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Castlight Health IPO from the Guy Who Brought You

Ask most people if they'd buy an initial public offering in a company co-founded by the guy who brought you and they'd probably laugh. 

But maybe they shouldn't.

The IPO in question is Castlight Health CSLT, which filed on Monday for a $100 milllion IPO. The company's filings don't mention it, but one of the San Francisco health-care information company's co-founders was Todd Park, President Obama's chief technology officer and the person who effectively took charge in the days immediately after the botched launch of the federal health-insurance exchange created by the Affordable Care Act.

So, who would sign up for another product from the health-care vision of Todd Park, the wonky Harvard boy hauled before Congress to face the wrath of Congressman Darrell Issa?

Castlight's customers include 26 of the Fortune 500 -- and consumers and corporations alike are going to buy a lot more of the services offered by Castlight or its competitors. The $3.1 trillion healthcare industry needs to give medical consumers, and the companies that pay for their care, much more and better information to allow them to compare health-care prices. It's all about helping consumers and businesses decide whether they really need certain tests that a doctor may recommend while the simplifying the process of buying health-care.

That's what Castlight's service intend to do. Its customers include heavyweights like Honeywell and newer titans like Tesla. It's a cloud-based suite of data tools and analytics that lets self-insuring companies and their employees try to manage their health care spending. The company boasts that its tools have helped clients cut spending by as much as 13%, compared to where it would have been. With companies spending $620 billion on health care this year, employer contributions to insurance having grown 32% in the last five years, the need to control cost growth is obvious.  

The Institute of Medicine estimated in 2012 that 30% of U.S. health spending is wasted, on everything from unnecessary tests to price gouging. The basic idea of Castlight and similar services is that what gets measured, gets managed. The waste in medicine comes from a combination of incentives to treat patients too aggressively, and often too sloppily, and poor information about what treatments generate the most cost-effective results and what providers do the same work for the lowest price.

That's why Castlight's prospectus estimates the eventual market for services like what it does at $5 billion in sales a year. That's a long, long way from the $13 million-with-an-M Castlight reported in 2013 revenue, leading to a loss of $62.5 million. It would be easy to dismiss the $5 billion projection as pie in the sky, and to question whether Castlight is anywhere near profitability.

But there are strong reasons to think that it's not crazy to take a hard look at Castlight's deal.

First, look at the personnel. Morgan Stanley and Goldman Sachs are co-managing the IPO. The lead venture investor is Venrock's Bryan Roberts, whom Forbes calls the best life-sciences venture investor in America. That doesn't guarantee anything, but it should make you look harder at the numbers.

And when you look harder at Castlight's numbers, they look quite attractive. Behind the paltry $13 million in sales is a $108.7 million backlog of future sales, thanks to contracts with an average of 30 months to run. That means if they didn't land anther customer, Castlight's sales would more than double. And naturally, they're likely to keep adding sales -- the backlog was only $44 million at the end of 2012. The company will have to explain more clearly how fast that can turn into profits.

But the trend is clearly moving in the right direction, and the 2013 budget was filled with investments in Castlight's sales operation that should pay dividends soon.

Finally, look at the track record. The last company Roberts and Park helped put together was Athenahealth (ATHN - Get Report), the Web-based medical-payment processing and electronic medical records company that went public at $18 a share in 2007.  With Athenahealth closing at $178.26 last night, it could be a 10-bagger as soon as today. (Which just makes last fall's caterwauling in Washington about how needed to bring in private-sector management all the more comical -- the guy leading the early fix-it operation had helped build a company now worth $6.6 billion. The lion's share of the credit, though, goes to Athenahealth's other co-founder, CEO Jonathan Bush. Whose cousin George W. presided over a different Washington).

The difference between Athena's IPO and Castlight's is that the newer company is going public much earlier in its life cycle. Sales are smaller, big investments that drain profits are still being made, and the picture is a lot harder to decipher from the prospectus alone. There's more risk for public investors this time -- not the least because of competition from both other startups and health insurors who want to become the key health-information advisers to companies and consumers.

But the similarity is that both Athena and Castlight are pursuing common-sense solutions to problems everyone admits are too huge not to solve. Just as the Affordable Care Act set out to use government to control the growth of health care spending, Castlight's big idea is to use the genius of free markets to do the same.

Park, who sold his Castlight stock when he joined the administration, has said he thought of his work at Castlight and what he does for the government as two sides of the same coin. And just as and its state-run counterparts went from enrolling 106,000 people in its disastrous October to 3 million by late January as things began to work more smoothly, so Castlight stands to shake off its big pre-IPO losses and become a fascinating company to watch as U.S. health care is remade.

Tim Mullaney is a New York-based financial writer, who has worked for publications including USA Today and BusinessWeek.

Tim Mullaney is an economics writer.

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