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Back in July of 2021, cardiac imaging AI vendor HeartFlow announced that it was set to go public through a SPAC merger with Longview Acquisition Corporation II. This deal was set to make HeartFlow medical imaging AI’s first double unicorn, with a pro forma enterprise valuation of $2.4bn.
However, this deal has since been called off, with the vendor giving unfavourable market conditions as the cause. The move comes after HeartFlow cut its 2021 revenue forecast back in September, when the company said that the disruption caused by the then-prevalent delta variant meant that it expected revenues of $36m-$42m, rather than the previously stated $42m given in June. A move which prompted its acquisitor to demand a “thorough analysis of its financial projections”.
The Signify View
Assessing the value of something is a notoriously difficult task. One famous case covered by the Wall Street Journal regarded the pricing strategy of the Williams-Sonoma company which had launched its first at-home bread making machine. This device retailed for $275, but customers weren’t interested, and sales were disappointing. Instead of assuming the device was priced too highly for consumers and lowering it accordingly, at the suggestion of a marketing firm, the company brought out a second, similar model for the inflated price of $415. Although the original model hadn’t changed, the introduction of the second, more expensive model made the original device look like a bargain by comparison, and its sales doubled. Without the second product, consumers were unable to contextualise the price of the first.
HeartFlow is likely to have fallen foul of similar psychology. When HeartFlow announced that it was listing, it was set to become medical imaging AI’s first double unicorn. More pertinently it was set to become one of the first medical imaging AI vendors outside of China which had chosen to list publicly, while also establishing itself as the most notable heart health software vendor. Since last summer, however, there have been a number of heart health vendors which have made moves in the space. In November, Artrya, for example, announced its own plans for a public listing, which it hoped would raise AUD 40m ($29m), while Cleerly secured $43m in series B funding for its own heart health solution back in June. Although HeartFlow is more advanced in its plans than either of these companies, the much smaller amounts involved in these deals could have made HeartFlow look overpriced by comparison. Deals done outside of heart health could have compounded this effect. IBM, for example, recently agreed the sale of its Watson Health business, which reportedly generates around $1bn in annual revenue, for ‘over $1bn’. HeartFlow may have huge growth potential, but looking for a valuation 2 – 2.5 times IBM Watson Health’s reported selling price, while bringing in around one-twentieth of the revenue could have seemed a bad deal to some.
Drawing a Line
This difficulty in ascribing a valuation to HeartFlow was perhaps the final straw. Longview Capital itself recognised as much in its February 4th 8-K filing with the SEC, noting that after Longview requested HeartFlow “undertake a thorough analysis of its financial projections” the deal fell apart. “Following the conclusion of that process, and extensive mutual efforts to negotiate an appropriate valuation adjustment, both parties agreed to terminate the Business Combination Agreement,” the filing read.
There are however other factors that will likely have contributed to the listing going south. Unlike several other successful AI vendors which have developed care-coordination platforms, comprehensive tools or suites based around clinical use cases, HeartFlow has predominantly relied on a single tool. The tool is very clinically valuable, offering an alternative to more risky invasive diagnostic procedures, however, the vendor itself has recognised that to continue to grow it must develop and offer additional capability. In its investor presentation, it highlights a myocardial insight tool, a stenosis tool and a plaque visualisation, quantification and characterisation tool in its development pipeline, but the latter two of these aren’t given launch dates, suggesting they are some way off. Some of this functionality is also offered by other vendors. While no vendor has yet combined these tools with FFR-CT, the fact that other vendors have some comparable functionality may have made investors less bullish about HeartFlow.
While HeartFlow has control of these factors, there were other issues that the AI vendor had no influence over. Chief among them was the coronavirus pandemic. When the vendor first announced it was listing in the summer of 2021, many countries, and their health services, were beginning to open up. The worst of the Covid pandemic appeared to be over, and providers would be able to shift their focus to longer-term goals and the adoption of new technology, such as AI. There would still be considerable hurdles, with the conservatism of some radiologists and cardiologists likely to impede the adoption of FFR-CT at some hospitals, but HeartFlow could up market education and support activities to overcome these.
The Beating of a Butterfly’s Wings
The pandemic was less malleable, and, according to the vendor, the factor that was primarily responsible for the aforementioned reduction in revenue guidance. This alone may have given some would-be investors cold feet, but a bearish response was made more likely by the fortunes of an entirely separate concern. HeartFlow planned to merge with Longview Acquisition Corporation II (Longview II), an investment vehicle for Glenview Capital Management. The first Longview Acquisition Corporation (Longview I) merged with disruptive handheld ultrasound vendor Butterfly Network, facilitating its entry onto the New York Stock Exchange in February 2021. Since listing on the bourse, the modality vendor’s share price has plummeted from a peak of more than $29 in February 2021, to its current position, languishing around the $5 mark. One of the main reasons for this fall has been the vendor’s underwhelming results. In its investor presentation released in November 2020, the company forecast revenues of $78.1m for 2021. In January 2022, in its preliminary results for the fourth quarter of 2021, it anticipated annual revenues in the range of $61.5m to $62.5m.
Despite the fact that both vendors are completely separate and operating in separate areas of imaging, investors who had their fingers burned with Longview I are likely to be far less accommodating to Longview II, with any revisions to revenue guidance or discrepancies regarding valuations enough to send already flighty investors fleeing.
The Mythical Beast
This is unfortunate. It is possible that the original $2.4bn valuation of HeartFlow was too high, or that its worth has changed because of both the internal and external factors, but these differences are somewhat moot. As highlighted in Signify Research’s recent Insight assessing vendors with more than $100m of funding, HeartFlow has, so far, not missed a beat. It offers a product that solves a real clinical problem, offering a safer and cheaper alternative to an invasive diagnostic procedure. Its FFR-CT tool has received regulatory approval in several key markets and the vendor has proved its tool with considerable clinical validation studies. Even more impressively, use of FFR-CT now qualifies for reimbursement in multiple markets, making it a viable financial, as well as clinical solution. This will benefit HeartFlow, which does not have any direct competitors in the US, while only a few vendors offer similar capability in other regions. Interestingly, one of these is Chinese firm Keya Medical, which also had a failed IPO after its application to list on the Hong Kong Stock Exchange, at a valuation of more than $600m, was rejected.
Despite these strengths, the next steps for HeartFlow are unclear. The failure to list once will likely hinder its ability to list again, at least in the near term, as potential investors’ confidence in any future valuation given will wane. Further funding may be forthcoming, but any investor will be wary that their cash will be diverted to earlier investors looking to exit, rather than being spent on research, development and sales which will grow their own capital. By dint of its hard work over the past decade, HeartFlow is, unlike many medical imaging AI vendors, at least generating reasonable revenue. While some plans may have to be scaled back, and some frantic strategy meetings may now be on the cards, at least the vendor has cash coming in as it works through its challenges. Less showy, perhaps, but a period of internal focus and commercial growth will only do the vendor good, standing it in good stead for future fundraising opportunities. What’s more, by then, more imaging vendors may have listed, and investors will have more confidence in a new valuation. Until that happens, medical imaging unicorns will remain as rare as their namesake.
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This Insight is part of your subscription to Signify Premium Insights – Medical Imaging. This content is only available to individuals with an active account for this paid-for service and is the copyright of Signify Research. Content cannot be shared or distributed to non-subscribers or other third parties without express written consent from Signify Research. To view other recent Premium Insights that are part of the service please click here