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Disruptor Alert: These 3 Companies Are Changing Healthcare

By Nicholas Rossolillo – Jun 7, 2020 at 10:08AM

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The healthcare industry was a mess already, then coronavirus happened.

The U.S. population is aging and expected to continue getting older for the foreseeable future. As demand on the system causes prices to steadily rise, pressure is being applied to both consumers of healthcare services and the providers themselves. Add a pandemic to the mix, and it's clear (if it wasn't before) the system needs some help.  

But just how to go about tackling the issues with healthcare is highly contentious. While the debate continues, though, technology is already at work. Business disruption is aptly named. It creates some pain along the way, especially for incumbents that have been slow to change and adapt. But ultimately, disruption can create a better outcome for those making use of a service.

Technology is already beginning to make a serious crack in the healthcare industry and is creating some much needed improved patient outcomes (just look at the work Intuitive Surgical has done for outpatient surgeries in the last decade-and-a-half). In the years ahead, I think the pace of change will accelerate even more. Three disruptive companies that demand some attention are Veeva Systems (VEEV -0.19%), Livongo Healthcare (LVGO), and Teladoc Health (TDOC -3.54%).

Bringing the power of data to life sciences and healthcare

Veeva is a cloud-based software platform designed specifically for life sciences (pharmaceutical and biotech companies) and healthcare providers, with newer versions of its platform targeting cosmetics and consumer goods companies. The start to 2020 was expected to be a mixed bag for Veeva with its newer business lines taking a hit due to the crisis, but its life science bread-and-butter surged amid mounting worries over the pandemic and infectious disease.

The company's software system helps pharmaceutical and biotech outfits break down the silos that often exist between different teams within a company. Whether its clinical trial data management or its customer relationship management software (which now includes a compliant teleconferencing tool for customers adjusting to work-from-home), Veeva has a software suite to help companies on the cutting edge of healthcare science get their operations updated for the digital age. And the need for such updates just got a shot in the arm. 

Veeva has grown by leaps and bounds the last few years -- its market cap has more than tripled in just three years and values the company at $30.5 billion as of this writing. But the growth story here is far from over. When COVID-19 arrived on the scene, biotech and pharmaceutical companies got a jolt and kicked into high gear looking for a cure. Since Veeva can help enhance the whole treatment-development process, there was plenty of new business for it to scoop up. Revenue growth accelerated to 38% during the fiscal first quarter (up from 25% in the prior-year period), and current full-year sales are expected to be about 26% higher.

There's more game-changing services on the way by the end of 2020 too. Veeva Data Cloud will make its initial debut in the U.S. to help manage patient and prescriber data, and the offering will expand to other countries over time. Global health science is a massive industry but often requires extensive research to determine which companies are nearing a successful end to a clinical trial and have a large addressable market for their new treatment. With Veeva, investors can bet on the growth of the whole industry as the cloud software suite supports innovation on the treatment of all diseases.  

A doctor standing behind a screen and holding a stethoscope up to an illustrated icon of a person.

Image source: Getty Images.

A true consumer-facing service model

Livongo is an even higher-flying outfit than Veeva. Shares are up 128% year to date as the recent IPO is experiencing booming demand for its health solutions. The business took a novel approach -- at least for the healthcare industry -- to addressing healthcare needs, focusing on people suffering with chronic conditions and looking to solve those end-consumer's biggest pain points. 

The result is a coaching platform delivered in a virtual format and available to patients 24/7, combining data science and AI to provide personalized care and measurable outcomes. Livongo started with a coaching and management platform for those suffering from diabetes and has more recently applied its platform to provide care for hypertension, weight management, diabetes prevention, and behavioral health. In total, it's a massive market for Livongo to tackle, and a current price-to-sales ratio of 27 assumes it will be successful in rapidly expanding.

So far so good. 2020 got off to a stellar start with Livongo reporting a 115% year-over-year increase in revenue to $68.8 million in the first quarter. Profits aren't to be found here yet with free cash flow (revenue less cash operating and capital expenses) running at a negative $13.5 million rate during the period. That's partly by design as this small healthcare technologist is all about maximizing sales at the moment, but the potential for big bottom-line returns is there as adjusted gross profit margin (revenue less cost of service) was 74.4%.  

The financial outlook is promising, but it's the consumer-facing nature of this business that really gets me excited. Technology is figuring out how to not just disrupt the status quo but more importantly figuring out how to deliver better outcomes and simultaneously reduce expense for patients. I hope Livongo is the first of many healthcare start-ups that turn the industry into more of a consumer demand-driven one. 

Making care more accessible

Speaking of consumer-facing businesses, a few years ago, a small technology outfit named Teladoc Health caught my eye not long after it made its public debut. At the time, telemedicine -- a visit with a healthcare professional via phone or online video conference -- was barely an idea on most consumer's radar. Now, it's an essential service making fast inroads into the industry because of the coronavirus. 

Much like the other two stocks on this list, Teladoc is by no means a cheap stock. Shares are priced assuming that the double-digit revenue growth will continue for the foreseeable future. Shares have nearly doubled so far this year, and the stock trades at 21 times trailing 12-month revenue. But for good reason. Revenue and total visits with a provider via Teladoc's platform grew 41% and 92% year over year, respectively, during the first three months of 2020. Full-year revenue is forecast to be up 47% at the midpoint of management's guidance.

An ardent shareholder for a few years now, even I've been surprised at how quickly Teladoc's trajectory has accelerated. I think there's a good chance the migration to telemedicine has legs for a while. The high-growth health technologist crossed into positive free cash flow territory in 2019 (which means its expansion isn't bleeding cash off the balance sheet anymore), and the company just added net $829 million in cash via an $850 million convertible debt offering to the $511 million it already had at the end of March. About a quarter of the proceeds will be used to retire other debt, but the vast majority will go to bolster the company's financial position.  

Clearly, this company is getting itself ready to continue disrupting the old methods of healthcare delivery. At $12.7 billion, it isn't a tiny company anymore, but it nonetheless has ample room to continue consolidating the massive multi-trillion dollar healthcare industry to itself in the years to come as consumers make the switch to remotely delivered care.

Nicholas Rossolillo owns shares of Intuitive Surgical, Livongo Health Inc, Teladoc Health, and Veeva Systems. The Motley Fool owns shares of and recommends Intuitive Surgical, Livongo Health Inc, Teladoc Health, and Veeva Systems. The Motley Fool has a disclosure policy.

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Stocks Mentioned

Veeva Systems Inc. Stock Quote
Veeva Systems Inc.
$162.57 (-0.19%) $0.31
Teladoc Health, Inc. Stock Quote
Teladoc Health, Inc.
$26.97 (-3.54%) $0.99
Livongo Health, Inc. Stock Quote
Livongo Health, Inc.
Intuitive Surgical, Inc. Stock Quote
Intuitive Surgical, Inc.
$190.52 (-0.29%) $0.56

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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