We all want to live longer and healthier lives, so it’s no surprise that healthcare technology is a major area of research and innovation. Medtech and biotech are key investment themes in the Telescope Investing model portfolio, and in our own personal portfolios.
This week we had the pleasure of connecting with healthtech expert investor Richard Chu (@richard_chu97). Richard shares his thoughts on the healthtech sector, his key investments in this area including GoodRx, Doximity, and OptimizeRx, and also how he saw the writing on the wall for Teladoc Health and exited early, avoiding the share price slump that has hurt our own returns this year!
You can read more about Richard at his substack (https://richardchu97.substack.com/), and through Luca Capital (https://www.lucacap.com/), parent company of Saga Partners where Richard is a lead research analyst.
f you enjoyed this episode, please subscribe to the Telescope Investing podcast at anchor.fm, or on your podcast platform of choice
Transcript
Albert: Hi, this is Albert.
Luke: And this is Luke.
Albert: Today is Wednesday the 17th of November.
Luke: Welcome to the Telescope Investing podcast.
Intro
Albert: We all want to live longer and healthier lives, so it’s no surprise that healthcare is a big driver of research and innovation. In our episode on an ageing population, we mentioned that global life expectancy has been steadily increasing from 32 in 1900 to over 70 today, is due in large part to improvements in healthcare. Medtech and biotech are key investment themes for Luke and myself in our personal portfolios and we like to keep track of what’s happening in healthcare we consider our investments in this space.
Luke: With that in mind, we’re delighted to welcome Richard Chu to our podcast today. you are very well known on Fintwit. I know you’ve got a number of software-as-a-service investments, but you’re particularly renowned expertise in healthcare. And Albert and I discovered you on Twitter after Teladoc’s acquisition of Livongo last year. Livongo wasn’t on our radar December 2019 post was a really insightful pointer to what we’ve been missing out on. So we’re really looking forward to having a chat with you about a number of health stocks today. Welcome to the Telescope podcast, Richard.
Richard: Thanks for having me.
About Richard
Albert: So Richard, as Luke just mentioned, you’re quite well known on Fintwit with thousands of followers, but can you tell us a bit about yourself and your investing journey so far?
Richard: Yeah. So to give you a background, I’m currently living in the Toronto area and I graduated from Queens University in Canada studying business. I guess, to start my investing journey, it was back in the third year of university when I was doing my internship at the time, and I had some extra money from the internship and I decided, why not learn personal finance and put my money to work. So I initially started off investing in kind of stocks that I knew: Facebook Tesla, et cetera. Actually like, because it was the middle of 2018 and we all know what happened heading into December of 2018, I didn’t have that great of a start and I think that really motivated me to really dive deeper into learning and understanding about different investing philosophies, and really trying to hone a process that worked for me, and was something that I understood and could get comfortable with.
So with an open mind, I read as much as I could. I learned from as many people as I could and eventually found my sector, which was sort of these high-growth SaaS companies and that’s where like caught my interest. And really it was, I guess, Livongo which came about from that interest as I was looking into… like it hadn’t looked into digital health before that, but because it was a very fast-growing company at a time and its valuation was also very compelling. It prompted me to give that a look and it happened to have this SaaS recurring revenue business model, even though it was in digital health at the time. And I wrote an article about it and that was released around the fall of 2019, and the reason behind that article was I was working at EY at the time. I had graduated from university and I was doing tech consulting and I realized I wanted to get into finance, I wanted to get into the investing industry but I didn’t really have any experience. So, aside from not having any connections and not having any experience, I figured that one way to make myself stand out on paper would be to go online and sort of demonstrate my interest by posting an article.
And that happened to put in touch with Saga Partners and two portfolio managers there who had owned Livongo at the time as well. And they thought my article was great and we got in touch and we communicated over the next few months and I eventually joined them last August. So it’s been great so far working for them. And I think Livongo as an investment also turned out really well. So yeah, I post on Twitter these days and I also have my own Substack where I write about other high-growth stocks.
Luke: And would you say you’re still a SaaS guy or are you primarily a healthcare or a health tech guy these days?
Richard: So definitely, I think I got a bit of reputation on Twitter recently for delving more into healthcare and that was really from Livongo, which was how a lot of people discovered me, and then afterwards Teladoc. I’d say these days, I’m just looking for good businesses. So I have a number of investments. Actually, I have fewer of my portfolio concentrated in health tech. So, I own GoodRx, which is my largest position by far and OptimizeRx, and that’s pretty much it. In terms of other sectors, I have some ad tech names, so I’m in Roku, Cardlytics and Trade Desk. And in terms of software, I own Datadog, CrowdStrike, Snowflake, Olo, and ZoomInfo. And then I also own Carvana, which is an e-commerce company.
Luke: There’s a couple of overlaps with our own portfolios there. Albert and I started researching ad-tech this year. We’ve got The Trade Desk, Magnite, a few other companies in that space. Yeah, think it’s a great area not saving the world, and if I contrast technology and health tech, they’re very different sectors in terms of just the kind of emotions and the kind of ethical investing side of things. I’m very passionate about investing in the healthcare sector in particular, even though a couple of those names that we’re invested in aren’t doing so well right now.
Richard: Yeah. I mean, ad tech I think, even though it’s not saving the world, it’s a very big market and certainly there’s been some very successful names. I think you really have to choose your winners. Trade Desk and Roku have definitely been some of the biggest winners over the past few years. But yeah, I continue to see a lot of potential going forward with the move to connected TV.
Albert: Yeah, I’ve mentioned to Luke before that advertising is still needed. It may not save the world but it keeps people informed, you need to know what’s available and it’s a big market.
Healthcare sector
Luke: Let’s focus on healthcare today and I’m really keen to delve into Richard’s knowledge and tap his wisdom. Although you and I have a couple of investments in this space, Albert, there’s a number of companies I’d like to add to my health tech portfolio. And maybe to get into that just as a sector, we recognize that healthcare in the US is notoriously complicated and expensive. Something like 18% of US GDP is spent on healthcare, which is more than double most other developed nations. Have you got any thoughts on what the reasons are for this and whether it’s likely to change?
Richard: Yeah. So I think there’s a couple of reasons. First of all, would be the presence of misaligned incentives. So currently under fee for service payment models where hospitals are reimbursed based on how many procedures they do, there’s almost this perverse incentive for them to give more care than necessary to try and extract more revenue. I’m sure that most physicians, they always want what’s best for their patients, but at a health system level, there are these perverse incentives, and also hospitals are notoriously inefficient. So, a quarter of healthcare spending or around $760 to $935 billion is considered waste. And some of the biggest drivers behind that are administrative complexity, failure of care coordination, et cetera. Because you have your doctor, you have your therapist, you have your nutritionist, and these are all these different parties that don’t necessarily talk to each other, so mistakes are pretty common and it’s all under one roof as opposed to like having different specialists they could go to. So yeah, there’s a lot of waste.
And finally, I’d say, unlike other industries, which are really aligned with the consumer, in healthcare, it’s really not. So, the person who receives the care, the person who pays for the care, and the person who provides the care are all different. So it’s much easier for hospitals to try and maximize the volume of care because the patient isn’t necessarily paying for it. It’s the payers who are paying for it and they frequently dispute the claims. So as the payers pay more, because of the system’s inefficiencies, they have to charge someone for that, and that comes in the form of increased premiums for patients. The average family premium has increased 54% in the US over the past decade. I don’t know if that’s sustainable, I think that the healthcare system itself was brought to the breaking point really by COVID. So I think going forward, things do need to change, although I’m not sure how they will change exactly.
Albert: Yeah, you’re right, Richard. would never enter the US without medical insurance. I think a trip to the hospital could bankrupt me!
Luke: Yeah. You mentioned you’re from Toronto. I’m actually visiting some very good friends who live in New York at the moment, but they’re from Toronto and we were chatting about their own plans for retirement one day. They’re like we can’t retire to the US, it’s just crazily expensive here. We’ve got to go back to Canada where we
Richard: Yeah.
Luke: Much more effective healthcare. Yeah.
Albert: Actually Richard, what is the healthcare in Canada like?
Richard: Yeah. The main doctor’s visits and procedures are covered. I think, there are some stuff that you have to pay out of pocket but I think, for the most part, it’s pretty much got your back.
Digital health
Albert: we watched you at the Fintwit Summit this year and in your presentation there, about finding winners in digital health. And you went through the case for proactive, preventative healthcare, technology such as remote monitoring and personal coaching. And I thought really made sense, but are you seeing increasing adoption of these technologies?
Richard: So, I think digital health as a trend is doing very well. I mean, if you just look at VC funding like rock health has this chart and it’s at all-time highs. So, I think the problem with that is that like the traditional healthcare system, it’s very fragmented. So you see all of these digital health startups, and they’re all essentially trying to do the same thing. They’re all trying to be the one-stop-shop kind of front door to healthcare and within the remote monitoring space, you have different players, you have Livongo, you had Dario, and Omada as well, and they all have the same strategy, right? Like, it’s just starting out with diabetes and moving to hypertension, behavioural health, et cetera, and trying to be the one-stop shop for remote monitoring. And you see Teladoc and they’re also trying to do the same thing where they’re acquiring different startups in order to stand out because telemedicine is so crowded. And so, do I see remote monitoring as a feature? Absolutely. It’s all about preventative healthcare and that’s the way that I think the healthcare system should be in order to really reduce those inefficiencies.
But healthcare is not like SaaS right. Everything begins and ends with the payers because they control the budgets. So it doesn’t matter how much patients love you, how much engagement you get, how great of a product you are. If you don’t have an abundance of proof that you are showing actual ROI, actual outcomes, then payers are simply not going to reimburse you. So I think that bar is continuing to get higher and higher over time as the space continues to evolve.
Albert: Are you not seeing these technologies have an actual effect?
Richard: Well, it’s not about having effect, it’s more like a lot of these startups need to go through these trials to actually show that they’re producing results. So Livongo went through it, Dario also had some proof as well. But you need an abundance of proof. You need sort of blue-chip clients. You need to show that, and it’s like a chicken and egg problem. So you can’t show the results if you don’t get traction, then you can’t get traction if you don’t show results.
Luke: And I guess if the way to really cut costs out of healthcare is to try and address issues much earlier in the life cycle before they become chronic conditions. you can a patient, maybe manage their weight, there’s a whole bunch of health conditions they’re not going to incur later in life and then up costs on themselves. But as you say, misaligned incentives and perhaps the healthcare industry isn’t financially motivated to patients mitigate those issues because in some ways, it shrinks their total addressable market.
Albert: Actually, I considered getting an Apple Watch specifically for its health-monitoring features and I believe they’re planning on including glucose monitoring in future Apple Watches, which I think could be a game-changer for diabetes diagnosis and treatment.
Richard: Yeah, that could definitely be a game-changer.
Luke: I’m looking at wearables myself like an Oura ring or that Wahoo thing whatever the hell that is. I’m not sure the tech’s quite where I want it to be just yet, but I did buy Apple Watches for both my parents earlier this year. Things like full detection are quite reassuring. I can check in on them, make sure they’re okay.
Albert: Yeah, actually, speaking of Apple, healthcare and tech sectors are converging and many of these big tech companies getting into healthcare, and I believe Tim Cook said that he wants Apple’s biggest contribution to society to be in healthcare and Alphabet have dabbled in healthcare as well. What do you think about these moves by the tech giants, Richard?
Richard: Yeah. I think overall it’s very promising. I think the wearable space especially, Apple has a lot of potential just because the amount of data that they’re collecting from the Apple Watch. And it’s this whole play on preventive healthcare, right. but I think it’s going to be as hard for big tech to disrupt healthcare as a lot of these other established companies. Because there’s a lot of headlines that Amazon’s now doing healthcare and Google’s now doing healthcare and Google recently pulled out of healthcare and Apple as well. So I think, they’re going to have a hard time because let’s say for example, with Amazon, they recently launched Amazon Care and they tried to do value-based payments, which is essentially where you’re paying for the outcomes and the ROI they’re able to generate. But they couldn’t because payers wouldn’t reimburse them without proof of ROI and results. So I’d say that healthcare in general, it’s very relationship-based and it’s not just who has the best technology or who can pour the most capital in. It’s really, as I mentioned before, getting ROI and proof of results to the payers and getting those relationships, which is partly why Teladoc is well-positioned because they have those relationships.
Albert: Do you think privacy issues is a big factor why these tech giants like Google and Facebook not going to make progress in healthcare?
Richard: Yeah. Privacy is always going to be an issue for big tech. You’re not going to be a hundred percent confident if someone like Facebook or Google is collecting your healthcare data. And there has been some I’d say dispute over that in the past in terms of collecting people’s healthcare data without necessarily their permission. Apple could be much better placed in that case because they’re generally more well known for their privacy than the other companies.
GoodRx
Luke: Well, should we drill into one of the stocks I know you’ve researched quite heavily as a big part of your portfolio, but not something Albert and I own today, and that’s GoodRx. I think you said at the top of the pod, you’ve got a pretty heavy concentration into that stock yourself. Could you tell us a little bit about what they do and why you like the company so much?
Richard: Yeah. I’d say, to give you an idea of what I look for in companies. I look for the presence of a growing moat. I look for something like a network effect or the kinds of skills shared, something that will help the company to only get stronger with scale to the point where no one can really compete with them on the same kind of scale. And I also looked for these founder-led companies with a mission-driven culture. And I look for large addressable markets with lots of optionality. I also consider valuation but it’s one of the last things that I look at, and it’s usually to really determine how much I allocate to an idea, rather than as opposed to like this stock, it looks cheap, I’m just going to buy it.
So I think with GoodRx, the reason why I like it so much is because I like companies where I think they’re inevitable. So if you look five or 10 years down the road, can I get conviction that this company is not going to get disrupted? Can I get conviction that it’s going to continue dominating its space?
So there are very few companies where I have that level of conviction. And I’ve looked at a lot of companies, especially recently, and a lot of these companies, they don’t have very deep moats. Let’s take something like Datadog for example, I mean like, Datadog has done tremendously well and I own it, and I’m very happy that I own it because it’s also been a big boost to my portfolio. But I think GoodRx’s moat is a bit wider than Datadog. If you look at the observability space, things have changed a lot in the last five years. Datadog has risen, stuff like Splunk, New Relic have fallen. And can I get conviction Datadog will still be a leader in five to 10 years? Well, I think they have very great product development velocity, but I’m not a hundred percent as confident as something like GoodRx. And the reason behind that really is I think they have no real competition because of their scale advantages, their network effects, and I’ll dive deeper into that later.
But essentially to give the audience who don’t know what GoodRx is, it’s a prescription savings marketplace. So, it’s really a no brainer for Americans to use it because it helps people save on average of 78% off of their prescriptions. And because they have that kind of user base, like 6.4 million monthly active users, they’re able to then branch off into these other segments. They recently started a pharma ads business where they’re selling ad space or like, these branded drug coupons to consumers and they’re charging pharma for it. So pharma ad spend is increasingly moving to digital. So I think that’s going to be a huge growth driver going forward and they also have this telehealth business, which is quite small, like they acquired, HeyDoctor. And they’re also trying to, be like the leading brand by launching GoodRx Health, which is this WebMD competitor where you can learn about different conditions online. So that’s the gist of what they do, but essentially, I think the valuation is quite reasonable and I think they are tremendously well-positioned founder-led company with very mission-driven culture and good, fast level of growth, like they’ve grown 50 to 60% over the past four years and they are positioned well for growth, like around 30 to 40% I think, going forward.
Albert: Your Substack article on GoodRx was excellent Richard, and I really recommend it to all our listeners if they’re interested in this company, but in that article, you described this as a win-win-win for consumers, pharmacy benefit managers, and providers. That sounds too good to be true. If consumers are paying lower prices, surely somebody is losing out?
Richard: Yeah. Like the pharmacies, they are cutting into their margins. So the pharmacy benefit managers, which are PBMs, they aggregate the pharmacies because they have the population and the budget to be able to actually direct consumers. So pharmacies, they have to partner with these PBMs and give them these discounted prices in order for them to really be able to direct their own patient base and help them get reimbursed by these pharmacies.
So, I’d say that with pharmacies losing out, they are losing their margin, but they are also benefiting from the foot traffic. So with every drug purchase, I think there was a statistic that around half the people spent around $40 in other stuff, in other higher-margin stuff. So chain pharmacies like CVS, Walgreens, they love it because consumers, because they’re using GoodRx, they’re more loyal to the pharmacy. They are coming in more. Unfilled prescriptions, which account for 20 to 30% are also being filled. So they win as well but they’re losing out on the absurdly high cash prices that they were charging the consumer before. But in terms of PBMs, consumers, and providers, they’re all winning.
Luke: It definitely sounds like a win and I think you describe in your Substack article to consumers engaging with GoodRx, maybe people just wouldn’t go to the pharmacy, they wouldn’t fill prescriptions that they’ve been given they were afraid or they couldn’t afford it. And this is actually saving lives if people are able to get access to more cost-effective healthcare.
Albert: Yeah. And you mentioned in your article that prices can vary across pharmacies by over a hundred times for the same medication. That was quite shocking to me, and I know it pays to shop around, but that’s extreme.
Richard: Yeah. I mean, again, it’s the fact that the pharmacy system is so complex and, I can go in-depth into it, but I’d say essentially, the reason behind that. Like there’s nothing that’s transparent, right. Like the PBMs have their MAC list, which they give to different pharmacies and no one really knows whose MAC list is whose. And GoodRx, it’s bringing transparency. It’s partnering with the PBMs and giving consumers, both insured and uninsured, access to these negotiated prices. And that’s how they’re saving tons of money. And I think it’s a sustainable model because PBMs, essentially, they kind of have to participate in GoodRx. It’s free revenue for them, right?
Like they’re all providing the same service to consumers at the end of the day. And so, if you’re using GoodRx, you don’t really know which PBM is providing the price. So the PBMs, they all compete within GoodRx’s marketplace to deliver the best prices to the consumer. And so prices are continually improving over time. They’re cheaper and cheaper, and GoodRx is driving that. And with the more scale that GoodRx gets, the better position they’re able to be in terms of negotiating even better prices with the PBMs, or the PBMs will offer better prices in order to capture more and more volume because that volume matters more and more to them, right?
It’s all free EBIT and PBMs, you can look at the revenue, but in terms of their operating income and how much that’s growing every single year, I’d say like GoodRx is in a position to make a difference, especially for smaller PBMs and increasingly larger PBMs. So they definitely have this two-sided network effect, which really gives them an advantage that no other discount card has, not even Amazon because everyone else, they mostly partner up with only one PBM or they partner up with the pharmacist directly. They don’t have a marketplace.
Luke: And I think you say in your article how their customers seem to love them and they’ve got what to me is eye-watering net promoter score. To have anything over 80 is world-class. These guys have got 90 when they engage with their consumers. That’s a crazy number. I’ve never seen an NPS so high.
Richard: Yeah. It’s definitely on Peloton, Tesla level. And I think the reason why that matters is because it drives low CAC, right? So GoodRx fundamentally is able to acquire customers for a lower cost and their competitors because they have that brand, because customers are telling each other about this crazy good service.
Albert: So you don’t think that Amazon Pharmacy is a big threat to GoodRx?
Richard: No. And for the reasons that I mentioned before about the marketplace and the fact that different PBMs will compete against each other to offer GoodRx the best price. Amazon is only partnered up with one, which is Express Scripts. And they could try and drive mass adoption by like marketing it like really hugely, but I think with Amazon, their primary focus is on mail order and mail order is under 5% of prescription volume in the US. So I think that the discount card is not Amazon’s huge focus and so far I think as of Q3, they only had a few hundred retail users per month. So that pales in comparison to GoodRx’s 6.4 million.
Luke: What would you say is the biggest risks are facing GoodRx?
Richard: So regulatory risk definitely. I don’t think it’s likely, but there could be some change in the future. So this stock has definitely higher terminal value risk than most other SaaS companies because of that. And I’d say another huge risk is kind of, just looking at it from a pharmacy level, GoodRx, at the end of the day, they’re doing the online-offline handoff. So the pharmacies have an opportunity to potentially disintermediate them at the point of sale and say like, why don’t you use CVS discount card? Why don’t you use our discount card? Why don’t you use this PBM’s discount card?
But GoodRx is saved at the point of sale, right? So you don’t have to swipe GoodRx every single time you come in. You use it once and it’s saved, like the code is saved so next time you come in, it’s already there. And 80% of GoodRx’s volume is coming from repeat transactions. So it’s a recurring revenue business model. It’s very predictable, I think. And I’d say potentially another risks are potentially PBMs leaving. I don’t think that’s likely because if you’re leaving, they’re just giving up that free revenue to other PBMs. So I don’t think that they will.
Teladoc and Livongo
Albert: As we mentioned earlier, we found you through your research in Teladoc At the time, you were quite positive but you decided to sell your Teladoc shares earlier this year. And in hindsight, it appears that was the right decision, given the stock performance the last year. But what did you see at the time that changed your mind about Teladoc?
Richard: Well, I definitely got some criticism for that decision at the time, and I think, you know, so far, I think it was warranted, of course. It was definitely a mistake on my part. But I think that so far, obviously, Teladoc stock has not done too well. I’m not saying that I’m right, but I think, time will tell of course. I think with the reasoning behind why it caused me to sell, I mean, I was really bullish since the merger and I was overly bullish I think, because of how well Livongo had done. And so Livongo was my biggest position for pretty much all of 2020, and it’d done really well for my portfolio. And so, I had all these ideas about what this new merged company could become. And I had read Glen’s book on healthcare and the vision that he had laid out for the future of healthcare. And like “The Patient Will See You Now”, that’s another great healthcare disruption book. So I had read all this material and I’d good understanding of what Teladoc was doing and what Livongo was doing. And they had laid out this vision in their slide decks, in their management calls and it was like, perfect. It was exactly my vision of what healthcare should be. They’re driving this vision of preventative health care and they’re addressing the misaligned incentives through a value-based payments model. And they’re combining all of the care providers like nutritional therapists, et cetera, all in one end-to-end patient journey. So all of those factors that I had laid out before on why healthcare, like so expensive and so misaligned, they were essentially being solved by Teladoc and so I saw a ton of potential and I think they had all the ingredients.
However, I think that a number of red flags popped up earlier this year. So, first of all, was Livongo management, they sold a large amount of their holdings. Glen, he was the chairman of Livongo, he went to another company. Most of the Livongo management left and I think 14% of Livongo employees left the company. And so I think that was one and the other was really after looking at a few expert interviews, these are like former employees and other industry experts, et cetera, and they came up with concerning things. First was the cultural issues within Teladoc. Second was increasing competition for both Teladoc solution, as well as remote patient monitoring. Third was these integration issues with past mergers. And so I thought the execution risk was much higher than I thought because of it.
And I’d say, I also misinterpreted the core source of Livongo’s moat. It wasn’t the AI. It wasn’t quality or product. It was more in hindsight about their go-to-market motion and how Glen and the Livongo sales team and how well they were able to communicate your vision and drive and execute within the market. And so I’d say that loss of talent really hurt them. Finally, I’d say Livongo metrics were also slowing dramatically year over year, so we can see that clearly now. But I think Q1, which was really when all the new contracts will launch, it was very muted this year. So there was very little sequential growth and you can come up with a bunch of reasons behind that, like that Livongo was like potentially distracted during selling season because of the merger, et cetera. Increased competition, but that stuff was supposed to clear up by 2022.
However, Teladoc management, they just said that they were only going to guide for 25 to 35% revenue growth. And that was a complete shock, right. Because Livongo management had projected in their merger filing 60% growth. So I don’t know how you get from 60% growth to 25 to 35% growth unless something’s really going wrong. And even Glen admitted that. There was a Business Insider article that came out and they referenced how Glen even said that he thought that the merger wasn’t going as well as they had hoped because so many Livongo employees have left. And so, all of that combined led me to sell back in May. Of course, I didn’t know about the revenue guidance for 2022 but by now I think it’s made clear.
And I think, back then I had enough red flags to tell me that this wasn’t going to work out as well as I’d hoped. So I made a decision to get rid of my entire position. And now I think, I’m not sure really like how to justify the investment based on Livongo. You have to be confident in Teladoc’s core business because I think that’s really what’s driving the thesis right now. It’s BetterHelp, it’s their core business and I was never a fan of the core business. So I always thought that telemedicine was a commodity and it was not that differentiated. It was hard to differentiate. Really. I saw it as an avenue to cross-sell Livongo. However, obviously, the cross-sell and the integration is not going as I had originally imagined.
Luke: I think you called it very well and not even just your spookily uncanny timing on selling almost at the peak. I just had a quick look at it looks like that was mid to late June, so you’re only a month early, but calling some of those cultural problems in the organization early was clearly a big driver of your decision. I remember myself reviewing what’s happening in the company. did a deep dive on it quite early this year and every time we looked at another set of quarterly results, I kept saying to Albert, oh we just need another quarter to swallow the acquisition and then we’ll start to see the benefit.
Richard: Yeah.
Luke: I said that for like three quarters in a row, and then I’m like, this is never happening. These guys, they’ve bitten off more than they can chew with this company.
Richard: Yeah. I definitely think the acquisition was a very, very high price to pay
Luke: Mm.
Richard: really, it could have been worth it if they had been able to really execute and integrate Livongo seamlessly and really deliver on their vision, but so far that hasn’t happened and I’m not sure when that will happen. I think, just give another quarter, just give another quarter, well they just came out with guidance for 2022 and it’s kind of disappointing if you look at it from a Livongo perspective, right. So I think really that’s what drove my core thesis and that hasn’t played out so far.
Albert: If I remember correctly, I believe they paid $18 billion for Livongo, and Teladoc as a company now, the whole company is worth $21 billion, so I think we can safely say they overpaid for Livongo.
Luke: Do you think they have a path to mid to long-term recovery?
Richard: Yeah, I don’t sell stocks based on just the results of a quarter or two. I’d say that I only sell when I see long-term issues. So I think there are definitely some long-term challenges that Teladoc will have to go through, like those cultural challenges won’t go away, the competition won’t go away. So. I think based on valuation right now, it’s a fair valuation. I mean, it’s not too demanding compared to like some of these other hyper-growth companies. So I think that they can continue growing. I think near-term pricing pressure is relatively muted so far. I mean, you’re not seeing that much gross margin compression.
Part of it is due to the Livongo acquisition of course, but the core business is surprisingly strong. Like BetterHelp is finally strong. So I think they can continue driving growth based on that. However, as I mentioned, I view really telemedicine as a pretty commoditized business. So I think over the long term, they might have trouble sustaining that kind of growth if they’re not able to really deliver on the successful integration and the cross-sell.
Albert: Well, we’re long-term shareholders and we try to hold our stocks for a minimum of a few years, ideally five years. So we remain shareholders in Teladoc but I have been reluctant to adding to my position given its difficulties.
I saw a few weeks ago on Teladoc’s Twitter account their team in China won a healthcare insurers innovator’s award the best virtual care service provider, which is issued by the Health Insurance Congress. And this was really surprising because they have a lot of big competitors out there in AliHealth, We Doctor, and JD Health, but also because I had no idea that Teladoc was operating in China.
Richard: Yeah. Like Teladoc does have international presence. They’re big in Europe too after acquiring Advance Medical, and I’d say so far it’s been not a big revenue driver but there’s definitely some potential there. I think international has its own set of challenges because US of course, it’s private healthcare, whereas abroad and overseas, it’s like a lot of single-payer systems. So I think that’s going to be a challenge, but it’s an opportunity as well. There’s also a recent survey by JD Power that show like Teladoc had best consumer satisfaction. So I think they definitely have some good things going on and their telemedicine business, but again, it’s a very competitive space.
Luke: Yeah, your comments on it being such a commoditized space are a little surprising to me. I hadn’t really thought about it that way, but you could well be right.
Richard: Yeah. I think in terms of that, the biggest competition is not necessarily, something like Amwell or some of these other like big established telemedicine companies, like MDLive, Doctor on Demand, et cetera. There’s the big four. It’s more like providers and patients. If you think about it, when you go and see a provider, they recommend what service you’re going to use. If your provider uses Zoom, then you’re going to use Zoom. So, you can complain about it, but I mean, that’s what’s more patients are going to use, right? So that provider generated kind of demand, and if you look at the stock called Doximity, they had their video Dialer product, which is adopted by a lot of physicians across the country and it’s this sort of service that they like to use, and because they’re gone Doximity and it’s this social network, that’s what they’re going to know and tell their patients to use. So, these big organisations, like that’s another incentive for them not to adopt Teladoc. And with the pandemic, it’s kind of a double-edged sword, right? Because Teladoc spurred investment and increased interest in telemedicine, but it also got a lot of these providers, which were traditionally opposed to telemedicine to suddenly look for a quick fix, which is like Zoom, et cetera, and they found that it works fine. Like why do I need Teladoc, right? The idea behind that was originally Livongo were supposed to make Teladoc stand out in terms of ROI and outcomes. However, without the integration, Teladoc is just another telemedicine company. So they have their provider pool, but everyone else also has their provider pool, right. It’s kind of like Uber.
Luke: Yeah. that’s fair if they haven’t really integrated the products, and if the Teladoc platform and the Livongo platform aren’t creating a network effect amongst themselves then yeah, you’re right, it’s just another telemedicine company. But I think it’s fair to say it’s on the chopping block for our 2022 model portfolio, as we turn our minds to that next month.
Doximity and OptimizeRx
Luke: And maybe we can tap your wisdom, Richard, because we are looking for other interesting stock ideas. I was chatting to a friend, Stef who works in healthcare in the US at the moment. She’s just starting to build our own stock portfolio. So we’ve covered a couple of great health tech investments with you today. Are there any other companies we’ve not mentioned in the sector though that are on your own investing radar?
Richard: So in terms of health tech, I’d say it’s important to be very selective. In terms of high growth SaaS, I think a lot of stocks have done well. It seems like this year, you could have really looked at the highest growth SaaS companies and they’re also valued like pretty highly, you could have put them on a dartboard and shot a dart and done pretty well. There’s something like Cloudflare and Datadog, CrowdStrike, they’re all killing it this year. But with health tech, a lot of these stocks have not done very well, right. And there are only like a few, like I think Progeny stands out, OptimizeRx stands out, Doximity stands out. So I think those three are ones that I’m looking into and especially with Doximity, it’s kind of this LinkedIn for doctors. They have 45% net income margins that are reported last quarter, 173% net retention rate and around 75% revenue growth. So this is clearly very, very top-line metrics. What it essentially is like they make money selling ad space to these healthcare companies as well as pharma. So this megatrend of pharma moving their ad spend from just traditional in-person, like pharma sales reps, to online and through these digital channels is definitely a huge growth driver for not only Doximity but also OptimizeRx and also GoodRx. And I think manufacturer solutions with GoodRx is going to be absolutely huge for them. I think that’s not priced into the stock right now in terms of where I see it going. And I think that’s a core part of my thesis in terms of why I like GoodRx so much and where I see the upside. But going back to Doximity, I think it’s a big trend for them and my primary issue with it, it’s so highly priced right now, and it’s not SaaS, right? Like ad budgets are not as sticky as SaaS. So I think, the market may be a bit too optimistic, but I’m definitely waiting for it to come down a bit more.
With OptimizeRx, that’s one I own. It’s essentially, kind of more transactional than Doximity. Doximity is more for branded opportunity. Whereas OptimizeRx, it’s similar to GoodRx where essentially they’re partnering up with the major EHRs, like electronic health records systems in the US, and they can cover 60% of physicians in the country. And essentially what happens is that as the providers are in the EHR system, they can see what kind of drugs they’re looking at and prescribing, and OptimizeRx can send a coupon to the physician to pass along to the consumer to like make your drug cheaper for them and help them to like be aware of drugs, communicate with these reps and all that commercialization stage for the pharma. And so I think that they are very well positioned to keep growing, and I own it, and I’d say like those two are really the ones that I’m looking at right now.
Luke: Sounds really promising. We’ll take a look ourselves. Thank you for the tips.
Portfolio concentration
Albert: You actually publish your portfolio on Twitter and you have what I would consider a quite concentrated portfolio, and I’m the opposite, I have about 34 stocks in my portfolio I believe, and you have maybe 10 or 12?
Richard: Yes. 12 right now.
Albert: Is that by design? Can you just take us through your decision on why you have a concentrated portfolio?
Richard: Yeah. I mean, of course, it doesn’t work for everyone, right? I’d say a few of the reasons why is, first of all, I just can’t keep up with like 20 plus different names. I think the time it takes to keep up with already 12 is like taking up all my time and I do this for a living, right? So I think, with just managing and being able to follow up on earnings reports and making sure that all these companies are heading in the right direction, that takes up a lot of time.
The second reason is really, as I mentioned before, I have pretty high criteria for what I look for in companies. And so if I’m not able to get conviction in what a company will look like five or 10 years out, I don’t feel comfortable with investing. A company can have pretty high revenue growth today, outstanding financial metrics, but if I don’t see the presence of a moat, or if the valuation is too high, or if I don’t see enough runway, then it’s not going to be a stock that I’m interested in, right. Because my current idea is they can provide a higher return in my opinion, than that idea, or they can provide a higher probability of a better return than that idea. So I miss a lot of names, right? Like I missed Upstart, which was a huge winner this year, but I don’t think I could’ve gotten comfortable with it based on what I know and even after a drop I’m still not a hundred percent confident, so I try not to get FOMO and invest in those kinds of stocks.
Luke: It’s good, you gotta have the courage of your convictions, I think. And if you build your reputation and your expertise in a particular area, that gives you a real advantage rather than spreading yourself across every possible industry.
Albert: Well, actually I think one reason why I have about 35 stocks is because I’ve been investing for almost 20 years and there’s just so many good companies and you just want to buy them. And you just build this collection of stocks over time.
Richard: Yeah.
Albert: trying to actively trim this and concentrate my portfolio a little bit. Probably not down to 10, but maybe down to about 25.
Richard: I think there are companies that a lot of people agree that are excellent, right? Like Facebook, Google, like these are some of the best companies in the world. However, as much as I admire them, they haven’t really done enough the going to start keeping up with them on a quarter to quarter basis, and really having a good idea of where I see the returns will be in five to 10 years to be able to really make a bet on them. So personally, I would rather invest in something like GoodRx or just invest more there. And if it turns out well then great, but I think the risk of getting blindsided is relatively low. I mean, like I was blindsided by Teladoc but I also happened to get out at a price that was a bit higher than where it is now. So I think just keeping up with that core group of stocks is something that has, I think helped my returns in the past.
It doesn’t work for everyone, right? Like if you’re new to investing or if you don’t have time to keep up with all these companies, then it might make sense to buy a basket and really have a more diversified portfolio that really lowers your risk, right? Like a lot of the reason why new investors blow up is because they allocate too much to an idea that they think is great but in reality, they haven’t done enough due diligence to say so.
Where to find Richard
Luke: We’re totally with you on that point. Hey Richard, it’s been great chatting to you. You’re someone we’ve been admiring and reading about for quite some time, and it’s a little surreal having a chance to chat to you on the podcast today. Where can our listeners find out more about you though if they want to read a little
Richard: Yeah. They can find out about me on Twitter. So it’s @richard_chu97 and they can find out about me on my Substack so it’s again, same name.
Luke: We’ll drop links to both of those in the podcast today.
Richard: Awesome. And just for full disclosure, I work for Saga Partners, and we also run a concentrated strategy of these high-growth names as well.
Luke: Every investor is different and you have to find the path that works for you. We often say large majority of investors should stick to mutual funds, passive index trackers, if you’re willing to do the work and do the research, then investing in individual companies can give you exceptional returns. And particularly if you have a concentrated portfolio in an area that does well. I think picking SaaS particularly this year, as you say, you could have thrown anything at that dartboard, but you’ve got some pretty strong names in your portfolio.
Quote
Luke: Well Alb, do you want to wrap us up with an investing quote for today?
Albert: Sure Luke. I have one from Mahatma Gandhi, and he said ” It is health that is real wealth and not pieces of gold and silver.”
Luke: Health is wealth, Albert. I just retired just last week, in fact, so I can enjoy the fruits of my labours, hopefully for a couple of more decades, rather than sitting in counting the gold and silver.
Wrap
Albert: Well, that’s all for this week. Thanks for listening.
Luke: If there’s a future topic, you’d like us to cover. You can message us on Twitter. I’m at @LukeTelescope.
Albert: I’m at @AlbertTelescope or you can email us at feedback@telescopeinvesting.com.
Luke: One of the best ways you can show support for the podcast is to leave us a review on Apple Podcasts.
Albert: And if you have a friend who you think would also get value from Telescope Investing, we’d love it if you could take a moment now to spread the word and send them a link.
Luke: Albert.
Albert: Thanks, Luke, and thank you, Richard.
Richard: Thanks for having me.
Luke: Thanks, Richard. Great having you on the show today.
