Trump's Obamacare Promise: Teladoc's Code Blue?

| About: Teladoc (TDOC)

Summary

*Obamacare, once a catalyst, is now deemed a "catastrophe" by president-elect Trump. Teladoc faces great risk if he and Republican leaders follow through with their pledge to repeal the measure.

*Teladoc faces a treacherous competitive field and has already lost a $1.5 million contract. The low-barrier business is rather easily entered by TV doctors, drug stores and other healthcare providers.

*The company is high cash-burn, negative earnings and recently filed a shelf registration ripe with dilution potential.

President-elect Donald Trump's dump Obamacare pledge could be Teladoc's code blue.

Obamacare has been a luscious target for companies like Teladoc (NYSE:TDOC), releasing a veritable army of telemedicine companies onto Wall Street in the last few years.

Obamacare "is certainly an accelerator for us," Teledoc CEO Jason Gorevic said in a September 2014 article.

In a press release titled "Obamacare creates greater need for telehealth innovations," Teledoc emphasized Obamacare or the Affordable Care Act (ACA) as a telehealth driver. The release announced new board members David B. Snow and U.S. Senator William Frist, M.D., who said the ACA "has infused an additional 8 million patients into the health care system ... Teladoc is an innovative and effective solution for addressing the current access barriers to primary care..."

And in its annual report, Teladoc wrote of the risks of ACA:

The impact of recent healthcare reform legislation and other changes in the healthcare industry and in healthcare spending on us is currently unknown, but may adversely affect our business, financial condition and results of operations.

Our revenue is dependent on the healthcare industry and could be affected by changes in healthcare spending and policy. The healthcare industry is subject to changing political, regulatory and other influences. The PPACA made major changes in how healthcare is delivered and reimbursed, and increased access to health insurance benefits to the uninsured and underinsured population of the United States.

Obamacare, once a catalyst, has been deemed a "catastrophe" by president-elect Trump and may be repealed.

Mr. Trump pledged that once he won the election, he would convene a special session of Congress to repeal the ACA:

(Source: NBC News/YouTube)

"Obamacare has to be replaced. And we will do it. And we will do it very, very quickly," he said in a Nov. 1 healthcare policy speech.

The day after the election, Republican leaders promised that they will "hit the ground running." Getting rid of Obamacare is a top priority.

Investors may find other viewpoints on Teladoc here. Meanwhile, TheStreetSweeper takes a closer look at the Teladoc foundation that is precariously propped up by Obamacare.

*Cash Burn; Dilution Ready

Teladoc's business of connecting patients to doctors by webcam, app or phone has depended on loans, plus private and public stock offerings, while losing money since inception.

The cash burn rate is ~$14.6 million per quarter, which places a mighty squeeze on Teladoc's $44 million cash and equivalents.

And as many assumed Obamacare would be relatively safe with Hillary Clinton in the White House, company managers said that cash and borrowings would last through 2017. CFO Mark Hirschhorn stated:

"Based on our current projections, we believe we will have cash balances and available borrowings in excess of $50 million as we exit 2017. This assumes no additional borrowings or capital raises."

Still, Teladoc prepared to plug any cash hole by issuing more stock.

The shelf of shares registered Sept. 20 may be sold in any amount from time to time, giving company the power to dilute.

APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: From time to time after the effective date of this registration statement.

So at the current stock price, Teladoc would be able to sell about 17 million shares. This means more than another third of shares outstanding could hit the market.

"We may offer and sell up to $300,000,000 in the aggregate of shares of our common stock identified above, and the selling stockholders may offer and sell up to 2,000,000 shares in the aggregate of common stock identified above, in each case from time to time in one or more offerings. "

The registration, declared effective by the Securities and Exchange Commission on Oct. 5, also cleared the path for unnamed selling stockholders to unload 2 million shares. Sellers will get all proceeds. Not one dime will go to the company.

*Losses: Analysts Expect More Of The Same

Normally optimistic analysts offer a rather poor prognosis for this year and next for Teladoc:

(Source: Marketwatch, TheStreetSweeper)

Those analysts may have noticed that Teladoc got a big boost from its $163 million initial public offering last year and saw revenue grow from $26 million to $32 million last quarter ... while earnings have been mired in red since the beginning.

(Source: Seeking Alpha, SEC filings, TheStreetSweeper)

Losses have already accumulated to more than $190 million. The company itself expects revenue of $122 million to $123 million and a loss of $-1.79 to $-1.81 per share for 2016.

Meanwhile, investors endure poor profitability measurements from Teladoc:

(Source: Seeking Alpha)

Meanwhile, the rate of use of the service has dropped since the first quarter:

(Source: Company/Seeking Alpha here, here, here, TheStreetSweeper)

*Insiders Dump Teladoc

Among company insiders, the number of sold shares over 12 months exceeds bought shares by about 15-to-1.

(Source: Nasdaq)

In the last three trades, officers sold when shares were trading around today's prices and below.

Sometimes the actions of the chief financial officers are particularly telling because they usually understand a company as well or better than anyone. About a dozen days before the company announced in September that CFO/Executive Vice President Mark Hirschhorn would also serve as chief operating officer, the financial officer set up an automatic trading plan.

Last month, the CFO/COO sold 5,000 shares at an average of $15.52. That's more than two bucks below the current level.

(Source: insidertrading.org)

Last summer, CEO Gorevic did some similar trading of company stock. On June 29, he bought 5,000 shares through stock options for a buck and change and sold them under an automatic plan for ~$15. He did basically the same thing on July 15 bringing in over $141,000 in two days.

(Source: insidertrading.org)

The graphic below shows the stock chart with insider buys in green and sells in red:

(Source: CNN )

The sales suggest that insiders may be anxious about their company's future and stock price.

*Fierce Competitors

Teladoc went public in July 2015, a couple months after Barron's article on the Obamacare-spurred telehealth IPO madness in "Brace for a Cascade of Health-Tech IPOs."

The company immediately found itself facing competitors who had been selling their own telehealth programs to employers and health insurance companies for quite some time.

Compared with a couple of rivals that went public about 1 1/2 years earlier, Teladoc produces much less revenue and even greater losses. Yet its market valuation is more than double its peers.

(Source: Marketwatch, TheStreetSweeper)

The long list of competitors include MDLive, Medidata Solutions, Athenahealth, Call A Doctor Plus and Sharecare, founded by cardiac surgeon and TV personality Dr. Oz.

Indeed, it's difficult for any one company to stand out among the competition. And this low-barrier business is an easy one to enter for various health care providers, TV doctors and drug stores. The more than 7,000 urgent care centers that have popped up on every other corner nationwide are providing cheaper, easier, faster alternatives to the emergency room, too.

Meanwhile, two private rivals have engaged Teladoc in a very public battle that did not go well for the Purchase, NY-based company ...

*Contract Loss Suggests Threatened Business Model

In October 2015, Deutsche Bank broke the news that an insurer would not renew a $1.5 million contract with Teladoc.

Highmark Health had decided to switch some customers to American Well and Doctor On Demand.

Highmark may have been put off by Teladoc's per-member, per-month fee, suggested The Wall Street Journal in an article headlined, "Why Teladoc Needs Medical Attention."

The Teladoc and Doctor On Demand chief executives each spiritedly defended their respective business models in a follow-up mobihealthnews article.

Doctor on Demand CEO Adam Jackson said his company's lack of a monthly fee makes it more committed to telehealth services. He said Teladoc's fee of $145 per visit is higher than seeing a doctor. Indeed, the fee is higher than the estimated $138 cost of an in-office visit in the Boston area.

But Teladoc CEO Gorevic said a fee helps drive use because the customer essentially has skin in the game.

"We have no plans to abandon our current pricing model," Mr. Gorevic said. "The fees our clients pay us provide money for engagement programs that drive utilization. Without those strategies or funding for those strategies it is an unsuccessful model. And I think that's what you're going to see with these extraordinarily low-priced options in the market."

But Mr. Jackson predicted Teladoc's business model will become obsolete by next April.

"One thing will certainly be true in the telemedicine market in the next 12 to 18 months," Mr. Jackson said. "No one will be charging a per-market per-month (OTCPK:PRPM) fee. We're basically forcing it out of the market."

If that happened, some customers just might be happier ...

*Customer Complaints

Some Teladoc customers have gone to the Internet to express their exasperation with everything from having to pay an additional consultation fee for uploading a photo of a throat, to rude doctors, to not receiving a call back from a doctor....

One doc got a little short-tempered with the whiners:

Another doctor who says he's a Teladoc physician may offer the best insight into a doctor's view of the model's shortcomings... too much time out of a doctor's day for too little money:

(Source: complaintsboard.com, TheStreetSweeper)

*Conclusion

Teladoc's shelf of stock, cash position, persistent losses, insider selling, pricing model risk, customer disenchantment and treacherous competition were already threatening to place this stock on life support. When Mr. Trump and the Republican legislature get finished with Obamacare, it may be too late to call code blue.

We believe Teladoc will drop to a more reasonable valuation of about $9 per share.

Disclosure: I am/we are short TDOC.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

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