Future Health (NASDAQ:FHLT) has entered into a definitive agreement to combine with medical technology company Excelera Health at an enterprise value of $459 million, or 1.3x its annualized Q1 2022 revenues.

Newport Beach, California-based Excelera operates a just-launched network of physicians serving Medicare patients through a direct contracting entity (DCE) model aimed at reducing costs.

The combined company is expected to trade on the Nasdaq under the symbol “XLRA” once the deal is completed in the second half of 2022.

Transaction Overview

Future Health is financing the deal with about $201 million from its current trust supplemented by a $100 million PIPE at $11 per share. PIPE investors have also agreed to buy up $20 million-worth in Future Health shares on the open market prior to closing.

Excelera expects to add $282 million to its balance sheet after paying $21 million in expenses. The parties have not yet released their merger documents or full presentation, but Future Health’s profile page will be updated once additional information on terms is available.

Assuming no redemptions, existing Excelera shareholders are expected to own 64% of the combined company with Future Health shareholders taking 21% and PIPE investors 10%. The SPAC’s promote shares are expected to convert to a 5% stake.

Excelera shareholders also stand to increase their holdings from 40,000,000 shares to 60,000,0000 if the company achieves $150 million in revenue for any quarter within five years of close.

The company, SPAC sponsor and PIPE investors are all subject to a one-year lock-up, but their shares may be earlier released for trading in thirds if company stock hits price targets of $12, $13 and $14. No shareholder is also allowed to sell more than one third of their shares within any 90-day period.

Quick Takes: With healthcare representing nearly 20% of US GDP and the Medicare slice of it representing the single largest market within that, there has naturally been a scramble by companies seeking to pluck up a decent share.

Some of this rush came as the government opened up more and more of Medicare to private providers through the Medicare Advantage program. Excelera has taken this a step further by taking advantage of the government’s direct contracting entity (DCE) model.

In a status quo model, a patient might contact a telehealth physician with symptoms and the physician then recommends they receive treatment at a hospital, clinic or receive home-based care. Patients typically pay a 20% copay to each entity they engage with and hospitals typically get the largest reimbursements from Medicare.

DCEs, which represent a much smaller portion of the market, instead receive funding from Medicare and their networked physicians direct patients to types of care that reduce overall spending. For these physicians, 5% of their overall billing is made contingent upon them receiving high marks for quality from patients, but they stand to gain far more by receiving a share of the cost savings.

Physicians that manage to treat patients with 10-19% cost savings receive up to 30% of this saved amount. “Optimal performance” within the Excelera system counts as achieving 20% cost savings, and physicians that hit this mark keep 50% of the savings.

Excelera estimates that these bonuses and savings shares could bump up the annual salary of a Medicare-focused physician with about 300 patients from $144,000 to $403,200. Physicians working with Excelera are also exempt from Medicare’s existing Merit-based Incentive Payment System (MIPS), which was designed to push physicians towards value-based care, but has drawn criticism the medical community for the administrative burdens it places on practices.

All of this sounds great for individual physicians and some new models are clearly needed to bring down costs in the overall healthcare system. But, the question of where those costs are eliminated is a key one.

Excelera cites “excess administrative and marketing costs” as one of the part of the problem but “avoidable costs such as unnecessary admissions or re-admissions” as the other side of it, according to an explainer video on its website. It notes that Medicare’s traditional fee for service model drives up costs “because patients can go where they want to when they want to” – and this is a problem.

For all of the healthcare system’s excesses, it seems like there should be a way to bring costs down other than simply providing less care to patients. And, it seems that creating a one-way incentive structure with physicians that have the potential to nearly triple their salary by simply directing patients away from care rather than towards it could spawn new problems.

In theory, however, DCEs are incentivized to provide as much preventative care as possible to make sure conditions don’t worsen to the point of needing hospital visits. In practice, this can take the form of waiving co-pays for check-ups or even offering gift cards to patients that can demonstrate they’re filling their prescriptions on time and allowing physicians to monitor important metrics like blood sugar or blood pressure levels via at-home IoT devices.

At any rate, Excelera is off to a fast start with this model, launching on January 1, 2022 and turning $352 million in revenue in its first quarter of operations. With that in mind, the hurdle of $150 million in quarterly revenue in order for Excelera to gain 20,000,000 new earnout shares is relatively low.

But, Future Health appears to have priced in significant growth in its valuation of Excelera. At 1.3x its annualized Q1 2022 revenue, it comes at a major premium to other recent de-SPACs in the digital healthcare and Medicare Advantage space. Clover (NASDAQ:CLOV) trades at 0.1x, while Cano (NYSE:CANO) has a 0.7x multiple and Babylon (NYSE:BBLN) 0.5x.

These companies have all been heavily affected by the malaise of the current market conditions, however, and some of Excelera’s other listed peers have fared better. Signify (NYSE:SGFY) trades at 3.1x and Agilon (NYSE:AGL) at 2.7x and the basket of 16 peers selected for the deal’s materials trades at a weighted average of 1.4x.

That makes for a discount, assuming Excelera’s first quarter was not a fluke, but a thin one.

ADVISORS

• Cantor Fitzgerald & Co., is acting as capital markets advisor to Future Health.
• BTIG, LLC is acting as capital markets advisor to Future Health.
• Roth Capital Partners, LLC is acting as capital markets advisor to Future Health.
• Buchanan Ingersoll & Rooney PC is serving as legal counsel to Excelera
• McDermott Will & Emery LLP is serving as legal counsel to Future Health.