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Summary

  • San-Fran-based Castlight Health Inc provides software for the management and analysis of employers' healthcare costs.
  • Castlight Health plans to raise $155 million in its upcoming IPO, offering 11.1 million shares at an expected price range of $13.00 to $15.00 per share.
  • We plan to buy this IPO, due to the sector and strong tech IPO demand .

Castlight Health (CSTL), a provider of software for the management and analysis of employers' healthcare costs, plans to raise $155 million in its upcoming IPO this week.

The San Francisco, California-based firm will offer 11.1 million shares at an expected price range of $13 to $15 per share. If the IPO can hit the midpoint of that range at $14 per share, CSLT will command a market value of $1.4 billion.

CSLT filed on February 10, 2014.
Lead Underwriters: Goldman Sachs & Co, Morgan Stanley & Co LLC
Underwriters: Allen & Company LLC, Canaccord Genuity Inc, Raymond James and Associates Inc, Stifel Nicolaus & Company Inc

Summary
Castlight is a provider of cloud-based software, designed to assist enterprises in improving cost-efficiency and spending control in their healthcare costs. The firm's software aggregates and analyzes complex, large-scale data in order to create usable information, related to healthcare costs and quality. It also allows companies to distributed personalized, usable information to their employees, integrate disparate systems and applications, and implement "technology enabled" benefit designs.

Castlight believes that the massive inefficiencies in the current American healthcare system can at least, in part, be remedied through the usage of such software. Over the past two years, CSLT has signed over 95 customers, including 24 Fortune 500 companies.

Valuation
CSLT offers the following figures in its S-1 balance sheet for the year ending December 31, 2013:

Revenue: $12,973,000.00
Net Loss: ($62,182,000.00)
Total Assets: $83,517,000.00
Total Liabilities: $27,444,000.00
Stockholders' Equity: ($124,350,000.00)

For the years ended December 31, 2011, 2012, and 2013, CSLT's revenues totaled $1.9 million, $4.2 million and $13.0 million, respectively. Over the same periods, net losses totaled $19.9 million, $35.0 million and $62.2 million, respectively. The firm's accumulated deficit as of December 31, 2013 was $131.2 million.

Business
CSLT hopes to derive increased business from the rapidly escalating costs of healthcare for employers in the United States. (The Centers for Medicare and Medicaid services estimated that US healthcare spending will total approximately $3.1 trillion in 2014, $620 billion of which will be paid by US employers.) These rising costs, along with the byzantine nature of regulations surrounding employers' healthcare obligations, may well expand the market for CSLT's products.

CSLT competes with other software providers that currently offer products similar to some components of CSLT's software, many of which are in the process of developing more sophisticated and more comprehensive offerings. These firms include Truven Health Analytics Inc, Change Healthcare Corporation, HealthSparq Inc, and ClearCost Health. CSLT also competes with some large health plans that have created their own cost and quality tools that are often provided to customers at dramatically reduced costs. These include Aetna Inc (NYSE:AET), Cigna Corporation (NYSE:CI), and UnitedHealth Group Inc (NYSE:UNH).

Management
CEO Giovanni M. Colella has served in his current position since co-founding CSLT in 2008. Dr. Colella previously founded served as President and CEO of RelayHealth Corporation. He holds an M.D. from the Universita Degli Studi di Milano in Italy and an M.B.A. from Columbia Business School. Dr. Colella is joined by Chief Medical Officer Dena Bravata, who joined the company in April 2009. Dr. Bravata previously was a Senior Research Scholar at the Stanford University Center for Primary Care and Outcomes Research and was an internist in private practice for nearly a decade. Dr. Bravata holds a B.S. in Biology from Yale University, an M.D. from Columbia University and an M.S. in Health Research and Policy from Stanford University.

It's worth noting that CFO John C. Doyle received total compensation of $1.0 million for the year ended December 31, 2013, while Chief Revenue Officer Michele K. Law received total compensation of $3.3 million for the same period. Seven-digit compensation figures seem more than a little bit out of line for executives of a company losing money as quickly as CSLT.

Conclusion
We rate this IPO a buy in the proposed price range of $13 to $15.

We believe that Goldman has priced this deal below where it will open giving the institutional shareholders who get large allocations a huge windfall before the weekend.

Institutional and retail investors have been very receptive this year to technology IPOs and we expect that trend to continue with CSLT.

The healthcare sector is obviously undergoing rapid change and companies like Castlight that are properly positioned will benefit.

While there is no doubt a burgeoning market for the software that CSLT provides, it's clear that the firm will soon be facing stiffer competition, and the firm's extraordinary losses thus far lead us to question whether CSLT will be able to outperform the market after the initial surge.

The firm's losses were nearly five times its revenue for the year ended December 31, 2013, and it has seen massively increasing losses each of the past three years. The overcompensation of CSLT's executives is especially mystifying in light of these huge losses.

Source: Castlight Health IPO May Be Goldman's Latest Mispricing This Friday