Doctor Care Anywhere Group — Delivering on another IPO commitment

The entry into a new geography via the acquisition of GP2U marks the delivery of another IPO commitment, following the expansion of DOC’s platform to include mental health services earlier in 2021. Australia presents a significant opportunity given demand for telehealth services far outweighs supply. DOC’s knowhow in scaling operations and experience with large corporate insurers provides the potential to accelerate GP2U’s revenues and profitability.

DOC has acquired 100% of GP2U for a total consideration of A$11m/£5.9m, implying a transaction multiple of 2.5x unaudited gross revenue for the year ending 30 June 2021 (which equates to 8.5x net revenue). The total consideration is made up of:

The acquisition has no deferred or earn-out consideration and GP2U has no material liabilities on its balance sheet.

DOC believes that only a modest initial investment is needed to scale up GP2U’s services to help meet the current high levels of demand for telehealth services in Australia, with no additional fundraising needed. GP2U’s broadly breakeven EBITDA and cashflow levels support this belief.

GP2U is an Australian-based telehealth business, providing tele-mental health services under the brand Psych2U (78% of net revenue) and virtual GP services under the brand GP2U (22% of net revenue). Payers for both services come from either channel partner relationships, including insurers and corporates that pay on behalf of their employees, or from bulk billing – a payment option under the Australian Medicare system of universal health insurance. Notably, GP2U has an existing relationship with HCF, Australia’s largest non-for-profit private health insurer. Customer volume is driven either by partners promoting GP2U’s service or from relationships with GPs who refer patients to GP2U’s platform.

As illustrated by Exhibit 2, Psych2U offers the highest revenue per patient, particularly when services are delivered through channel partner relationships. For example, an initial consultation costs the payer c A$90 and a further treatment plan of 10–19 consultations costs between c A$90 and A$250 per session, equating to a potential value of A$4,800 for one patient journey.

A limiting factor for GP2U has been its relatively small size (see Exhibit 1), with the company reporting A$4.4m gross revenue and a total of 35,000 consultations in FY21 – DOC achieved the equivalent number of consultations in its record month of July. Despite this, the company has been growing strongly, reporting year-on-year gross revenue growth of 54.8% in FY21 (year-ended 30 June 2021) and an 84.8% reduction in EBITDA loss to A$0.1m in the same period. DOC’s investment in its own platform and its experience with large corporate insurers could provide the synergies needed for GP2U to significantly scale operations.

GP2U has access to 10 GPs, 28 psychiatrists and 22 psychologists; to meet existing pent-up demand and grow the business, DOC plans to invest a modest amount to attract more practitioners, of which management believes there is sufficient supply for the foreseeable future.

COVID-19 and related lockdowns have accelerated the adoption of telehealth globally and we believe that the recent robust performances of telehealth providers give the strongest indication yet that the sector is following a secular trend that is set to remain strong as even once the pandemic subsides. In Australia, incentives designed to promote telehealth to minimise the spread of COVID-19, as well as telehealth’s inclusion within Medicare (Australia’s universal national insurance system) have provided robust structural tailwinds. Australia’s health minister Greg Hunt confirmed this in November 2020, when he stated that the country had ‘jumped from 2030 to 2020 for the delivery of telehealth for all Australians’.

Mental health is an area particularly affected by COVID-19, where planned Australian government spending in 2021 increased to A$6.3bn to tackle the issue, including a significant expansion of telehealth services. DOC believes the greatest impact on mental health from the pandemic is yet to come, with CEO Dr Bayju Thakar, a former psychiatrist, stating he expects this to occur two to three years after the pandemic. The market opportunity for DOC is strengthened by Australia’s large rural population, which includes seven million people or 28% of the total population, where access to quality healthcare is limited as over 80% of psychiatrists and psychologists live in metropolitan areas.

The acquisition of GP2U expands DOC’s presence to one of its target geographies and into the market in which it is listed, highlighting the delivery of another key IPO commitment. DOC believes Australia is a largely underpenetrated and fragmented market, which offers opportunity for consolidation, where demand for telehealth services far outweighs supply. As illustrated above, a significant proportion of this is from mental health, where management believes the gap will widen unless supply rises.

GP2U, with its focus on tele-mental health services and its relationship with HCF, gives DOC a foothold within the market. DOC’s corporate relationship experience with major insurers such as Axa Health, Allianz and Nuffield Health, could help GP2U to extend and build on its own current corporate relationships. DOC’s experience with running telehealth services at scale provides a competitive advantage and the high levels of unmet demand in Australia could allow it to capture significant market share. In the future there may be cross-selling opportunities for mental health support software packages but this is not an immediate focus.

We have incorporated GP2U financials and estimates in our model. Our forecasts are based on GP2U’s net revenue figure, rather than gross figure due to the revenue recognition standards of Australian businesses. Given the timing of the deal in the year, the acquisition should only marginally increase FY21 revenues, with management still expecting to reach at least 100% y-o-y revenue growth without the contribution from GP2U. GP2U’s FY22 revenue contribution should be greater, but still marginal given its relatively small size compared to DOC. That said, GP2U should be immediately accretive to DOC’s gross margin. Unlike DOC’s business model, payments to clinicians are deducted from gross revenue to give a net revenue figure and this means GP2U reports 100% gross margins. Given GP2U’s FY21 EBITDA was broadly breakeven and opex is expected to rise slightly given the planned modest investment in GP2U’s platform, we do not anticipate the acquisition will materially affect DOC’s profitability in either FY21 or FY22 (excluding any exceptional items).

However, we have increased DOC’s FY21 underlying cost of sales to reflect heightened cost pressures resulting from its GP recruitment drive following the vaccine rollout in the first half of the year. Subsequently, we have lowered our gross profit forecast for the year. We expect costs to reduce towards more normalised levels in FY22, resulting in no material changes to our FY22 profit forecasts. EPS loss will reduce in both years reflecting the higher share count.

DOC’s cash position should remain robust, reducing by the A$3.3m spent on the acquisition. We believe that DOC will remain in a net cash position in FY21 and FY22.

Separately, we have not yet adjusted our forecasts to reflect DOC’s new arrangement with Boots Ireland as it is too early to see what material impact this will have. That said, it does highlight management’s commitment to continue DOC’s international expansion and the potential to enhance its direct-to-consumer model across Boots’ 89 stores across the country and Irish website. DOC’s existing operations in the Irish market include providing virtual GP services to the headquarters of one of the UK’s largest banking groups and a partnership with Allianz.