LifeMD: High Growth GLP-1 Telehealth Play at a Discount
Summary
LifeMD is positioned as a high-growth telehealth play with a focus on GLP-1 weight management treatments.
The company is guiding for 35% revenue growth in 2024. Its core telehealth business is expected to grow at least 43%.
Non-core software subsidiary WorkSimpli may be spun off within a year, while the company is on track for GAAP profitability next year.
Like its larger competitor, Hims & Hers Health, Inc. (HIMS), LifeMD, Inc. (NASDAQ:LFMD) has positioned itself as a high-growth direct-to-consumer (DTC) telehealth play with a substantial focus on access to GLP-1 weight management treatments.
It is currently guiding for 35% revenue growth in 2024 - and at least 43% in its core telehealth business, with some additional likely growth not included in the guide. Already profitable on an adjusted EBITDA basis, it is expected to reach GAAP profitability sometime next year.
The expansion of its P/S multiple, currently below 2, should drive the stock back to its previous recent high of $12 within six months (a 70% potential upside) and higher in 2025 as it approaches GAAP profitability.
A Bumpy Ride
Early last year, LifeMD seemed like a struggling also-ran in the telehealth space. It lacked the substantial revenue growth of high-fliers like Hims & Hers and the economies of scale of large virtual primary care players like Teladoc Health, Inc. (TDOC). It seemed to be going nowhere fast and was priced accordingly, floating just above penny stock status in March 2023.
That changed when it launched a new weight management program featuring access to GLP-1 weight loss drugs that April. It was a well-timed move. Over the next year, the stock rode a wave of investor enthusiasm for GLP-1s, rising more than tenfold off its 2023 lows to close at $12.64 on May 8, the day of its last earnings release.
Since then, the stock has fallen back precipitously - and probably deservedly so. Prior to the May earnings report, its P/S ratio was comparable to its larger peer, Hims & Hers, but it lacked the latter's demonstrated revenue growth, scale, and GAAP profitability. Since then, the stock price has dropped considerably, closing at $7.03 on July 26.
Although initially deserved, the correction has now gone too far. LifeMD is still guiding for 35 percent annualized revenue growth by the end of the year and at least 43 percent in its core telehealth segment. It is already cash-flow positive and profitable on an adjusted EBITDA basis. In an interview I conducted on July 11 with Marc Benathen, LifeMD's CFO, he indicated they are on track to reach GAAP profitability sometime next year. Despite this, with a market cap of $296 million and $205 million in forward (CY 2024) revenue, the stock is currently being priced at a forward P/S ratio of just 1.45. That is well below where HIMS was trading at this same stage of its revenue and earnings trajectory.
Positioning in the Telehealth Sector
In the post-pandemic world, telehealth has been a mixed bag, both in terms of usage and as an investment. Generalist primary care providers like Teladoc and the American Well Corporation (AMWL) have struggled with poor revenue growth and lack of profitability. By contrast, DTC telehealth plays like Hims & Hers have stood out by focusing on a select number of high-growth, high-demand specialty categories such as sexual health, hair loss, mental health, and prescription-strength skin care products.
The favorable unit economics of these conditions, which are usually chronic and involve prescriptions sold on a recurring basis, have allowed Hims & Hers to spend substantial sums on marketing. This has produced revenue growth and profitability that larger telehealth players like Teladoc have lacked.
LifeMD combines elements of both. Like other DTC competitors such as Hims or Ro, it has substantially focused on a few high-growth specialty categories, which has helped it escape the slow growth trap that has been typical of large enterprise-level companies. This has been particularly true for its RexMD segment, which provides products and services similar to Hims and Ro and still accounts for most of its telehealth revenues.
Unlike its DTC competitors, however, LifeMD has increasingly positioned itself as a more traditional telehealth provider rather than a low-cost online purveyor of prescription-strength drugs. One particularly important differentiator is that LifeMD accepts insurance, which covers the cost of lab tests, prescription drugs, and (starting in June) the cost of its primary care offerings and weight management services. Insurance coverage for its primary care is now available in Illinois, and management said in my interview that they expect substantial expansion to other states over the next 12 to 18 months. The company also expects to start accepting Medicare in early 2025.
Insurance coverage will make its services and products more affordable, which should help with upfront sales and patient retention. It will also allow LifeMD to maintain a more traditional patient-provider relationship with its customer base rather than relying on the one-off, text-based interactions that are more typical among online telehealth providers like Hims & Hers. These may be particularly important competitive advantages in the GLP-1 weight loss category, which typically features higher costs, especially for the drugs themselves, and an increased need for monitoring health outcomes on an ongoing basis.
One potential concern is low insurance reimbursement rates, particularly from public programs like Medicare. Historically, this has sometimes proven problematic for physicians, so it is reasonable to wonder if this might be a limiting factor for a DTC telehealth company like LifeMD, which must also cover marketing and other costs. Despite this, management said in my interview that they do not expect to see any margin pressures compared to cash-only patients, so it appears to be all upside.
LifeMD 2024-Q1 Earnings Presentation
GLP-1s
If direct-to-consumer specialty care is the key to telehealth growth, weight management featuring GLP-1 agonist medications seems to be the reigning king of the specialty care categories. Goldman Sachs and J.P Morgan have both projected the GLP-1 market to reach or surpass $100 billion in annual revenues by 2030, up from $6 billion last year.
LifeMD's embrace of GLP-1s and related weight management services lifted its stock price last year. GLP-1s also sparked a similar run for Hims earlier this year, but they are not alone. Multiple telehealth platforms have launched similar weight management programs, most of which include compounded generic GLP-1s as a more affordable alternative to the more expensive brand-name drugs like Ozempic, Wegovy, or Mounjaro.
Telehealth companies that specialize in weight management may have certain advantages. According to one recent survey, most primary care physicians do not feel they have adequate time to discuss weight management issues with their patients who are obese. Fewer than a third report that they frequently prescribe anti-obesity medications.
LifeMD's own internal metrics, as reported in various earnings calls over the past year, seem to confirm both the central role that GLP-1s have played as a growth driver for the company and its potential advantages compared to some of its competitors. Management has confirmed that their initial return on ad spending in the category has been substantially higher than normal, fully covering their average customer acquisition costs on day one.
About 20-25 percent of LifeMD's new weight loss patients are being approved for insurance coverage for brand name GLP-1s, a significant advantage compared to competitors who are only offering access to compounded generics on a cash basis. As mentioned earlier, insurance also covers lab tests and will increasingly cover the ongoing costs of primary care and weight management services. This lowers costs to the patient and should increase demand and retention. Overall, management reports that about half of their new weight loss patients that go on therapy are still enrolled in the program a year later, a retention rate that is substantially higher than usual for most DTC telehealth offerings.
As expected, these metrics have driven substantial growth. LifeMD's weight loss subscriptions nearly doubled from 22,000 to 42,000 in the first quarter of this year. They reported more than 50,000 by May and seem to be on track to reach 60,000 by the end of the second quarter. If their marketing spend holds, and Google Trends data suggests that it is, they could reach 100,000 weight loss subscribers by the end of the year. By then, the category would likely account for more than a third of its telehealth subscribers and close to half of its overall telehealth revenues, which are on track to grow by at least 43 percent on a year/year basis.
A final wildcard in LifeMD's weight management efforts is its partnership with Medifast, Inc. (MED), which was announced late last year. Under the agreement, which included a $10 million investment by Medifast in LifeMD common stock and another $10 million in direct payments, Medifast will spend just under $30 million during the second half of this year marketing a combined package that will couple Medifast's food and coaching with LifeMD's GLP-1 program. They are also offering it through their network of coaches to their prospective customers, half of whom expressed interest in GLP-1s in internal company surveys.
LifeMD is unable to estimate how many new weight management subscriptions this effort will generate, so it has left it out of its guidance. Based on the size of the ad buy and LifeMD's likely share of the combined proceeds (about 23 percent), I estimate that it could add another 10 to 20 thousand weight loss subscribers by the end of this year and twice that in 2025 if the partnership continues (it has no fixed end date).
This may well be a substantial underestimate. Weight Watchers, a top Medifast competitor, is currently adding 20 to 25 thousand GLP-1 subscribers per quarter through its acquisition of Sequence. If the Medifast partnership produces anything close to that on top of LifeMD's own weight management marketing efforts, the stock could skyrocket from its current price.
Medifast announced the ad campaign on May 20. So far, there is little sign of it in Google Trends data for Optavia, its signature weight loss brand. That suggests a soft launch that will probably ramp up slowly over the rest of the year. We should learn more from their respective earnings calls in August.
Potential Concerns
Although LifeMD seems like a promising investment, there are still a few negatives worth considering. One is that it is not a pure telehealth play. About a third of its current revenues come from a majority-owned subsidiary, WorkSimpli, which provides productivity-focused software products such as PDF conversion, resume building, and e-document signatures. The WorkSimpli subsidiary is expected to generate 20 percent year-over-year revenue growth this year, which is a solid contribution. Unfortunately, that is substantially lower than the growth in LifeMD's core telehealth business, so its presence is a drag on the company's overall growth. It also unnecessarily complicates what might otherwise be a compelling telehealth investment.
LifeMD explored selling off this subsidiary more than a year ago but decided to keep it after receiving offers that failed to match its estimated value. It is still open to selling it and management indicated in my interview that this could happen within the next year. If this were to occur, the company would gain cash on its balance sheet but lose WorkSimpli's contributions to revenue and adjusted EBITDA. By then the core telehealth business should be more than able to stand on its own, however, so I consider the potential sale a positive move.
Another recent concern, at least for retail investors, was an announcement in early June that it had filed a $150 million mixed-shelf offering with the SEC. This suggested that the company might dilute its current shareholders with an offering more than half the size of its current market cap (about $296 million at $7.03 per share). According to LifeMD's management, however, these fears are unwarranted. In my interview, they indicated that the existing shelf was about to expire, and the company was merely filing mandatory paperwork needed to keep it open in case another anchor investor like Medifast appeared or an attractive acquisition opportunity presented itself. The company currently has more than $35 million in short-term investments and cash on hand, is cash-flow positive, and does not foresee any emerging liquidity problems.
On the other hand, the number of outstanding common shares is up 30 percent over the past year. In my interview, management said most of this was due to the Medifast share purchase and other one-time conversions into common stock by early-stage preferred shareholders and debt holders that will not be repeated. About a quarter was stock-based compensation, which should be roughly comparable over the coming year, depending on the company's performance (to which it is mostly tied). This will become less important as the company continues toward GAAP profitability, which accounts for such compensation. It is also undoubtedly why institutional investors, who have substantially upped their stake over the past year, do not seem concerned.
Valuation
So what is an appropriate valuation for LifeMD? I cannot project the company's financial metrics past 2024 with any degree of precision, so a discounted cash flow (DCF) model would be merely an assumption-driven guesstimate. Instead, I will look at comps, with a particular emphasis on Hims & Hers.
In the following table, I show revenue growth, basic earnings per share (EPS), and forward and trailing P/S ratios for LFMD, HIMS, and the two enterprise-level telehealth companies previously mentioned, AMWL and TDOC. Of the four, only HIMS is currently profitable on a GAAP basis, although only barely so, having just crossed that threshold in the most recent quarter. So, for valuation purposes, we will focus on P/S comparables, both forward and trailing.
As can be seen, the two enterprise-level companies, AMWL and TDOC, feature low growth and negative earnings and trade at much lower P/S valuations. The two direct-to-consumer companies, LFMD and HIMS, feature higher growth levels and higher P/S valuations.
HIMS has a higher valuation than LFMD on a P/S basis, but I believe this is deserved because it has crossed over into GAAP profitability, and it seems well-positioned to become more profitable as its current growth trajectory continues. By comparison, LFMD is still a year or so away from GAAP profitability. I estimate that they hit break even on a GAAP basis by the second quarter of next year, based on a continuation of their current growth rate and operating margins.
In my view, the best comp for valuation purposes is the trailing P/S that HIMS experienced in 2023, the year before it hit GAAP profitability. During that period, HIMS generally traded with a trailing P/S valuation in the 2-3x range. If LifeMD merely hit the midpoint of the HIMS prior P/S range, say 2.5x, it would be valued at $512 million by the end of the year based on the company's current revenue guidance ($205 million). That suggests a return to a $12 share price within the next six months (a 70% potential upside), with more gains to come as it transitions to GAAP profitability in 2025.
Conclusion
Overall, LifeMD appears to be a compelling investment opportunity, especially at its current valuation. It is currently guiding to 35 percent revenue growth in 2024, but its core telehealth business looks on track to grow well over 40 percent - and possibly more than 50 percent once the Medifast partnership is fully accounted for. It is well-positioned in the competitive GLP-1 space, with substantial and growing insurance coverage capacity that is lacking among DTC competitors like Hims & Hers. It is already profitable on an adjusted EBITDA basis and should become profitable on a GAAP basis sometime next year.
Despite these many advantages, LifeMD is currently undervalued, especially compared to where Hims & Hers was trading at a similar point in its growth and earnings trajectory. The company seems well-positioned to reverse its recent price drop within the next few months, perhaps beginning as soon as its next earnings release on August 7.
This article originally appeared on Seeking Alpha on July 31, 2024.