In this episode of Industry Focus: Wildcard, host Dylan Lewis is joined by Motley Fool contributor Brian Feroldi to look at the results of GoodRx (NASDAQ:GDRX), Inari (NASDAQ:NARI), and Amwell (NYSE:AMWL) and check if they are still interesting enough for your watch list.
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This video was recorded on February 10, 2021.
Dylan Lewis: It's Wednesday, February 10th, and we're recapping some of the big healthcare IPOs of 2020. I'm your host Dylan Lewis and I'm joined by Fool.com's grungy guesser of grabbing go-go growth greenbacks, Brian Feroldi. Brian, how are you doing?
Brian Feroldi: I'm doing well, Dylan. Tell me about your trip up to the Poconos.
Lewis: I had a wonderful time. People connecting some dots here might realize there was a prerecorded episode that went out on Friday for the tech show. We aired an interview with Twilio CEO Jeff Lawson from the Motley Fool Live members-only livestream, and wanted to share that with folks because it was a great conversation. The reason was because I took a little bit of a break, did the work from cabin weekend up in the Poconos, and just coincidentally wound up getting a foot of snow dumped on us while we were there, which made for some very fun snowboarding. Brian, I am not the only one though who managed to get out and enjoy the snow. I got a Slack from you the other day saying, hold on, I'm on my phone sledding. We can talk about this later.
Feroldi: Rhode Island, just like many other parts of the Northeast, got dumped on with snow. I've been out there enjoying it with my kids. Last year we got absolutely nothing. This year we have been sledding in neighborhoods around where we live at least 20 times. We're really making the most of the snow this year.
Lewis: You have to. I feel like it's a silver lining. It's a fun way to get outside. It's a COVID-friendly activity. We're all just looking for something different right now, Brian, right?
Feroldi: That's exactly it. Like you said, it's a COVID-friendly activity, you get outside, it's a great time.
Lewis: Yeah. But I am happy to be back, much as I enjoyed my time away, I'm happy to be back and happy to be talking with you again, Brian. We are bringing the healthcare back on the Wednesday show. I know some folks eagerly want to hear healthcare stocks talked about. Today we're going to be doing that, breaking down three IPOs from 2020, checking in on them just as we have with some recent tech shows, Brian.
Feroldi: That's right. It always makes sense to go back, reassess companies because now these companies that we talked about when they were pre-public in 2020 now have a little bit of a track record as a public company that we can look at. I always love looking back and reminding myself of companies that we talked about.
Lewis: Yeah. We're going to be talking about Amwell, we're going to be talking about GoodRX. We have a third business that Brian added late in the game, that's Inari Medical. You can see who did what in terms of the preparation for the outline here. Those are going to be our three businesses, we'll drop the tickers as we get into it. That first one, Brian, Amwell, I have to confess before you told me this is what we were going to be talking about, I looked at the name of this company and I was like, they could do anything. It's one of those perfectly vague business names that could be in almost any industry.
Feroldi: Fair enough. Would you be surprised to learn that they are actually in the telemedicine space? Which has been a red hot place to invest over the last couple of years.
Lewis: It makes more sense. Then I look at it and I'm like, oh, "American Well," it's a healthcare company. Things are starting to click for me, Brian.
Feroldi: Yeah, nice and generic. But the company, the easiest way to describe it, is one of Teladoc's biggest competitors. Teladoc has been a wonderful investment and it's a Fool favorite. Amwell came public last September or September 2020. They were priced at $18. They raised about $750 million at the IPO. As we've seen, the stock shot up immediately, before retail investors couldn't get in. But not an insane amount, it shot up to about $25, $26. They left some money on the table, but not as much as we've seen from others. If you bought in right at the IPO prices, you're pretty happy this stock is about $35 today so you're up about 40% or so. The market cap of this company is about $8.3 billion, so overall, a pretty good start for Amwell.
Lewis: $8.3 billion, I think [laughs].
Feroldi: Yes, billion. Did I say million?
Lewis: You just said $8.3, which I'm like, I've heard of some pretty insane valuations, Brian, but I think that one will take the cake [laughs]. I think one of the interesting things about this business is, as it came public, you mentioned the average investor getting in a little bit late. There were some big names attached to this company when it went public. I believe Google wound up providing a $100 million investment to this business as it was coming public helped bolster the balance sheet a little bit. For spaces where I'm a little bit less familiar when I see those types of stamps of approval, it always gets me a little bit more interested.
Feroldi: Yeah. The other big name that this company has associated with is Apple. People may have heard of Apple's heart study, which uses the Apple Watch to monitor and do tracking on patients' hearts. Amwell is the company that is powering that behind the scenes and Apple chose to partner with them. That is yet another boost of confidence for this business.
Lewis: I think a lot of folks are familiar with Teladoc and I think anyone that owns it is probably quite happy that they do, Brian. It has been a wonderful performer over the last year or so and certainly over the last three or five years. This business operates in a very similar way and I think the same things does have some differences though.
Feroldi: Some subtle differences. The biggest one that I would say is that Amwell really works with existing EHR systems, electronic health record systems. Amwell provides a software development kit and an API that makes it easy for leading EMR systems to integrate telemedicine directly into their app. Amwell has already built out the ability to have over 40 different dot care modules in here. It offers a huge range of services and more than 2,000 hospital and hospital systems have chosen to partner with Amwell, and that includes some real big names such as [...] clinic, and UNH and Northwell. They've done a really good job at penetrating their market.
Lewis: That's crucial for this kind of business because this is a network effect type company. The value for users is going to be there if the providers are there, the value for providers is going to be there if the users are there, they feed each other. When you have a lot, it's only going to mean good things for you.
Feroldi: If you were choosing a telehealth service to go with what would be extremely important to you? For me, it would be service. I want to know that if I need somebody, I'm not going to be in a doctor's waiting room waiting hours upon hours to get in charge with a patient. To your point there, yes. A scale is really important in this business, you want to have thousands upon thousands of doctors available at any given time to interact with the patient and Amwell has already achieved that scale.
Lewis: I think what surprises me about this business Brian is, we often think of Teladoc as the Kleenex here or the q-tip here. It's the brand name that I think most people are familiar with. Depending on how you stack these companies and what numbers you look at, Amwell is actually edging out Teladoc in some core, core business metrics.
Feroldi: Amwell has again achieved really good scale and as you can probably predict, 2020 was a really pivotal year for the company because we just saw an absolute surge in the demand for telehealth medicine. Yeah, this company has over 62,000 providers on its platform, I believe. If you leverage that to provide tens of thousands of used cases, they are really, I would say, the Pepsi to Teladoc's Coke [Coca-Cola].
Lewis: We've seen before, Pepsi, not a bad place to park money. Coke's been great too. But there are so many industries where there are multiple winners and we've seen it play out. I think there's a temptation to think that one big business is going to take everything. More often than not, that doesn't happen.
Feroldi: Especially when there's a megatrend under way and there's no doubt that the move to telemedicine is a supersonic size trend with healthcare. Yeah, it's not necessarily going to be a one-company takes all environment.
Lewis: Looking at the recent earnings report for this business, Brian, we saw some pretty crazy growth rates for this business. The last couple of quarters, 80% year-over-year growth before that 94% year-over-year growth COVID obviously a major tailwind for this business. That is a pretty steep acceleration from where we saw them even earlier in 2020, they were posting 60% year-over-year growth. COVID's helping a lot. I think we're going to see that moderate a bit, but adoption definitely increased due to COVID.
Feroldi: You're seeing tremendous top-line growth and that's exactly what you would want to see at a company at this stage of the game right now. In the most recent quarter yet we saw 80% revenue growth and revenue from site visits was up 300%. That is an insanely large number. That's one portion of their revenue just like Teladoc. The other revenue is subscription revenue, and that grew more than 17%. That is a much more modest growth rate, but both sides of the business are clearly growing.
Lewis: Just to help people understand what the pie looks like, what we're seeing there from the revenue from [...] says it's just about half the revenue, a little bit less than half the revenue. Then [laughs] keep anything close to a triple-digit year-over-year growth rate going, it is going to show up in the top line. We're not talking about some tiny fraction of their business that's building off of a small denominator here, Brian.
Feroldi: That's exactly right. The interesting thing that I'm going to watch with this business is what's going to happen in 2021. Was the boost that they got from COVID a one-time thing, or was it a habit-changing formation? I'm hoping that it's the latter. I think that it could kick start growth, but we're just going to have to see that as the numbers play out.
Lewis: I saw a comment from management recently saying while visit volumes are lower than the numbers that we had seen in March and April, they're still much higher than before COVID. I think that that's something that we have to keep in mind with a lot of businesses, Brian, as things might be moderating a bit, coming back down to slightly more reasonable levels. But if they're still well above where they were before early 2020, then I think that's a growth path.
Feroldi: Totally. That's something that, like you said, is going to be a one-time boost that is going to be the gift that keeps on giving to companies like this, or at least that's the theory. Now, one thing I will note that we called out when we did the S-1 show in this company is while the business model is very similar to Teladoc, one surprising thing that I saw was that the gross margin profile here is actually quite a bit lower than Teladoc. In the most recent quarter, Teladoc was in the 62% gross margin range. That was down due to huge investments to handle all the capacity that they had to invest in. With Amwell, their gross margin was also down. This dipped down to the 36% range, so almost half the level of Teladoc. That to me is a major differentiator between these two businesses.
Lewis: I think to some extent, it's the pains of scale for them where they are ramping up very quickly. We've seen their gross margins go from being in the mid-40%'s and even eclipsing 50% in some quarters a year or two ago to now being in the low 30%'s. You look over at their operating income and in absolute terms, it's bigger than their revenue. Unfortunately, it's negative. They are obviously in a high-growth phase. They're spending a lot of money on SG&A, but they're also really spending a lot more to fulfill their core revenue. I wonder where that shakes out for them long term, if they're able to enjoy scale or if we're looking at a different margin profile for this business.
Feroldi: That is something I too am going to watch as I follow this company moving forward. On the one hand, the lower gross margin is a big thing for investing in this company versus Teladoc. On the other hand, if Teladoc can get into the 60%'s, and I think they were even in the 70% at one point, is there reason to believe that as the company continues to grow in scale that there's a lot of room for a gross margin to expand? If so, that could be a major tailwind for running the stock.
Lewis: I think that this company in the future could also look a little different than it does now. I mean, we talked about their scale before. They run 2,000 hospitals, more than 55 health plan providers that they work with, and I think it is more likely than not that you see them pivot more and more to being tech providers, a little bit less of a services provider. I'm guessing that's where the better, more scalable, more profitable business is going to be, and I think that that's where we're going to see the business start to orient itself in the coming years.
Feroldi: I think once they do get to those hospitals and providers on board, they are building out some really serious switching costs to their platform, but getting in those hospital systems and getting on board with health plans and signing up providers, all that is incredibly expensive upfront to say nothing of actually fulfilling the demand. If you're an investor, you have to be OK with this company really, really investing in itself for probably a couple of years before you can start to see some operating leverage kick-in.
Lewis: I think things could be ugly for a little bit [laughs] when it comes to the margin profile, and we see this often with businesses in transition. You have to believe the core thesis at the end of the road though to want to be a shareholder right now, I think.
Feroldi: So far, shareholders had been rewarded for taking on that risk. I mean, while the margins decline significantly, that top-line grew 80%. That is the thing that investors are focused on right now.
Lewis: Let's kick it over to stock No. 2, Brian, and that is GoodRx, ticker GDRX. Another healthcare space company, one that maybe consumers might be familiar with. They might already be customers of this company.
Feroldi: This is one of the largest prescription drug pricing comparison platforms in America. This company came public in September of 2020. They raised just under $1 billion at the IPO at $33. They left quite a bit of money on the table because the stock immediately shot up to $47. But like we saw with Amwell, if you bought even at $47, you've done OK so far. This stock is currently trading at about $59. Now, GoodRx, like you said, many Americans are likely familiar with this company. It is the leading shopping portal for helping you to get drug prices. You download their app or go on their website and type in your medication and GoodRx will shop around a number of different pharmacies to find you the absolute lowest price. They provide you with a coupon that you can then take into your pharmacy, and that is the price that your drug will get filled at. If you're a consumer and you're looking to save money on your prescriptions, working with GoodRx is almost a no-brainer.
Lewis: The way I like to think about it is Google shopping, except for prescription drugs. It's a market, and we can say this about some elements of the healthcare market, but it's a market that feels right for transparency and right for disruption. GoodRx finds itself at a nice intersection here.
Feroldi: Totally. To your point, I love the founding story of this business where the founder had a prescription himself went down to his local pharmacy and was quoted $450. He didn't want to pay that amount, so he just started to shop around. He found that depending on what pharmacy he went to, he got wildly different prices. He just thought that that was completely opaque, and he built GoodRx from the ground up to really bring pricing transparency to the market.
Lewis: Pricing transparency, it's also looking to solve some issues that are going on in the pharmacy business in general. What we see, and I was shocked by this as we dug into this company and we dug in the space a little bit, was there's a shocking amount of prescriptions that wind up being wasted or left at the pharmacy counter.
Feroldi: Between 20% and 30% of all prescriptions that are ordered go unfilled at the pharmacy counter, and that has all kinds of healthcare implications for people. In fact, the company points out that every four minutes, somebody in America dies solely due to lack of adherence to medication. The No. 1 reason they don't adhere to medicine is because of costs. GoodRx is on a mission to really make healthcare more affordable for Americans.
Lewis: You know what? The more ways that there is in a system, the more cost has to be built into it to make up for it. If you can cut some of that stuff out, it's generally going to be better for consumers.
Feroldi: That is one of the reasons why it makes sense that pharmacies and pharmacy benefit managers are interested in working with GoodRx. There's also a cost to them to just fulfill those prescriptions that then sit on their shelves and are just wasted. If GoodRx can help to reduce the number of prescriptions that go unfilled, it makes sense for them to partner with GoodRx and offer lower prices to everybody because it will lower their overall costs.
Lewis: We'll touch on some of the recent earnings elements in a minute. But just as a refresher for folks that maybe didn't catch our previous episode on this company, the bulk of revenue for this company, not surprising given how much we've just talked about prescriptions. It's the prescription [laughs] side of the company, just about 90%.
Feroldi: That's correct. That is the primary moneymaker. That was their first business that they got into, but we do see some optionality with this business. A few years ago, they launched something called GoodRx Gold subscriptions. That's where subscribers can pay a modest monthly fee of between $6 and $10, and they can buy even lower prices on over a thousand drugs at some of their pharmacy partners. That's a business that's really starting to grow. Another business that this company started up was getting into the telehealth space, so a lot of people that may need a drug might not have a doctor to actually write them a drug. You can go on GoodRx's platform and use their telehealth product called HeyDoctor to speak with a physician and actually get a script if you don't work with a doctor regularly. The company is building out other business lines for itself.
Lewis: With that, far more total addressable market. When we talked about optionality, Brian, we like to see companies that have expanding addressable markets. One of the reasons that we like seeing these flexible and nimble businesses, in their case, all of these different spaces they're playing in, the numbers get pretty big pretty fast.
Feroldi: These numbers are huge. I think most people understand that the prescription drug market in America is just enormous. But the company estimates that the amount of revenue that it could create if it could fulfill all those prescriptions that went unfulfilled, that's a $500 billion market opportunity. That number is so massive. It's really hard to even believe in some cases. That again is just one of their businesses. They also believe that the telehealth business has hundreds of billions of dollars that they could get into and up for grabs. They also work with manufacturers to help them implement the co-pay cards and get patient assistant programs. That is also a $30 billion market opportunity. If this company does not succeed, it's not because its market isn't huge.
Lewis: [laughs] Brian, you were the one who dug a little bit more into the recent earnings report for this company. What do you see?
Feroldi: Basically great results all across the board. The metric that we track most closely will be monthly active users. That's the number of people that have downloaded a GoodRx app and are using it to fill up prescriptions. That number grew 29% over the last quarter to 4.9 million. That translated into revenue growth for the company of 38% to 140 million. If you breakdown that total, as you tee up the top of the show, 88% of that total is from prescription revenue that grew 30% to $124 million. Their other revenue segment which includes the gold subscriptions as well as telemedicine, that revenue grew 170% to$16 million. Really good topline growth. The thing that really jumped off a page to me was the gross margin here. Dylan, this company's gross margin, 94%.
Lewis: Yeah, that's what happens when you specialize in digital goods, right?
Feroldi: That's good, and it's a power of a business where essentially your business is a digital coupon. That is just an insanely high number and it's likely that that's going to come back down to earth overtime as other businesses grow. But overall, wow. Now in their first quarterly report, they did report a net loss of $15 million, but that isn't really a true net loss, the CEO made almost $100 million in stock-based compensation just from taking the company public. If you adjust for that, the company reported an adjusted net income of $36 million, that figure was up 53% over the prior period. This company is growing the topline fast, has strong margins, and is highly profitable.
Lewis: You're not going to sweat profitability too much when you see those growth rates in those margins, right Brian? That's something you want to feed and let grow as big as it's going to get.
Feroldi: Yeah, but I love seeing companies at this stage of the game are already profitable. While the business is nine years old, it's a pretty decent size company already. It's a $23 billion business, given the revenue growth and the gross margins, I understand why it's that huge.
Lewis: It seems like all told things are looking pretty good over at GoodRX.
Feroldi: Really good public debut, they exceeded expectations on their first report, they remain ridiculously profitable and huge opportunities ahead. Yeah, a lot of reasons to like this company.
Lewis: All right, stock No. 3 is Inari Medical, ticker there N-A-R-I, a medical device company, and I think listeners of our show have gotten pretty used to you bringing some interesting medical device companies into the conversation, Brian.
Feroldi: This is a medical device company that's focused on, I'm going to do my best here, venous thromboembolisms. Essentially those are when there's a blood clot in the vein that is restricting flow of blood. Inari Medical makes a couple of products that go in there and help to remove that blood clot. This is a company that is currently worth about $5.6 billion. We talked about it last May, so it's been public for almost a year. They raised $180 million at the IPO and they priced at $19. Wow, did they screw up that number because this stock immediately doubled to $41, that's the price their public investors could have gotten. That was over 100% pop on day one. But even still, if you bought after that 100% pop on day one, wow, are you happy. This stock is currently at $113, so it has been a huge winner way out of the gate.
Lewis: I think we're going to need to unpack exactly what that multiple was you got there. I'm going to take a stab at it and then you can correct me if I'm wrong here, VTE, venous thromboembolism. Let's talk a little bit about what that is. What the market looks like for this. Because I'm sure most people listening to this have never heard of that before.
Feroldi: Yeah. That is simply a blockage or a blood clot that exists in somebody's veins and that just restricts flow to certain parts of your body. Now blood clots are nothing new, there are actually hundreds of products on the market that treat, that remove blood clots from the body. There's also a whole bunch of drugs that people can use to send their blood and make blood flow easier. What Inari did that is novel here is, all of the existing products that were made to remove blood clots were designed specifically for arteries and arteries are different than veins. Arteries carry oxygenated blood away from the heart, whereas veins carry low oxygen blood back to the heart for oxygenation. I'm assuming that where it is correct. Jeez, I don't even know. Arteries have been dealing with a lot of pressure because they have the heart pushing behind them. Veins, by comparison, are obviously under pressure too, but the pressure is much lower than it is for arteries. All the existing medical products that are out there that have been used on veins were first and specifically designed for the arteries. What Inari did was specifically make their products for the veins. That might sound like a small difference to you and me, but if you look at the numbers, healthcare providers clearly understand the difference.
Lewis: Yeah, this screams in the weeds thing that you really only understand if you have to or if you want to. That kind of thing that just isn't going to come up at dinner table conversation, Brian.
Feroldi: Fair enough. But again, when it comes to things like this, I always take management's word for it and then say, great, prove it with the numbers. I believe you, but go out and prove that you can generate enormous revenue growth with this product on the market. There's no doubt that Inari has done just that. In their first quarterly report, they reported revenue growth of 172%. That number was $39 million in total. That is a clear sign of product-market fit. Impressively here, the gross margin of this business is 92% already. Holy cow, is that strong top-line growth and a very high gross margin.
Lewis: Yeah, now that's the number that makes you pay attention. For anyone who's eyes or ears may have glazed over during some of the earlier medical discussion, 92% is going to make your ears perk up. This is a business that is, wait for it, Brian, it's profitable. There's profits to show for it, which is impressive given that growth rate.
Feroldi: Again, this is roughly a $5 billion company clearly in hyper growth mode. I would just naturally expect that they will be bleeding capital and reinvesting like crazy. That's a very common thing that we see for medical device companies. As you just teed up, this company is profitable. In the most recent quarter, it's net income was $6.5 million. That figure was up 20X over the prior period, albeit off of a small base. But that to me is just the power of having a really strong top-line growth and a really high gross margin. I'm sure this company is investing as quickly as it can to hire and build out, but it's top-line growth is so strong that it almost accidentally made a profit.
Lewis: If you run out of places to put the cash and you still have some leftover, I would consider that a high-class problem.
Feroldi: Yeah, totally for sure. Now, management did recently at the JPMorgan Healthcare Conference, which is an annual conference that a lot of companies go to and share their plans for the year ahead. They did give us a sneak peek at their fourth-quarter results. Basically, they said that the momentum continues in the fourth quarter of the year. They said that they expect to grow the topline by at least 141%. So the huge topline growth continues. This company is going to report earnings in a couple of weeks and it'll be interesting to see what kind of forecast they give for 2021 as a whole. But wow, diluent, so far, so good.
Lewis: Brian, if you were to look at the three of these and force rank them, I'm curious, what order are you putting them in, in terms of most interested to least interested? Also, do you own any of these businesses?
Feroldi: I do not own any of these businesses, but after reviewing them, there are plenty of reasons to do so. I'll answer your question first, I would say, I am most interested in GoodRX. After doing this show, I think they have really built themselves out. They are the number one APP in their space. By far they have the scale. They are still run by their founder, and they clearly have optionality inherent in the business to say nothing of the profit. Of the three, I think that is probably the lowest risk business and I can see that really being a market beater. But I'm not going to close my eyes on Inari. They are top-line growth is extreme and their gross margin is so impressive. If forced to rank them, I would say No. 1, GoodRX, No. 2 Inari, and No. 3 Amwell. How about you, Dylan?
Lewis: I look at Inari and what they're doing, and I say upside, they might be the riskier, but higher upside business out of the three. I think GoodRX is a business that has plenty of upside in front of it, maybe risk-adjusted, a little bit less to worry about there. I think you could debate which one gets top billing there depending on what your personal risk profile is. But they both seem like really solid businesses and we've seen some great stuff there. I want to see what happens a little bit with margins in Amwell. I think they are in an interesting line-of-business we've seen be successful. In some ways, it kind of reminds me of The Trade Desk magnet dynamic, where it's like you see one of these companies go on an absolute tear. This other one operates in pretty much the same space like it's not hard to envision it growing very quickly. But I think that business does have some more questions than these other two.
Feroldi: The bottom line for me is there's reasons to like and invest in all three of these companies, and we say over and over, you don't have to pick one. You can invest in all three if you want to.
Lewis: Yeah, there you go. There are no calls strikes and there's nothing wrong with going the basket approach and just buying a little bit of everything.
Feroldi: That's right, and I love doing these reviews shows because it reminds me to go back and take another look at these companies. I remember the first time we looked at GoodRX and I was just like, "Wow, what a gross margin."
Lewis: Well, yeah, that's the thing, Brian. Sometimes it's an embarrassment of riches with the companies we talk about. It's like we get on a heater and there are a bunch of prospectuses that come out and all of a sudden, just in doing shows, we've got a laundry list of 10 or 15 stocks that we've looked at recently. Sometimes you get a little attached to the stuff you talked about. Most recently, a little bit of recency bias there. It's nice to revisit things and make sure that you're keeping your watchlist up-to-date.
Feroldi: Yeah. Again, the next thing about relooking at companies after the fact that you now have actual data to look back on and see how they have adjusted to life as a public company and for all three of these companies, so far, so good.
Lewis: All right, Brian, thank you so much for joining me and talking healthcare, always a treat, and I know our healthcare oriented listeners are always happy to hear you on the show.
Feroldi: Anytime, Dylan.
Lewis: Listeners, that's going to do it for this episode of Industry Focus. If you have any questions or you want to reach out and say "Hey," just email at email@example.com or you can tweet @MFindustryfocus. If you want more stuff, subscribe on iTunes or wherever you get your podcasts. As always, people on the program may own companies discussed on the show and The Motley Fool may have formal recommendations for or against stocks mentioned, so don't buy or sell anything based solely on what you hear. Thanks to Tim Sparks for his work behind the glass today and thank you for listening, Fool on!