There was a time when this column was more than a never-ending run of IPO coverage. Then the unicorn liquidity cycle kicked off and it’s been a long run of public offerings ever since. This morning is no exception.
Doximity filed to go public earlier today. You likely haven’t heard of the company because it exists in the modestly obscure world of telehealth. But it’s a venture-backed startup all the same that raised more than $80 million from investors like Emergence, InterWest Partners, Morgenthaler Ventures and Threshold, according to Crunchbase data.
Notably, Doximity has not fundraised since 2014, a year in which it attracted just under $82 million at a valuation of $355 million, per PitchBook data. How has it managed to not raise for so long? By generating lots of cash and profit over the years. Health tech communications, it turns out, can be a lucrative endeavor.
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Doximity is a social network that allows doctors to speak to each other while complying with HIPAA, a federal law that promotes medical privacy. The network, originally defined as a LinkedIn for medical professionals, gives doctors a Rolodex for specialists, a newsfeed for healthcare updates, a communication tool to talk to patients and a job search tool.
In 2017, Doximity claimed that it reached 70% of all U.S. doctors, more than 800,000 licensed professionals.
This is CEO Jeff Tangney’s second time bringing a health tech company public after his previous medical software startup, Epocrates, debuted in 2011.
Let’s chat briefly about the larger health tech exit market and then dig into Doximity’s IPO filing and get our heads around how the company managed to avoid private-market dilution for seven years — and what the company may be worth.
Health tech exits
The global digital health market is estimated to hit $221 billion by 2026, underscoring how large an opportunity the sector may present to venture capitalists. But investors aren’t merely just paying attention to estimates; they are seeing a number of exits in digital health (read: liquidity) that are warming up their checkbooks.
CB Insights estimates that there were 79 healthcare IPOs and M&A transactions in Q1 2021 alone, a 60% increase from the quarter prior. Another report says that there were 145 acquisitions of digital health companies in 2020, up from a solid 113 in 2019.
While still growing, it’s fair to say that those figures describe a healthy exit environment.
The list of deals in the market is straight fire. Earlier this year, Everlywell, founded in 2015, acquired two healthcare companies to expand its digital health service and distribution. Last week, Modern Fertility was bought by Ro for north of $225 million in a majority-equity deal. Before you start complaining that it’s not an IPO, consider this: A less than four-year-old company just got bought for a quarter of a billion dollars by another company that is less than four years old.
In the public market world, Oscar Health’s IPO was a big deal for the health insurance space last year, while Signify Health and Movano hit the stock market this year.
Inside the numbers
Turning back to Doximity, let’s start with a quick look at its growth rate, and then take a look at its profitability in a historical context.
Doximity’s fiscal year ends March 31 of each year. So, we’ll be looking at its yearly results through calendar Q1 of each calendar year. That in mind, for the company’s fiscal years ending March 31, 2019, 2020 and 2021, Doximity recorded $85.7 million, $116.4 million and $206.9 million in total revenue. The latter two figures work out to growth of 36% and 78%, respectively.
How does Doximity make money? Not by charging doctors, notably. Instead, it generates revenue from a host of other players in the American healthcare system, according to its SEC filing:
Our business model is designed to both respect and support physicians while driving value for our customers. We monetize our platform today through our Marketing, Hiring, and Telehealth Solutions. Our Marketing Solutions enable our pharmaceutical and health system customers to get the right content, services, and peer connections to the right medical professionals through a variety of modules. We count 20 out of the top 20 pharmaceutical manufacturers [ … ] among our customers.
In case you were curious why American healthcare is so expensive, there’s more than a hint in that paragraph.
Regardless, before we get to profitability at Doximity, the company just taught us two important lessons: First, that the health tech market was healthy pre-COVID. Second, COVID-19 did have the sort of impact that we expected — by showing sharp revenue growth acceleration in its most recent fiscal year, the company has underwritten our read of its market, essentially.
In profit terms, Doximity also recorded steady improvement in its three most recent fiscal years. For fiscal years ending March 31 in 2019, 2020 and 2021, the company saw net income inclusive of all costs (GAAP) of $595,000, $10.8 million and $21.6 million, respectively.
But once we adjust for some reasonable exceptions, like the company’s yearly expense for “undistributed earnings attributable to participating securities” and share-based compensation, we can see that Doximity is a bit more profitable than we’d first imagine. Its most recent fiscal year generated adjusted EBITDA of $64.8 million, for example, more than double its preceding fiscal year result.
Returning to our question about why Doximity had not raised more capital more recently from its private backers, we can learn quite a lot from the company’s strong cash balance; Doximity had $142.5 million in cash, equivalents and marketing securities at the close of March of this calendar year.
How did it generate such a dragon’s hoard of cash? By posting regular — and rising — operating cash flow. In its most recent three fiscal years, Doximity’s operating cash flow rose from $15.3 million to $26.2 million to $83 million.
In old-fashioned terminology, that’s called self-funding your business.
There are other metrics worth highlighting in the Doximity filing. For example, the number of companies at the firm generating $100,000 or more in revenue rose from 141 in the March 31, 2020 year to 200 in the company’s most recent fiscal year. And its net retention rate rose from 130% to 153% over the same time frame.
Doximity is an ass-kicking business across every metric that we care about. Its public debut should be a boon for its sector, as it’s hard to imagine investors not lapping up its recent (and improving) financial performance.
More when we get an initial price range, but it seems clear that Doximity will not go public for less than a multiple of its final private price.
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