Hims & Hers Vs. Teladoc: Different Approaches To ‘Telemedicine’ (NYSE:HIMS)

Investment Overview Part 1 – Teladoc’s Rise & Fall

By the time the COVID crisis was declared a pandemic by the World Health Organization (“WHO”) in March 2020, the New York based “telehealth” specialist Teladoc’s (NYSE:TDOC) shares were already displaying some strong upside.

Teladoc IPO’d in July 2015, raising $157m via the issuance of 8.25m shares priced at $19 per share, but by March 2020 shares had reached a value of $150, up nearly 700% since listing.

The business model of allowing patients, or “customers” to access medical care via video chat, while Teladoc’s digital platform built up a profound knowledge of patients health and healthcare needs using bleeding edge data analytics and algorithms, seemed capable (at the time) of permanently disrupting the healthcare industry, and the pandemic induced lockdown suggested the transformation had already begun.

What could possibly go wrong? Pretty much everything, it transpires. After hitting an all-time high share price of $292 in February 2021 – I had tipped the share price to “grow and grow” in an October 2020 note for Seeking Alpha – cracks began to appear in Teladoc’s business model, which soon turned into chasms.

Teladoc had 76m paid and visit-fee-only members as of FY21, but very few of these members were accessing services provided by the site. It quickly became apparent that patients didn’t want to video chat with physicians, and that the feeling was likely mutual. In October 2020 Teladoc merged with arguably its biggest rival, Livongo in an $18.5bn deal, giving the company an apparently monopolistic control of the telemedicine industry.

Try as it might, however, Teladoc’s services were largely ignored by its members, its only success of note being within its direct to consumer mental health platform. Whether too far ahead of its time, poorly executed, or solving a “problem” that didn’t exist, the market rapidly gave up on Teladoc.

By the end of 2022 Teladoc’s stock price had fallen to ~$20, a smidgen above its IPO price. In 2022, the company recorded a catastrophic net loss of $(13.7bn), albeit this was primarily due to a non-cash impairment charge of $13.4bn.

From being the best thing to emerge from a globally enforced lockdown, Teladoc’s dream “to lead the market and set the pace for a rapidly evolving healthcare industry”, had turned into its worst nightmare.

Investment Overview Part 2 – Hims & Hers Pragmatic Approach To Telemedicine

Meanwhile, in January 2021, a “consumer health facing digital startup” – Hims & Hers (NYSE:HIMS) – joined the New York Stock Exchange after completing a merger with the Special Purpose Acquisition Company (“SPAC”) Oaktree Acquisition Corp, in a deal valuing the company at $1.6 billion.

Hims & Health wasn’t offering face-time with physicians mimicking what patients might receive in a surgery, or to collect “billions” of data points so that its algorithms knew patients better than they knew themselves. Instead, the company limited itself to a specific range of conditions – primarily mental health, sexual health, dermatology and primary care.

Hims & Hers enabled patients with a relatively limited range of conditions to receive a consultation and subsequently (if necessary) a prescription for e.g. a hair loss, impotence, or mental health without having to pay a visit to their physician and then visit a pharmacy. The company does not work with health insurers, but instead contracts with “Affiliated Medical Groups”, described as follows in its 2022 10K submission (annual report).

The Affiliated Medical Groups contract with or employ physicians, nurse practitioners, physician assistants, and behavioral health providers (each, a “Provider”) to provide telehealth consultations and related services on the Hims & Hers platform.

We enter into certain contractual agreements with the Affiliated Medical Groups and their physician owners, including administrative services agreements and continuity agreements, under which we serve as an administrative services manager for the Affiliated Medical Groups for the non-clinical aspects of their operations and receive a fixed administrative fee from each Affiliated Medical Group for these services.

In effect, Hims & Hers is sending its Affiliated Medical Groups (“AMGs”) warm leads, i.e., patients looking for a specific consultation around a specific product, like a hair loss treatment, skin condition, erectile dysfunction, etc. The patient obtains the product via a subscription with Hims & Hers, from a once-monthly to a once 12-monthly product delivery.

Compared to Teladoc, Hims & Hers’ business model has several advantages – it is streamlined, focused on certain specific conditions, connects patients who already have a good idea of what treatment they are looking for to physicians who can provide such products, and the business takes a cut from both the AGM, and the customer/patient. In addition, Hims & Hers provides a range of non-prescription products, discussed as follows in its 2022 10K:

…primarily focused on general wellness, skincare, sexual health and wellness, and hair care. These curated non-prescription products include melatonin, biotin, probiotics and collagen protein supplements in the wellness category, moisturizer, creams, sunscreen, serum, face oil and face wash in the skincare category, condoms, climax delay spray and wipes, vibrators and lubricants in the sexual health and wellness category, and shampoos, conditioners, scalp scrubs and topical treatments such as minoxidil in the hair care category.

Teladoc Vs Hims & Hers – Financials

First let’s briefly review Teladoc’s annual income statements, as shown below:

The revenues growth is reasonably strong – from $43.5m in 2014, to $2.4bn in FY22 – A CAGR of >65%, which is impressive even by technology startup standards, and even more so for a “health-tech” company. The red flag begins waving as we look at the bottom line, however, which shows that Teladoc has never turned an operating profit, and its losses in the last 3 years from 2020 have been >$(400m), >$(235m), and >$(227)m. Net income is uglier still, being $(485m), $(428m), and $(13,659m) in the last 3 years.

Granted, businesses hoping to generate fast growth can be forgiven for speculating to accumulate, but it has been obvious to investors and the market for some time that Teladoc requires a complete business reset, as its plans to reinvent the way that healthcare is administered globally have evidently fallen flat, as admirable as they may have been.

The above graph gives some indication of the incredible gains Teladoc stock made versus revenues generated per quarter, and compares it against Hims & Hers – as we see the latter company’s progress has been more modest.

Hims & Hers’ revenue growth is arguably as impressive as Teladoc’s – CAGR is >110%, albeit over a shorter period, and only passing $500m per annum, nearly 5x less than Teladoc earned last year.

Hims & Hers share price briefly spiked to $24, in February 2021 when the company was likely riding Teladoc’s coat tails, but otherwise it has sunk <$3 at times, and today trades at $9.2, a smidgen under its IP price, while Teladoc, as discussed, trades a smidgen over its IPO price.

Importantly, while Teladoc’s losses threaten to spiral out of control, Hims & Hers losses are narrowing, to “just” $(66m) last year, and unlike Teladoc, there is scarcely any difference between operating loss and overall net loss, suggesting there are no skeletons in the closet.

Looking Ahead – Hims & Hers Keeps Growing Whilst Teladoc Searches For Answers

In Hims & Hers’ world, the equation is pretty simple – more subscribers equals more revenue, and likely soon, more profits also.

In fact, the business generated positive EBITDA in both Q4’22 and Q1’23, and the forecast for FY23 is for revenues of $810 – $830m, and adjusted EBITDA of $25 – $30m. The company says it’s retention rate in 2023 is likely to be ~85% of customers, and management is promising revenue of “at least $1.2bn” by 2025, and adjusted EBITDA of “at least $100m”.

The growth trajectory looks solid, the path to profitability clear, the business model is working, and given all of this, Hims & Hers’ market cap valuation of $1.93bn could be considered quite low, at ~2.35 forward sales, and 1.6x 2025 sales, with earning per share likely to be strongly positive by then also – the forward price to EBITDA is a competitive ~19x based on minimum expected EBITDA by 2025.

Now let’s consider Teladoc’s outlook. For FY23, the company is promising revenues of $2.575bn – $2.675bn, and an adjusted EBITDA of $285m – $325m. The positive EBITDA is welcome, but needs to be framed against the fact that net loss per share is forecast to be $(1.7) – $(1.25). The company has a share float of ~164m, so that translates to a net loss of ~$250m, which if true, is at least an improvement on the last few years.

Teladoc has effectively reclassified its business so it has 2 main segments – an Integrated Care segment, which drove $350m of revenues in Q1’23 – down from $357m in Q4’22 – and its BetterHelp segment, which drove $279m of revenues in Q1’23, up $2m sequentially. That must feel like a crushing disappointment for investors who have witnessed share price highs of >$250 – a $41bn market cap based on current share count – and an $18bn merger intended to create a virtual care superpower, but this is where Teladoc finds itself.

Customers still don’t seem to be accessing Teladoc’s services either – in 2022, revenues from monthly access fees – i.e. subscriptions – represented 87% of all revenues, meaning very few people are finding services on the site they might need and be prepared to pay for. In reality, the majority of access fees are paid by employers on behalf of their employees – most Teladoc “members” may not even be aware that they are members.

In that sense there may be a ticking time bomb here, because when employers realize their employees see no benefit in a Teladoc subscription, they may conclude they no longer need to provide access to the platform. Presently BetterHelp – a mental health service Teladoc probably considered no more than a minor bolt-on business in its hype-drive heyday – is its only meaningful revenue contributor, and that service could easily decouple from Teladoc’s platform, and be just as successful.

Teladoc’s market cap is $4.1bn – double that of Hims & Hers – but revenues and membership numbers aside, and I have discusses why these are unreliable metrics to value the company by – it does not justify such a valuation based on short term or long term outlook at this time, and it is hard to know what effective changes the business can make.

Concluding Thoughts – The “Tortoise” Overtakes The Hare – Teladoc Needs To Engineer A Second Revolution

Hims & Hers is hardly a “tortoise” of a business, growing at a >100% CAGR, but compared to the leaps and bounds that Teladoc has taken in recent years – a share price spiking >$250, a >$(13bn) net loss last year, albeit a paper one, it looks a relatively safe bet for growth investors that could quite easily add another $1bn or more to its valuation if prevailing market conditions remains favorable – and the company seems to know its customers well.

Teladoc, on the other hand, despite its billions of data points collected, scarcely seems to know its customers, and its customers don’t know Teladoc. That is usually a recipe for disaster, and so it has proven for Teladoc over the past 2 years. And yet…

I would not necessarily rule out the possibility of Teladoc staging a comeback, as unlikely as it may seem. This is nothing if not a big picture company, which has attracted powerful backers, board members, and ambitious management.

Teladoc still seems to believe it can be a major healthcare disruptor, and you have to admire the fact that it has not given up on the holistic concept of “whole person care”. The company’s latest push is into the weight loss and diabetes space – unsurprisingly perhaps, the 2 most-hyped fields of healthcare, given the emergence of Eli Lilly (LLY) and Novo Nordisk’s (NVO) miracle T2D and weight loss drugs, tirzepatide and semaglutide.

What role could Teladoc play in this field – here is CEO Jason Gorevic’s comments from the Q1’23 earnings call:

Finally, last week, we took another step forward in our efforts to provide integrated whole person care solutions to our clients and members with the introduction of our new provider based care programs for weight management and pre-diabetes.

Distinct from our existing digital programs, enrollees will have access to personalized care plans developed in collaboration with a Teladoc physician who will leverage our broad-based tools and capabilities such as nutrition counseling, mental healthcare, behavioral science, health coaching, and prescription drug management.

In order to secure prescriptions for its drugs, Lilly and Novo Nordisk may have to show first that they have worked with patients to try to make lifestyle changes to reinforce healthier habits. Only once these have failed may the drug be prescribed.

Frankly, that actually sounds closer to the Hims & Hers business model than Teladoc’s scatter-gun approach, so I am not sure even this strategy can work, although a gambler might look at the >$100bn weight loss market and be prepared to bet on Teladoc establishing a first mover advantage in the complementary healthcare app space.

At the end of the day, health and fitness apps have not really caught on in the way telehealth evangelists believed they would. Customers seem to know what they want, they just need a platform – like Hims & Hers – to obtain it faster than they can by visiting a physician in person, and then a physical pharmacy.