Doctor Care Anywhere Group — Growth company focused on profitability

Doctor Care Anywhere Group (DOC) was founded in 2013. It is headquartered in London but listed on the Australian Securities Exchange (ASX). DOC’s telehealth services currently include virtual GP (VGP) and Internet Hospital, which customers can access through its channel partners. It aims to provide health insurers with a reduction in claims costs of up to 20% by combining primary and secondary care and, in doing so, reduce unnecessary appointments and diagnostic tests. Patients benefit from better and quicker access to healthcare, with fewer in-person appointments.

In its December 2020 IPO, DOC aimed to achieve at least 100% organic growth in FY21, which it exceeded with group revenue increasing by 115.7% to £25m (+114.6% organic). Demand for telehealth has been consistently high, benefiting from the pandemic’s positive impact on consumer, clinician and payor realisations on the benefits of digital solutions in healthcare. DOC has been successful in onboarding clinicians across 2021 to meet this rising demand for telehealth, despite GP supply shortages caused by constraints on the UK’s clinical workforce. In addition to this revenue target, management completed several other targets by successfully growing the number of services it can provide on its platform and by expanding into new geographies with its acquisition of GP2U Telehealth in Australia.

Management’s short- and medium-term objective is to continue growing revenues at a high rate, while also delivering robust margin expansion. Its new operating model, announced in December 2021, should drive margin improvements through its ability to deliver consultations more efficiently via a greater range of clinicians, leading to a lower cost of delivery per consultation. This should support DOC’s margin recovery, which saw temporary pressures from the investment needed to onboard GPs. The group now expects to reach run-rate EBITDA profitability by the end of H123. Our updated forecasts reflect this, where we expect DOC will achieve revenue growth of 45% to £36.1m in FY22 (+2% on our previous estimate) and 39% to £50.3m in FY23. Gross profit should grow at a faster rate in both years at 65% and 57% respectively, leading to gross margin improvement of 5.8pp in FY22e (+4.6pp higher than our previous estimate) and 6.0pp in FY23. Supported by greater operational leverage, we believe DOC will be EBITDA positive in H223 and we forecast an adjusted EBITDA loss of £0.8m for FY23. The February 2022 capital raise of A$11.2m (gross) should provide sufficient funds to achieve this target.

The key sensitivity to our forecasts is customer concentration, with DOC’s relationship with AXA accounting for 85% of 2021 revenue. Additionally, DOC cannot provide any online GP services or facilitate diagnostics with any direct competitor of AXA in the UK. However, its plans for geographic expansion and existing relationships with large payors like Nuffield Health and Allianz should help diversify revenue in the longer term.

Looking at EV/Sales across FY22e and FY23e, DOC trades on 0.9x and 0.7x our revenue forecasts, representing a discount of 80% and 81% respectively to the peer group averages. We believe these discounts could be due to investor concerns around DOC’s loss-making track record and fast cash burn rate. We therefore believe they will narrow as DOC builds towards profitability. Were the shares to be priced at an average parity with peers across FY22e and FY23e, the implied share price would be A$0.75, suggesting significant upside potential.

DOC is a fast-growing telehealth company focused on delivering high-quality, effective and efficient care to its patients, while reducing the cost of providing healthcare for health insurers and healthcare providers. The company operates a business-to-business-to-consumer (B2B2C) model, using its relationships with health insurers, healthcare providers and employee benefits providers to offer its patients a range of telehealth services, which currently includes VGP and Internet Hospital.

DOC mainly services the UK’s private health sector but has plans to expand into new markets as well as growing its service offerings. In 2021, it expanded its operations in Ireland and entered the Australian market with the acquisition of GP2U Telehealth. Management’s new agreements with AXA and Nuffield Health, as well as its new operating model, provide good visibility on the company’s growth plans for 2022 and beyond.

DOC was founded in 2013 to provide better access to healthcare for patients by using technology, while saving costs for insurers and healthcare providers. At the end of 2020, DOC became a publicly listed company with its successful IPO on the ASX and has since delivered on several IPO commitments, including:

The company’s track record of strong growth has been driven by new service offerings, the development of new partnerships and the expansion of existing relationships, both with large insurers and healthcare and benefit providers.

In 2015, DOC entered into its first strategic relationship with health insurer AXA Health to provide its virtual GP services. The partnership with AXA has been key to the company’s growth, with DOC and AXA establishing a UK JV in 2020. On 15 December 2021, management announced its Variation of Agreement with AXA Health, which we expect to contribute significantly to the group’s goal of delivering profitable growth from H123 due to a reduction in the cost of delivery per consultation.

Other important partnerships include Nuffield Health (2016), Perkbox (2018), HCA Healthcare (2020), Allianz Partners (2020), Boots Ireland (2021) and HCF health insurance (2021) via its acquisition of the Australia-based GP2U Telehealth.

A key element of DOC’s rapid growth has been the increase in its service offerings. In 2019, it completed a pilot of its Internet Hospital offering, which combines primary and secondary healthcare, leading to a full-service launch of Internet Hospital with AXA in early 2020. In November 2020, it expanded into mental healthcare services and in January 2021 it partnered with digital mental healthcare pioneers Koa Health and Kooth.

At the end of 2021, management announced its new operating model, where patients will now be able to see an advanced nurse practitioner or take a QuickConsult, adding to its existing GP option. The diversification of the offering and lower average cost of delivery per consultation should be key to DOC’s ambition of building on profitability and margins from Q222 onwards. In H222, the company is expected to launch its new service with Nuffield Health, which will establish the UK’s first digitally integrated virtual and in-person primary care service.

DOC made its first foray outside the UK in 2020, entering the Republic of Ireland using a team of doctors registered by the Irish Medical Council. Since then, it has built on its existing B2B operations through its partnership with Boots Ireland, expanding its service to self-pay patients. DOC also entered the Australian market in September 2021 through its acquisition of GP2U Telehealth, a leading provider of virtual GP services and telemental health services in the region.

Through the investment and development of its platform, DOC is implementing innovative new ways of connecting patients to doctors. Over 2021, management invested significantly in onboarding new GPs and retaining existing ones, which was crucial to meeting the heightened levels of demand for telehealth services over the life of the pandemic. At the end of the year, it announced its new operating model, which provides patients with options based on their clinical requirements. By expanding its range of services, DOC should be able to continue to scale in line with the demand for consultations on its platform where, according to management, there are twice as many advanced nurse practitioners in the UK as GPs.

Practitioners are either employed by DOC or self-employed and have a contract with the company, while specialists are all currently self-employed and have contracts with DOC that can be terminated at short notice. The medical practitioners are overseen by clinical leads, who are responsible for the recruitment, training, quality assurance and performance management of DOC’s medical practitioners. Notably, DOC can now accredit practitioners without needing a third-party, making the GP onboarding process more efficient.

Patient safety and service quality are a key focus for DOC’s senior management, with high standards of clinical quality governance integral to the company’s strategy. There is an independent Clinical Governance Committee (CGC), which reports to the board on matters such as effectiveness of clinical governance, quality and compliance arrangements and performance. DOC’s chief medical officer holds primary accountability for clinical governance, while the chairman of the CGC provides assurance oversight of the application and effectiveness of clinical governance standards and performance. Additionally, DOC is regulated by the Care Quality Commission (CQC) and obtained an overall rating of ‘good’ at its last assessment in September 2019.

DOC’s core technology platform is built in a modular and scalable manner, allowing it to be customised to clients’ specific needs. The platform is deployed over Microsoft’s Azure cloud service as well as the UK public health cloud – UKCloud – facilitating the launch of DOC’s services into new geographies as well as additional service offerings. Electronic health records (EHRs) are a key part of the platform. Both patients and medical practitioners can access records related to their consultations over the DOC platform online 24/7, thereby leading to more complete information for the practitioner to base their decision on. DOC plans to invest in further developing its EHRs to expand its functionality substantially.

Virtual consultations over the platform are encrypted to ensure patient data remain private as well as appropriately stored and used. Cyber security protocols have been embedded into the platform from its inception and DOC has been General Data Protection Regulation (GDPR) compliant since 2018, with a set of policies in place to govern data protection and breaches.

DOC’s route to market is through channel relationships, which provide a lower cost of customer acquisition than a direct business-to-consumer (B2C) model. The company has built up an impressive list of partners including major global health insurers such as AXA Health and Allianz Partners, and large healthcare providers like HCA Healthcare and Nuffield Health, among others, through which it provides its telehealth services. DOC currently services more than 1,500 corporate clients and had a base of 2.4 million patients at the end of 2021.

AXA Health is the company’s oldest partner, dating back to 2015, when it established a commercial relationship with DOC. This subsequently led to a UK JV between AXA Health and DOC in January 2020, with the JV partners launching their Internet Hospital in April 2020.

Given DOC’s participation in the UK JV, it has an exclusive relationship with AXA, which prevents the company from working with other health insurers in the UK. However, this does not prevent DOC from partnering in the UK with healthcare providers like HCA and Nuffield or potentially exploring other avenues such as retail pharmacies like Boots Ireland.

DOC’s business model is designed to capture revenue from different parts of the patient journey, where most of the revenue is generated through either a utilisation-based model or a subscription model for VGP consultations and specialist reviews. Licence fees are also charged to some channel relationships for development work and access to the platform. Revenue is largely generated from the provision of services in connection with:

Until the recent agreement with AXA Health, all rebates earned from diagnostic referrals were paid into the JV. Following the recent agreement, AXA will now pay DOC’s share of the rebate directly to it and DOC will pay an annual licence fee to the JV for using its technology. We expect this to have a material impact from Q222 onwards, and we forecast an additional £3m in revenue in FY22 compared to our previous estimate. Previously, DOC was only entitled to receive a share of dividends paid by the JV, which has so far been loss making.

DOC was founded specifically to address the fragmentation found in health systems globally, which leads to cost inefficiencies and poor patient outcomes. The company aims to provide health insurers with a reduction in claims costs of up to 20% by combining primary and secondary care and, in doing so, reduce unnecessary appointments and diagnostic tests. Patients benefit from better and quicker access to private healthcare, with fewer in-person appointments. DOC’s strategy is to move towards ‘total care’ by capturing a greater proportion of the care pathway. It plans to do this by developing and optimising treatment pathways across its seven medical specialties and expanding into other areas, combining primary and secondary care, acute and chronic conditions, and physical and mental health management.

The company has detailed five key areas of growth:

DOC currently offers both primary and secondary clinical services, which are delivered through its proprietary cloud-based platform. It integrates virtual consultations with diagnostic reviews, resulting in time and cost efficiencies as well as an improved patient experience. An overview of its services is shown in Exhibit 4, highlighting how management efficiently uses varying types of clinicians within a workforce to treat a wide range of conditions at scale.

DOC currently has two established service offerings:

Traditionally, DOC’s VGP services were provided by a doctor, involving a 20-minute video or phone appointment made available 24/7, 365 days of the year. In December 2021, management announced its new operating model, expanding its range of services and tailoring them to a patient’s clinical requirements, including:

The new operating model should allow DOC to continue to scale in line with the demand for consultations on its platform where, according to management, there are twice as many advanced nurse practitioners in the UK as GPs. The 15-minute option will also enable GPs to deliver more consultations per hour, compared to the previous fixed 20-minute sessions.

The diversification of the offering and its subsequent lower average cost of delivery per consultation should improve margins, supporting management’s goal of delivering profitable growth in FY22 and beyond. The automated triage system, health navigator, should also help the company grow consultation volumes while minimising the impacts on its cost base. These implementations are expected to be rolled out gradually from Q222 and should start having a full impact from FY23 onwards.

Patients can also use the platform to access prescription medication, where prescriptions are automatically uploaded to their account for them to take to any participating pharmacy, which currently includes Boots, Tesco, Superdrug, Day Lewis and Rowlands. DOC can also liaise with non-participating pharmacies to ensure patients receive their medication.

All records of consultations over the DOC platform are available to the patient 24/7. Private specialist referrals, diagnostic referrals, private in-person GP referrals and official statements regarding the patient’s fitness to work or sick notes are directly uploaded to the patient’s records.

The target segment for VGP services includes payors (healthcare insurers like AXA Health and Allianz Partners), healthcare providers (like HCA and Nuffield) and health services resellers (such as Perkbox) and corporates.

DOC’s Internet Hospital combines primary and secondary care into a single seamless experience for the patient, while saving costs for the payor. A pilot of the Internet Hospital was launched with AXA Health in January 2019, with a full commercial launch in April 2020.

The Internet Hospital currently covers seven medical specialities: cardiology, ear nose and throat (ENT), gastroenterology, gynaecology, orthopaedics, spinal and urology.

The seamless proposition which the Internet Hospital provides to patients is best illustrated by an example of how a patient’s journey would compare to a traditional in-person solution.

Additionally, the number of in-person visits, in our example above, is greatly reduced by DOC’s Internet Hospital at just one versus three for the traditional healthcare set-up. This two-thirds reduction in in-person visits is a win-win, given it is both more convenient and faster for the patient, while reducing the cost of providing the care for the payor.

Financially, DOC benefits from an extended patient journey, where an initial consultation of £45 could grow into a total revenue per patient journey of £200 through additional diagnostic tests, specialist reviews and GP follow-ups. DOC collects a 100% gross margin on those steps of the patient journey that do not include a GP consultation, as none of the secondary care is provided on its platform and so it only collects a rebate for referrals for the amounts shown in Exhibit 8. As mentioned earlier, DOC will now be able to collect these rebates directly, where previously it Could only collect a share of dividends paid by the JV.

In June 2021, DOC announced that it had strengthened its partnership with Nuffield Health with a five-year contract to deliver the UK’s first digitally integrated virtual and in-person primary care service. The partnership will combine DOC’s 24/7 VGP service with Nuffield Health’s national network of face-to-face GPs and facilitate a greater range of services that DOC can deliver, including in the areas of women’s health, travel and immunisation clinics and chronic disease management programmes.

It is due to launch in mid-2022 (delayed from Q421, as previously indicated) and DOC expects it to generate minimum revenue of £1.9m across two years post service launch, primarily through rebates collected from referrals to in-person care. There is growth potential above this, where DOC has scope to increase its volume of primary care consultations and offer a broader scope of services.

DOC’s executive board (biographies on page 18) consists of co-founder and CEO Dr Bayju Thakar and chairman Jonathan Baines. Bayju is a medical doctor, specialising in psychiatry, and previously worked at McKinsey & Co. He co-founded DOC and has been key to the company’s growth into an integrated digital healthcare provider. Jonathan, who has been chairman since November 2018, has extensive board and governance experience. He had a successful career in the search industry, which included founding and selling his own firm and serving as chairman of Korn Ferry in EMEA. Bayju and Jonathan have built up a solid executive management team (biographies on page 18), which includes CFO and company secretary Dan Curran, medical director Dr Tim Bray, chief commercial officer Paul Tambeau, chief innovation officer Mark Findlater, and brand and communications director Leonie Foster.

The executive board and management team are augmented by five experienced, high-profile non-executive directors: David Ravech, Simon Calver and independent non-executives Richard Dammery, Romana Abdin and Vanessa Wallace.

Telehealth is the provision of healthcare services at a distance, using information and communications technology (ICT), instead of traditional in-person treatment. ICT such as computers and smartphones with video calling, digital imaging and healthcare monitoring devices has made it possible for doctors and other clinical staff to monitor, diagnose and treat patients remotely. Telehealth is a broad term that covers any type of healthcare that is delivered remotely, including medical information provided online, calling a nurse hotline, apps that provide information and initial diagnosis, and sending data from a device like a heart monitor via the telephone to a cardiologist.

There are three ways in which telehealth can be delivered:

The healthcare services provided by DOC fall under the synchronous and asynchronous categories.

Without the effective intervention of digital solutions, the global healthcare market will continue to face unsustainable rising cost pressures and a shortage of clinicians. Telehealth providers benefited significantly from the pandemic due to restrictions limiting in-person doctor and hospital visits, with usage growing by 78x from February to April 2020 (source: McKinsey). Despite a fall from the highs seen in April 2020, telehealth use has stabilised at a level 38x higher than before the pandemic as of February 2021, with psychiatry seeing the highest penetration levels of any speciality at 50% (measured by percentage share of outpatient and office visit claims, source: McKinsey). This highlights that there has been both greater consumer and provider willingness to use telehealth, where the market has also benefited from certain regulatory changes designed to increase adoption during the pandemic.

However, healthcare remains one of the few areas in which the prospect of digital transformation is so controversial, with concerns over an erosion in outcomes, digital exclusion, disruption to established healthcare structures and privacy all frequently voiced. Historically, medical training was based on the notion that physical examination (eg auscultation, palpation and percussion) was a necessary part of evaluating a patient. Additionally, every medical decision potentially carries a legal risk for the physicians. As a result, the medical fraternity pushed back against the adoption of telehealth, either because of dogmatic views gained during university years or simply due to fear of legal action. Patients still need to visit a diagnostic test centre for things such as x-rays or MRI scans, blood and other samples or for some diagnoses that require a more hands-on approach. Additionally, not all patients have the systems, broadband or ability to use such technology.

Statista forecasts that the global telehealth market will grow at a CAGR of 25% from US$49.9bn in 2019 to US$459.8bn (8.2x) by 2030, primarily driven by COVID-19-related changes in the habits of consumers and providers. Despite varying industry estimates, the consensus that telehealth is poised for higher adoption and robust growth remains broadly consistent. For example, Global Market Insights estimates that the global telehealth market will increase by a CAGR of 25.2% between 2019 and 2026, from US$45.5bn to US$175.5bn.

Key growth drivers for increased telehealth adoption include increased prevalence of chronic diseases, long waiting times at hospitals, greater need for cost-saving in healthcare delivery, a growing number of smartphone users, and advances in consumer information and communications technologies.

Below we compare the average share price performance of DOC’s peers, representing the leading listed telehealth companies globally, with the major US, UK and Australian indices and with the Facebook (Meta), Amazon, Apple, Netflix and Google (FAANG) average. As expected, the peer average outperformed all the global indices in the exhibit, underpinned by the fact that telehealth providers were among the top beneficiaries of the pandemic. However, notably, the peer group has also outperformed the MSCI World Health Index (which includes all digital health services) and the average of the FAANG stocks from the start of 2020 to date.

From the start of 2020, the average peer share price has risen by 72%, despite a de-rating from the highs seen at the peak of the pandemic (February 2021). This is 17% higher than the FAANG stocks’ average and 41% greater than the best performing global index (S&P 500: 31%).

The number of telehealth companies listing globally continued to grow from the strong levels seen in 2020, following the robust growth in demand for telehealth since the start of the pandemic. The listings with the highest profiles in 2021 were in the US, including:

Following a strong period of growth, we believe that the global telehealth market is now undergoing a period of consolidation, underpinned by the typical behaviour of product life cycles. As shown in Exhibit 11, 2021 saw the highest level of M&A activity in the healthcare technology market in both deal volume and total value, and we believe this trend will continue.

A rapid scale-up in venture capital investment has catalysed growth in the market, demonstrated by investment in mental health in the UK reaching US$3.1bn in the first nine months of 2021, double the levels seen in 2019 and substantially higher than the US$90m spent 10 years ago (source: Edison digital health webinar). Our digital health webinar in December 2021 highlights the importance of scale for telehealth companies, so that they can provide the best outcomes by creating a one-stop shop for patients.

Babylon has historically been the UK’s largest telehealth provider, but has switched its focus to the larger US market following its IPO at the end of 2021. Subsequently, the UK telehealth market provides a broad range of services but primarily consists of private companies, including:

DOC’s financial results are accompanied by three main key performance indicators (KPIs):

The company provides a further breakdown by utilisation or subscription for each of the three KPIs, as shown below:

DOC’s FY21 results show that it has beaten its headline target of achieving at least 100% organic growth in the year, with group revenue increasing by 115.7% to £25m (+114.6% on an organic basis). Q421 was DOC’s strongest quarter to date, with the group reporting revenue of £7.9m, up 35.9% q-o-q and 107.7% y-o-y, benefiting from higher average revenue per consultation across its core business, as well as a c £100k contribution from the newly acquired GP2U Telehealth.

FY21 consultations, the group’s primary revenue driver, grew by 105% year-on-year to 440k. Consultations in Q421 grew by 23% quarter-on-quarter to 143.3k, representing a second consecutive quarter of record figures. Notably, the percentage of returning patients remained flat quarter-on-quarter at 65% and the remaining 35% equated to a record 50,600 first-time patients. The level of growth achieved highlights the success of the group’s GP onboarding programme, where competition to secure GPs has been high in 2021 due to the pressures faced by the UK’s clinical workforce relating to COVID-19 and the vaccine roll-out.

However, the higher-than-normal rates and additional incentives required to secure GPs resulted in significant margin pressure in FY21. On an underlying basis, FY21 gross margin fell by 12.7pp year-on-year to 36.5%, with the greatest impact seen in Q321 when margins were 30.3%. There was a recovery in Q421 as a result of the updated agreement with AXA Health, and we expect margins to keep building in FY22 as the impact on the UK’s clinical workforce eases and DOC rolls out its new operating model.

After completing several of its IPO goals in 2021, management is now looking to achieve profitable growth and expects to reach run-rate EBITDA profitability by the end of H123. Its updated service agreement with AXA and new operating model should both allow for consultations to be delivered more efficiently and support margin improvements through a lower cost of delivery by consultation. Its investments in automating technologies, such as its health navigator, could also strengthen operating leverage as it will not need to scale staff costs in line with expected consultation growth.

Management guidance given in its FY21 results indicates that it expects revenue to grow by another 40–50% year-on-year in FY22 to £35–38m and to achieve an annualised revenue run rate of £44–55m by the end of H123. DOC also expects to achieve run-rate EBITDA profitability by H123 and a gross margin of 50–60%.

This is in line with our forecasts, where we expect momentum to continue with revenue growth of 45% to £36.1m in FY22 and 39% to £50.3m in FY23. Gross profit should grow at a faster rate in both years at 65% and 57% respectively, leading to gross margin improvement of 5.8pp in FY22e and 6.0pp in FY23e. Supported by greater operational leverage, we believe DOC will be close to EBITDA break-even in FY23, where we forecast adjusted EBITDA loss of £0.8m.

In the same way as before, DOC reports a cost recharge from the JV as other operating income. However, DOC is now entitled to collect rebates directly from AXA, providing an immediate boost to revenue as well as having a quick impact on cash due to the contract’s agreed cash conversion cycle of three months. Previously, all rebates were paid into the JV, with DOC entitled to dividends once the JV was in a position to pay them (the JV has been loss-making to date). DOC’s ability to renegotiate its existing contract with AXA highlights the importance of its model for payors, as it provides both potential cost savings and better clinician outcomes.

At the end of February 2022, DOC announced that it had successfully completed a capital raising of A$11.2m (A$10.5m/c £5.9m net) through the issue of c 36.1m CHESS depositary interests (CDIs), which is the primary driver for our FY22 net cash forecast increasing by nearly 4x from our previous estimate. Given the high cash burn rate of c £5m per quarter in FY21, management wanted to ensure that it has sufficient capital to fuel growth and achieve its target of run-rate EBITDA profitability by end-H123. The use of the funds is highlighted below:

Additionally, DOC is currently undertaking a security purchase plan with existing eligible holders in Australia and New Zealand, which could raise up to another A$1m.

Our forecasts and the share price will be sensitive to the following factors:

As previously discussed, 2021 saw several IPOs across the telehealth market, which we have reflected in our peer table. EV/sales multiples form the basis of our valuation as the peer group companies are fast growing and pre-profitability. Across FY22e and FY23e, DOC trades at 0.9x and 0.7x respectively, representing discounts of 80% and 81% to the peer group averages in both years. We believe that these discounts could be due to investor concerns around DOC’s loss-making track record and fast cash burn rate. Subsequently, we expect the discounts to narrow if DOC delivers on its goal of expanding margins and achieving EBITDA profitability by H123.

Were DOC’s shares to be priced at an average parity with peers across FY22 and FY23, the implied share price would be A$0.79, suggesting significant upside potential from its current share price of A$0.29.