It’s been just over a year since Definitive Healthcare, a healthcare analytics and insights company, went public and the results have not been great.
Framingham, Massachusetts-based Definitive went public at $27 per share in September 2021, peaked at $43.92 per share in November 2021 and has since dropped to $13.83 per share at the close of business Wednesday.
Definitive reported a net loss in the third quarter of $6.4 million, compared to a loss of $21 million in 2021. Its adjusted earnings before interest, taxes, depreciation and amortization was $16.4 million compared to $14.4 million last year. The company’s shares fell in the after-hours market by nearly 10%.
CEO Robert Musslewhite is no stranger to leading a publicly traded company. He spent 14 years as CEO of Advisory Board, a market research firm, until it was acquired by Optum. Musslewhite came on board right after Definitive’s IPO. On the recent earnings call, he said that the macroeconomic conditions have created longer and more challenging sales cycles among life sciences and provider customers but expressed optimism for how the company could endure during a downturn.
"We believe the selling environment will remain the same or even deteriorate further in the fourth quarter into 2023," Musslewhite said on the call. "But we believe growth rates will improve when the macroenvironment improves."
Musslewhite spoke about the difficult macroeconomic market, potential M&A activity and more. The interview, conducted before third-quarter earnings were announced, has been edited for length and clarity.
It’s been a tough year for a lot of publicly traded companies and Definitive is no different. What are the challenges?
I was the CEO of a public company for a long time before coming here. And one of the things I learned is you can control your own performance and strategy. You can't always control the market. If you look at everything that's happened since our IPO, our whole sector is down about as much as we are. So, it's not like we're being unfairly punished. We're just in the midst of a sectoral shift of dollars out of equities and out of high-growth healthcare technology companies that went public last year.
Looking at our company performance though, we continue to grow at more than 30% year-over-year. We've maintained really good margins. The fundamentals of the company and the business model still feel great. My belief is there can be market disruptions in the short term, but over the long term, if you continue to perform well, the market kind of takes care of itself.
Definitive purchased Analytical Wizards in February. How does that company fit into your product portfolio?
Analytical Wizards essentially brings two unique capabilities for us. One is they have a really good analytics platform that essentially creates customized analytics, but in a way that can be created very quickly. It’s a great fit with our subscription-based business model. The second is they're data agnostic. They can work with a client, not just with Definitive’s data, but with any dataset that the client wants to use. And they can combine that data in their analyses. For instance, our larger biopharma clients have a lot of different data sources that they like to use for analysis. This doesn't confine someone from having to have only use Definitive data for their analysis. Also, they have a really good operation in Bangalore. It's given us a foundation to expand some of the work we do in Bangalore.
Can we expect more M&A activity?
We've told investors that we'll do one to two per year. That feels like the right pace. Typically, for acquisitions we find smaller companies that bring a capability we don't have. We like to find something that's growing, proven, has got market demand, and deliver against the needs in the market. But these are typically companies that haven't really invested in a huge commercial team and haven't really scaled it to the level we think it can scale. Those make great acquisitions for us.
What are your thoughts on overall digital health M&A activity?
Valuations are probably a little bit in question based on what's happened in the public markets. How quickly does that translate to private markets? In my experience, it generally doesn't until people go back out for funding and then you kind of find the new valuation environment that can balance out the public and private markets. But I think there's a ton of innovation, a ton of really good products out there. If the economy is a little bit tougher, maybe that starts to lead to more people who might consider selling and that's better for us.
Where do you hope to be in a year?
We're not looking for a revolutionary change over the next year. There's just a lot of growth opportunity that we need to execute to go get. And so at the end of the day, I'd like to be doing more for our clients. I'd like to be 30% larger. And I'd like to see us continuing to innovate in ways that can help people commercially in healthcare.
