Castlight Health Vaults with a High Value IPO

According to the Centers for Medicare and Medicaid Services, healthcare spending in the US is projected to be worth $3.1 trillion this year, of which $620 billion is paid by US employers. Despite this significant expenditure, the healthcare industry in the country is plagued with inefficiencies and extreme variations in price and quality of health care. A major factor for these inefficiencies is the inadequate availability of information, especially with respect to the price and quality of health care, which makes it difficult for employees and health care providers to make wise health care choices.

Castlight’s Offerings
San Francisco-based Castlight (NYSE: CSLT) was founded in 2008 by Todd Park, Bryan Roberts, and Giovanni Colella to help “transform health care in the United States”. Castlight offers a cloud-based healthcare related technology solution that is capable of handling the scale and complexity of the health care industry. The Enterprise Healthcare Cloud platform uses complex data from multiple sources including health care providers, insurance companies, and government agencies and translates it into transparent and useful information. With the help of advanced analytic tools including data science techniques, predictive modeling tools, and complex analytics, they are able to leverage their database to help identify relevant information such as high-risk individuals and estimated costs of care so that employers can devise better benefit plans. Through Castlight’s subscriptions, employees can see how much a service would cost and make more informed decisions about their health care needs.

Castlight’s offering has been received well by the industry and over the last two years, they have signed up more than 100 customers, most of whom are self-insured employers, including 24 of Fortune 500 companies. Their customer list includes names like Walmart, CVS Caremark, and Microsoft. Walmart is among their top clients and helps generate 16% of their revenues.

Castlight’s Financials
Castlight does offer a well-accepted product, but it is yet to deliver a profitable business model. Revenues have grown from $1.9 million in 2011 to $13.0 million for the year ended December 2013. But over the same period, losses have grown significantly. Net loss of $19.9 million for the year ended 2011 grew to $62.2 million for fiscal 2013.

Castlight had raised $181 million from investors including Morgan Stanley, Wellcome Trust, US Venture Partners, Maverick Capital, Oak Investment Partners, Venrock, Cleveland Clinic, and T Rowe Price. Last week, they raised another $178 million by selling 11.1 million shares at $16 each. The stock listed on the NYSE and soon soared to a high of $41.95, giving them a valuation of over $3 billion. That is a surprisingly high valuation for a company that earned only $13 million in revenues last year. Castlight plans to use the recent influx of funds towards marketing and research and development needs.

According to a report by Mercer, an increasing number of employers are shifting health care costs to employees through high-deductible plans. Mercer estimates that enrollment in these consumer-directed health plans, with higher deductibles and health savings accounts, grew from 16% in 2012 to 18% last year. They also project that within the next three years, nearly two-thirds of large employers will be shifting toward a consumer-directed health plan, thus widening the market opportunity for players like Castlight. While I agree that the market opportunity is present, I still remain a skeptic of such  high valuations.