As the coronavirus constrained the public’s ability to visit their doctors as normal, the telehealth industry quickly took flight.
Shares of pure-plays Teladoc Health (TDOC) - Get Report and Hims and Hers HIMS more than doubled from February 2020 into early 2021, while Massachusetts-based American Well (AMWL) - Get Report capitalized on telehealth demand to stage a stellar IPO debut late in 2020, soaring nearly 50% on its first day of trading.
Meanwhile, privately-held leaders like the newly-merged Grand Rounds and Doctor On Demand fetch billion-dollar valuations and and, most recently, Cigna (CI) - Get Report continues to rise after completing its acquisition of telehealth platform MDLive in late April.
However, as the economy begins to reopen, the hot investing trend is rapidly losing steam, leading some to wonder if telehealth is destined to produce diminishing returns going forward.
As many industries eagerly await a return to normalcy and major indices inch upward in anticipation, the telehealth industry has, by contrast, taken a hit.
For example, Cathie Wood-favorite Teladoc has been nearly halved since February as the double whammy of a reopening economy and the entrance of Amazon (AMZN) - Get Report into the space sparked selling action. In mid-March, Amazon announced an expanded roll-out of its Amazon Care telemedicine services to all its employees, with a plan to eventually offer it to other employers.
“TDOC detracted despite reporting a strong fiscal year in the face of competitive noise in the telemedicine space from Amazon, Talkspace and Hims & Hers (HIMS), among others,” Wood’s firm ARK Invest wrote in a quarterly report on its Genomic Revolution ARKG ETF. “Not to mention the unwinding of ‘stay-at-home stocks’ as COVID-19 vaccinations proliferated.”
Similarly, shares of American Well have been ailing into the second quarter of 2020, falling over 60% from its first-quarter peak. While the company may have entered the public market at a point where the industry was heating up quickly, the cool-down in 2021 has been just as fast.
However, many industry experts and analysts are stressing that a narrow focus on the reopening and near-term dynamics is shortsighted.
“These slumps are knee-jerk reactions and don’t accurately reflect the fundamentals of those businesses and their long-term value propositions,” said Jeff Ransdell, founding partner and managing director of Fuel Venture Capital. “I’m confident that demand for telehealth will stay steady, if not rise, once the U.S. returns to status quo, not only because doctor’s offices will be very busy returning to business-as-usual, but because people will want to find ways to automate or virtually outsource ‘errand-type’ things to retain balanced daily schedules as we return to regular life.”
Indeed, many industry estimates agree with the optimistic outlook. For example, Grand View Research estimates the global telemedicine market will grow into a $298.9 billion industry by 2028 from around $55.9 billion in 2020 as trends in healthcare established during the pandemic prove their staying power.
“I think the momentum today may be sufficient to break the old system paradigms and drive meaningful change in [medicine],” Dr. Dan Carlin, CEO of New Hampshire-based telemedicine company WorldClinic, said. “Certainly, the patients have come to expect the better, faster and easier care they get with telemedicine.”
As such, he suspects firms that want to remain competitive will inevitably shift focus to telemedicine.
Too Many Companies in Telehealth?
Still, while the opportunity might appear incredibly promising, picking the right company to capitalize on the opportunity is not easy, especially as more firms enter the fray.
Likening the current situation in telehealth to the rapid growth seen in electronic medical records (EMR) following the passage of Obamacare, in which the EMR industry grew too quickly to the point of oversaturation, Deutsche Bank analyst George Hill said the telehealth movement was at an inflection point.
“In the case of telemedicine, the COVID pandemic and relaxed payer utilization standards have pulled five-to-ten year’s worth of growth into a period of just over a year,” Hill explained in a recent note. “Too many companies fueled by easy access to capital came to market chasing the opportunity. We suspect that in three to four years, only a handful of these companies (if that many) will be viable as publicly-traded companies with any significant market capitalization.”
Hill added that he nonetheless still views Teladoc as a premier player given its large market share, but remains cautious on telemedicine overall as competition heats up.
By contrast, Fuel Venture Capital’s Ransdell was more bullish on Hims/Hers, an online pharmacy that more recently expanded into online appointments and therapy, than the much-discussed Teladoc.
“They’ve built robust traction since the launch of their telehealth platform, and they’re on a trajectory to be a one-stop-shop for a high-value segment of millennial and Gen Z customers,” Ransdell said of Hims/Hers. “Teladoc feels like they’re occupying an opposite dimension compared to Hims/Hers. They’ve been around for over a decade and haven’t notched the kind of growth I’d expect from a SaaS company, and an incumbent at that.”
Overall, the consensus seems to be that while the industry still offers great opportunity, it will ultimately be the savvy stockpickers that seize it as the industry grows larger -- likely with fewer firms.