IPO Preview: Oak Street Health Begins U.S. IPO Rollout

IPOStreet

Oak Street Health (OSH) intends to raise $100 million in an IPO of its common stock, according to an S-1 registration statement.

The firm provides primary care services to Medicare-eligible patients in the United States via capped per patient revenue model.

OSH says that its approach may be more adaptable to changing economic and healthcare delivery system environments.

I’ll provide a final opinion when we learn more about the IPO from management.

Chicago, Illinois-based Oak Street was founded to develop an integrated, personalized approach to health care services for Medicare-eligible persons using a value-based capitation contract revenue model.

Management is led by co-founder and Chief Executive Officer Mike Pykosz, who was previously Principal and the Boston Consulting Group.

Below is a brief overview video of Oak Street's approach:

Source: LivingHealthChicago

The company is paid on a per patient, per month basis, creating a recurring revenue stream model that management believes incentivizes it to focus on 'interventions that keep our patients healthy' while capturing cost savings as a result.

Oak Street has received at least $545 million from investors including private equity firms General Atlantic and Newlight, and Humana (HUM).

The firm obtains new patients through its network of 54 medical centers in 13 markets across 8 states.

Oak Street currently cares for about 85,000 patients 'of which approximately 65% are at-risk and approximately 35% are fee-for-service, although fee-for-service accounted for less than 1% of our revenue for the three months ended March 31, 2020.'

Sales and Marketing expenses as a percentage of total revenue have been trending downward as revenues have increased.

The Sales and Marketing efficiency rate, defined as how many dollars of additional new revenue are generated by each dollar of Sales and Marketing spend, rose to 7.1x in the most recent reporting period.

According to a 2017 market research report by LEK Consulting, the U.S market for Medicare Advantage is advancing toward 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
  • Iora Health
  • Health system affiliated practices

Oak Street’s recent financial results can be summarized as follows:

  • Growing topline revenue
  • Increasing gross profit and gross margin
  • Reduced operating losses
  • Increasing cash used in operations

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

oakpl

Source: Company registration statement

As of March 31, 2020, Oak Street had $226.3 million in cash and $355 million in total liabilities.

Free cash flow during the twelve months ended March 31, 2020, was negative ($88.3 million).

Oak Street intends to raise $100 million in gross proceeds from an IPO of its common stock, although the final amount may differ.

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

We expect to use approximately [an as-yet-undetermined amount] of the net proceeds of this offering to repay outstanding borrowings, including fees and expenses, under our Loan Agreement, under which $80.0 million in principal amount was outstanding and which had an interest rate of 9.75% as of March 31, 2020, and the remainder of such net proceeds will be used for general corporate purposes.

Management’s presentation of the company roadshow isn’t available.

Listed bookrunners of the IPO are J.P. Morgan, Goldman Sachs, Morgan Stanley, William Blair, Piper Sandler, Baird and SunTrust Robinson Humphrey.

Commentary

Oak Street is seeking to go public in order to pay down debt.

Although the firm is primarily owned by private equity firms, it doesn’t have too big of a debt load as many private equity IPO candidates do.

The company’s financials show strong revenue and gross profit growth, but still high operating losses and high operating cash burn in the most recent quarter.

OSH is making a turn toward operating breakeven, always a good sign.

Sales and Marketing expenses as a percentage of total revenue have fluctuated; its Sales and Marketing efficiency rate has improved markedly.

The market opportunity for capitation contract revenue models is significant, especially as the number of retiring baby boomers increases by 10,000 per day.

Management highlighted the difficulty of the prevalent fee-for-service business model in the current Covid19 pandemic, and believes its capitation revenue model along with its operational flexibility will enable it to adapt to pandemic conditions better than legacy healthcare service providers.

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 76.9% since their IPO. This is a top-tier performance for all major underwriters during the period.

I look forward to learning more details about the firm’s IPO as well as its Q2 2020 financial results and will provide an update when we know more.

Expected IPO Pricing Date: To be announced.

Glossary Of Terms

(I have no position in any stocks mentioned as of the article date, no plans to initiate any positions within the next 48 hours, and no business relationship with any company whose stock is mentioned in this article. IPO stocks can be very volatile in the days immediately after an IPO. Information provided is for educational purposes only, may be in error, incomplete or out of date, and does not constitute financial, legal, or investment advice.)

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