Companies using technology to try and shake up the health-care industry have been rewarded with sky-high valuations. IMS Health Holdings Inc. won’t be one.
IMS, a 60-year old company that sells data on prescription use to drugmakers and analysts, is asking investors to buy shares in its initial public offering at as little as one-seventh the earnings multiple its digital peers fetch. The company and backers including TPG Capital are looking to raise up to $1.37 billion in the sale today, making it the second-largest U.S. IPO this year, according to data compiled by Bloomberg.
Companies including Castlight Health Inc. (CSLT) have excited investors with Internet-based business models that promise to help bring down costs, for example by letting customers find doctors and compare and estimate treatment expenses online. IMS, which touts the breadth of its health-care information and consulting services, won’t see the same type of hype, says B Riley & Co. analyst Gene Mannheimer.
“There’s definitely recognition that change has to happen in healthcare, so the market is rewarding innovative, disruptive models,” said Mannheimer, a health-care technology analyst in Los Angeles. “I would caution that IMS is not one of those health-care disrupters.”
Tor Constantino, a spokesman for Danbury, Connecticut-based IMS, declined to comment on the IPO.
IMS gathers data including on how drugs are marketed and prescribed and sells that along with analytical tools and services. Its clients include drugmakers, pharmacies and government agencies, and sales rose 4 percent to $2.54 billion last year, its filing shows. IMS says it competes with companies ranging from management consultancy Accenture Plc to Indian software developer Infosys Ltd.
The company is seeking an enterprise value as high as 14 times last year’s earnings before interest, taxes, depreciation and amortization of $764 million. That’s more in line with 35-year-old Cerner Corp. (CERN), which is trading at 22 times Ebitda, than newer companies such as Athenahealth Inc. (ATHN) and Medidata Solutions Inc. Those two trade at over 90 times Ebitda.
San Francisco-based Castlight raised $204 million in its offering last month, pricing shares above the marketed range. Castlight, which was valued in the IPO at more than 100 times the $13 million it made in sales last year, is up 55 percent since its debut, through yesterday.
“At Castlight, we are solving the biggest problem for the American enterprise, which is the escalating cost of American healthcare,” Giovanni Colella, chief executive officer, said from the New York Stock Exchange on March 14 after Castlight’s shares started trading. “That is an exciting business proposition in a market that is unbelievable size.”
Health-care spending in the U.S. is estimated to grow at an average rate of 5.8 percent through 2022, one percentage point more than the projected growth in gross domestic product, according to the Centers for Medicare & Medicaid Services. The Patient Protection and Affordable Care Act of 2010, which concluded its sign-up period this week, has brought into focus the various technologies that could help reduce these costs, according to Les Funtleyder, partner at Bluecloud Healthcare.
“Cost increases in health care have to do with asymmetries of information,” said Funtleyder, whose New York-based firm focuses on health-care investing. “We don’t know what things cost, we don’t know what the quality is, and the access to this information could allow us to alleviate the externalities and make the health-care system more efficient.”
At the 14-times-Ebitda multiple, IMS’s valuation is still too high, since the company hasn’t demonstrated strong growth potential, Funtleyder says.
Also pricing an IPO today is GrubHub Inc., the Chicago-based company that runs food-delivery websites including Seamless.com and Menupages.com. Grubhub is seeking as much as $176 million in its share sale.
IMS’s backers -- TPG, Canada Pension Plan Investment Board and Leonard Green & Partners LP -- stand to begin exiting the four-year old investment with a 160 percent profit at the offering’s midpoint, regulatory filings indicate. Because they’re not selling the entire holding in the IPO, that gain will be largely unrealized.
The IPO would value their pre-offering stakes at $5.4 billion. They previously recouped two-thirds of their $2.8 billion investment in dividends. At the middle of the IPO price range, IMS would have a market value of $6.47 billion and an enterprise value of $10.1 billion, data compiled by Bloomberg show. The private-equity firms plan to sell about 5 percent of their stock in the IPO.
Owen Blicksilver, a spokesman for TPG at Owen Blicksilver Public Relations, declined to comment on the offering or the profit.
The IPO will be the second-biggest offering in the U.S. this year, after subprime auto lender Santander Consumer USA Holdings Inc. (SC) raised $2.1 billion in January, data compiled by Bloomberg show.
JPMorgan Chase & Co., Goldman Sachs Group Inc. and Morgan Stanley are managing the IMS offering. The company plans to list its shares on the New York Stock Exchange under the symbol IMS. The stock is expected to start trading tomorrow.
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