British Healthcare Company Eyes US Market Disruption

Babylon Health's Pursuit of a U.S. Listing

As we begin the week and another edition of The Exchange, we continue to await Robinhood’s IPO filing. In the interim, our focus shifts to other companies preparing to go public. Today, we're examining Babylon Health, a UK-based health technology firm aiming for a U.S. listing through a special-purpose acquisition company, or SPAC.

Numerous inquiries have been raised, both from our side and from our audience. We intend to address some of these questions as we proceed.

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Now, let's turn our attention to Babylon Health. We will begin with a review of its funding history, followed by an examination of its core product offerings. Subsequently, we will analyze its financial performance and, with caution, its future projections.

Anticipating a Busy IPO Season

The current market environment suggests a potentially robust Q3 2021 IPO cycle. Kanzhun, a Chinese corporation, has already submitted its application for a U.S. listing.

Adding to this, the anticipated filing from Robinhood, when it is released, promises to further contribute to a dynamic period for initial public offerings.

We are anticipating a significant number of companies entering the public market.

Babylon Health

According to data from Crunchbase, Babylon has secured over $600 million in funding while operating as a private entity. However, the sources of this funding differ from those typically covered by TechCrunch. While some investment came from firms like Hoxton Ventures and Kinnevik, the majority was provided by the Saudi Arabian Public Investment Fund (PIF).

Specifically, the PIF spearheaded a $550 million investment round in the UK-based health technology company in August 2019.

PitchBook details this round as occurring in two phases, with the initial, larger tranche establishing a post-money valuation of $1.9 billion for the company.

This valuation is central to Babylon’s current pursuit of a SPAC (Special Purpose Acquisition Company) deal. Following the completion of this deal, the company’s new equity value is projected to be approximately $4.2 billion.

Furthermore, Babylon is expected to have around $540 million in cash reserves once the merger is finalized. The enterprise valuation, post-merger with Alkuri, will be $3.6 billion.

Prior to the SPAC agreement, Babylon was already considered a unicorn. The completed deal will elevate its status to an even larger unicorn. A key question arises: what innovations has Babylon developed to warrant such substantial investment?

Company Funding Breakdown

• Initial Funding Sources: Hoxton Ventures, Kinnevik
• Major Investor: Saudi Arabian Public Investment Fund (PIF)
• 2019 Funding Round: $550 million led by PIF
• Post-Money Valuation (2019): $1.9 billion
• Post-SPAC Equity Value: Approximately $4.2 billion
• Post-SPAC Enterprise Value: $3.6 billion

The significant capital infusion demonstrates strong investor confidence in Babylon’s potential within the health tech sector. The company’s trajectory highlights a notable shift in funding landscapes for innovative healthcare solutions.

Understanding Babylon's Core Function

Babylon’s central premise revolves around the inefficiencies within the global healthcare landscape. The company believes a synergy of digital services, artificial intelligence, and proactive healthcare can lead to significant improvements.

Specifically, Babylon positions itself as a provider of “Digital-First Value Based Care.” A more precise description would be digital-first, value-based care (VBC). The initial aspect is readily apparent, while the latter requires further clarification.

Babylon defines VBC as a system where healthcare providers receive a comprehensive health budget for the individuals under their care. The company aims to leverage the strengths of both digital services and VBC, mitigating the weaknesses inherent in each approach through mutual support.

The following image illustrates how Babylon presents this concept to potential investors:

Babylon generates revenue through three primary avenues. Firstly, it licenses its software to other organizations. This software package assists users with health evaluations, symptom assessment, and ongoing care monitoring, sold under contractual agreements.

Secondly, Babylon provides “virtual care” services, essentially telehealth offerings. Finally, the company delivers the aforementioned VBC model, encompassing real-world care and rehabilitation services for its clientele.

Improving Healthcare Systems

How does this model address the issues of high costs, inflexibility, and general shortcomings often found in existing health systems? One key aspect is the substitution of expensive emergency room visits and in-office appointments with more affordable telehealth options.

Furthermore, the focus on preventative care aims to reduce the need for more costly medical interventions down the line. This proactive approach is central to Babylon’s strategy.

The company’s software licensing fees are billed annually. Virtual care services operate on a fee-for-service basis, while the VBC model functions similarly to insurance, collecting regular payments to cover all costs associated with primary, secondary, and tertiary care, including stop-loss protection.

Babylon anticipates that approximately 85% of its revenue will originate from the U.S. market in the coming years. This projection is based on 2021 and 2023 estimates, alongside anticipated shifts in market share. Software revenue is expected to constitute roughly 10% of total revenue during the same period.

With this foundational understanding established, a detailed examination of Babylon’s historical performance and future projections can now be undertaken.

Babylon's Market Entry and Financial Performance

The following analysis is based on publicly available information and does not reflect endorsement of the presented graphic, which was not created by me.

Babylon reported revenues of $16 million in 2019, experiencing a substantial increase to $79 million in 2020. This represents a growth rate of 394%, indicating significant expansion.

Revenue Growth Trajectory

While Babylon anticipates continued revenue growth, the rate is projected to decelerate. However, the absolute dollar value of revenue increases is expected to rise as the company’s overall revenue base expands.

This shift means that future top-line growth, measured in dollars, will likely be more substantial than growth expressed as a year-over-year percentage.

EBITDA and Profitability

The company’s adjusted EBITDA performance indicates ongoing losses. Historical and projected figures suggest continued financial losses for the foreseeable future.

Achieving adjusted EBITDA breakeven by 2023 is considered an ambitious goal.

Gross Profit Analysis

More reliable financial indicators are found within the gross profit data. Babylon successfully transitioned from negative gross margins to positive gross margins in 2020.

This achievement is significant, as demonstrating the potential for gross profit generation and margin improvement was crucial for securing the SPAC deal.

The realization of (gross) operating leverage is a positive development.

Gross Margin Expectations

Babylon does not foresee further gross margin improvements in 2021, despite anticipating a rise in gross profit. This is based on maintaining a 15% gross margin rate alongside increasing revenues.

Looking ahead, the company projects that gross margin improvements will accompany its revenue gains, though these improvements are still some time away.

Concluding Remarks

Babylon presents a complex business model with multiple revenue streams, varying quality of earnings, and a diverse geographic presence.

Despite the information presented in its SPAC deck, further clarity is desired, specifically a comprehensive, standard S-1 filing.

The ability of SPACs to finalize large transactions with limited disclosure raises questions, mirroring similar practices observed among private investors.