Today, as we begin week 6 of intense Covid lockdown, our service industry is in a state of near-complete paralysis. Despite this bleak reality, this situation has single-handedly unlocked a new healthcare commodity: telemedicine. Prior to the lockdown, many (US) state governments were reluctant to allow the practice of virtual medicine, both due to lobbying by healthcare professional groups and bureaucratic inertia. An emergency basis order was placed under the 1135 waiver authority of the Coronavirus Preparedness and Response Supplemental Appropriations Act that greatly extended telemedicine services in an attempt to offer working health care during a time of isolation. “Under this Act, Medicare provides coverage for office, hospital and other visits equipped with telehealth facilities in the United States and at patients’ residences.” (Zach’s equity research, April 2020) This development was both a necessary and exciting disruptor as it offers uniquely profitable avenues for investors.
The traditional patient-physician interaction is anachronistic in nearly every manner. A patient has to call and schedule an appointment, arrive an hour early and hope that insurance information is properly conveyed and authorized, then continue to wait for a backlogged physician to arrive and give 5 minutes of consistently divided attention. This process is reasonable if one were living in the 1980s or 1990s though is completely discongruent with the standard for nearly any other service industry. We expect our bank agent to chat with us online and our lawyers to video conference, but we expect our physician to require 4 hours of time in order to get a simple medication refill.
Telemedicine services were growing pre-Covid, particularly within certain specialties including neurology, psychiatry, and radiology as these disciplines were not readily accessible for hospitals and clinics in rural areas. Based on (pre-Covid) research at MarketsandMarkets, the CAGR was projected to be 16.9% for telemedicine markets during the 2020-2025 forecast period. Extending this projection, the overall market would propel to the size of $55.6 billion by 2025 from a current $25.4 billion in 2020. Moreover, there is a documented physician shortage that is becoming more pronounced as older physicians are retiring in disproportionate amounts. Telemedicine is a more practical and efficient means of matching supply and demand in the medical space. As a physician, I have seen this demand rise over the past 5 years and drastically in the past few months as state medical boards have lifted the previous restrictions in an attempt to offer medical care during this crisis. Now that this door has opened, it will never close as this platform is much more convenient for patients and substantially cheaper for insurance companies (telemedicine encounters cost less). There is no going back.
We believe the telemedicine industry is poised to grow rapidly and become a staple of health care and the market cap will continue to rise in the upcoming months and years. This model has always been the expected future course of medicine; COVID19 just forced the future earlier. Established companies with an operational platform will see a huge rise in patients/revenues and will only incur minimal variable server and bandwidth related costs as the bulk of the infrastructure has already been built out. The revenue from each additional patient encounter is essentially purely profit.
Which companies should we consider?
For now, we recommend watching one company that is a pure telemedicine operation and is publicly traded:
Teladoc (TDOC)
- Market Cap: $12.2 billion
- 1-Year Total Return: 184.2%
- 2019 Annual Revenue: $553.3 million
- 2019 Annual Net Income: -$98.9 million
Source: YCharts. “Teladoc Health”
Teladoc (TDOC) is a company that allows virtual physician evaluations with patients through a phone, tablet, or computer and has been growing steadily in the past 6 months. Most of the balance sheet liabilities on these companies are directly related to growth and expansion, which heralds significant future profitability. See the stock price climb significantly over the past 6 months. We believe this is the tip of the iceberg and simply the beginning of a rapid upswing.
Larger healthcare insurance companies such as Anthem (ANTM) and Humana (HUM) are also extending into the telemedicine space to reduce costs though these businesses are inherently complex and an investment would encompass the larger insurance practices as well. Smaller companies such as Doctor on Demand (raised $160 million over 5 funding rounds) are also interesting players as they have launched a fully-integrated platform aimed at providing comprehensive tele-primary care services to health insurance plans. I literally get several job requests from Doctors on Demand weekly and, in a time where physicians are being exposed to the uncertainty of hospital medicine, these telemedicine agencies offer a compelling option and will continue to grow from a physician staffing perspective.
Other companies to watch in the upcoming months: Well Health (TSX: WELL) is a telemedicine company based in Canada that is focused on acquiring smaller platforms and developing vertically integrated telehealth services. In addition to operating medical clinics, it is the third largest provider of electronic medical record (EMR) services in Canada.Recently, Well Health announced a 5.94 million dollar investment in Insig, a market leader, that will create a larger strategic alliance and cobranded new entity called Virtualclinic+. The past three months have demonstrated consistent growth as would be expected during the increased demand during the coronavirus pandemic.
Cloud MD (DOC: CSE) is another burgeoning telemedicine company worth watching. With more than 100,000 patients registered on its proprietary EMR system, the company has demonstrated an aggressive growth strategy. The recent partnership with IDYA4 allows Cloud MD to expand its platform into the US to both the public and private systems. Yet again, this stock tracks positive in the past few months while the market is bathing in global uncertainty:
