Analyst: Bright Health (BHG) changes bode well for turnaround
Surging Bright Health Group is giving investors more confidence but it must resolve capital pressures before it can sustain a profit, according to Kevin Fischbeck of BofA Securities.
BHG's stock rose about 14% around mid-afternoon Thursday before receding. Prior to Thursday’s opening, the price had risen 17% since Friday 3 December after taking hard hits before then.
The boost came after BHG provided a 2022 revenue projection and received $750m from Cigna, a competitor, and long-time investor New Enterprise Associates (NEA).
Fischbeck said details around BHG’s path to profitability add confidence to the company’s upward trajectory.
More disciplined approach
“Beyond 2022, BHG's tone seems to have shifted from growth at all costs, to a more disciplined, capital-efficient approach,” Fishbeck wrote in a research report that BofA provided to Capital.com.
BHG operates two businesses: NeueHealth and Bright HealthCare.
Neue delivers care through 131 owned and affiliated clinics and a broader partner network. The healthcare segment offers commercial and Medicare health plan products to about 720,000 consumers across the US.
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Stock well down from IPO price
BHG stock has slid considerably from its June IPO price of $18 per share, largely due to disappointing financial results in the company’s first quarter as a public entity.
Fischbeck said BHG’s aim to break even by 2024 is largely in line with Wall Street expectations but is driven by greater operating-cost leverage rather than an improvement in medical loss ratio (MLR).
According to the US Centers for Medicare and Medicaid Services, the US Affordable Care Act requires health insurance issuers to submit data on the proportion of premium revenues spent on clinical services and quality improvement, or MLR. The law also requires insurance issuers to provide rebates to enrollees if this percentage does not meet minimum standards.
Fischbeck said BHG’s decision to focus more deeply on expanding states, rather than expand into new ones, will add visibility to its product pricing and allow for better insurance risk coding and, ultimately, better MLR performance.
Revenue projections beat Street consensus
The analyst wrote that BHG’s initial guidance is generally ahead of Wall Street’s consensus growth estimates. Revenue projections are about 11% higher than the Street’s expectation, due to outperformance at NeueHealth and stronger health-plan membership growth. In terms of margins, initial MLR guidance is just 10 basis points above the Street analyst consensus, while consolidated EBITDA margins are 30bps worse.
On Tuesday 7 December, Bright reaffirmed a revenue projection of $4.1bn to $4.2bn for 2021. The company also forecast a 50% revenue increase in 2022, based on guidance of $6.3bn to $6.5bn.
"In 2022 we expect to serve over one million risk-based lives across our two businesses, providing a strong foundation to achieve our full potential," said Mike Mikan, BHG’s president and CEO in a news release on the guidance. "Our differentiated, fully aligned model connecting the financing and delivery of care, delivers improved outcomes for consumers and providers. We are confident in our strategy and have the team, capital, and model to execute on it."
The projections were released one day after BHG announced the $750m investment from Cigna and NEA.
The financing includes an investment from Cigna while NEA participates as a co-investor, the three companies said in a news release.
Under the terms of the investment, Cigna, through its wholly owned indirect subsidiary Cigna Ventures, and NEA will purchase, in aggregate, $750m of convertible perpetual preferred stock at a price of $1,000 per share. The preferred stock carries a 5% dividend that can be payable in cash or kind at Bright’s election, and will be convertible into shares of common stock at an initial conversion price of $4.55 per share, which is a 25% premium on the recent average price.
“The investment from Cigna and NEA signifies continued conviction in Bright Health Group’s alignment model,” said Mikan in the news release on the financing.
Investment backed by competitor
The investment is also backed, and partially funded, through Cigna.
Fischbeck found it interesting that Cigna, one of BHG’s largest competitors, came onboard as a new investor. Cigna’s involvement also gives BHG “a stamp of approval,” he added.
Cigna said in the news release that it plans to explore ways that NeueHealth and Cigna-owned Evernorth, whose business includes pharmaceutical benefits management, can provide services to each other’s customers and clients. Fischbeck noted that Cigna’s recent partnership with small competitor Oscar Health, has been able to “steer significant volumes” to that New York-based company.
“A similar partnership with BHG could help drive sustainable profitability, since it would allow BHG to leverage (Cigna’s) cost structure and scale,” Fischbeck wrote.
Little room for error
BHG could have run out of cash by the end of 2022 if not for the injection from Cigna and NEA, he said. As a result of the deal, BHG now has enough money to sustain itself until 2025.
But the company is still in danger of running low on cash in 2024 and must steadily improve margins – “with little room for operational error, or accounting for another year of elevated MLR due to Covid.”
“Therefore, another equity raise over the next few years would not be surprising,” he wrote.