The Amazon Pharmacy home screen on a smartphone arranged in the Brooklyn Borough of New York, U.S., on Tuesday, Nov. 17, 2020.
Gabby Jones | Bloomberg | Getty Images
Ask a sports star before a game whether their team is going to win and they’re likely to say yes with confidence. And then cue the headlines that will sensationalize the hubris. But would you expect an athlete to say — would you want them to think — they’re about to lose?
The heads of companies sometimes talk about the competition in a similar way, and they shouldn’t be in the CEO hot seat without confidence in their company’s ability to win.
“Based on the fact that it has one enterprise client of 385 employees, it is overrated,” Gorevic said, answering a question about Amazon Care, the retail and tech giant’s app-based primary care entry in Teladoc’s market, which signed up its first client, Peloton-owned fitness equipment company Precor, in May.
Should the Teladoc CEO be more worried? Even after Amazon’s deal with Berkshire Hathaway and J.P. Morgan to take on the status quo with its health care joint effort, Haven, fell apart, the merchandising giant still has a big market to exploit.
Amazon Care is expected to expand to its own employees in all 50 states this summer. It has been adding workers faster than any company in history, more than 500,000 in 2020. It also has had a deal with employer health provider Crossover Health for in-person employee health clinics that continues to expand across states with a goal of putting these clinics within a few miles of all Amazon employees, especially in light of the attention its workplace injury rates have received.
J.P. Morgan is moving on and deeper into health care after Haven, recently announcing it will move ahead with its own effort to invest in new health-care ideas, to be offered among its 165,000 employees and families.
As society has moved rapidly from the awareness phase of virtual care to the expectation phase, those expectations have increased, and Teladoc has added services like mental health treatment as part of what Gorevic tells CNBC is the future “unified experience” with patients.
“Virtual care is not a stay at home phenomenon,” Gorevic said. “The utilization we are seeing across multiple conditions all indicate it is here to stay.”
He cited first quarter 2021 results during which visit volume was up 69% year over year in spite of the fact that seasonal flu-related visits were down 90%.
Nevertheless, Teladoc shares have cratered, down from a peak earlier this year above $290 to roughly half that level, ending trading last week slightly above $146. But Gorevic says investors are missing the bigger picture, and overlooking improving numbers. The biggest quarterly number he cites: revenue per member, per month, which in Q1 2021 was $2.25, versus 87 cents a year ago.
Others cite the rapid M&A taking place in Teladoc’s market as reason to worry.
Walmart acquired MeMD in May; two other telemedicine competitors, Doctor on Demand and Grand Rounds, recently merged.
“Everyone feels like they have to have a press release that says something about telehealth to be relevant,” Gorevic told CNBC Healthy Returns. “I’m not surprised by any of these moves.”
“This pandemic has thrown the whole market into motion. As we looked at the market, we said we needed to be bold, and we see where it’s going,” the Teladoc CEO said, citing its $18 billion acquisition of chronic disease management company Livongo, which is focused on diabetes, and its expanding mental health services.
Gorevic says health-care consumers are overwhelmed by health-care websites and apps and want a unified experience, and the company is seeing that in multi-product bookings, which in 2020 represented two-thirds of bookings.
Amazon’s ability to upend, or at least send waves of terror, through the health care industry has already been seen in the launch of its online pharmacy, which led to shares of Goodrx dropping from over $52 to roughly $33 after the announcement last October.
Wall Street analysts who cover Teladoc see Amazon’s presence as significant, yet not all agree it is an acute threat to Teladoc currently.
“Leery of Amazon’s initiatives here,” wrote Sean Wieland, managing director and a senior research analyst focusing on health-care information technology and health-care services at Piper Sandler, in response to an email.
“Even Amazon would have to get the enterprise market on board one employer at a time, as it’s a highly fragmented market and that would take years. Also, it’s a significant lift to go from offering urgent care visits on demand to whole person health care.”
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Charles Rhyee, managing director and senior research analyst covering health-care technology and distribution at Cowen & Co., said Goodrx is a good example of how Amazon can disrupt health care, and it would be a mistake to ignore Amazon’s potential. But he thinks the threat in pharmacy is more direct than in telehealth.
“It’s is a mature market. There are tons of pharmacies out there and it is not a growth sector. In the truest sense, more of zero sum game,” Rhyee said, and that is something Amazon can afford to win at the expense of CVS or Goodrx.
Telehealth is still a nascent field and that may play to Teladoc’s favor in the years ahead.
“We are all talking about it because of Covid forcing everyone to seek virtual care, but if you think about how many visits Teladoc will do this year, it’s 12 million to 13 million visits,” Rhyee said.
That compares to a U.S. market in which there are one billion visits or more, annually, including mental health care.
Whether a Teladoc or American Well is growing in the telemedicine market, Rhyee says that amounts to about 2% to 3% of visits, a small fraction of what can be virtualized and an indicator that the market is going to expand.
“I’m not concerned,” Rhyee said. “Where Teladoc sits is not what Amazon is doing. It’s not just basic video visits to speak to a doctor for a minor thing. It is increasingly in multiple specialities and second opinions and Livongo. You can argue right now very few, if any, have that broad capabilities, and that’s why Doctor on Demand is merging with Grand Rounds.”
He looks at Amazon in basic care and pharmacy in a similar way to his analysis of Walmart’s health care after its acquisition of MeMD. “They want to provide some basic connectivity and prescriptions that can be dispensed at Walmart.”
Stocks move up and down in discrete periods of time, and that doesn’t always correspond to the longer-term trend. That’s part of the challenge for investors with Teladoc right now, trying to figure out what its growth looks like post-Covid.
Membership growth guidance for this year may not be as strong as some investors wanted coming out of Covid, and app tracking firms have shown slowing momentum in daily usage. Yet people using Teladoc less now than April of last year does not mean they are using it less than they were in 2019. And last year was unusual.
“We don’t know what virtual will look like in the end,” Rhyee said.
The Cowen analyst has a $240 price target on the stock and says at $140 it is trading at roughly 8 times forward revenue, which is up from where it traded before Covid, but that was when “people didn’t believe it was a real business.”
Rhyee says he will worry more about Amazon if it starts stringing together acquisitions in health care, including in the chronic condition management space. “That would tell me they are much more serious about it,” he said.
As long as Amazon Care is one enterprise client and its own employees, the Teladoc outlook will be based elsewhere.
The idea of competition between Teladoc and Amazon may be missing the real threat Amazon poses in health care, according to David Grossman, research manager director at Stifel. That includes disrupting the legacy providers in insurance and pharmacy benefits managers.
Teladoc is disrupting traditional providers by creating a virtual 24/7 network on demand that can offer a potentially lower-cost alternative. Those traditional providers now forced to offer telemedicine are more of a near-term threat to Teladoc, in Grossman’s view, as they evolve from starting telehealth “literally overnight” to incorporating virtual care as a permanent feature of their care delivery models.
“Virtual care is now table stakes for providers, while 15 months ago it was barely on the radar screen,” he said.
Setting up appointments online and having telehealth as an option may be one of the features Amazon offers, but that is a shortsighted way to view what Amazon is after in the health care system.
Amazon is saying we take over everything. It’s not lets go after Teladoc. That’s incidental.
David Gross, Stifel analyst
Grossman, who is concerned about Teladoc’s ability to grow revenue and margins, says Gorevic is a smart guy building a reasonable model. Now they can pitch health plans on using a provider network they have created at lower cost for employers, if employees agree to access services virtually as a first stop. That disintermediates the traditional provider network, but he does not see Amazon stopping there or even thinking in those terms specifically.
“Amazon is saying we take over everything,” Grossman said, looking at traditional health care market that is flawed in delivery and pricing and adds little value. “It’s not lets go after Teladoc. That’s incidental.”
Taking cost out of the system is what Amazon already has proven to be great at, squeezing out players that don’t offer value and shouldn’t be there. “I’m rooting for them in that sense,” the Stifel analyst said.
But whether it is Amazon’s or Walmart’s efforts that are emerging in health care, the models to watch do not exclude Teladoc. “There is no indication we should write it off,” Grossman said.
Teladoc shares are down for a lot of reasons, starting with the market rotation out of growth names and the market acknowledging that traditional providers are ramping up their own telemedicine products.
“Everyone points to Amazon, and let’s be fair, it was a high multiple stock and the market is getting out of the stay at home trade and pricing how high can utilization translate into pricing” Grossman said. He added that Teladoc has struggled to convince the street of its pricing power. “They have been opaque.”
The company is growing monthly revenue per member, as Gorevic noted, but the Stifel analyst was quick to point out the recent Q1 growth relied on the acquisition of Livongo. Livongo is the largest provider of virtual chronic care and that is top of mind for employers, but Teladoc has a lot of work left to do to prove demand for it is a secular driver of its business growth.
Behavioral health, meanwhile, is the fastest- growing incremental service but there is only so much that can be delivered on an automated basis, so it becomes a staffing platform to match supply and demand and help sole mental health practice proprietors fill their book of business like an Uber or Lyft.
While the 8 times revenue the company is trading at might seem less than rich, double-digit revenue multiple companies tend to be in sectors like software, where scalability comes fast and at high margins. Teladoc’s subscription-heavy sales model means a majority of revenue is fixed while the costs remain variable.
“Their claim all along has been as utilization goes up it’s good for them, but there is no pricing algorithm around that. We don’t know how to calculate that,” Grossman said.
Companies like Teladoc and American Well can grow members, and grow utilization among members, but how either of those growth measures factor into pricing power remains unpredictable. Utilization can go up, but revenue not match it. And that contributes to investor concerns about its scalability.
“It is factually correct they can get more per member with more services and there are lots of opportunities, but lots of competition for each module and booking,” Grossman said. The company’s scale and visibility give it an advantage, “but lots remains uncertain,” he said.
Gorevic told CNBC this is not a pandemic story. “Something else is going on here. People are reaching out for other things.”
Mental health, dermatology, and chronic conditions including diabetes, and health issues linked to it such as weight loss. “Not one and done things, and that’s why I am convinced,” the Teladoc CEO said.
Building the virtual primary care model and convincing payers and employers that it is most cost-effective to choose this option, and agree to have members enter the health system virtually as the first step, is the bigger opportunity to drive higher revenue per member, Grossman said, and longer-term it is the more sustainable way to disrupt the traditional provider network.
In that sense, Teladoc is taking market share just like Amazon would, and they can grow for a longer period of time. That may be a discrete disruption in health care that becomes permanent. The biggest disruption in health care, though, is not about telemedicine.
“All roads lead into the payers,” Grossman said. “That’s where the level of satisfaction is low and the control they have is high.”
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