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BrightSpring Health Services filed on January 2 to go public and has now proceeded with a transaction, having priced the deal at $13 per share, below the original $15-$18 target price range. This was the largest healthcare sector IPO in years. KKR and Walgreens Boots Alliance own the Louisville, KY-based company. The Company runs pharmacy management and medical provider services, with operations in all 50 U.S. states serving over 400,000 patients.
The Company raised $693 million in the offering, reflecting a valuation of $2.2 billion.
The IPO market is showing signs of a thaw, and much hope surrounded the BrightSpring transaction as a sign of more successful deals to come. The post pricing decline in share price, however, has caused market participants to pause to reflect on true investor demand for IPOs, just as the IPO pipeline continues to build. Many of the largest private companies are rumored to be in the planning stages for IPOs. Equity Uplift: Unicorn IPOs in 2024?
KKR bought BrightSpring for $1.32 billion in 2019 and merged it with PharMerica, an affiliate of Walgreens Boots. It shelved earlier plans to take the combined company public in 2022 due to the downturn in the IPO market.
The Company’s S1 indicates that it plans to use the proceeds to pay off its $459 million second lien facility, $173 million revolving credit facility. Also, it will pay off part of its $2.9 billion first lien facility. Its senior secured facilities are rated single B by S&P; its second lien debt is rated CCC+.
When the Company filed in 2021 for the IPO it eventually postponed, S&P rewarded BrightSpring by putting its ratings on CreditWatch for upgrade.
BrightSpring IPO Underwriting and Market Conditions
The IPO had significant underwriting muscle behind it: Goldman Sachs and KKR will run the book while co-leads are Jefferies, Morgan Stanley, UBS, BofA, Guggenheim, and Leerink Partners. The co-managers were Wells Fargo, Deutsche Bank, HSBC, Mizuho, BMO, Loop Capital Markets and SoFi.
Also in its favor is the market’s view on healthcare stocks. Investors appear currently more forgiving of healthcare companies than in 2022 and 2023, although the post IPO price drop has challenged that premise.
Value investors m are increasingly paying attention to the healthcare sector. The S&P 500 Health Care Index gained 4.18% in the year to January 12, 2024. The S&P 500 gained 20.10% over the same period. (See figure 1.).
Figure 1: S&P 500 Health Care Index vs S&P 500 Index, 12 months to January 15
By contrast, healthcare shares got a running start this year. In the first two weeks of 2024, the S&P Health Care Index was up 2.98%, while the S&P 500 had barely budged at 0.29%.
BrightSpring’s longer term share price performance could benefit from this. Indeed, at least two of its competitors have made notable gains in the past six months. After losing over a quarter of its value in the first nine months of 2023, CVS Health (CVS) shares have since clawed their way back about 17% above their September nadir as of early January, trading at a P/E of about 11.8. UnitedHealthcare (UNH) shares are up over 12% from their first-quarter 2023 lows and are now only 5.6% off their 52-week high, trading at a P/E of approximately 22.
Business and Competition
BrightSpring integrates its Pharmacy Solutions and Provider Services businesses to serve high-need, high-cost, medically complex patients. This is a client base the company expects will grow as the baby boomer demographic ages. BrightSpring provides services across Medicaid, Medicare, and pharmacy services payors, and claims these platforms have the potential to become a $1 trillion market.
BrightSpring’s pharmacy business competes against CVS Health’s Omnicare subsidiary, UnitedHealth Group’s Optum Specialty Pharmacy subsidiary, and other specialty pharmacy services companies. The pharmacy business contributed 73% of BrightSpring’s revenues last year.
BrightSpring’s provider services business competes on a national level with Amedisys, Inc., Encompass Health Corporation, LHC Group, Inc., and Addus HomeCare Corporation. It also competes with local and regional providers. The provider services business contributed 27% of BrightSpring’s revenues last year.
In the first nine months of last year, BrightSpring’s pharmacy business had revenues of $4.7 billion, up from $3.9 billion in the year-earlier period. Its provider services business had revenues of $1.7 billion, up from $1.6 billion the prior year.
BrightSpring reported a $149.6 million net loss in the first nine months of 2023, compared with a net income of $2.5 million in the year-earlier period. The company attributed this to higher costs of goods and services, and higher sales and administrative expenses.
BrightSpring IPO Risk Considerations
The Company’s risk factors fall into two categories. The first is the operational risks – regulatory, legal, reputational, and personnel management risks – typical of any healthcare company operating in a competitive and highly regulated environment.
The second is risks related to its debt load. It acknowledges that this keeps it from exploiting attractive opportunities and puts it at risk of default should interest rates on its revolver increase sharply, or should it have an unexpected decrease in cash flow.
If the IPO is successful, and the company uses the proceeds as stated in its prospectus, to pay down its debt, those risks will be reduced.
The current market receptivity to healthcare names makes this a good time for BrightSpring to reduce these leverage risks. If, as it suggests, a potential $1 trillion market exists for companies serving high-need, medically complex, aging boomers, reducing its debt-related growth constraints should be a priority.
Jon Rousseau, the Company’s Chairman, Chief Executive Officer, and President, will spearhead these efforts. Rousseau has run the Company since 2016. He was executive vice president at Kindred Healthcare before that and has worked at several other healthcare and technology companies. He also has experience in private equity and investment banking.
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