In the 1930s, 40% of patient encounters with a doctor occurred in the home. By the late 1980s, house calls were down to less than 1% of all physician encounters. It would seem that telehealth could fill some of the gaps in physician access, but for years, adoption has been less than enthusiastic. A 2014 survey found that of those who took advantage of telehealth, just over 80% engaged with their physicians only once per year through online platforms. This year, the coronavirus has drastically shifted patient behaviors. Stay at home orders and the fear of visiting a doctor's office have driven rapid adoption of telehealth offerings. Analysts expect telehealth visits to top 1 billion before the year's end, up from pre-pandemic estimates of 36 million virtual visits.
Since 2005, Teladoc Health (NYSE:TDOC) has been using technology to bring doctors to patients where and when it is most convenient. Despite telemedicine's historical lack of utilization, it may be critical in meeting a projected shortage of physicians in the coming decades. However, Teladoc isn't alone in recognizing its massive market opportunity.
Teladoc's robust revenue growth since going public in 2015 had tapered off from 90% and 80% in 2017 and 2018, respectively, to 32% in 2019. But the pandemic has made traditional office visits impossible in some areas. In turn, patients still wanting to see a clinician have pushed growth back to 85% in the latest quarter. With a service perfectly designed for a year spent at home, the company is in a strong position. But good ideas always draw competition and challengers. Investors should ask if Teladoc's good fortune will continue or if that luck will end up being a curse, as stronger competitors are attracted to the market now that adoption of its services has increased.
More patients = more doctors = more patients
Moats are a common way of understanding a company's competitive position. There are several types of moats, and a wide one means it will be hard for competition to gain a foothold in the industry. For Teladoc, the clearest path to a moat is establishing strong network effects; getting more participants on the platform attracts more doctors which increases the value in the eyes of all current and prospective participants. If Teladoc is struggling to demonstrate this, it could mean that the company will have trouble fending off future competitors. On the other hand, if we see evidence of a widening moat, the company may just be starting to deliver returns for shareholders. So are the number of patients and measures of their engagement increasing?
Not only is the number of patients covered by Teladoc subscriptions increasing, the rate at which they utilize the platform is increasing. In fact, in the most recent coronavirus-fueled quarter, utilization -- the number of consults divided by paid subscription members -- was over 16%. This shows that the patient side of the network is strengthening.Management also tapped the direct-to-consumer channel by forming a three-year partnership with CVS Health (NYSE:CVS) in 2018. The collaboration allows CVS to offer its MinuteClinic services directly to patients via Teladoc's online platform. Customers can subsequently fill prescriptions at the CVS pharmacy of their choice. Teladoc management expects the partnership to add more engaged participants to the platform. The other side of the network, which focuses on physician engagement and uptake, however, is harder to evaluate at this stage.
The number of healthcare professionals on the other side of the platform who are able to assist patients would be the best measure of the strength of the platform. But Teladoc doesn't break that out those numbers for investors as consistently. Other proxy measurements that would be useful, such as wait time for patients or member satisfaction, are so far absent from reports.
Filling in the blanks
Acquisitions are evidence of management making an effort to expand offerings and increase capacity on the provider side of the network. Teladoc's acquisition of Best Doctors in 2017 added 50,000 medical experts covering more than 450 specialties. The 2018 acquisition of Advanced Medical brought the largest virtual care provider outside the U.S. under the company's roof.
2020 has been a year that Teladoc will be digesting for a long time. In January, management made another acquisition -- InTouch Health -- to bolster its offering for hospitals and healthcare systems. The deal brought an additional 14,500 physicians onto the platform. Finally, in August, Teladoc made one of the biggest splashes in healthcare this year by announcing plans to purchase a virtual health provider focused on chronic disease management -- Livongo Health (NASDAQ:LVGO). In aggregate, these acquisitions have significantly strengthened the supply side of the network with medical experts, service offerings, and global access.
The 600-pound gorillas
Today, most companies having any success with technology are keeping an eye on the Silicon Valley giants. This is especially true in healthcare where Apple (NASDAQ:AAPL), Amazon (NASDAQ:AMZN), Alphabet (NASDAQ:GOOGL), and Microsoft (NASDAQ:MSFT) have all tried their hand at leveraging existing capabilities as a foray into the $2.5 trillion healthcare industry.
Apple is working to market its popular Apple Watch as a health-monitoring tool, and is now using the product to help pilot an electronic health records (EHR) platform. The program demonstrated positive patient engagement in an initial rollout: About 90% of survey respondents indicated better information sharing and understanding of their health. Apple's new system now has more than 130 health-system partners.
The other tech giants have fared far worse. Google and Microsoft have shuttered health-record offerings, and Amazon's joint venture, Haven, has been largely silent in the years since it was created. But Google's 2019 acquisition of Fitbit and $100 million investment in recent IPO Amwell (NYSE:AMWL) show that management hasn't given up on healthcare yet.
The most likely competition for Teladoc may come from entrenched EHR providers such as Epic, which has 29% market share in the U.S. and is now extending its existing platforms beyond traditional boundaries. The software platforms have a strong foothold in hospitals and doctors' offices with software designed to house all patient information. Epic is now turning its focus to connecting patients with their health information. In May, Epic launched a telehealth service with Twilio (NYSE:TWLO) which allows doctors to launch a virtual visit while reviewing clinical history and updating records. This integration saves time and money, reduces complexity, and provides continuity of care as patients remain within their familiar network.
Can you hear me now?
Regardless of what healthcare delivery looks like in the future, the industry is big enough for multiple winners. Teladoc management clearly understands the importance of getting big as quickly as possible, but its industry is highly regulated and moves slowly. The bottom line is that its incumbents must find a way to generate profits and hold onto them.
Teladoc investors shouldn't become complacent with the moves management has made so far. Ultimately, profit is the most popular metric on the scorecard. Increased adoption of remote healthcare due to the pandemic has created a sense of urgency from legacy solutions. If history is any guide, Teladoc will profit from a shift toward this mode of delivery. But despite Teladoc's impressive revenue growth and membership expansion, the future of healthcare could, in theory, look like an industry shared by Epic and Apple, two wildly profitable companies with already dominant positions that could work together to create the new model for care. Teladoc shareholders should pay close attention to the Epic-Twilio collaboration and Apple's EHR developments, and listen for any impacts they have on Teladoc's growth in the coming quarters.