5b24e693-08e2-4c1c-9f3a-b33b510925c4_Amwell-IPO-Analysis.pdf
Amwell: IPO Analysis
Introduction:
Please reference the Telehealth PDF which discusses why we are bullish on the telehealth trend and reviews three additional companies in the space: Teladoc, Livongo and Veeva. Telehealth PDF which discusses why we are bullish on the telehealth trend and reviews three additional companies in the space: Teladoc, Livongo and Veeva.
We are very interested in the Amwell IPO and will attempt to initiate on opening day. Please see the valuation section for the range we are targeting.
Amwell’s mobile and telehealth platform connects patients with doctors over video and handles administration. As of June 30th, 2020, the company powers the digital care programs of 55 health plans – which equates to 36,000 employees and 80 million insured. The company also works with 150 of the nation’s largest health systems, encompassing more than 2,000 hospitals.
Amwell’s growth has accelerated substantially from 31% year-over-year in 2019 to 77% year-over-year in H1 2020. Net losses increased in both the fiscal year and the first six months of 2020. We review this in more detail below.
There are three classes of shareholders with Class A common stock, Class B held by the founders at 51% of voting power and Class C common stock. Google Cloud has agreed to purchase $100 million of the Class C common stock in a private placement.
There was an announcement in late August announcing Google Cloud’s partnership with Amwell. The announcement discusses how Google Cloud plans to merge AI with health care, including digital waiting rooms, language translations, offloading tasks from the provider to conversational AI and to help manage chronic conditions. The announcement is worth a read.
Telehealth is a microtrend we covered in June with an increase of 3,000 to 4,000% in telehealth patient volume. Facilities such as NYU Langone Health saw 7,000 video visits per day or about 100,000 video visits in April compared to 300 visits per month pre-pandemic. According to American Telemed, three-quarters of U.S. hospitals are using digital technology to reach their patients via video, audio, chat, or email. You can read more here in the Telehealth PDF.
According to Amwell’s S-1 filing, healthcare expenditures in the United States more than doubled from $1.3 trillion to $3.6 trillion from 2000 to 2018. In 2019, the average employer health insurance was $20,576 representing an increase of 54% over the last decade. Meanwhile, health system operating margins declined by 39% as margins were impacted by reimbursement pressures and increased cost structures.
Telehealth addresses these issues and mitigates rising costs. An urgent care telehealth visits costs $79 before insurance compared to a visit cost of up to $150 for urgent care and $1,389 for the emergency room plus any additional services rendered on-site. Some plans will offer telehealth visits at $0 to avoid the high cost of these in-person visits.
The temporary federal policy changes that allowed health care providers to expand telehealth and mHealth for the covid-19 emergency had an expiration date that was extended by HHS secretary Alex Azar from July of 2020 to mid-October.
There is pressure from all sides to approve a dozen or more telehealth bills that would make telehealth coverage permanent and/or to expand coverage for Medicare. For instance, the Telehealth Modernization Act, the CONNECT for Health Act, Protecting Access to Post COVID-19 Telehealth Act, and many more. According to reports in July, there were 340 health care organizations that published an open letter asking Congress to enact permanent changes to telemedicine regulations. The pressure is bi-partisan.
Anthem is a large client for Amwell and accounted for 23% of 2019 revenue. The risk of high concentration in one customer is muted as Anthem owns 3% of Amwell’s outstanding shares. Furthermore, AMG clinical visits represented 51% of H1 2020 revenue (see below).
We expect the telehealth trend to continue being a dominant trend this year and into next year due to patient demand, easing government regulations around telehealth coverage, and from more doctors and health care providers seeking to reach as many patients as possible as quickly as possible.
Amwell Overview:
The Amwell platform is a complete “digital care delivery solution” that provides tools to enable new models of care for patients and members. Amwell’s primary function is to facilitate consultations between patients and providers.
The company sells the Amwell platform on a subscription basis. In order to support the Amwell Platform, the company offers professional services on a fee-for-service basis and a range of patient and provider access Carepoints that support hospital and home use cases.
The company’s customers often deploy telemedicine through a variety of proprietary Carepoints, which are medical carts and kiosks designed for various clinical and community settings. This is digitized approach is likely why Google is interested as these access points range across desktop, mobile devices, console kiosks, enclosed kiosks, polycom-codec based carts and Cisco-codec based carts (pictured below).
Module offerings include Acute Behavioral Health, Urgent Care, Speciality Consult, School Health, Telestroke, Behavioral Health Therapy, Retail Health, Triage in the ED and Dialysis.
The company offers software development kits (SDKs) and APIs to integrate telehealth digitally and to embed into workflows. This includes web and mobile apps, 24-hour nurse and customer support, electronic health record (EHR) systems — including Cerner and Epic – with the ability to launch telehealth visits from within the EHR, and administration functions, like enrollment.
Subscription fees are recurring and are determined by the initial forecast of the number of overall consultations throughout the entire health system on the Amwell Platform and net patient revenue of the health system.
Subscriptions include a maximum number of consultations, when it exceeds the contractual maximum, overages result in higher subscription fees in the following annual period.
The company also provides access to AMG, the company’s affiliated medical group that provides clinical services on a fee-for-service basis. Amwell’s contracts are typically three years in length or longer. AMG services are provided on a fee-for-service basis. These clinical fees vary significantly from $59 to more than $800 per consultation or case based on the specialty and may require an additional module subscription, such as telepsychiatry.
Amwell’s partner AMG has built a network of over 5,000 providers who are registered and credentialed to deliver care on the Amwell Platform. AMG earns fee-for-service revenue for each episode of care delivered on the Amwell Platform by its providers with fees varying by physician specialty or clinical program. Health systems often choose to purchase clinical services from AMG to deliver care for certain specialties, such as telepsychiatry, behavioral health therapy and general urgent care, or as backup for off-hours.
Amwell’s Growth:
Here’s a visualization provided by the company in the S1 that shows how the telehealth microtrend is playing out on the provider level and the tailwinds this has provided to Amwell:
Here’s how monthly visits across customers has grown with some of the numbers retreating once shelter-in-home restrictions were lifted. Visits in April 2020 were as high as 40K per day compared to 3K per day in April 2019 and 5,500 visits in January and February.
There is overlap with Teladoc and Amwell, yet Amwell has more of a slant towards emergency and urgent care services. The company is also distributed across more kiosks and “care points” and is centered around two major partnerships (AMG and Anthem). Anthem began using Amwell for urgent care in 2013 with psychology and integrated EAP added in 2016 (this is where Teladoc competes). According to the S-1 filing, if the Anthem-Amwell product “LiveHealth” had not been offered, then 6% would have gone to the emergency room, 42% to urgent care and 33% to a physician’s office.
Finances:
Amwell reported revenue growth of 31% year-over-year to $148.9 million in 2019. The company saw phenomenal revenue acceleration of 77% in the first six months of 2020 from $69 million to $122.3 million for an annual run rate of $244.6 million.
There are worsening losses in both periods. Net losses increased year-over-year from negative $52.7 million in 2018 to negative $87.2 million in 2019. For the first six months of 2020, net losses increased from negative $40.7 million to negative $111 million, or $222 million annual run rate for losses. This will represent an increase of over 200% year-over-year.
The company had cash and investments of $262.7 million and no debt as of June 30th.
Subscription fees received from health system clients totaled $27.3 million for the year ended December 31, 2018, and $38.8 million for the year ended December 31, 2019, respectively, and $17.9 million for the 1H 2019 ended June 30, 2019, and $23.6 million for the 1H 2020 ended June 30, 2020.
According to the S-1 filing, the subscription revenue market for health plan and health system customers is $8.7 billion and $3.7 billion, respectively. The company believes the 290 million that are insured in the United States are potential customers. They have identified 802 health systems that could benefit from Amwell.
The urgent care market is $18.2 billion. According to a 2016 report referenced in the S-1, there are 883 million ambulatory care visits in the United States. Amwell states 35% of these visits, or 309 million could be handled through telehealth.
Revenue Mix
The company has a mix of revenue from health systems, health plans and AMG paid visits. As of June 30th, the company had 55 health plans (covering 80 million lives) and 150 health systems (more than 2,000 hospitals). AMG’s active provider network grew 145% year-over-year to a total of 3,800 active providers.
For the year ending 2019, where total revenue was $148.9 million, 57% was platform and 27% clinical visits.
• $38.8 million in Health Systems revenue, or 26%
• $30.6 million in Health Plans revenue, or 20.5%
• $40.7 million in AMG Paid Visits, or 27.3%
• 11% Sales of additional services
• 5% Care Points/Hardware
In 2020, the Amwell platform (Health Systems and Health Plans) represented 38% of revenue while clinical visits represented 51% of H1 2020 revenue. Here we see that the 2020 growth was primarily driven by AMG.
Risks:
The relaxation of regulatory and reimbursement barriers could be temporary without support from Congress, especially for Medicare. Telehealth is a new trend that could slow once there is a vaccine and treatment for the coronavirus. Amwell believes their partnership with AMG and adherence to HIPAA regulations will cause them to stand out over time and even in the face of a return to tighter regulations.
AMG is a very large concentration of revenue although this partnership does not appear to be at risk at this time. Per the Revenue Mix section in this analysis, it should be noted the revenue acceleration we saw in H1 2020 came from AMG clinical visits rather than the platform.
The net loss increase is substantial, with the net loss-to-revenue ratio increasing from 46% to 93% between FY2018 and H1 2020.
Valuation:
Amwell plans to raise $525 million by offering 35 million shares at a price range of $14 to $16. The company will raise an additional $100 million in the private placement with Google. At the midpoint, this places Amwell’s diluted market value at $3.6 billion.
Amwell Valuation Table
$3.6 billion $4.0 billion $4.5 billion $5.0 billion
TTM Revenue $202 million 17.8 19.8 22.2 25
Current Year 70% $330 million 10.9 12.2 13.6 15
Forward Revenue 70% $415 million 8.7 9.6 10.8 12
1-year Forward 60% $665 million 5.41 6 6.8 7.5
1-year forward 80% $747 million 4.8 5.4 6 6.69
We can comfortably go up to a $6.6 billion valuation and still trade at the forward P/S of Teladoc, which saw a similar range of revenue acceleration from 30-40% pre-covid to 85% post-covid. Livongo is not the best comparable as the company reported much higher revenue growth of 100%+ both pre-covid and post-covid.
Therefore, we will go as high as $6 billion market cap on opening day. The risk is that the addressable market is not very large at this time relative to market cap. We are comfortable with this risk in light of the strength in the telehealth trend.