I’m not a fan of investing in new stock issues because too much about initial public offerings (IPOs) is risky.
They come to market at the best time for insiders to cash out, often at the peak of their economic cycle. The good news is out, while the bad is hidden. You don’t much about the company, so it is hard to know whether the product or service is really better than others like it. They tend to sell off after the initial hype around launch.
Every once in a while, I come across an exception to the rule. Babylon Holdings Ltd. (NYSE: BBLN) which went public on Oct. 21 at US $9 a share is one of them.
Babylon is in the telehealth business with a healthcare app and related mobile services that connect doctors, patients and pharmacists, via their phones or computers. It is subscription based for patients and insurers and offers consultations, referrals, personal care plans and tools and advice for health and wellness. There are also practice management services for doctors to manage their offices.
Babylon has 350,000 customers in 16 countries, including Canada and an impressive client list which is what makes the company stand out.
Telus Corp., (TSX:T) has been Babylon’s Canadian partner since 2019 and uses the Babylon platform to power its Telus Health offerings. I updated this connection recently, noting that Telus Health is an $800 million a year business and may soon be spun off.
It was founded in 2013 by CEO Ali Parsa, a British-Iranian healthcare entrepreneur with a PhD in engineering physics. He worked for a time in investment management and left that to set up a company called Circle Health, the first private company to run a UK National Health Service (NHS) hospital. Soon after the launch of the Babylon app he formed a partnership with the NHS that continues to expand.
Telus Health uses Babylon’s platform to link millions of Canadians without a family doctor to healthcare. The pandemic accelerated the use and acceptance of this type of interaction as it is convenient for non-urgent matters. Telehealth has become particularly useful for mental health issues. Babylon and Telus created Babylon Health Canada but in January 2021, Telus acquired all of that.
The app allows patients and their doctors, nurses and pharmacists, to interact quickly and easily and share information 24 hours a day, seven days a week. Doctors can prescribe drugs and help with referrals. Patients can do this at a time of their choosing. The software helps doctors manage billings and appointments and store patient records. It collects high level information that can be used to spot trends and help with diagnoses. In Canada most provinces cover the costs of these virtual visits.
In a letter to shareholders soon after the October listing, Mr. Parsa noted that Babylon’s focus is on preventing illness and promoting wellness by helping patients and doctors interact in a preventative way.
“The healthcare sector is …misnamed. It is a sick-care sector well-tuned to extract maximum economic benefit. [It] is designed to wait for crises and then get to work.”
Babylon went public through a special purpose acquisitions company (SPAC) which raised US$460 million for Babylon. (SPACs are shell companies set up with the sole purpose of raising money through an IPO.)
The SPAC deal was through Alkuri Global Acquisition Corp. which is controlled by Qatar’s Sovereign Wealth Fund, which remains a shareholder. Other private investors include Palantir Technologies (NYSE:PLTR) a US software company that focuses on big data analytics and AMF Pensionsförsäkring AB, one of Sweden’s largest insurers.
The cash is earmarked for an aggressive US expansion. Babylon has laid the groundwork for this with the purchase of two California-based medical practices with a network of several thousand GPs and specialists. Mr. Parsa has noted that the US accounts for 40% of global healthcare spending.
Babylon’s revenue growth is rapid and its losses are high although they are shrinking as a portion of revenue. In its third quarter, reported Nov. 12, revenue grew 371% year-over-year to $74.5 million. The loss was $66 million.
For the nine-months revenue rose 430% to $203.2 million with an operating loss of $141.7 million. The loss as a percentage of revenue fell year-over-year from 336% to 70%.
By the beginning of 2022 new contracts will add 80,000 members in Georgia, California and Mississippi and 55,000 members in the UK.
Babylon has announced a partnership with Microsoft Corp. (NDQ:MSFT) to enhance its platform and make it available for sale on Microsoft’s Azure cloud marketplace. This will allow healthcare insurers to process claims.
Telehealth has been around for a while, but advances in technology and the pandemic are acting as a catalyst. It is also competitive. Loblaw Cos. Ltd. (TSX:L) has an app tied in with its Shopper Drug Mart unit. Well Health Technologies Inc., (TSX: WELL) based in Vancouver, recently went public. Teladoc Health Inc. (NYSE: TDOC) is among the biggest U.S. players.
But if you judge people by the company they keep, the same goes for a business. Babylon has A-list of clients, a CEO with a history of entrepreneurship and a leading technology in a growing area of healthcare.
It is a higher risk investment even so. The shares have bounced and at the time of writing are trading at US $6.61, about 26.5% below their issue price.