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A top 10 investor in health insurance marketplace eHealth has told Activist Insight Online that it backs board changes sought by Starboard Value. The investor, which declined to be named, said the news that Starboard nominated four directors for election to the board “should be seen as positive.”

“We are in touch with eHealth and they are going to work closely with them,” the investor added. Indeed, expectations that eHealth will reach a settlement are high, as the company itself suggested it was open to “continued engagement.”

Starboard’s nominations come just a few weeks after the company struck a settlement agreement for a board seat with Doug Braunstein’s Hudson Executive Capital. But apparently, Starboard thinks more board changes are needed.

Lack of skills

With two of the four Starboard nominees having experience in the healthcare insurance sector, it appears clear that the activist thinks more skills are necessary in this area. Indeed, of the eight eHealth board members, only Dale Wolf has previous experience in healthcare insurance as CEO of Onecall Care Management and he was appointed just a year ago. According to Activist Insight Governance, four eHealth directors have served on the board for 12 years or more, with Michael Goldberg serving for 21 years.

The recent appointment of former Rosetta Stone CEO John Hass following a settlement with Hudson Executive has not addressed the board’s lack of skills and experience in healthcare, and Starboard seems to want to fix that. SelectQuote, a direct peer, has five of seven directors that have at least some experience in healthcare.

As Hudson Executive and eHealth need to find another joint board candidate, Starboard might also get involved in the selection process, although the activist is likely pushing for more.

CEO Scott Flanders’ poor execution and strategic blunders mean his job is at risk, particularly since he has no prior experience in the healthcare sector. Flanders is the former CEO of Playboy Enterprises.

High churn

EHealth, a $1.86 billion market capitalization company, connects people seeking Medicare Advantage insurance with coverage providers like Humana, UnitedHealthcare, and Aetna via an online marketplace and specialized agents. Catering mostly to the seniors, the industry tailwinds are massive given that a growing number of American baby boomers reach the age of 65 – more than 10,000 a day by some estimates.

However, eHealth has performed worse than its key peers GoHealth and SelectQuote, and management has made some uninspired decisions that dented investor confidence. GoHealth and SelectQuote have 2020 Ebitda margins of 32% and 24%, respectively, while eHealth’s revolve around 22%.

Part of the reason is eHealth’s high customer churn rate, which spiked above the industry average of 30%-35% to over 40% in 2020. The company explained this was largely attributable to so-called “external agents,” which it relies on during the Medicare Annual Election Period (AEP), around 10 weeks a year through the start of December when demand for insurance spikes. SelectQuote and GoHealth do not use external agents and their churn rate has been stable as a result.

As initial customer acquisition costs are high, a high retention rate is key to establishing future profits because eHealth and its peers receive commissions every year in perpetuity for every customer that chooses to continue with the same plan.

Bad financing

The high churn rate was not the only thing that disappointed investors. The company announced a $225 million convertible preferred investment from H.I.G Capital on January 29, something that erased 40% from its market capitalization in just one day, although the stock has recovered somewhat since then. The financing is expected to dilute current shareholders by at least 10% and a lack of transparency over how the funds will be used made investors wary of holding the stock.

As a result, eHealth is extremely undervalued relative to peers. According to Raymond James analysts, eHealth trades at a 2021 enterprise value to adjusted Ebitda of 14.4 versus 50.2 for median peers. SelectQuote trades at 21, while GoHealth at 13.5. eHealth also trades at much lower enterprise value to sales multiple than both SelectQuote and GoHealth. Up 694% over the past five years, eHealth has underperformed SelectQuote, which returned 1,408% over the same period, and outperformed GoHealth, which is up 512%.

The upside for eHealth could be enormous if it is successful in reducing the churn rate and improving margins. At the same time, eHealth could choose other ways to finance its growth than dilutive financings.

EHealth’s share register is filled with active investors and occasional activists. In addition to Hudson Executive Capital and Starboard collectively owning 12% of the stock, occasional activists like Villere St. Denis, Palo Alto Investors, Nantahala Capital Management, and Voss Capital own significant stakes. In an eventual proxy contest, Hudson Executive is bound by a standstill agreement to vote with management.

The healthcare sector has been increasingly attractive for activists in recent years. According to Activist Insight Online, 18 U.S. companies were publicly subjected to activist demands in 2020, representing 12% of the total, the highest proportion since at least 2013. Six companies were targeted so far this year, including Bausch Health by Carl Icahn and Laboratory Corporation of America by Jana Partners.