Teladoc´s Progress YoY is Disappointing.
Teladoc´s Progress YoY is Disappointing.
Update
Edited by Brian Birnbaum and an update of my original Teladoc deep dive.
New: You can now listen to this write up on Spotify.
1.0 The Potential of Longitudinal Medicine
Teladoc´s growing dataset is primed to unlock longitudinal medicine, which can transform the healthcare system.
Teladoc is positioned to bring longitudinal medicine to life at scale in the US and then to the rest of the world. In case of success, this would radically transform the healthcare system, which would go from being processed-based to outcomes-based.
Ultimately, this shift would amount to improved healthcare across society and, thus, tremendous value creation, in the realm of trillions of dollars. Nonetheless, Teladoc faces a multitude of operational challenges and, in my view, still lacks clarity as an organization.
Before digging in, allow me to give you some context on why Teladoc indeed has enormous long term potential.
Today´s healthcare system rarely takes snapshots of its patients´ health. If you feel sick, you go to the doctor, and the system takes a snapshot of your biodata. Until your next visit, the system and your practitioner receive no new information–unless they are truly committed to their work and follow up with patients on their own volition.
Diagnosis and treatment are therefore stultified and inefficient. A patient´s journey is a tedious and bureaucratic process. Rather than your health, the priority is satisfactory completion of the process itself and, by virtue of such, payment. Doctors do the best they can with little to no data as they process one patient after another.
Longitudinal medicine is the cure that Teledoc has brought to market. It consists of picking up patient data over time and using it to generate insights which can lead to better outcomes. In this sense, the human body is a dataset. If we could fully process this data at all times, diagnoses would be seamless, and ultimately, so would treatment.
The body is packed with amino-acids, which coil up into proteins that take on specific shapes. The shape of a protein determines its function, attaching to other proteins to build structures that perform specific jobs. If we knew the status of every single protein, at all times, we could identify and perhaps even eliminate illness on sight.
We are still very far away from that reality, but Teladoc is well positioned to make it happen. It has distributed its offering to 92M+ insured lives in the US. This metric is from Q2 2022 and unfortunately the company has not updated it for Q2 2023. Regardless, Teladoc has a substantial portion of the US healthcare demand on its platform with no competitor in sight, establishing themselves as the forerunner in longitudinal medicine.
The way Teladoc got so many patients on its platform is by working directly with employers. As I outlined in my Hims and Hers deep dive, the US healthcare market is a monopsony, meaning there’s only one type of client, which in the case of the US healthcare market is insurance companies. Many individuals do not pay for the insurance themselves, instead receiving insurance from employers as part of benefits compensation.
The monopsony has led to an inflationary hamster wheel, by which healthcare providers just keep on raising prices, because there is no demand elasticity. Every time providers raise prices, insurance companies increase their prices a little bit to absorb the inflation across the insuree base. As you can see in the graph below, this has led to anomalous performance of the overall healthcare market.
While the system has worked well for quite some time, this is now translating into healthcare that even the unit economics of insurance cannot quite absorb. Copays, the mechanism via which patients pay for a part of treatments with money from their pockets, have emerged. However, this has just moved some of the pressure from the system to the patient.
Thus, Teladoc´s distribution prowess with employers can over time and with much iteration lead to longitudinal medicine. Despite success on this front, however, the company seems to be struggling to find a differentiated product-market fit, beyond simply connecting patients with practitioners. I will explore this in depth in the next section.
2.0 Teladoc´s Business Lacks Focus
Teladoc is struggling to find higher value applications and the path to get there is quite unclear. The company´s reporting is also somewhat off.
Teladoc is now reporting its revenue via two segments: US Integrated Care and BetterHelp. Integrated Care connects patients with practitioners operating under the B2B deals with employers. They do this via an app that acts sort of like a healthcare concierge. BetterHelp connects private patients (those that do not derive from the B2B deals) with mental health providers.
In both segments, Teladoc makes money by charging patients to connect them with practitioners. For insured patients, their respective insurance company pays for the bill.
Although revenue has been growing really fast since 2014, there is a total lack of visibility within the two segments for investors. When asked about key performance metrics of the two networks like patient retention and engagement, management does not issue them. Thus, we have no way of qualitatively assessing their evolution.
Further, when CEO Jason Goranovic talks about the difference between accessing a practitioner via the traditional means and doing so via Teladoc, I sense a lack of clarity. His comments do not denote a particularly differentiated product:
So if you think about the difference between our solution and someone going to their local physician in their market, the local physician is limited to simply a prescription.
We're working with our health plans and our employer clients to make sure that we are bringing the full scope of our services, the digital solutions, the coaches as well as the physicians with the goal of ensuring that the people who are appropriate and in need of these medications get them and that we're engaging them with all of those other behavior and lifestyle changes, including registered dieticians and nutritionists, including coaching relative to activity and exercise.
In his remarks, Goranovic is indeed pointing to some form of longitudinal medicine, but he does not point to a particular value proposal that is factually equating to better outcomes than otherwise. Additionally, the Q2 2023 conference call offered little visibility into what actions the company is taking to get to such a scenario.
What stands out from Q1 and Q2 2023, however, is that free cash flow production is up meaningfully. At first glance, this correlates nicely to higher gross margins but, digging deeper, it seems that the rise of free cash flow is due to:
management´s improved visibility of the business (since apparently free cash flow has a large timing component to it),
physician productivity gains across the board, especially in BetterHelp, and
the launch of the unified consumer app in Q1 2023, which previously required much more developmental CapEx.
Note: adj. gross margin is simply gross margin plus the amortization of intangible assets.
While I definitely welcome the above progress, I would like to see improvements closer to the company´s core fundamentals. As I outlined in my original deep dive, Teladoc´s business consists of increasing patients and revenue per patient over time. YoY, the latter metric has actually decreased, allegedly due to more members coming in, which obviously increases the denominator.
The other thing that caught my eye is that, as you will appreciate in the bottom left hand corner of the above graph, in Q2 2023 Teladoc reported the average revenue per patient metric only for patients in the Integrated Care segment. In Q2 2023, Teladoc reported it for all of its patients, which makes analyzing the metric quite confusing.
Digging deeper into the 10-Q (quarterly report), Teladoc does disclose how the average revenue per Integrated Care member has evolved YoY, which is not the metric it used in Q2 2022, but does it make it easier to understand what is going on inside the business.
Average revenue per U.S. Integrated Care member decreased to $1.41 in the three months ended June 30, 2023, from $1.43 in the same period in 2022, primarily due to the impact of new members onboarded over the course of the year.
Average revenue per U.S. Integrated Care member decreased to $1.40 in the six months ended June 30, 2023 from $1.42 in the same period in 2022, primarily due to the impact of new members onboarded over the course of the year.
Further, in Q2 2022 Teladoc reported how many paid members it had in the US in total, which came in at 56.6M. In Q2 2023, it has not displayed the metric yet and has instead opted to include graphs for:
US Integrated Care Members and,
BetterHelp paying users.
Needless to say, the level of confusion brought about by the reporting changes and/or lack of reporting is a major red flag. Meanwhile, the balance sheet is not looking especially healthy either.
3.0 Concluding Thoughts
Just because of its dataset, Teladoc is worth watching going forward.
Firstly, Teladoc should be reporting total platform members and average revenue per member, for every quarter. Not doing so makes it hard for investors to track Teladoc´s progress over time. Secondly, I believe that this lack of clarity reflects the lack of clarity within the company.
At an average of $2.60 of income per month per member in Q2 2022–and whatever it is as of Q2 2023–over the long term, Teladoc has meaningful upside. But it has to find a way for its dataset and telemetry devices to offer some kind of differentiated value, beyond connecting patients and practitioners online.
To give credit where it’s due, revenue in the aggregate is increasing as the bottom line continues to hover close to zero. In other words, the growth of the platform does not seem to stem from inordinate outbound marketing efforts. That being said, management, it appears, has no concrete idea of how to achieve operating leverage going forward.
As the platform continues to grow, the potential to bring longitudinal medicine to life remains material. For this reason, I will continue watching the company going forward. But, before considering it as a potential investment, I need to see more focus.
Until next time!
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