Oscar Health Inc., the digital health-insurance company well known to New Yorkers thanks to a subway advertising campaign, has gone public in a deal that priced above the proposed price range, but initial trading was soft.
The company OSCR, -9.15% offered an upsized 37 million shares, priced at $39 each. The expected pricing of the initial public offering was increased early Tuesday to between $34 and $38 a share, from $32 to $34. The company raised $1.4 billion. Underwriters can purchase an additional roughly 4.65 million shares.
The stock was last down 8% at $35.75.
The original price range implied a market cap of $7.05 billion to $8 billion, according to MKM Partners analyst Rohit Kulkarni, assuming it would have about 234 million shares outstanding. The final pricing has given it a market cap of $9.126 billion.
Oscar was valued at $3.2 billion in a funding round in early 2019, and Google parent Alphabet Inc. GOOG, -1.73% GOOGL, -1.90% is its biggest shareholder with about an 18% pre-IPO ownership stake, the MKM analyst wrote in a note.
MKM did not participate in the offering and is not making a recommendation or initiating coverage, said Kulkarni.
However, “we watched Oscar’s roadshow presentation as well as accompanying product demo, and were impressed by a fairly comprehensive set of tech-enabled user experiences and Oscar’s ongoing focus on rethinking every building block of [the] healthcare insurance supply chain,” he wrote in the note.
Oscar was founded in 2012 by Joshua Kushner, Kevin Nazemi and Mario Schlosser, who is currently chief executive. Kushner is a brother of former White House adviser Jared Kushner, son-in-law of the previous U.S. president, and is married to supermodel Karlie Kloss.
Kushner is also managing director of the New York venture-capital firm Thrive Capital Management.
Today, Oscar has more than 500,000 people signed up to its platform in 18 states, offering individual and family, small group, and Medicare Advantage plans, with benefits that include telehealth visits at no extra cost and a network of doctors and hospitals to choose from.
There are 10 banks underwriting the deal, led by Goldman Sachs, Morgan Stanley, Allen & Co. and Wells Fargo Securities. Proceeds will be used to repay debt and for general corporate purposes, including growing the business and for technology development, according to filing documents.
The company has applied to list on the New York Stock Exchange under the ticker symbol “OSCR.”
“We created Oscar because of our own frustrations with U.S. healthcare,” says the prospectus. “The U.S. healthcare system is the world’s largest and most expensive — estimated to have cost over $4 trillion in 2020 — yet health outcomes are worse than in other advanced economies.”
Costs are so excessive that medical bills contribute to roughly 66% of all personal bankruptcies in the U.S.
“It doesn’t have to be this way,” according to the Oscar prospectus. “According to a report published in the Journal of the American Medical Association in 2019, nearly 25% of healthcare spending in the U.S. is wasted, the result of a system plagued by misaligned incentives, lack of coordination, and administrative complexities.”
Health insurers play a key role in this set-up, because they disburse 75 cents of each healthcare dollar spent. But after decades of effort, the incumbent insurers have failed to rein in costs or incentivize key stakeholders to improve the system.
“We founded Oscar to solve these problems and to provide consumers with access to the affordable, high-quality healthcare they deserve,” it continues.
In a letter from the founders included in the prospectus, they explain the name Oscar is that of Kushner’s great-grandfather, an immigrant who is said to have acquired the name at Ellis Island. The name was also inspired by the doctor who took care of Schlosser during his youth in a small German town, a doctor who made home visits to patients most weekday afternoons. On arriving in the U.S., Schlosser was surprised to learn that “family doctor” model was not available.
“He saw that the reason wasn’t any lack of dedication among American caregivers,” said the letter. “It was because of the fee-for-service system — a system that produces worse outcomes than in other countries, and at a higher cost.”
Here are five things to know about Oscar:
Oscar has a large market opportunity
The U.S. health-insurance market is a huge one, accounting for about $4 trillion in annual spending, or 18% of GDP. As a new, tech-savvy company, Oscar has a pretty strong market opportunity, assuming it is able to compete with incumbent insurers.
The company believes it’s the third biggest for-profit health insurer in the 18 states it operates in. The company may also benefit from the shift to telehealth that has accelerated during the coronavirus pandemic and saw 62% more telehealth visits per 10,000 members in March 2020 compared with the year-earlier month. It may also benefit from an overall positive reception of other recent telehealth IPOs, including Teladoc Health Inc. TDOC, -5.86%, Lemonade LMND, -2.86% and American Well Corp. AMWL, -5.00%, according to MKM’s Kulkarni.
Oscar’s founders will retain control of the company
The IPO envisages a dual-class share structure with Class A and Class B stock, with the latter carrying 20 voting rights per share compared with the Class A’s one vote per share. The Class B shares are to be held by co-founders Kushner and Schlosser, and Kushner’s Thrive Capital, which together will own about 82.9% of voting rights once the deal is completed.
That means regular shareholders will have little say in the running of the company.
Other investors include Tiger Capital, Coatue Management and Dragoneer Investment Group, which have said they are interested in purchasing $125 million of shares each, or $375 million in shares in total.
Oscar is not profitable and may never be
The company has never made a profit and had an accumulated deficit of $1.427 billion as of Dec. 31, 2020, according to its prospectus.
“We incurred net losses of $261.2 million and $406.8 million in the years ended December 31, 2019, and 2020, respectively,” says the prospectus.
Revenue fell to $462. 8 million from $488.2 million.
The company’s adjusted Ebitda (earnings before interest, taxes, depreciation and amortization) losses are also growing, rising to $402.4 million in 2020 from $222.2 million in 2019.
Its medical loss ratio stood at 84.7% at end 2020, while its administrative ratio stood at 26%, giving it an overall combined ratio of more than 110%, which “implies negative operating margins despite rising scale,” said MKM analyst Kulkarni.
The company intends to make “significant investments” to further market, develop and grow the business, with a focus on its technology platform and member-engagement engine. That effort will mean hiring more people. As a public company, it is also expecting higher legal, accounting and compliance costs than has been the case as long as it was private.
“We may not achieve or maintain profitability, and we may continue to incur significant losses in the future,” the company says in its list of risk factors.
Oscar is highly exposed to the Affordable Care Act
Oscar is highly exposed to the Affordable Care Act, the signature piece of healthcare legislation achieved during the presidency of Barack Obama, which continues to be the subject of lawsuits and efforts to change its provisions. Plans that are subject to regulation under the ACA accounted for 95% of its revenue in 2020 and 96% in 2019, says the prospectus.
While the act may remain safe under President Joe Biden — Obama’s vice president — there is no guarantee a future Republican administration would not seek to overturn it and with it, a large part of Oscar’s business.
A constitutional challenge brought in Texas in December 2018 is still working its way through the system and is now captioned California v. Texas and awaiting a Supreme Court decision, said the prospectus.
“In the interim, Congress and President Biden may consider other legislation and/or executive orders to change elements of the ACA, including for example, the January 28, 2021 Executive Order issued by President Biden directing the Secretary of HHS to consider opening a Special Enrollment Period for the Health Insurance Marketplace as well as directing federal agencies to examine all existing regulations, orders, guidance documents, policies and similar agency actions to determine if any such actions are inconsistent with the policy set forth in the Executive Order to protect and strengthen Medicaid and the ACA and make high-quality healthcare accessible and affordable for every American,” it said.
Those changes could materially impact Oscar’s business, results and financial condition, it concludes.
Oscar has no plans to pay dividends
Like many companies when they first go public, Oscar does not plan to pay dividends in the foreseeable future. That means shareholders will have to rely on price gains for returns.
The ability to pay dividends in the future is also restricted by some of the terms of its revolving loan facility, which may be embedded in future credit agreements, says the prospectus.