These are the next 5 digital health IPOs (plus one)

The healthcare system in the U.S. is a slow-moving, slow-changing beast, but it’s also riddled with inefficient parts that beg for data-driven reinvention. That’s created huge opportunities for startups — and some of them are already seeing the payoff.

The Affordable Care Act and accompanying legislation like the HITECH Act have lit a fire under the movement to rethink they way we deliver and pay for healthcare. Accordingly, investment in the digital health space has accelerated in 2014; at the end of June it totaled $2.2 billion, already exceeding 2013’s total funding just halfway through the year.

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Motivating those investments: Digital health companies have a $3.8 trillion addressable healthcare market in the U.S., according to the Congressional Budget Office (CBO).

Now some of the earliest digital health companies have reached the point where they’re almost ready for an initial public offering.

One key signal of imminent IPO: Late-stage investors. These investors often jump in with large amounts of funding when it appears that the company will become profitable in the next 12 to 18 months.

Imminent profitability isn’t enough, however. The company’s story has to be aligned with the type of business story Wall Street is feeling bullish about at the moment. The company has to have a good “cocktail party” story.

“What gets investors excited is strong customer growth, on the order of 50 percent to 100 percent year-over-year,” said Michael Matly, M.D., principal at Montreux Equity Partners in San Francisco. “If a company can do that for three years that gets investors’ attention.”

He added: “They want to see high customer retention rates, because this points to business that’s recurring and predictable.”

Matly says investors also look for profit margins of 60 percent to 70 percent or higher, large addressable markets, and customer acquisition costs that are low relative to customer’s lifetime profit potential.

“It’s these companies that have a strong reception on Wall Street,” he said — and that’s why the late-stage investors are willing to bet on them.

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With the help with some wise observers and advisers, VentureBeat has identified five of the most appealing cocktail party stories in the digital health space.

We’re going out on a limb and predicting that these companies — Healthgrades, MindBody, Doximity, Evolent Health, and Best Doctors — will be the next five digital health companies to hold IPOs. Here’s the full list (in no particular order).

Evolent Health

Evolent Health, which refers to itself as a “technology-enabled operating partner,” is helping health care organizations in 20 U.S. markets (so far) switch to a delivery model built around taking care of whole populations, not just the patients who show up when they’re sick.

In the old fee-for-service model, a third-party payer collects money from an insured person, then pays the healthcare provider when the patient comes in with a problem.

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In a value-based plan, the healthcare provider gets the whole premium payment from the insured, then keeps any portion of it that isn’t needed to provide care. So the provider has an incentive to keep its members healthy, and keep them away from the clinic, hospital or ER.

In other words, Evolent is helping providers adopt a population health management model like the one used by Kaiser Permanente, in which the insurer and a care provider are all wrapped up in one, says Evolent Health CEO Frank Williams.

And the company has been busy. Williams says Evolent, which now employees around 600 people, is on track to report more than $100 million in revenue this year.

Evolent raised a $100 million funding round in September, which Williams says his company is using to build out its infrastructure. “I don’t think we’ll have to take any more investment to reach break even,” Williams says. That, he says, will happen in the second half of 2015.

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The company has a population health services component that embeds people in hospitals and other medical providers, working hand-in-hand with a health care system’s clinical leadership to make the transition to the new approach.

“We are really an operating company; we put people on the ground sometimes for as much as ten years to help manage the business on a day to day basis,” Williams says. “We provide the people, the process, and the expertise.”

Evolent also operates an enterprise software platform that integrates large volumes of clinical and demographic data about covered populations, then helps to devise a plan for targeting interventions for subgroups, from the sickest to the healthiest, in a cost-efficient way.

Founded in 2011, Evolent Health is based in Arlington, Virginia. Its total funding is $126.5 million. Original investors include The Advisory Board Company and UPMC. TPG Growth joined as a third investor in 2013.

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Doximity

Doximity, the “LinkedIn for doctors,” has been steadily gaining momentum since its launch in 2011. The company in late April announced that it had taken a new $54 million round of funding, bringing its total up to $81 million.

But it’s the names behind the funding that give some clues about Doximity’s future. DFJ, Morgan Stanley, and the mutual fund company T. Rowe Price each contributed. Morgan Stanley is often involved as a broker of record in taking companies public. Perhaps more telling is the involvement of T. Rowe Price’s Horizon fund. It’s said in investment circles that when the manager of that fund, Henry Ellenbogen, makes a bet on a startup, it’s a sign that an IPO may be in the cards.

Doctors are using Doximity to exchange secure (HIPAA-friendly) messages about patients, send digital faxes, peruse profiles of specialists and general practitioners, stay in touch with friends from medical school, and even gain accreditation for their medical education.

Doximity’s Jeff Tangney says his company has seen its revenues quadruple thus far in 2014 compared to the same period in 2013. Tangney says his company is focused on growing membership now, but an IPO could be one eventuality for his company. He points out that it depends in large part on the market’s appetite for digital health IPOs in the next year.

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Doximity is based in San Mateo, California.

Best Doctors

Best Doctors, like many digital health companies, has arrived at two related, but distinct, ways of making money.

The company contracts with large employers to provide expert physician opinions to employees. The experts are chosen by their peers as among the best in a particular treatment area. Most of these doctors are located outside the U.S. The company can also find available doctors for customers who have urgent or emergency medical problems.

The company’s customers are Fortune 500 and Fortune 1000 companies that operate all over the world, like Pepsico. Best Doctors makes it easier for these large companies to send executives and their families to far flung places around the world with some guarantee of good healthcare. Those employees can get access to physicians nearby, or can consult with Best Doctors physicians from virtually anywhere.

Best Doctors also designs, implements, and administers health plans for individuals and families. The company says it now has 30 million members worldwide.

“Best Doctors is well-positioned to take advantage of changes that have taken place due to the Affordable Care Act,” says the company’s COO John Varvaris, in a note to VentureBeat. “We are always examining the best ways to optimize our capital structure, and believe we’re in a very unique position within the industry.”

That’s not exactly a confirmation that the company is going to IPO, but it’s not a denial either. Either way, it’s a pretty typically vague statement for a company at this stage.

Best Doctors has raised a total of $65.5 million in venture funding from Brown Brothers Harriman and Nippon Life Insurance Company of Japan.

Varvaris says the company grew 18.6 percent from 2012 to 2013, and he expects a similar growth rate from last year to this year. The expert physician opinion service and the insurance business contribute roughly equal amounts to the company’s bottom line.

Boston-based Best Doctors was founded by Harvard doctors in 1989.

Honorable Mention: Proteus Digital Health

Proteus Digital Health, at its core, involves a tiny, all-organic sensor that people swallow with their medication.

The sensor contains tiny amounts of magnesium and copper that react together, sending a wireless signal to a battery-operated patch that’s worn on the patient’s abdomen. The patch, which lasts about a week, reports its data to a tablet or smartphone via Bluetooth, and the device forwards the information up to the cloud. Once the data is in the cloud, it can be monitored by doctors and other caregivers.

Proteus is addressing a key driver of healthcare costs. Repeat illnesses and re-admissions are often caused by patients not taking their medication or failing to follow medical orders while at home. The Proteus hardware and software give caregivers a way to make sure they do.

Proteus became a company in 2001 and has been working with the FDA to approve its technology since the mid-2000s. The company has received European Commission (CE mark) and FDA market clearance in the U.S. for its wearables and Ingestible Sensors.

A handful of health systems in the U.S. and U.K. are now testing the Proteus system in what Proteus calls a “private beta.” The company isn’t saying when the product will become generally available.

To fuel the rest of the beta testing, the company has just taken an new $52 million to add to the $120 million it announced in early June. Proteus’s funding total is now $291.5 million, the investments coming from Carlyle, Essex Woodlands, Kaiser Permanente, Medtronic, Novartis, Otsuka, Oracle, ON Semiconductor, and others.

Proteus, too, is benefiting from a shift toward population management and value-based care. With its patented method of making sure people take their meds, it can explain in about one sentence how it can save its healthcare provider and insurer customers lots of money. It’s a story investors might easily latch onto.

“The key will be the status of their sustainable financial revenue models,” says HealthTech Capital’s DeGheest. “Proteus is more a of a drug device play, but will need a very high IPO valuation based on prior fund raising levels, so it may need more quarterly revenue growth to get there.”

Proteus, with is based in Redwood City, California, didn’t respond to calls for comment.

Digital health and Wall Street

So there you have it: the next five digital companies to IPO. These, of course, are educated guesses, based on our conversations with people in the digital health community with knowledge of the histories and business performances of the companies.

The timing of these exits is another question. It all depends on Wall Street’s appetite for digital health IPOs. The last big one, Castlight Health, opened at $16 in March, then roared up to $40 per share on the first day. This enthusiasm soon cooled way down, and Castlight’s stock price sunk to below its opening price. But the stock has battled back, closing at $14.11 July 30.

On the other hand, the other big digital health IPO this year was Care.com, which connects family with dependent care providers, hasn’t gone so well. The stock was priced at $17 and closed at $24.30 on opening day, January 24. Within 10 days the stock had risen to $29, but then began to sink. And sink. It’s now trading at just above $10 a share.

In actuality, one source said, the timing of the next digital health IPOs has a lot to do with the way about 60 sell-side fund managers in New York feel about the space from month to month. Right now, it’s about neutral, but that could break in a bullish, or bearish, direction any time.