The dam finally seems to be breaking in the digital health world.
There was a surge of digital health companies going public in 2020 and 2021, but many of those that made the leap have faced significant challenges. Accolade, which went public in 2020, was recently taken private by Transcarent after losing key customers. Amwell, another 2020 IPO, has seen its stock value decline sharply as telehealth has become commoditized. Perhaps in response to these difficulties, only a handful of digital health companies have ventured into the public markets in the last couple of years.
Until now.
In just the last month, musculoskeletal company Hinge Health and chronic condition company Omada Health have gone public. And although it’s still early days, many experts are calling their debuts a success so far. Hinge Health went public on May 22 with an offer price of $32 a share, while Omada Health went public last week with an offer price of $19 a share, according to Yahoo Finance. Hinge’s market capitalization was about $3 billion and it raised $437 million, and Omada’s was about $1.1 billion and raised $150 million. As of June 12, Hinge is trading above its offer price, while Omada is trading a little below.
“I think what most differentiates them relative to a lot of the others that you saw, particularly in 2021 when there was this SPAC mania, was both are the kind of leading company in the space in which they compete,” said John Beadle, co-founder and managing partner of Aegis Ventures, in an interview. “They both have a path to profitability. In Hinge’s case, they’re already profitable and [Omada has] a clear path to get there within a reasonable amount of time. Both have a lot of operational maturity and really experienced management teams, and both have been around quite a long time and have a long operating history.”
Another healthcare investor said there was a “collective sigh of relief” that both companies traded above their offer price. Hinge’s stock closed at $37.56 on its debut, 17% up from its offer price of $32. Omada’s stock closed at $23, a 21% increase from its offer price of $19.
“I think there was some anxiety that [there’d be] a broken IPO, that after the offering price, the stocks traded down, and both of them traded up nicely,” said Michael Greeley, cofounder and general partner of Flare Capital Partners, in an interview.
Greeley did flag at the time of the interview on Tuesday that Omada’s stock was down 14%, which is not of concern just yet, but is worth noting.
While many have called Hinge and Omada’s early days on the public markets a success, Seth Joseph, founder and managing director of consulting firm Summit Health Advisors, said that it’s in the eye of the beholder.
“Hinge’s early investors did well, but others have noted that at $3 billion, its current market capitalization is about half the $6 billion valuation in 2021,” he said. “Omada raised quite a bit less and was never as high flying, so it’s easier to point to as a success for all involved.”
What to watch for
It’s important to note that going public isn’t the final chapter for Hinge and Omada.
“Reaching this milestone is in itself significant and an affirmation of both businesses,” said Bill Evans, founder and general partner of Rock Health Capital, a seed fund. “At the same time, an IPO isn’t a destination; it’s a waypoint. Expectations only go up from here.” Rock Health is an investor in Omada, but not Hinge.
The most “anxious period” will be the next six months, according to Greeley. The existing venture capital investors are locked up for six months, meaning they’re not able to trade their shares and get a return on their investment.
“It’s just a very nerve wracking window that early investors now have to kind of weather,” he said. “And so if the stocks continue to trade up, then actually it’s to their benefit that they weren’t able to sell, because they’re getting even more of a gain. If the stocks start to trade down, there’s nothing you can do. You’re just watching.”
This lockup period is true of all IPOs, unless the bankers decide to release early investors early based on their assessment of market conditions, Greeley added.
He also said that there will likely be a series of announcements and partnership news coming from these companies to reinforce that they’re valuable.
Others are taking a slightly longer view.
Beadle believes that the real sign of success for Hinge and Omada will be how they’re performing a year from now. Every company faces tough earnings at some point. The real test of a public company is how it handles that first wave of bad news, he said.
“I think it’s very hard for companies that are not hugely free cash flow generative to be public because the market can sour on your name fairly quickly, often for insignificant reasons. … The only certainty I think about running businesses is there’s always going to be bad news in one form or another. So I think what will be most telling is, as we look back a year from now, as both companies need to deal with their first bad news events, how do they manage that?” he noted.
What will also be interesting is if they can sustainably grow while they’re public. There will be a lot of M&A opportunities for both companies. For Omada, there could also be an opportunity to expand if they decide to shift to prescribing weight loss drugs, Beadle said. They’re currently focused on providing behavior change programs for people taking GLP-1s without actually distributing the drug. This would be the “fastest vector of growth if they decided to take it,” according to Beadle.
Joseph is less confident in Omada’s ability to grow.
“Hinge is sitting on $470 million in cash (versus just $60 million for Omada), so it seems we might expect more acquisitions for Hinge. How does Omada reach more meaningful scale?” he said.
While both Omada and Hinge offer joint and muscle health support, it’s important to note that they primarily operate in distinct spaces. Omada is best known for diabetes care.
While many digital health companies have struggled in the public market in the past, Evans noted that it’s important to think about the companies’ differences, both from each other and other listed companies.
“Though they’re both in healthcare and both ‘use tech,’ it’s easy to overlook how different they really are and a bit tricky to fit them into existing categories,” Evans said. “As category leaders, the problems they solve, their business models, and their history all make them a bit different. Public market investors are still learning about both companies, and it may take time for consensus to emerge.”
Will more companies follow suit?
Omada and Hinge’s IPOs are a “sign of thawing markets” and a positive for other later-stage startups, Joseph said. There are several companies he anticipates to go public soon, including Maven Clinic, Included Health, Sword Health and Zocdoc.
Beadle agreed that these IPOs will likely spur additional companies to go public, and listed Innovaccer and Commure as ones to watch.
Hinge and Omada’s IPOs are beneficial for early-stage companies as well.
“It’s also encouraging for founders just starting out and the investors looking to fund very early stage companies, so they can point to recent successful exits,” Joseph said.
Photo: jxfzsy, Getty Images
