Is Coronavirus Good or Bad for Telemedicine?
Hello again friends. The entire world is obsessed with talking about coronavirus or COVID-19, so why not me? One thing I’ve noticed is a lot of people speculating how the coronavirus could affect the American healthcare system. Honestly, it remains up in the air at this point, but it’s interesting to talk about. For example, health insurance stocks were hit hard, with the S&P 500 Managed Health Care sector falling more than 15% last week. I suppose this makes rationale sense to some degree. A health plan cannot easily increase their premium revenue for 2020, given that it is a capitated per member per month (PMPM) fee, so their medical loss ratio (MLR) might be higher than expected due to hospitalizations and emergency visits. Later on I’ll discuss whether it’s not just health insurance companies that should be worried…
One particular area that has piqued investor interest is remote communication. In the event of massive contagion, individuals will likely barricade themselves in their homes. Not good news for restaurants, conferences, hotels, and airlines. However, any company who assists with remote lifestyles like social media, streaming, gaming, or teleconferencing could see an uptick in utilization. Based on this thesis, many investors are trying to find opportunities before the broader population figures these trends out. There is a popular company called Zoom Video Communication (NASDAQ: ZM) who has become the improved version of Microsoft Skype. Today, ZM has a market valuation cap of $31 billion, due to the stock increasing from $71.51 to $112.58 in the last month. I don’t own any ZM stock, but I can certainly understand the rationale. Unfortunately, some investors with this grand idea failed to execute the proper trade. Instead of buying ZM, the, Bay Area tech giant founded by Eric Yuan in 2011, many investors hastily typed “ZOOM” into the search bar and found Zoom Technologies, Inc. (OTC: ZOOM) In the last five days the stock has gone from $2.75 to $8.02. However, this is the completely wrong company! ZOOM is a mostly-defunct telecommunications company that hasn’t reported earnings since 2011, and trades as an over-the-counter (OTC) stock. Now let’s get back to healthcare…
Along a similar vein, I’ve heard the optimism for telemedicine in 2020 due to the coronavirus. For those who live under a rock, telemedicine (also referred to as “telehealth” or “e-health”) allows healthcare providers to evaluate, diagnose, and treat patients in remote locations using voice, video, and text technology. Telemedicine allows patients, particularly those in remote locations, to access medical expertise without having to travel. This is believed to be better quality for the patient but also represents a big money opportunity with decently high gross margins. The U.S. telemedicine market alone is estimated to become worth $64 billion by 2025. Venture capitalists have jumped head first into the industry, hoping for broad adoption of at-home virtual visits through devices like the smartphone, tablet, or smart tv. This is why if you type the world “Telehealth” into Crunchbase, you’ll find 403 different companies claiming to provide a unique telemedicine experience.
In the world of telemedicine there’s one company above the rest, Teladoc (NYSE: TDOC). Teladoc was founded back in 2002 and is now publicly traded worth over $9 billion. Just last week, the stock went from $107.50 on Monday to $144.86 on Thursday. It is clear that investors believe the market leader in telemedicine will benefit from coronavirus. In addition, there are three very well-funded startups chasing them,American Well (raised $517 million), MDLive (raised $124 million), and Doctor On Demand (raised $161 million). I have no idea what the actual market share breakdown is between the four telemedicine companies, but I’ve seen one estimate that put Teladoc at 30%, American Well at 25%, MDLive at 20%, and Doctor On Demand at 15% back in 2018. I will caveat that this data was pulled from a Sohn Conference investor deck about Teladoc and cites “industry consultants” as the informant. As a “consultant” myself, I acknowledge this isn’t the most credible source in the world… However, it’s probably safe to assume the overall market is fragmented across the four players and beyond.
Similar to the investors, I believe that patients receive value from being able to speak with a physician from their smartphone 24/7. The problem is that advice is the easiest component, actual diagnosis and treatment is hard. For example, in order to determine the flu, patients often receive a rapid influenza diagnostic test (RIDT). If the RIDT signals a positive influenza type A or B reading, physicians often prescribe Tamiflu to attack the virus and treat symptoms. In addition, diseases like coronavirus require tests in hospitals or public health departments. The problem with telemedicine is that in order to receive these actual tests, you still must present in-person to a physician after your e-visit. That presents a major gap in the product to effectively manage coronavirus here in the states.
If we switch gears and talk about how telemedicine companies get paid, it is often broken down into three different versions: (1) PMPM Only; (2) PMPM + Visit; and (3) Visit Fee Only. It may seem obvious, but the per member per month (PMPM) contracts with health plans or employers are oftentimes higher margin and guaranteed revenue. The visit fee only ensures an employer or health plan only pays for the services rendered, and the the hybrid approach has the pros and cons of each. In a world where investors love consistent, re-occurring revenue, the subscription model is extremely intriguing to these companies for providing line of sight into financial projections. The only downside I can find is if utilization rates in subscription-based models are much higher than expected. And even if they have a set fee visit in addition to the PMPM, majority of that visit fee revenue must pay for the actual physician services and supplementary operations. Also, given the scarcity of physicians able to provide telemedicine services, I see the incremental costs of a potential tsunami of e-visits from employees under employer subscription models eating into profits. Particularly if physicians are smart and begin to demand higher rates. After reviewing Teladoc’s 2019 Annual 10-K, here’s exactly what they say about their revenue model:
“We primarily generate revenue on a contractually recurring, subscription access fee basis, typically on a per- Member-per-month (PMPM) basis, and in certain contracts, on a per subscriber basis.Our subscription access fees comprise the majority of our revenue and therefore provide us with significant revenue visibility. We also generate additional revenue on a per-visit basis through certain Clients with visit fee only (VFO) arrangements.
Subscription access fees are paid by our Clients on behalf of their employees, dependents, policy holders, card holders, beneficiaries or, as is the case with certain of our subscribers, fees are paid by our Members themselves. General medical and other specialty visit fees are paid by Clients and/or Members.
For certain Clients, we also earn visit fees or per-case fees in combination with subscription access fees. Subscription access fee services continue to be the most appealing to our Clients due to the proven effectiveness of our engagement science and surround sound strategies driving utilization of our services. In 2019, we continued to experience strong demand for our subscription access fee services. For the year ended December 31, 2019, 84% and 16% of our revenue was derived from subscription access fees and visit fees, respectively.”
Teladoc is the market leading company with $553.3 million in revenue. This revenue is broken down between subscription revenue and visit fee revenue. The subscription component represents 84% of the overall revenue and is primarily attributed to the U.S. market (77%) versus International (23%). In order to administer the e-visit, these telemedicine companies must pay the physician and all provide all requisite operations like medical malpractice, network management, IT, and call center support. Overall, each of the four companies are targeting similar stakeholders (employers and health plans) to provide access to broad networks of providers via stable communication platforms. Assuming each of four companies offer similar quality, the major differentiator would be price to the customer.
I don’t contend to know anything about stocks and I am certainly not an investment advisor. I wrote this just for fun. I am also a big fan of telemedicine startups and hope they continue to thrive. Teladoc grew 32% year-over-year from 2018 to 2019, which is not easy to do for a healthcare company. The one thing I’ve questioning is whether it is competitive pricing that has contributed to gross margin compression over the past few years. The gross margins were 74% in 2017, 69% in 2018, and 67% in 2019. And despite decent gross margins for health IT, Teladoc has reported a loss since inception, losing $98.9 million in 2019. I don’t know the financial situations of the other companies, but wonder if their business models are too different. I’ve heard anecdotally that contracts without subscriptions and visit only fees are normally frowned upon by investors due to inconsistency of revenue, but that type of contract could actually be a godsend if a spike in coronavirus visits occur throughout 2020. At the end of the day, it would be a great Greek tragedy if an influx of e-visits due to a potential epidemic like Coronavirus forced telemedicine companies into unpredicted, massive losses.