In this week's episode of Industry Focus: Healthcare, The Motley Fool's Shannon Jones and Brian Feroldi dive into three companies that work to make healthcare more affordable. HealthEquity (NASDAQ:HQY) is the leading provider of health savings plans, or HSAs. Livongo Health (NASDAQ:LVGO) uses connected technology to help patients better manage chronic conditions like diabetes and depression. Teladoc (NYSE:TDOC) lets people video conference with their doctors, skipping more expensive in-person visits.
Tune in to learn more about how these companies work, how they make money, some recent developments, their biggest opportunities and risks going forward, which of the three looks the most appealing to the analysts, and more.
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This video was recorded on Sept. 25, 2019.
Shannon Jones: Welcome to Industry Focus, the show that dives into a different sector of the stock market every single day. Today is Wednesday, September the 25th, and we're talking Healthcare. I'm your host, Shannon Jones, and I am joined via Skype by Brian Feroldi. He is our health and medtech specialist. Brian, so glad to be back on the show with you today!
Brian Feroldi: Hey, Shannon! It is awesome to be back!
Jones: How have things been since we last checked, then?
Feroldi: Oh, things are going great here. We're back into the swing of school season. I do have three children attending elementary school now, which is just fantastic. I am actually in the process of kicking off a stock-picking contest at my children's elementary school. I've been invited to go in and talk to the kids about video game stocks, streaming video companies, clothing companies. I'm allowing the kids to pick a couple of stocks, and I'll be tracking the results between now and the end of the year. Doing my best to spread the Foolish word, here.
Jones: Oh, I love that, Brian! I love it so much I could almost forgive you for wearing a Patriots sweater right now. [laughs] But, in the honor of Foolish wisdom, I think that is all great. Love that you're getting started so early with kids and investing. I look back and wish I'd had those seeds planted early on. It's awesome that you're doing it at the elementary school level.
Feroldi: Yeah, totally. It's a really exciting time right now because I get to talk to the kids about the upcoming launch of Disney+ and how that compares to YouTube and Netflix. There's tons to talk about. The kids just love it.
Jones: Awesome. I cannot wait to hear updates when we have you back on the show. I want to hear these kids are doing. I bet you they can probably beat some of our best analysts there.
Feroldi: I think so. [laughs]
Jones: On today's show, we're talking about three companies at the forefront of a huge problem particularly here in the U.S. That is healthcare expenses. As you know, healthcare expenditures here in the U.S. are just astronomical. Companies that are at the forefront of helping to drive down the cost of healthcare are always top on our list. Today's show is going to be giving you three stock ideas, three great companies that I think really are at the forefront of that movement. Brian, before we get into those three stocks, I think we should probably set the stage and explain just how big of a problem this is here in the U.S. Brian, what can you tell us about that?
Feroldi: It's no shock to our listeners that the U.S. spends a huge amount of money on healthcare, and this figure has been growing at a much faster rate than inflation for years. Last year, the U.S. spent about $3.5 trillion on healthcare. That amounted to about 18% of our GDP. To break that number down further, about a third of that total goes to hospitals; 20% goes to physicians or clinicians -- think outpatient visits -- drugs were about 10% of the total, both prescription and generic; nursing homes were 5%; dental was 4%; medical devices were 4%. The big driver there is clearly hospitals and physician visits. If you break that down on a per-person basis, it amounts to about $10,739 per person.
Now, to give you some context, the next highest spender on a country basis is Switzerland at about $8,000 per person. So, the U.S. is almost 35-40% above the second-highest spender. The average developed country that's similar to the U.S. spends about $5,280 per year. The U.S. is almost double the average.
Jones: That is amazing to me, and really sad more than anything. Even just getting access to quality healthcare is hard here in the U.S. And then, on top of that, when you have the massive amount of money that's required to even try to get basic services, that's something that certainly is near and dear to my heart. But, healthcare spending, it's bad now, and it's only expected to get worse moving forward. You talked about that $3.5 trillion figure. That's expected to surpass $6 trillion by 2027. That means, basically, it's going to be outpacing GDP, growing about an average of 5.5% every single year. This is a problem that is going to continue to get worse. So, companies that are driving to help bring down costs certainly a big focus of ours.
Let's start with the top stock for you, Brian, the first one being HealthEquity, ticker HQY. For our listeners who may not be aware, Brian, can you explain exactly what HealthEquity does and how it's aiming to solve the healthcare expenditure problem?
Feroldi: Sure. HealthEquity is a company that we've covered on the show before. They're the country's leading provider of health savings accounts. They actually just completed an acquisition recently of a company called WageWorks. As long as we've been covering them on the show, they've been the No. 2 provider, but they've now leapfrogged into the No. 1 position. They now administer 4.9 million health savings accounts. They also provide other types of healthcare-focused savings accounts, such as flexible spending accounts, health reimbursement arrangements, COBRA benefits, etc.
Health savings accounts are their bread and butter. These accounts are basically a triple-tax-free free savings vehicle for healthcare expenditures for Americans. You can make contributions to an HSA before tax. Any funds that are in there grow in the account tax-free. And then, as long as you spend them on qualified healthcare expenditures, that's also tax-free. So, these are almost a no-brainer choice, if you have access to them. However, not every American has access to an HSA account. In order to gain access, you have to have a high deductible health plan. That is a health plan that has a $1,350 deductible for an individual or $2,700 for a family. High deductible healthcare plans are becoming increasingly popular with employers around the U.S. because the average high deductible health plan offers a premium savings of about $1,700 per year. These things are definitely growing in popularity with both employers and members.
Jones: Absolutely. With this particular model, with HSAs, popular especially with the younger adults who tend to be on the healthier side. One of the key things with HealthEquity -- you had a chance to talk with the CEO. I know Motley Fool co-founder and CEO Tom Gardner and I had a chance to sit down with him. One of the big things I think with HealthEquity, I love the ability to save for expenses and then be able to invest those expenses. But I think the education piece is key to that. Obviously, most people are getting their insurance through an employer. So, it requires an employer being educated about this particular option, and then having the employer also educate their employees. So, I think there's a huge opportunity within this space to increase overall awareness, and continue to get people interested in learning about the advantages of an HSA and the advantages of just being able to invest and set aside money for healthcare expenses long-term.
Feroldi: Yeah. You touched on a couple of important points right there. HealthEquity does administer the HSAs themselves, which can lead to significant cost savings. They also do a couple of other things that help members save money. Through their investments, they actually have partnered with Vanguard, the leading provider of low-cost index funds, to enable their members to invest in Vanguard funds once they have funds in their account. They also provide a high-touch model. If you're a HealthEquity member and you have a big healthcare expense coming up -- say you need an MRI or a PET scan or something like that -- you can actually call HealthEquity and they can actually do some shopping around for you so that you can save money on your spending by them recommending to you a certain facility over another one. They are helping their members to save money in numerous ways.
For investors, what really excites me about HealthEquity is that HSAs have come a long way, but there is still an enormous amount of room for growth there. To put some numbers on it, there are currently about 22 million HSA accounts in the U.S. Within the next couple of years, that number is expected to reach at least 50 million. The number of members is going to grow. The amount of assets that are held in these HSA accounts is, combined, about $8 billion today. HealthEquity believes that at market maturity, that figure will grow to $600 billion. That's really exciting for investors in HealthEquity because they earn fees on both assets under management as well as subscription fees and transaction fees. The more people that choose HSAs and the more assets they have, the more money that HealthEquity will make.
Jones: Absolutely. A huge long-term runway right there for HealthEquity. A lot to watch with this particular platform, especially with that WageWorks acquisition that you mentioned. They are aiming to be an end-to-end solution for healthcare expenses. A lot to watch there.
Let's talk about our next company, next stock. This is a digital health player, none other than Livongo Health, ticker LVGO. Also a recent IPO. It hit the market back in July. Brian a lot of eyes on Livongo, especially as I think investors have had somewhat of a tepid response to digital health. Hello, Fitbit! But Livongo was among a pack of companies hoping to go public, test the waters, see if investor appetite was improving. A lot of eyes have been on this particular stock.
Before we get into that, though, can you just explain exactly what Livongo Health does?
Feroldi: Yes. Livongo provides a connected health platform helping people with chronic diseases to better manage their disease. An example of a chronic disease would be diabetes, hypertension, depression, obesity. The number of Americans with chronic diseases is huge. 147 million Americans have at least one chronic disease. What Livongo does is, it provides a platform that enables real-time coaching and feedback to patients that encourages them to live a healthier life when they are in the moment. Their flagship product is called Livongo for Diabetes. A Livongo member gets an internet-connected blood glucose meter. Whenever they take a blood glucose reading, that number is sent off to Livongo, and Livongo contacts the member immediately after the reading and makes suggestions for what they can do based on the reading. If they get a high number, they can get a suggestion to take some medication or talk to their doctor about increasing their dosage. If they get a low number, they can get advice about how to raise their blood sugar to a healthier level. The important thing here is that these messages are given to the patient when they need it most, when they are actively doing something to manage their disease.
Livongo calls these mini-interventions health nudges. They actually have the data to show that these little interventions on a constant basis actually lead to significantly better health outcomes and cost savings. The average Livongo for Diabetes user lowers their A1C by 0.8 points, which is a meaningful difference. That leads to cost savings of about $1,908 per member per year. These little health nudges really add up.
Jones: Exactly. And it's not just diabetes they're going after, either. Granted, that's where they've really made a name for themselves. They've even actually rolled out an Amazon Alexa-enabled skill. Members literally can go up to Alexa, ask about their blood glucose readings, and then get tips on how to manage diabetes, which I think is really cool. I think they're even integrated with Apple Watch, Samsung, even Fitbit. Certainly becoming more a part of the lifestyle. But diabetes is not where they're stopping, Brian, because they're also looking at some other chronic diseases to help manage that, too.
Feroldi: Yes. They've already launched Livongo for Hypertension, Livongo for Weight Management and Prediabetes, Livongo for Behavioral Health, which includes depression. In the case of weight management, for example, they have the data to show that the average Livongo for Weight Management user loses 7% of their body weight after one year. The average of Livongo for Behavioral Health member with depression has much better management of their depression over time. All of these changes actually lead to meaningful clinical outcomes for patients. That does, in the long term, drive long-term cost savings.
Livongo's sales pitch to insurers or employers or health plans is basically, "Allow us to manage your members in real time. We will save them more money in the long run through healthcare savings than we charge you upfront for our subscription services." That's a message that is really resonating with employers right now. These guys just crossed 192,000 Livongo for Diabetes members, which is the only number that they report. That's a lot of patients. The good news for investors is that's still very tiny when compared to the 30 million Americans alone that have diabetes. They've come a long way, but wow do they have a long way to go.
Jones: They have a very long way to go. I think all in all, they've got a business model that has a reoccurring revenue stream, which we like. I mentioned, of course, with any IPO, you're always looking at financials. They actually just posted some pretty impressive top line results, right, Brian?
Feroldi: Yes. Their revenue just grew 156% year over year to $41 million. The nice thing is, this is actually a relatively high-margin business. Their gross margin is about 68%. When you combine triple-digit growth with a strong gross margin, their gross profit is expanding rapidly, which gives them many options to continue to reinvest heavily, and the business to continue to grow and scale. The early numbers that we've seen from this company thus far, very impressive.
Jones: Exactly. I just read a report by Healthcare Growth Partners. They evaluated Livongo plus a few other peers within this digital health space. Basically, the conclusion was, Livongo has the highest share of reoccurring revenue, the highest growth rate, and the highest gross margin, and, of course, the highest valuation among the group. That also includes Health Catalyst.
With that being said, certainly a company to keep an eye on. Anything that can not only drive clinical outcomes, but really drive and reinforce better habits for the long term is only going to save the patient and the healthcare system long-term.
Feroldi: Yeah, totally. Encouraging people to live healthier lives just leads to enormous benefits down the road. If you can keep just one member out of the hospital, that leads to thousands of dollars of cost savings.
Jones: Absolutely. All right, the last and final company that is driving, hopefully, healthcare expenses down is none other than Teladoc, ticker TDOC. This is a company that I think combines the latest tech in video conferencing with access to quality medical care. For me, that's a winning strategy that I think is a win for all. Brian, tell us a little bit more about the awesome company that is Teladoc.
Feroldi: I think this is the one that probably our listeners are most familiar with, if for no other reason than Jason Moser has been banging the drum on Teladoc basically since it came public. Teladoc is the leader in the virtual doctor's visit. The ability to have a video conference consultation with a doctor, no matter where you are, on any device, at any time. Teladoc's services enable patients to be connected to a qualified physician within minutes just by pushing a button from the comfort of their own home. Virtual visits can be used to treat a huge range of disease states, including depression, tobacco cessation, dermatology issues, basic healthcare like the flu or respiratory conditions, skin problems, or if a patient just wants a second opinion on a diagnosis. Doctors, over the internet, can actually order tests to be done. They can provide prescriptions to local pharmacies. The number of services that Teladoc offers patients is growing. So far, more than 3,000 doctors are signed up on Teladoc's platform. This is a big network that continues to grow.
Jones: This is a company that's really about scale. When you think about investing opportunities, good stocks to invest in, I like to see that there are multiple tailwinds that will drive and propel this company forward. For Teladoc, there's so much driving this. Of course, people are looking for access to quality medical care. There's a convenience factor. There's also a physician shortage. It's not even just stopping with physicians, it's just healthcare professionals in general. And then, of course, you've got the healthcare expenditures that are also driving people to try this. From a scale perspective, you're getting more and more doctors who ultimately want to be on a platform like this because ultimately, they can hop on, they can control their own hours. I think what that is doing is driving more patients to get on this platform.
Brian, I don't know about you, I tried telemedicine for the first time last year. The interesting thing was, it was not my first choice for healthcare. It just so happened that I was coming into work, I had a sick child, and my first thought was, "Oh my goodness, how quickly can I get over to the pediatrician?" And then my husband just so happened to say, "By the way, we actually have an app through insurance. Why don't you try that?" As a parent, I was a little hesitant, Brian. [laughs] But I can tell you, from the very first visit that I had, I was hooked. Now it has become the first line of defense, if you will, whether it be for my child or for me, when I'm thinking about going in for something that's more acute care -- not anything that's chronic nature, something where I feel like a doctor is going to have to do some work. But now, I'm thinking, what can I not go into a doctor for? What can I use for telemedicine?
Have you used it at all? You, your kids, your family?
Feroldi: We actually just got access to it this year and I'm itching to give it a try. To your point, this is incredibly convenient to use. As a parent, my kids come home with runny noses, coughs, all kinds of skin things going on. It's incredibly compelling to me to be able to just hold a video conference, rather than having to put my kids in the car, take them out of school, drive up somewhere, wait in the waiting room, and go through that whole rigmarole. If we can get that done in a matter of minutes from the comfort of our home, I can easily see how that could become a standard of care process for us.
Teladoc is the far and away leader here. They also recently struck up a partnership with CVS. They can actually put these video conferencing things right into a CVS. Even if you don't have access to video conferencing at home, through CVS' vast network, it won't be long before you can go in there and hold one of these virtual conferences -- and then, by the way, you're in CVS, so you can get a prescription filled. That's a win-win for both.
Let's talk about cost savings. Not only is there a huge convenience for patients, it's actually much cheaper to hold a virtual conference than it is to an office visit. Teladoc claims that it saves $141 for using its platform versus an office visit. That number can be as high as $2,500 in savings if you use a video conference versus an ER. But when you blend everything together, Teladoc claims that the average visit leads to a cost savings of about $472, which is huge.
Jones: That is huge. It's easy to see why you can very easily get hooked into this platform. Teladoc is seeing this on the topic of member engagement. They're seeing visit volume actually grow faster than membership itself. So, once you get people using Teladoc, they continue to come back. This is something I like to see as an investor. I also like, with Teladoc, of course, reoccurring monthly revenue streams. They have a subscription offering. They also have some long-term license-based fees to supplement that. They've got a predictable sales cycle. And their retention rates have been in the 90% range and have been holding pretty steady. All in all, I think Teladoc makes for a very compelling long-term investment, especially if you're looking to add to your portfolio stocks that are going after the problem of healthcare expenditures.
Brian, I have to ask you -- of these three stocks that we talked about today, which one is your top pick?
Feroldi: That's a really tough call right there. In my opinion, these companies actually basket very well together as almost a "bringing down the cost of care" basket. There are definitely reasons to be excited about the long-term potential of all three. I'm a little biased here. I've talked with HealthEquity's management team. I think they're led by rock stars and have a very great long-term opportunity. They're also the only one of the three that are currently profitable and cash flow positive. So, from a risk management perspective, I think I would go with HealthEquity. But, I could easily see any of these being a very attractive choice for investors.
How about you, Shannon?
Jones: It's hard not to like HealthEquity. In terms of what they're doing, especially on the HSA front, there really isn't anyone that has come close to doing what HealthEquity is doing. So I think that's an easy one. But ... it's hard to say. I'd say for me, Teladoc just has a very wide net to cast, and they're just now scratching the surface of mental health, behavioral health. That's a huge market opportunity in and of itself. $12 billion opportunity for them. As mental health awareness and some of the stigmas that are associated with treatment for mental health are starting to go away, I think this puts Teladoc in a perfect place to jump right into that. And, for all of the other reasons that I said I like them, I think you really can't go wrong with Teladoc. Granted, they're not the only players in this space. Competitive dynamics are one thing. But, when I was listening to the most recent Teladoc call, one of the comments that the CEO mentioned is, yes, they do have, of course, some employers that will leave, but ultimately, they do come back. It's that churn that I want to keep an eye on with Teladoc. But I do think this is a platform that, once you get into it and your employees are using it, it's really hard to step away. Like you said, I don't think you can go wrong with any of the three. But ultimately, for me, I think it's a toss-up between HealthEquity and Teladoc.
Feroldi: I can hear almost hear Jason Moser somewhere pumping his fist with you saying that.
Jones: I'm sure he is. You can see him bust in the studio at any moment now. Well, awesome. Hopefully for all of our listeners out there, your takeaway from this is that there are opportunities that are going after the healthcare expenditure problem. You really can't go wrong with having that basket approach. Brian, I love that. Talk about a "war on healthcare expenses" basket. Start a basket, invest for the long run, and keep moving forward.
For Brian and me, that'll do it for Industry Focus: Healthcare. I do want to put out a very quick announcement. I hope, if you haven't already, that you've entered our Smarter, Happier, and Richer contest. If not, head on over to The Motley Fool Official Instagram account @TheMotleyFoolOfficial. Look for a photo of Foolish swag. To enter,. all you have to do is answer the question correctly and then just tag a friend in the comments of your post. If you win, your friends win, too. We've got 10 Foolish hats, T-shirts, and our Motley Fool Investment Guide as prizes. Brian, I think I might just tag you, see if I can get ahold of some of this Foolish swag.
Feroldi: Let's do it. I'm in.
Jones: Let's do it. All right, we want to thank you so much for tuning in.
As always, people on the program may have interest in the stocks they talk about, and The Motley Fool may have formal recommendations for or against, so don't buy or sell stocks based solely on what you hear. This show is being mixed by Austin Morgan. For Brian Feroldi, I'm Shannon Jones, thanks for listening and Fool on!