Skylight Health – disrupting the multi-trillion-dollar U.S. health care system
(TSXV: SLHG; NASDAQ: SLHG)
As our economy and society rebuilds and recovers post-pandemic, an enormous opportunity is presenting itself within the U.S. healthcare market – a multi-trillion-dollar industry that is ripe for disruption.
Let’s consider the primary care market. A primary care physician (PCP) is the gatekeeper of all other healthcare services. They’re the first point of contact for a routine physical, or when you have a specific health concern. They maintain and assess your medical records and refer you to specialists and secondary health care providers as needed.
The U.S. primary care market represents over $290 billion today, with an annual growth rate of 4.7%. Rapidly increasing health care costs are further driving capital to this market and placing an increasing importance on the shifting role of PCPs. As the country operates on a privatized healthcare model, this shift is being driven by insurance providers who are looking to PCPs for preventative care, as a means to reduce unnecessary reimbursement costs.
For example, if you undergo an annual mammogram, you can screen for pre-cancerous lumps before the problem escalates. If your blood pressure is tested regularly, you’re likely to reduce the chances of heart disease. Preventative care saves insurance providers billions of dollars each year, and these providers are willing to pay PCPs a substantial amount to act as gatekeeper.
This model represents a shift from “fee-for-service” to “value-based care” – a delivery model whereby providers are compensated based on the quality of care, patient health outcomes, and an ability to contain costs, rather than number of visits, procedures, and tests. Payors typically reimburse on a fixed-fee, per-member, per-month basis, so the emphasis is on quality, not volume.
From a patient perspective, the upside is improved health outcomes and reduced delivery costs. From a financial perspective, clinics who have transitioned to a value-based care model are showing 500%+ increases in profit.
How is Skylight Health participating in this space?
With no long-term debt and a cash balance of over $15 million, Skylight Health began trading on the TSX in January of this year and has already reported a 184% jump in revenue. They’re one of the largest multi-specialty health care systems operating in the U.S. and are leading the way in transitioning primary care practices from fee-for-service to the value-based care model across 15 states.
In a sector that is so lucrative, you can expect to find competition. Let’s look at some numbers: Oakstreet Health (NYSE:OSH) is trading at a $12.5 billion market cap, Cano Health (NYSE:CANO) is trading at a $7 billion market cap, and Privia Health is trading at a $3 billion market cap.
Skylight Health, trading at a $140 million market cap, is not only significantly undervalued by its peers, but is looking at the space from a different perspective.
Many of the larger players are buying clinics that have already implemented a value-based care model and they’re paying a lot for them, at 10x-15x revenue. Skylight Health, on the other hand, is buying primary care clinics that haven’t yet made the shift, and is only paying 2x-4x revenue. Using centralized technology and data, the company is then transitioning the clinics to a value-base care model and collecting the financial upside from that conversion.
Through an aggressive, growth-based acquisition model, Skylight Health has built an extensive network of 30 physical practices servicing over 135,000 patients with primary care, sub-specialty, allied health, and laboratory/diagnostic testing. The company’s hybrid approach also includes a disruptive subscription-based telemedicine service that provides access to health care for more than 40 million uninsured and under-insured patients at a cost of U.S.$199 per year.
Backed by strong financing, Skylight Health raised more than $22 million last year with participation from over 11 institutions across Canada and the U.S. In 2021, the company closed a bought deal financing with Raymond James Ltd. and Stifel GMP on behalf of a syndicate of underwriters that agreed to purchase 1,971,560 shares at a price of $7 per share for gross proceeds of roughly $13.8 million.
In recently released financial results for Q2 of 2021, Skylight Health had some good news to share. Driven by acquisitions and organic growth, company revenue increased by 184% to $10.5 million, compared to $3.7 million for the same period last year, and up 103% from $5.2 million for the first quarter of 2021.
The company also saw organic growth of approximately 13% within existing primary care clinics. Adjusted EBITDA took a dip of $1.5 million, which was mainly driven by investments in people, technology, and professional fees tied to the acquisition growth strategy.
The upside of value-based care includes improved patient outcomes, reduced delivery costs, and stronger financial performance for clinical practices.
Proven success in building and operating medical practices
Skylight Health is led by a top-notch executive team with a proven track record, collectively bringing more than 25 years of founder-led clinical management expertise to the table.
Patrick McNamee, Chairman of the Board, was the former EVP and COO of Express Scripts (NASDAQ:ESRX), where he oversaw all major activities for the technology-driven pharmacy benefit management company. With a focus on organic and acquisitive growth, McNamee was instrumental in skyrocketing the company from $3 billion to over $120 billion in revenue. He is also the former President and CEO of Health Insurance Innovations where he led a significant and fast turnaround that increased the share price from $4 to $58 in less than 2 years.
Director Grace Mellis has three decades of strategy, finance, and capital market experience. This includes executive roles at JP Morgan Chase as the Head of International Strategy, and Investor Services CFO for EMEA. Ms. Mellis is also the former CFO at Greendot Corporation, a U.S.$3.1 billion market cap NYSE-listed company, and is a mentor and investor with Techstars, a global start-up incubation platform.
At the helm of Skylight Health is CEO and Co-Founder Prad Sekar who spent his career building and operating successful medical practices across Canada and the U.S. He then began consulting with Canadian medical regulatory bodies and agencies to support their network of practitioners in establishing and operating medical clinics. I had the pleasure of catching up with Prad in a recent Stock Talk, and he had this to say about the value-based care model:
“What worked in the past won’t necessarily work in the future. With the old fee-for-service model, volume is the name of the game. Patients are allotted 5-10 minutes per visit, and only a single health concern can be addressed at each visit, resulting in most patients being referred out to specialists.”
“When the focus is on volume, quality goes down, and as quality goes down, health care costs go up. The value-based care model shifts the paradigm to focus on quality and cost containment, which creates huge financial gains on behalf of the provider, the practice, and Skylight Health.”
Prad went on to explain that the value-based care market currently accounts for less than 6% of the overall market, creating an optimal opportunity for the company, particularly in light of the reverberations of the pandemic.
In addition to the right model, at the right time, Skylight Health also has a technology-based advantage. They own and operate a proprietary electronic health record system, and recently partnered with a top U.S. electronic medical record (EMR) platform across all clinical practices, allowing the company to integrate, analyze, and digest large amounts of health care-related data.
“You can’t manage what you can’t measure,” said Prad. “The tech component is critical, and we have the systems in place to accurately track costs and quality as we shift our clinics to the value-based care model.”
Upon acquiring clinical practices, the transition to value-based care occurs within 12-18 months, providing Skylight Health with strong organic growth. The company is achieving gross margins of 65-75% and target operational net margin contributions of 20-30% per clinic.
Skylight Health is on track for continued, exponential growth through an ambitious expansion plan that will add new U.S. states to their portfolio. “We’re acquiring a bunch of companies together which is creating economies of scale and driving up bottom line profit,” said Prad. “Our main focus is acquiring practices that have a sizeable established patient base.”
The value-based care market currently accounts for less than 6% of the overall market, creating an optimal opportunity for Skylight Health.
Rapidly expanding a national footprint
Skylight Health’s acquisitions are attractively priced between 3 to 7 x EBITDA or in some cases, less than 1 x revenue. The company’s current pipeline of acquisitions is estimated at over $100 million in potential revenue, and their ability to target, qualify, and acquire is evidenced by the addition of seven multi-clinic practices since October 2020, totalling $30 million in annualized revenues.
The recent acquisition of Pennsylvania-based Aspire Health Concepts allowed the company to enter a new state and add over 10,000 patients annually along with 14 health care service providers. Skylight Health plans to enroll the clinic in its first value-based care performance year by 2022 and expects incremental annualized revenue of over U.S.$2.5 million with 8% EBITDA.
Skylight Health also has a large footprint in Colorado. In 2020, the company operated four physical clinics and a telemedicine platform in the state, providing care to over 17,000 patients. Adding to this footprint, they then went on to acquire seven health care clinics across the Denver and Boulder areas from the Rocky Mountain Group, with a forecasted annual revenue run rate of CA$56 million.
As part of the deal, Skylight Health agreed to pay a total of CA$13.5 million in cash to acquire the full assets, and will hold back roughly 20% to be paid in installments and potential working capital adjustments over the next two years.
This was the second Colorado-based deal to close in 2021, as Skylight Health announced the acquisition of APEX Family Medical earlier this year. APEX generated over $2.5 million in revenues in fiscal 2019 and $0.5 million in net income, servicing over 5,000 patients per year.
Further south, Skylight Health is making waves in Florida with the recent acquisition of the Doctors Center Inc., a primary care group with four locations in Jacksonville. This added four clinical locations to their portfolio and expanded the patient count by 6,000. The Center’s 2020 unaudited revenues hovered around CA$3.2 million with an expected EBITDA margin of 10%.
In the sunshine state, Skylight Health also acquired River City Medical Associates, a medical practice with six locations that generated $6 million in revenue last year along with $1.35 million in EBITA. The practice’s founder, Dr. Vipul Patel, stayed on as the Market Lead to generate future organic and acquisition growth across the state.
These recent acquisitions expanded Skylight Health’s national footprint which also includes a presence in Texas, Washington, Tennessee, Maine, Massachusetts, and New Jersey, while future planned markets include New York and California.