Teladoc - Is anyone following it?

Investment Analysis Clubs Saul’s Investing Discussions
#1

I had a small position briefly early in the year. I thought that doing some medical appointments by phone, and saving medical costs, is something that insurance companies and enterprises would both jump at. However I realized that a telephone “exam” is only good for patients that you have no need to examine physically, or for a preliminary screening, or something like that. But they were losing money and losing a little more each quarter than the year before. I got out when they bought Best Doctors, which is a consulting-at-a-distance service, and a totally different, 30-year old, stable business.

I thought I’d take another look at it, again thinking that doing some consults and saving medical costs is something that insurance companies and enterprises would both jump at. Maybe a wave of the future? Here’s what’s holding me up"

First, here’s why I didn’t like the acquisition

Teladoc paid $440 million!!! Remember that Teladoc had only $123 million in revenue in 2016, and was on track for maybe $180 million in 2017. That’s a bundle! They paid well more than twice their own annual revenue. And for a nearly 30-year old business that generated just $6.5 million of EBITDA in 2016. It’s almost unbelievable that they paid that much.

The huge acquisition takes them from a $134 million net cash position at the end of the Mar quarter to a net debt position of roughly $300 million. That’s a lot of debt for a business with a combined revenue run rate of about $280 million, and growing losses. How are they ever going to pay all that debt back, aside from selling more shares and further diluting (more on that below).

Second there’s the growing losses
Loss for 2016 was $74.2 million, up from losses of $58.0 million the year before. That’s losses growing by 28%.
3rd quarter loss was $31.3 million, up from $29.8 million,
For the 4th quarter they are predicting losses of $24.0 million up from $14.3).

Thirdly there’s the massive dilution.
Weighted average shares for the first nine months were 54.4 million, up from 41.1 million the year before at that time. That’s up 32% in one year.

If you are in Teladoc, what are you seeing that I’m not??? I know they are signing up businesses, but what about the debt, the losses, the dilution?

Thanks for any help,

Saul

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#2

I have looked at Teladoc some, and came away with the same conclusion, too much debt and cash flow negative, not a good combo.

The analyst Jason Moser at the Fool is very high on Teladoc. I have heard him on several podcasts talking about them, and saw a tweet last week that he bought some a couple months back and plans to add to it this year. His thesis is the future of medicine, money savings, etc. If I remember the numbers right, he quoted a study where their market is expected to grow from about $700 M to $3.5 B in 2021.

I think the minute clinics and such is a much better model, low cost and quick with a doc or PA seeing you with a quick appointment at an easy to get to location. We have small walk in clinics being put into our groceries stores and they work great.

Jimbo

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#3

Thanks Jimbo.
Saul

#4

The Motley Fool Money podcast from January 5th is where Jason Moser lays out his case for Teladoc. 6 minute mark.

Jimbo

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#5

However I realized that a telephone “exam” is only good for patients that you have no need to examine physically, or for a preliminary screening, or something like that.

Hey Saul:

I believe you are a retired physician so feel free to dispute this but I read a few places that at least 80% of the time, the doctor knows the diagnosis just from the history taken and before any hands-on physical. That being the base, one can see how this concept could be a useful tool to prevent ER visits, etc…and that is probably why Aetna is pushing this for its patients nationwide.

I could see its use for dermatology, HIV, Diabetes and psychiatry quite easily as well as many other indications…? reduced readmission rates.

Teladoc paid $440 million!!! Remember that Teladoc had only $123 million in revenue in 2016, and was on track for maybe $180 million in 2017. That’s a bundle! They paid well more than twice their own annual revenue. And for a nearly 30-year old business that generated just $6.5 million of EBITDA in 2016. It’s almost unbelievable that they paid that much.

I believe we already discussed this but remember that Best Doctors was very poorly advertised with mailed flyers such that Teledoc believes that they will do a much better job getting the word out that this service is available and expand usage dramatically. We also discussed that they believe this acquisition essentially DOUBLED their TAM. So for $440 million purchase (around 1/4 their then market cap), they expanded their TAM by 2 times.

The second reason that they felt justified with this price point was that they want to become the “go to” platform for virtual care (telemedicine plus) and this would differentiate their offering from the many other telemedicine wannabe’s that are already in existence. The “platform” is a crucial strategic initiative to build a reputable and dependable alternative to higher expense medical care such as an ER visit but also now with what may be inadequately delivered in a community hospital or overseas (complicated cases)…hence perhaps more than just Aetna will sign on a pay per member per month to Teledoc given its platform of services.

They believe they have an annual $200 million cross selling opportunity between Teledoc and Best Doctors.

If they pull these three core issues off with this acquisition (doubling of TAM and platform differentiator), this will have been a seminal event in their growth. But without a doubt, an investor here has to have a leap of faith that these two initiatives can be achieved.

Loss for 2016 was $74.2 million, up from losses of $58.0 million the year before. That’s losses growing by 28%. 3rd quarter loss was $31.3 million, up from $29.8 million, For the 4th quarter they are predicting losses of $24.0 million up from $14.3).

OK, of course this doesn’t appear great but it also doesn’t appear predictive of anything dire…this is a recent IPO and the platform is just being built out with the recent Best Doctors acquisition barely rolled into the product line and with minimal impact on this past quarter’s numbers. As in most startups, we should first see top line growth (up some 80%+ YoY). They say they will be + for EBTDA by 4th quarter!

EBITDA the last 3 quarters were -9, -5, -1 and now in 4th quarter +2. Or for year end totals past 3 years -48, -40 and then -14 for 2017 (estimate). This seems like progress.

But their main focus needs to be expanding their footprint and there are signs they are making some headway in that regard. On nearly every growth metric (PMPM, virtual visits), they are growing rapidly…visit growth up 187% YoY.

Again I refer you back to their recent investor slides:

https://seekingalpha.com/article/4126839-teladoc-tdoc-invest…

They have less than 1% market penetration into a TAM of $57 Billion.

AS you look at the technology adoption lifecycle (TALC), they are at the early adoption stage…Aetna/CVS, United health, Anthem and 206 hospitals are signed on…probably more to follow.

Weighted average shares for the first nine months were 54.4 million, up from 41.1 million the year before at that time. That’s up 32% in one year.

I had from 42.3 to 54.4 for increase of 29% from 2016. SBC is pretty low but I would expect more secondary offerings to fund future growth.

So while an investment in TDOC is not for everyone and without question, there are various concerns, it doesn’t seem grossly out of the universe from some other stocks you are invested in like SHOP, TLND (100% increase in shares), NTNX(21% increase shares), etc.

TDOC is certainly high risk but potential very high return investment at a market cap of $2.3 Billion, P/S of 11, and TAM that may be over $50 Billion. It is still very early in the expansion of their footprint, establishment of the virtual medical platform and cross selling…if these three things occur…will be a great investment…if not…much less so.

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#6

I believe you are a retired physician so feel free to dispute this but I read a few places that at least 80% of the time, the doctor knows the diagnosis just from the history taken and before any hands-on physical.

Probably true, but try telling the patient that and have them believe you!

I can’t imagine seeing reduced admission rates from teladoc. Best case scenario similar costs from reduced overhead, worst case is increased costs from teladocs telling patients to go and get worked up but still billing a similar rate! Plus they’re likely skimming insured patients.

This will be like urgent care, but worse. ED visits won’t fall (they usually don’t fall much even when an urgent care opens across the street), but the “less sick” who wouldn’t even have come in to an urgent care will now go to teladoc.

/End rant

#7

Duma,
There are a couple of important “ifs” in your evaluation. And then, as is always true with any investment there are all the “ifs” that you aren’t aware of.

If there’s anything I’ve learned from following this board it’s that you needn’t be in on the ground floor to make money. I did really well last year, I don’t think I was in on the ground floor with any company I profited from.

I’m perfectly willing to take a wait-see position with Teledoc. If they actually execute and are able to expand their market and if they can stem the losses and if they sign-up more insurance companies and big businesses and if (wait for it) . . . if they are accepted by and used by patients to the extent that they actually bend the cost curve for their clients it won’t be too late to take a position.

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#8

There are a couple of important “ifs” in your evaluation. And then, as is always true with any investment there are all the “ifs” that you aren’t aware of.</I?

Brittle:

You do realize that you had 8 “ifs” in your post alone…so if anyone knows ifs it has to be you :slight_smile:

Believe me when I say that I am not evangelizing TDOC…just answering Saul’s post.

I have not presented the bear case…not even thoroughly presented the bull case…just answered a post.

As regards your comment on getting in early, I have a rule here from 14 years ago that supports your assertion:

http://discussion.fool.com/the-duma-rule-20598973.aspx

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#9

I can’t really add much quality analysis than has already been said, but maybe I can add an alternative flavour regarding telemedicine.

Here in England, we’ve had some form of free telephone advice for a good number of years. The most recent iteration is the NHS 111 service. The national roll-out was back in 2013, with many problems and hiccups including increased use of ambulance and A&E services. But things have improved. The primary purpose of the service is essentially to save money. Rather than visiting your GP or going to hospital, you can call up 111 and ask for advice. You initially speak to a call-handler, who takes your details, before you get a call-back from a clinician.

What is NHS 111?
NHS 111 makes it easier for the public to access urgent healthcare services. The free to call
111 number is available 24 hours a day, 7 days a week, 365 days a year to respond to people’s
healthcare needs when:
- you need medical help fast, but it’s not a 999 emergency;
- you don’t know who to call for medical help or you don’t have a GP to call;
- you think you need to go to A&E or another NHS urgent care service; or
- you require health information or reassurance about what to do next.

Stats from November 2017
1,205,670 calls offered to the NHS 111 service in England in November 2017
986,292 put through to triage.

Population of England roughly 55 million
Population of Texas roughly 28 million

Of calls triaged in November 2017, 13.7% had ambulances dispatched, 8.5% were recommended to attend A&E, 59.1% were recommended to attend primary care, 4.4% were advised to attend another service and 14.3% were not recommended to attend another service. These proportions remain largely unchanged from October 2017.

Looking at these stats superficially, they imply that of the 986,292 call triaged in November, 14.3% (141,000), were dealt with with no further services required. So I guess you could say that money was saved on 14% of the calls.

Now maybe that’s a good thing. Reducing A&E and GP visits by 14% would save a lot of money. I have no idea whether you can use these results over in the states as there are significant differences. It’s also unclear whether the reduction is a true 14%. Similar to what Fuma mentioned, it probably doesn’t. A lot of people who call 111 only do it because it’s quite easy and free. If it didn’t exist, many probably wouldn’t bother. You also get the problem of over-triaging. Many of those referrals to A&E and ambulances are completely unnecessary. Especially in the early days of 111, the amount of work actually increased.

Telehealth is a relatively new discipline. At least in mass form. I’ve had the fortunate opportunity to sit in with a few GPs who do telephone consultation (no video). The ones I have seen have been fantastic. Their level of knowledge and skill was brilliant. A lot of GP surgeries here are now using telephones to screen emergency appointments - so if there’s something concerning them when they speak to the pt they can tell them to come in that day so they can do a physical assessment. Now I have no idea whether the GPs I’ve seen are the exception or the norm, but when you do consulting over the phone you really really need to have excellent medical knowledge, and know your patterns of illness’. Otherwise, you miss something and a patient suffers.

I think telehealth definitely has a place in our future. It can be such a time saver. But I guess it all comes down from an insurers point of view. Because of its ease of access, will it actually save money, create more work from over-triaging too many pts, or result in missed diagnoses and negligence suits?

Ben

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#10

Coincidently, TDOC updated 2018 here just today:

https://finance.yahoo.com/news/teladoc-completes-record-visi…

Preliminary 2018 Financial Outlook
•Total revenues of $350 million to $360 million, a 52% increase over 2017 (at the midpoint)

•Total adjusted EBITDA of $7 million to $10 million, a 169% increase over 2017 (at the midpoint)

•Total membership of 22 million to 24 million, a 20% increase over 2017 (at the midpoint) plus visit fee only access to 18 million individuals compared to zero in 2017

•Total visits of 1.9 million to 2.0 million, a 33% increase over 2017 (at the midpoint)

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#11

If you are in Teladoc, what are you seeing that I’m not??? I know they are signing up businesses, but what about the debt, the losses, the dilution?

Fair points, but I don’t see any as deal breakers. The debt is manageable, and with almost $200M in cash they can pay on it for quite some time. They’re saying they will be EBITDA positive in Q4 and for 2018, so even though that’s not the same as EPS, I think the losses will be mitigated quickly. Lastly, it seems to me that the dilution has slowed – looks like roughly 8% in the last 6 months. That’s still a lot, but not as much as the 32% you referenced in a year. My guess is it will continue to slow.

That said, this is my smallest position, and one that I’m not considering adding to any time soon. I believe telehealth is a great addition to traditional medicine. I don’t think it will replace doctor visits. But it doesn’t need to take over, or even disrupt, to add value.

What I see in Teladoc right now is a company that’s trading at 10x their TTM revenue, but just 5 or 6x their likely 2018 revenue. It’s hard to say how cheap that really is, because like you said, we don’t know how they’ll grow from here. But it’s certainly not incredibly expensive.

There are plenty of risks – they count on big contracts with insurers, and this is an industry where price is always a concern. But they are the leader in their field, and I think it’s likely that these insurers continue to adopt Teladoc. I think it’s not inconceivable to think they might grow at a better-than-expected rate for the foreseeable future, and display more of a path to profit. If that happens, I think the shares should appreciate quite a bit. But I’m keeping my position small, because there are a lot of question marks.

Bear

#12

I can’t imagine seeing reduced admission rates from teladoc. Best case scenario similar costs from reduced overhead, worst case is increased costs from teladocs telling patients to go and get worked up but still billing a similar rate!

I would agree with this. Easier access will drive volume from people otherwise not going through the trouble to seek early intervention for whatever ails them. We would hope it prevents unnecessary ER visits, but could just as likely cause more from increased volume alone.

I have used a teleneurology service in the past about a dozen times. In the experiences I had with the service docs would err on the side of caution and more than a few times ordered unnecessary imaging. I realize this is anecdotal and a small sample so just putting my experience out there. Also I’m not sure who provided the service, but pretty certain it was not Teladoc related.

It’s great technology and can help those who do not otherwise have access to certain services. The convenience factor is also huge if you just need a antibiotic for a simple pharyngitis or similar, but it could easily exacerbate some problems that already exist in healthcare.

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#13

Here is my one experience, which I might have related, but my mind is more porous than it once was.

We had taken a 9 hour drive to the beach for the labor day weekend/week. It was hard on my wife and her back was really hurting. By memorial day, she could not stand it, but all the local doctor offices were closed and she did not want to ride in a car to get to one farther away. We called Teledoc because our insurance covered it (turns out I was wrong, MDLive is covered). Anyway, it was a $45 charge to talk to the Doctor on the phone and it did not take long. She explained the severe pain and was given a prescription. That was all good. (Sidenote, all pharmacies within many miles were closed, so I could not get it that day. We found some actual painkillers from a friend of my sisters who was in the area).

Downside, not surprisingly that can’t presribe pain killers or muscle relaxers over the phone so when I went to the pharmacy the next day, the pharmacist told me they were just weak steroids that would probably not do anything. I was quite pissed that I spent many hours Monday and then another hour Tuesday chasing down this useless prescription.

Best Doctors. My insurance does cover them. I like them in the sense that I can get a second opion for free. This has helped me make some decisions about my health that I appreciate.

Not actionable data, but something.

P.

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