agilon health Proposes Terms For $1 Billion IPO

Summary

• agilon health has filed to raise $1 billion in an IPO.
• The firm provides a healthcare services platform for Medicare Advantage patients in the United States.
• AGL has produced strong growth, is operating in a growing industry segment, and the IPO appears reasonably valued, so is worth consideration.
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Photo by Geber86/E+ via Getty Images

Quick Take

agilon health (NYSE:AGL) has filed to raise $1 billion in an IPO of its common stock, according to an S-1 registration statement.

The firm provides a platform for member physician groups to serve patients in the Medicare Advantage program.

AGL has produced strong financial growth results, is operating in a growing segment of the industry and the IPO appears reasonably valued, so is worth consideration.

Company & Technology

Long Beach, California-based agilon was founded to develop a capitation Total Care business model to pay physician groups across various U.S. geographies for improving senior patient care while keeping costs under control.

Management is headed by president and CEO Steven Sell, who has been with the firm since 2020 and was previously president, Chairman and CEO of Health Net.

Below is a brief overview video of a COVID-19 vaccine campaign in conjunction with agilon health:

Source: agilon health

agilon has received at least $264 million from investors including CD&R Vector Holdings, Morgan Stanley, and Capital World.

Customer/User Acquisition

The company pursues relationships with physician groups interested in receiving a per month per member capitation-based payment relationship for Medicare Advantage patients.

AGL current has physician groups that serve 210,000 patients in Medicare Advantage and through its participation 'in the Center for Medicare & Medicaid Innovation (“CMS Innovation Center”) Direct Contracting Model, our PCPs are expected to serve over 50,000 Medicare fee-for-service (“FFS”) beneficiaries through our five currently approved Direct Contracting Entities (“DCEs”).'

General & Administrative expenses as a percentage of total revenue have decreased as revenues have increased, as the figures below indicate:

General & Administrative	Expenses vs. Revenue
Period	Percentage
2020	11.3%
2019	15.5%

Click to enlarge

Source: Company registration statement

The General & Administrative efficiency rate, defined as how many dollars of additional new revenue are generated by each dollar of General & Administrative spend, was a strong 3.1x in the most recent reporting period.

Market & Competition

According to a 2017 market research report by LEK Consulting, the U.S. market for Medicare Advantage is advancing toward a 70% penetration rate among seniors by 2040.

This represents an expected average rise of 1.5% per year from 2010 to 2040.

The main drivers for this expected growth are predictability, more benefits, care coordination, and lower annual healthcare costs.

Also, the federal government encourages the plan because it focuses on cost trend management and not fee-for-service.

Major competitive or other industry participants include:

• ChenMed

• Oak Street Health (OSH)

• Optum

• VillageMD

• Local provider networks

Financial Performance

agilon’s recent financial results can be summarized as follows:

• Strong growth in topline revenue

• Sharply increased gross profit and gross margin

• Reduced operating losses

• Lowered cash used in operations

Below are relevant financial results derived from the firm’s registration statement:

Total Revenue
Period	Total Revenue	% Variance vs. Prior
2020	$ 1,218,333,000	53.4%
2019	$ 794,411,000
Gross Profit (Loss)
Period	Gross Profit (Loss)	% Variance vs. Prior
2020	$ 196,456,000	184.6%
2019	$ 69,037,000
Gross Margin
Period	Gross Margin
2020	16.12%
2019	8.69%
Operating Profit (Loss)
Period	Operating Profit (Loss)	Operating Margin
2020	$ (56,673,000)	-4.7%
2019	$ (106,574,000)	-13.4%
Net Income (Loss)
Period	Net Income (Loss)
2020	$ (60,052,000)
2019	$ (282,588,000)
Cash Flow From Operations
Period	Cash Flow From Operations
2020	$ (53,204,000)
2019	$ (103,861,000)

Click to enlarge

Source: Company registration statement

As of December 31, 2020, agilon had $107 million in cash and $422 million in total liabilities.

Free cash flow during the twelve months ended December 31, 2020, was negative ($55 million).

IPO Details

agilon intends to raise $1 billion in gross proceeds from an IPO of its common stock, offering 46.6 million shares at a proposed midpoint price of $21.50 per share.

A number of funds have indicated a non-binding interest to purchase shares of up to $500 million in the aggregate at the IPO price.

Assuming a successful IPO, the company’s enterprise value at IPO would approximate $8 billion, excluding the effects of underwriter over-allotment options.

Excluding effects of underwriter options and private placement shares or restricted stock, if any, the float to outstanding shares ratio will be approximately 11.13%.

Management says it will use the net proceeds from the IPO as follows:

We intend to use the net proceeds from this offering for working capital and other general corporate purposes, including accelerating the growth of our existing geographies and our national network of partners, and to make available financing options to our physician partners in connection with taxes payable on shares to be distributed to them upon consummation of the offering under the partner physician group equity agreements, in an aggregate amount estimated to be approximately $90 million to $120 million.

Management’s presentation of the company roadshow is available here.

Listed bookrunners of the IPO are J.P. Morgan, Goldman Sachs, BofA Securities, Deutsche Bank Securities, Wells Fargo Securities, William Blair, Truist Securities, and Nomura.

Commentary

agilon is seeking public capital market investment to fund its growth initiatives and finance its partner physician tax payments related to shares provided to them from the company.

The firm’s financials show strong topline revenue and gross profit growth, reduced but still significant operating and net losses, and lowered cash used in operations.

General & Administrative expenses as a percentage of total revenue have dropped substantially as revenues have increased; its General & Administrative efficiency rate was a respectable 3.2x in 2020.

The market opportunity for providing a capitated total care approach to Medicare Advantage plans is expected to grow markedly as U.S. seniors, which include 10,000 Baby Boomers retiring per day, increasingly opt for the program.

J.P. Morgan is the lead left underwriter and IPOs led by the firm over the last 12-month period have generated an average return of 55.4% since their IPO. This is a mid-tier performance for all major underwriters during the period.

The primary risk to the company’s outlook is that the firm needs to expand its coverage area to achieve economies of scale. Recently it exited the large California market, so it appears management is avoiding markets that don’t make financial sense.

As for valuation, compared to recent IPO company and competitor Oak Street Health, the IPO appears reasonably valued on revenue multiple bases.

Oak Street Health’s stock has performed quite well since its IPO.

Given the firm’s approach, growth trajectory, and reasonable IPO price, the IPO is worth a close look.

Expected IPO Pricing Date: April 14, 2021

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.