Publicly traded digital health companies facing a challenging economic environment have responded with diverging paths.
As quarterly earnings have been reported in the past few weeks, it's clear some digital health companies have an uphill climb to profitability while others have a more promising future. Here were four themes that emerged from the recent round of earnings reports.
1. Winners and losers are emerging.
Of the approximately 30 digital health companies that went public in 2020 and 2021, a divide has begun to emerge. Some are thriving while others are faltering and analysts said the difference has become more pronounced.
Physician enablement company Privia Health has routinely exceeded investor expectations since going public in May 2021. The Arlington, Virginia-based company posted second-quarter net income of $7.3 million, or 6 cents per share, compared with a net loss of $10.5 million, or 10 cents per share, in the year-ago period.
Direct-to-consumer telehealth company Hims & Hers was another winner. The company saw a year-over-year increase of 83% in second-quarter revenue, to $207.9 million. The company narrowed its net loss to $7.1 million, or 3 cents per share, from $19.6 million, or 10 cents per share. The momentum has analysts enthused about its long-term prospects.
“This is not your everyday [direct-to-consumer] company,” said Jack Wallace, vice president of equity research at investment firm Guggenheim Securities. “This is a personalized medicine company that happens to have a subscription model and provides easy access to care. I think they're going to continue to innovate along that line and continue to drive growth forward.”
Analysts are skeptical about other companies. Membership-based primary care provider Cano Health announced plans to lay off 700 employees, exit four markets and explore a potential sale. The plans were disclosed as the company reported a second-quarter net loss of $270.7 million, or 51 cents per share, compared with a loss of $14.6 million, or 3 cents per share, in the same period last year.
“Cano has a track record of missed execution, and we don't yet have evidence that the new team is changing that track record,” said Jessica Tassan, a senior equity research analyst at investment bank Piper Sandler.
Babylon Health, an artificial intelligence-enabled virtual diagnosis and medical appointments company, laid off 94 employees last Monday and said its proposed deal to go private with MindMaze would not move forward. The company said it was exiting its core U.S. business.
Both Babylon and Cano have issued warnings about their futures. Cano said its liquidity of $125 million is not enough to cover operating, investing and financing uses for the next 12 months. Babylon said if it can’t secure additional funding or sell some of its businesses, it will have to file for bankruptcy protection or find another way to wind down operations.
2. Big software deals may lag for the rest of the year.
Digital health companies aiming to sign large, multiyear deals with health systems and insurers may continue to face resistance, analysts said.
“You see vendors like Amwell and Health Catalyst struggling to sell big software deals,” Wallace said.
Amwell, a Boston-based telehealth company, recorded a second-quarter net loss of $93.5 million, or 33 cents per share, compared with a loss of $69.6 million, or 25 cents per share, in 2022. Health Catalyst, a Salt Lake City-based data analytics company, recorded a $32.6 million loss, or 58 cents per share, in the second quarter compared with a loss of $33.4 million, or 62 cents per share, in 2022.
In reporting earnings, Health Catalyst said the financial stresses at health systems have led to a deterioration in operating margins across many of its clients and prospective clients. Amwell said during its analyst call that it was experiencing customer churn.
3. Quick return on investment is paramount.
Software solutions that provide health system and other buyers an immediate payoff continue to boost the short-term financials for digital health companies.
“Everyone wants a very quick return on investment of your software or digital solution,” said Scott Schoenhaus, a managing director at KeyBanc Capital Markets. “Those will be the winners going forward.”
Amwell, for instance, is changing its playbook for how it approaches new customers.
“The shift to [the] Converge platform requires changes to our selling approach from a point solution-focused sale to an ROI-based solution-driven methodology, which we believe will result in long-term partnerships and high customer value and retention,” Amwell CEO Ido Schoenberg said on a call with analysts.
4. Pharma spending has been choppy.
Depressed digital marketing spending by pharmaceutical companies is affecting companies like Doximity, which laid off 100 employees, or 10% of its workforce, on Tuesday.
“Pharma’s shift to digital has slowed,” Doximity’s co-founder and CEO Jeff Tangney said on a call with financial analysts. “In all, we estimate digital pharma has grown at half the low-teens growth rate that we and [market research company] eMarketer predicted last year.”
Tangney said Doximity is shifting focus from a white glove, personalized distribution model where salespeople personally build campaigns for clients to a self-service, more programmatic marketing spend model. Analysts remain skeptical.
“I think the setup is going to remain challenged,” Schoenhaus said. “We'll see if this shift from Doximity to more programmatic, self-service solutions can help them sort of regain market share that they've lost.”
GoodRx had a solid second quarter, reporting net income of $58 million, or 14 cents per share, compared with a loss of $1.4 million, or 0 cents per share, in 2022. But the company similarly struggled with pharmaceutical spending. Its pharmaceutical manufacturer solutions revenue decreased 8% to $24.3 million.
