Health Catalyst IPO — The Signify View

August 05, 2019
By Alex Green

In late July, Health Catalyst announced its common stock would begin trading on the Nasdaq Global Select Market. This marks the culmination of a journey that started 11 years ago and provides a great illustration of a startup that has maximised the potential of the move in healthcare to value-based care. However, the IPO comes at a time where there is some uncertainty gripping the markets it targets and there are several key challenges for Health Catalyst to overcome in order to drive future success. Here’s our take on the company’s journey to this point and its future opportunities and challenges as it transitions from startup to a publicly traded company.

The journey to IPO
The genesis of Health Catalyst goes back to work that its founders, Steven Barlow and Thomas Burton, started at U.S. healthcare provider Intermountain, developing tools that supported data warehousing and analytics on the back of Intermountain’s home grown EHR. Health Catalyst was the product of Barlow and Burton’s commercialisation of these tools. Since this time the company has grown rapidly in terms of commercial success and number of customers, achieving sales of $112.6M in 2018 (up more than 50% on 2017) with a customer base that had reached 126 US healthcare systems by the end of Q1 2019.

It has done this by offering a combination of technology and services that support healthcare providers when using data to improve clinical and financial performance. Tools of this nature have become increasingly important with the rise of value-based care, the implementation of the Affordable Care Act (ACA) and the increased demand for population health management (PHM) IT.

To date Health Catalyst has positioned itself well to maximise on these trends. New organic business has been the main driver of revenue growth, mostly driven by adding new customers to its subscription-based services and increasing the number of products each customer uses. However, this was supplemented with the acquisition of HIE vendor Medicity in June 2018, and is partly responsible for the increase in sales in 2018 (Medicity brought in $12.5M extra in revenue in 2018 and added 60 health systems to Health Catalyst’s customer base)



Future challenges
As Health Catalyst has its initial IPO it still faces several challenges. Firstly, the company is not yet profitable. In 2018 it recorded a net loss of $62M, up on the net loss in $47M in 2017.

Much of the success Health Catalyst has had, has been a result of the support services it offers in conjunction with its technology (services accounted for 49% of revenues in 2018 and 57% in 2017). These services often go beyond how the technology is implemented and supported and focus more on how health systems can reengineer process and workflows to ensure that the analytics that the technology provides can be used to maximise the health system’s performance. Whilst instrumental in its success, providing these services comes at a significant cost, shown by its services business line having a much higher ratio of cost to revenue than its technology business line.

Driving faster growth in the technology business, compared to the service business, as the company scales will aid the company in moving towards profitability. To do this it needs to increasingly upsell additional technology products to existing customers as it scales the business. This is already starting to occur — organic growth from existing customers in Q1 2019 represented 13% of overall technology business line growth, compared to the same quarter in 2018. Continuing this trend will be key to achieving a profit.

Secondly, the company also suffers, to some extent, due to the large number of products it supports. Whilst, on one hand the huge range has helped drive revenues, supporting this broad portfolio comes at a significant financial cost. It can also confuse customers. Simplifying the portfolio would help with both issues and the company has started addressing this. Last month it announced a new platform “Population Health Foundations”. This product brings together several technology modules and services, that had previous been sold separately, into one platform that supports providers when starting initial PHM program deployments. The solution simplifies the procurement process for the customer and has the potential to increase revenue per customer and reduce overall platform support costs for Health Catalyst. Following similar strategies with other product areas will also be instrumental in the journey to profitability.

Market environment
Whilst Health Catalyst’s core markets have grown rapidly over recent years, it now faces some headwinds in several of the key markets it plays in, specifically that of population health management.


The growth in demand for PHM technology has largely been the product of ACA implementation and the move to value-based care (VBC). Both have come under increasing pressure since the Trump administration came to power in 2017 with an agenda to reform the ACA. Coupled with the process barriers that moving to VBC presents, this has meant that healthcare providers in the U.S. have moved more slowly to VBC contracts than was widely expected.

Health Catalyst has navigated these headwinds well, as can be seen by its revenue growth in 2018. However, the challenge has been amplified this year as the Centers for Medicare and Medicaid Services (CMS) has changed provider payment structures of the Medicare Shared Savings Program (MSSP) via the introduction of the "Pathways to Success" rule. The rule effectively forces Accountable Care Organisations (ACOs) to take on downside risk contracts faster than previously dictated. ACOs tend to be first movers in the transition to VBC and so are a key customer for vendors such as Health Catalyst. The new MSSP payment models have resulted in a fall in the number of ACOs participating in MSSP programs in 2019, which has the potential to hit demand for PHM solutions.

However, for the remaining ACOs taking on more downside risk, it’s even more important to put in place PHM tools to mitigate these risks. Therefore, this trend has some upside.

Signify Research has taken these factors into account in its latest North American PHM market forecasts. The CMS Pathway to Success rule is forecast to slow growth to some extent; however, the projection is that the market will still enjoy high single digit growth over the medium term.

Final thoughts
Health Catalyst has proven that it can grow at a faster rate than the market average over recent years, consistently gaining PHM revenue share year-on-year in North America during the period 2015 to 2018. The IPO marks the next chapter in the company’s development, and whilst it is positioned well to continue to grow revenues, it will find itself coming under increasing scrutiny as a publicly traded company. In order to see substantial increases in its share price over the medium term, it will need to demonstrate to the market that it can consistently make progress against the factors which will ultimately support it moving toward profitability, namely those outlined above. Early signs are that it is starting to make progress on these — the level of success it enjoys as a public company will hinge on this continuing.

About the author: Alex Green is company director and principal analyst at Signify Research Limited.