Summary
SOC Telemed is a takeover target. The Company received some press during the COVID Pandemic, but has since fallen off the radar.
I interviewed with this company four years ago, long before they went public via a SPAC. I met the majority of the financial management team in Virginia, as well as a few sales directors. I liked their growth story. And I liked the fact that they had a long history with the folks at Warburg Pincus. They were well capitalized. And I believed, and still do, that telemedicine, is the future. Fast forward to 2021 and the stock goes public. I got into TLMD in December 2021, when it was trading at roughly $7.30 a share. Mind you, this IPO is in the midst of the pandemic. Stocks like Teladoc are hot. I thought I found a bottom and a good entry point.
Nope. In early July 2021, the stock now trades below $5.00. I have now increased my position in the stock two-fold, in hopes of improving my average purchase price per share since entry. Now I rarely hold a stock when I lose more than 20% of my investment. In fact, in my dedicated trading account, I cut my losses and run when the investment falls 15%. And I do this religiously to eliminate subjectivity.
I believe that TLMD is now a “Buy” and hold with the sole intention of holding out until the Company is acquired.
Telehealth is a valuable tool for monitoring health conditions and treatment. The adoption of telehealth is expected to rise with advances in technology and lead to high penetration rates across the healthcare landscape. The remote patient monitoring segment expects to reach over $13 billion by 2026.
The Acquisition Play
Baird says that telemedicine providers Talkspace and SOC Telemed are the most likely takeover targets in the space amid speculation on consolidation. Analyst Vikram Kesavabhotla says that while no potential deals appear imminent, both stocks are appealing, and he has an outperform rating on both. Over the past six years there were 21 publicly disclosed consolidations in telehealth, a trend that is likely to continue. For TLMD Vikram said, “we think the company’s strong physician relationships and specialty expertise (psychiatry and neurology) make it an attractive asset in an area of the market that is still underpenetrated.”
Company Overview
The company was founded in 2004 and is based in Reston, Virginia. TLMD provides acute care telemedicine services and technology to hospitals, health systems, physician groups, and government organizations in the United States. The company’s technology platform provides includes several key verticals: teleNeurology, telePulmonology, telePsychiatry, and teleICU.
Telehealth has the potential to address challenges faced by the US in providing accessible, cost-effective, and high-quality healthcare services to patients. TLMD is the largest dedicated provider of acute care telemedicine in the US and is uniquely positioned as a partner to provide continued solutions. The Company uses a highly-secure cloud-based platform purpose built for acute care, known as Telemed IQ. IQ supports complex hospital workflows and offers largescale enterprise solutions. The platform is currently used by more than 750 physicians across 1,000 facilities in 47 states. TLMD is currently in 19 out of 25 of the largest US health systems and is being utilized by 2 of the largest physician groups in the country. Management is focused on a growth strategy that entails 1) new customer wins, 2) cross-selling and upselling to existing customers, 3) accelerating SaaS platform growth, and 4) acquisitions.
Leadership
John Kalix is the CEO of SOC Telemed. He has 25 years of healthcare experience. Kalix worked at NAPA as the COO and GE Healthcare, where he led commercial operations across all medical equipment, healthcare IT, and solution service business units in the United States and Canada.
Hai Tran is the President and COO of TLMD. Tran has worked for BioScrip, Catalyst Healthy Solutions and Hanger Orthopedic Group. He is also the former CFO of Harris Healthcare Systems, a $6 billion diversified healthcare technology company.
Ownership Structure
Market
The pandemic has created a unique space for individuals to try telehealth for the first time. And this is the impetus the technology needed for widespread adoption. The U.S. telehealth market is expected to grow at a CAGR of over 28% during the period 2020-2026. The introduction of telehealth has led to the 1) availability of cost-effective treatment, 2) adoption of home healthcare services, and 3) low expenditure on infrastructure development. Telehealth seeks to revolutionize the healthcare industry as it minimizes hospital visits, reduces patient wait time, and improves the overall quality of patient care.
Medicaid provides coverage to virtual care services and private payers. Hospitals have started to provide services through virtual platforms, which increase their adoption among healthcare providers. It is believed that telehealth platforms have the potential to provide better access to end-users. In the US, the market continues to grow, fueled by the high expenditure on healthcare IT infrastructure by major stakeholders. The market, post-pandemic, will likely see increased investment for the integration of telecommunications with healthcare systems.
Why should you get behind telehealth stocks? Because of long-term industry growth potential. This growth can be attributed to the prevalence of chronic diseases such as cardiovascular, diabetes, and respiratory diseases in the elderly population that requires regular monitoring and quality care. The global market size is projected to reach $559.52 billion by 2027. Online consultation practices are becoming very popular because of their easy access, low waiting times in the outpatient department, and cost-effectiveness. Such benefits have started attracting various start-up companies in the industry.
TLMD addresses the acute care market, here, in the United States. That market is estimated to be roughly $7 billion in size. The Company is currently the largest provider in the space. And, more specifically, TLMD has identified a $2.7 billion market with existing customers.
Risks
Telemedicine services are expanding rapidly. A recent found that 1 in 5 doctors currently use telemedicine to care for patients, while “61% of those who don’t use telemedicine say it’s likely or very likely they’ll start by 2022”. Medicaid services and private insurers are expanding coverage. Given this rapid growth, it’s important to look at potential risks associated with telemedicine.
There are several threats to telehealth, including limited coverage of insurance, especially by Medicare. Additionally, there are issues related to an ambiguous regulatory framework adopted by different states and the US Federal government that have the potential to curtail market growth. The biggest risks (to practitioners) are 1) Litigation, 2) State Laws and Licensing, 3) Policies and Procedures, 4) Documentation and Informed Consent, and 5) Contracts.
Given providers can’t physically examine patients, it’s harder to ensure a standard of care. The possibility of misdiagnosis, rises with telehealth. While Medicare and Medicaid insurance programs have expanded coverage and reimbursement, the line for professional liability carriers is blurrier. This creates financial vulnerability for providers.
Telemedicine also raises HIPAA compliance issues. For example, to limit COVID-19 exposure and ensure continuity of care, the US Department of Health and Human Services waived several privacy penalties during the pandemic. However, waived fines do not mean the law is suspended. Organizations and practitioners need to take precautions to protect personal health information.
TLMD is accredited by The Joint Commission and URAC and certified by HITRUST, which may mitigate some security risk.
Peers
Teladoc Health is the leader in terms of market cap at $25.36 billion, as compared to SOC Telemed at $516 million. American Well Corporation is in between at $1.85 billion.
The graphic below shows the differentiated strategy of TLMD compared to several of its competitors in the space. You can see that they are uniquely positioned.
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TLMD trades at 5.2X EV/Sales, compared to 12.7X EV/Sales for Teladoc and 7.0X for American Well Corporation.
Beyond the pure plays above, other players have entered the space. For example, Walmart recently acquired MeMD. And it appears that further consolidation seems likely.
Many telehealth companies are supported by a business model of contracting directly with large employers to be integrated into their employee benefits plans. However, the largest players do not rely on a single model; Teladoc, for example, has gained some scale in its hospital relationships through its acquisition of InTouch last year.
Financials and Valuation
TLMD now includes the financials of Access Physicians post Q1 2021, as a result of the recent acquisition. Fully year pro-forma revenue for 2021 is expected to be $110 million.
*Access Physicians is a fast-growing acute care provider with 260 programs across 180 facilities in 24 states. The group operates with 600 physicians that have provided more than two million cumulative encounters. Access has been in operation for ten years and grew at a rate of 40% between 2019 and 2020.
Revenue for Q1 2021 was $14.8 million, with gross margins improving to 34%. SG&A expenses were higher year-over-year; $21 million compared to $8 million. This led to a quarterly loss of $12.6 million versus $8.7 million in the same period last year.
The share count has grown considerably and the net loss per share has improved from ($0.25) in Q1 2020 to ($0.17) for Q1 2021.
TLMD continues to seek aggressive growth. To raise the cash to manage CAPEX, TLMD has issued shares. Since Q1 2021, the Company has raised an additional $48 million. Cash on hand as of March 31, 2021, was $32.5 million and total long-term debt was $83 million.
Management is providing FY 2021E guidance of approximately $100 million with gross margins approaching 42%. This represents significant revenue growth and improved margins, but not positive EBITDA. EBITDA is still expected to be negative ($15 million to $20 million). Management remains confident that the Company will be approaching positive EBITDA soon.
TLMD Investment Strategy
TLMD has pulled back in valuation since the beginning of 2021, as the large pivot to telehealth from the pandemic has begun to fade.But that does not change the value of this stock as a takeover target nor the long-term future of telehealth as a viable and necessary tool in the healthcare system.
The stock trades below $5.00, after trading down substantially post-IPO.
TLMD: Year-to-Date
TLMD: Since IPO
References
Risks
https://www.fastcompany.com/90542626/telehealth-has-a-hidden-downside
Seeking Alpha Premium
https://seekingalpha.com/symbol/TLMD
https://seekingalpha.com/news/3718646-baird-sees-talkspace-soc-telemed-as-takeover-targets-amid-speculation
SOC Telemed
https://investors.soctelemed.com/presentations
StockCharts.com
https://www.globenewswire.com/news-release/2021/05/18/2231503/0/en/Telehealth-Market-Size-2021-Is-Projected-to-Reach-USD-559-52-Billion-by-2027-with-a-CAGR-of-25-2.htmlhttps://www.mckinsey.com/industries/healthcare-systems-and-services/our-insights/telehealth-a-quarter-trillion-dollar-post-covid-19-reality#
Disclosure
I am/we are long SOC Telemed (“TLMD”) either through stock ownership, options, or other derivatives.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.
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