Babylon Holdings Stock: A Virtual Values-Based Care Market With Upside Potential (NYSE:BBLN)
With the recent acquisitions of DayToDay Health and Higi, mobile-based healthcare application developer Babylon (BBLN) continues to gain traction in its focus on penetrating the US VBC (“Value-Based Care”) market and supports its upcoming strong growth trajectory . Additionally, BBLN’s growth path is supported by a sizeable and rapidly growing addressable market opportunity, strong payer relationships, and a unique virtual-first-capitated model aimed at the underserved Medicaid market. While BBLN’s IPO via a SPAC merger could weigh on investor confidence in the near-term, I see sentiment changing over time as the company successfully transitions its US pipeline to signed deals and leverages new license sales to expand its global footprint to expand
A closer look at DayToDay and Higi acquisitions
BBLN last announced the acquisition of its remaining stake in Higi, a provider of free blood pressure, weight, pulse and BMI screenings through its network of health kiosks at retail chains such as Sam’s Club (WMT), Kroger (KR), Rite Aid (RAD), and Publix, for c. 40 million dollars. Not only does this mean that BBLN gains full ownership of the asset, having previously held a 25% minority stake in Higi, but it also leverages its existing capabilities to monitor patients remotely (via its home-connected devices and clinic network ) will bring in BBLN umbrella. Longer term, I believe this acquisition will also improve BBLN’s digital infrastructure, as the brick-and-mortar presence (over 70% of the US population lives within five miles of a Higi health kiosk) will likely support brand building via access to existing Higi -Customers. And since access to care in the rural/Medicaid population tends to be limited, the addition of Higi’s network should well establish BBLN as a key chronic care access point for BBLN members.
Notably, the Higi deal follows that of BBLN completed takeover by DayToDay Health, a digital-first program and provider of clinical services for pre- and post-operative procedures and other major healthcare events such as childbirth. Upon completion, DayToDay’s platform will be fully integrated with its existing virtual first care offering, which should bring significant benefits – for example, the DayToDay care management model has kept rehospitalization rates at an impressive under 4% (vs. the industry average of around 15%) and resulted in a 93% reduction in expected wound infection rates. Longer-term, further acquisitions of specialty virtual networks could also lead to improved downstream cost management (note that this was a key motivation behind Oak Street Health’s (OSH) purchase of RubiconMD). Meanwhile, strategic investments that expand BBLN’s software capabilities should also unlock additional value from its software solutions and provide an important catalyst for future growth.
Robust pipeline underpins longer-term growth prospects
Since entering the US market, BBLN has successfully won new business – from 67,000 lives under management in FQ4 ’20, the company has since added multiple wins and one acquisition, bringing the total number of its VBC lives under contract in the US to 180,000 . Despite the lack of updates on the last quarterly call, management reiterated that the pipeline is “strong,” citing its “belief” that the pipeline can support sustained growth into fiscal 2023 and beyond. With outsized growth in value-based maintenance contracts in the US and additional software license sales, I see BBLN generating a higher recurring revenue mix in the years to come. Building on his c. $170 million ARR exiting fiscal 2020 and strong October contract starts are already pushing the monthly revenue rate to approximately $38 million (or $456 million annualized).
Coupled with the ability to close new deals in less than 90 days, investors should take comfort in signing off on current revenue and EBITDA growth targets. Longer term, BBLN’s global footprint is also critical – while a significant portion of Babylon’s growth is currently expected in the US VBC business, paves its ability to expand into other regions by helping governments and commercial entities in digital transformation of healthcare helps pave the way for a massive c. $10 trillion global opportunity. This, in turn, provides BBLN with a comprehensive launch pad from which to deliver robust growth beyond financial targets set through fiscal 2023.
Net cash balance supports path to break-even EBITDA
After the de-SPAC process, BBLN is likely to have a solid c. $360 million in cash on balance sheet. While the FQ3 ’21 financial report indicated that the company had $37.1 million in cash and $47.8 million in loans and borrowings, BBLN c. $200 million in debt financing last October from AlbaCore Capital Group, which issued five-year notes at a c. 8% interest. And through its post-SPAC transactions, BBLN has effectively c. Gross proceeds of US$460 million (including monies attributed to Alkuri in trust) demonstrating its ability to tap into capital markets as needed. So while BBLN has c. $200 million in debt that needs to be paid back, I think BBLN has enough cash to hit break-even EBITDA sometime in fiscal 2023. Assuming management meets its growth goals, BBLN should continue to be cash flow positive (as opposed to burning cash) in fiscal 2024. in the 2022/2023 financial year).
Overall, following a series of recent mergers and acquisitions, BBLN’s enhanced digital infrastructure and brick-and-mortar footprint makes the company an exciting player in the tech-enabled provider category. With massive global TAM opportunity and a secular shift to VBC that will also support greater scale, BBLN’s digital-first offering should become more capital efficient than traditional facility-based models going forward. Therefore, I think a premium rating is warranted, especially given the triple-digit revenue growth potential in fiscal 2022/2023. Still, despite their superior growth prospects, BBLN shares trade at an EV/sales discount to peer Teladoc (TDOC), which keeps me optimistic about the medium to longer term upside potential.