong local brand.
Today, increasing numbers of providers are adopting value-based strategies, including contracting for capitated arrangements with existing insurance companies, governmental payers or large self-funded employers and managing their own captive health plans.

Through value-based care, providers are in the early stages of transforming their role in healthcare as they attempt to defend their existing position and capture a greater portion of the more than $2 trillion in annual health insurance expenditures.

Post-IPO Organization chart

Intellectual Property

EVH’s continued growth and success depends, in part, on its ability to protect its intellectual property and proprietary technology, including the Identifi® software platform. EVH primarily protects its intellectual property through a combination of copyrights, trademarks and trade secrets, intellectual property licenses and other contractual.

Competition
The market for EVH’s products and services is fragmented, competitive and characterized by rapidly evolving technology standards, customer needs and the frequent introduction of new products and services.

EVH’s competitors range from smaller niche companies to large, well-financed and technologically-sophisticated entities.

EVH competes on the basis of several factors, including breadth, depth and quality of product and service offerings, ability to deliver clinical, financial and operational performance improvement through the use of products and services, quality and reliability of services, ease of use and convenience, brand recognition and the ability to integrate services with existing technology. EVH also competes on the basis of price.

5% shareholders pre-IPO
TPG Funds       8.4%      

UPMC    52.2%               

The Advisory Board Company 22.6%    

Dividends

EVH currently anticipates that it will retain all of its future earnings for use in the expansion and operation of its business and does not anticipate paying any cash dividends in the foreseeable future.

However, EVH will be required to pay cash dividends out of its future earnings to the extent that cash distributions from Evolent Health LLC are materially in excess of its assumed tax liability and its obligations under the tax receivables agreement.

The declaration and payment of all other future dividends to holders of EVH’s Class A common stock will be at the discretion of its board of directors and will depend on many factors, including its financial condition, earnings, legal requirements and any debt agreements EVH is then party to, and other factors its board of directors deems relevant.

Use of Proceeds

EVH expects to receive $137 million from its IPO and use it for the following:

to purchase Class A common units of Evolent Health LLC from Evolent Health LLC at a price per Class A common unit equal to the public offering price per share of its Class A Common Stock, after deducting underwriting discounts and commissions.

Upon the completion of this offering, EVH will have acquired Class A common units representing a 68.6% economic interest in Evolent Health LLC (or Class A common units representing a 69.4% economic interest if the underwriters exercise their over-allotment option in full). EVH will not retain any of the net proceeds used to purchase the Class A common units from Evolent Health LLC.

DISCLOSURE: The views and opinions expressed in this article are those of the authors, and do not represent the views of equities.com. Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions. To read our full disclosure, please go to: http://www.equities.com/disclaimer

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