HCA - Augmedix: Using Generative AI To Document Medical Records

2023-10-04 03:38:44 ET

Summary

• Augmedix's collaboration with HCA Healthcare led to a 100% surge in the stock, showcasing the positive impact of AI in healthcare.
• The company's technology platform improves patient care by allowing doctors to remotely access real-time medical records and save time on documentation.
• Augmedix's partnership with HCA Healthcare for testing and launching Augmedix Go indicates the potential for higher revenues and valuation.
• I also highlight the risks which could be caused mainly by a potential delay.

Headquartered in San Francisco, California, Augmedix ( AUGX ) is a medical technology company offering solutions that address one of the most cumbersome tasks in the healthcare sector which is the documentation of patient care. Now, it is precisely thanks to a collaboration with HCA Healthcare (NYSE: HCA ) for developing an AI-enabled tool in this respect that the stock surged by more than 60% on April 20 as shown in the chart below.

Now, my aim with this thesis is to show that even after such an upside, the stock is a buy, and for this purpose, I first start by providing some insights into how Generative AI is making its way into the healthcare system.

Appropriately Positioned in Medical Technology

According to Morgan Stanley ( MS ) research, more budgets should become skewed towards artificial intelligence and machine learning, or 10.5% of corporate spending in 2024, up from 5.5% in 2022. The investment bank adds that in addition to AI-driven drug discovery in the bio-pharmaceutical industry, there should also be benefits for life sciences tools, diagnostics, medical technology, and healthcare services.

Now, with its technology platform, Augmedix manages medical records for labs, medications, and allergies by allowing doctors to remotely access customized records on a real-time basis, all resulting in better patient care. Going a step further along the value chain, the company has developed hands-free charting which enables real-time documentation while abiding by the IT security rules in the healthcare sector where disclosure of patient information is unlawful and is governed by HIPAA compliance.

Now, for those who are new to the field, hands-free charting refers to a scenario where instead of using pen and paper or a laptop to record what the patient is saying, an audio device is used before ultimately transcribing the information into text. This information which pertains to diagnosis, medication, and procedures performed is ultimately inserted into the patient’s EHR or Electronic Health Record for sharing within a restricted group of medical professionals comprising doctors and nurses.

Now the whole process includes some dose of AI including large language models similar to those used by OpenAI's ChatGPT in order to process the words commonly used in the medical jargon for capturing multiple conversations and voices into medical notes. In addition to audio, the video medium is also supported.

Furthermore, in addition to the convenience factor this way of automating things alleviates the administrative burden off the shoulders of doctors, a key source of burnout for practitioners, and can save them up to three hours a day. This translates into higher patient volumes per day and significantly improves point-of-care economics, by up to 40%, especially for those equipped with emergency rooms which need to be well documented. At the same time, Augmedix has been able to capitalize on its products to consistently increase revenue, and, when considering the second quarter of 2023 (Q2) to the right side of the chart below, shows an acceleration.

Now for a relatively small medical technology provider with a market cap of only $210 million to grow in such a way, means that it needs to work closely with healthcare providers, and, to this end, the partnership with HCA Healthcare, one of the largest medical facilities operators in the U.S, will involve testing Augmedix Go, and is scheduled to be commercially launched later in 2023.

Competitive Products and Valuing the Stock

Now, this is a clinician-controlled mobile app that uses ambient AI technology (like for example our smartphone) and structured data to create an automated draft medical note as pictured below.

Looking across the industry, there is competition from Carbon Health which rolled out its hands-free charting in June, which also uses Generative AI. However, this company, in addition to being a technology developer like Augmedix is also a private owner of about 123 clinics and a healthcare provider. As a private enterprise, it has raised $622 million in funding after over 12 rounds, with the latest one occurring in January this year. Thus, the company was valued at about $3.3 billion early this year, but, unlike Augmedix which needs to collaborate with healthcare service providers to test its products before launch, Carbon Health can rely on its user base of clinicians.

While the two companies may have competing products, they are not direct competitors because Carbon Health is more focused on getting its brick-and-mortar clinics to be more AI-driven. In fact, we can learn from the adoption rate of its hands-free charts which are being “ embraced ” by both urgent and primary care providers since the new system enables the generation of a complete medical chart in one-fourth of the time it took before or 4 minutes compared to 16 minutes for manual charting. Therefore, as a tool that can reduce charting to one-fourth, Augmedix Go has a high chance of being adopted by practitioners and approved which in turn means that it could fetch higher revenues and deserves to be better valued.

For this purpose, since there are less than three months for 2023 to end, I look at FY-2024's revenues ending in December next year which analysts expect to be $60.36 million as tabled above. Assuming that this can increase to $70 million, or a 16% rise, this translates into a 60% sales increase compared to FY-2023, instead of 38%. Now, given that Sales is the denominator of the price-to-sales multiple, the forward P/S is conversely decreased by 16% to 3x instead of 3.48x. This in turn leads to a share price of $6.10 based on the current share price of $5.26 being incremented by 16%. This target accounts for the possibility of selling to others (besides HCA) who are also closely monitoring Augmedix Go.

Still, such gains do not come without volatility risks.

Potential Volatility Episodes and NRR

The most likely one could emerge in case there is a delay in the validation of Augmedix Go, especially given the high expectations after the vote of confidence by HCA and the subsequent stock surge in April. Now, a delayed launch can be envisaged as clinicians who have to devote considerable energy to providing the best patient care take time to adapt to Augmedix Go or there are hesitations from patients whose consent has to be obtained first. As for the timing, a potentially volatile episode could creep up when more precise information is obtained as to the exact time for the commercial launch during the third quarter earnings call around November 13 .

Furthermore, given its exposure to Generative AI, the stock could also suffer from market contagion in case NVIDIA (NASDAQ: NVDA ) which now serves as an unofficial barometer for everything that touched artificial intelligence were to suffer from a revenue setback during its upcoming quarter results expected around November 13 .

Also, with a debt-to-equity ratio exceeding 500% which is high relative to the healthcare technology sector, the medical equipment developer remains vulnerable to volatility risks in case there are further hikes in interest rates as the Federal Reserve continues to battle inflation.

Still, I am optimistic for the longer term as the company has other revenue streams and its customers are buying more products. First, it is getting more traction with the monetization of the data lake being built for HCA in partnership with Alphabet (NASDAQ: GOOG ). This body of knowledge can be made accessible to third parties against payment of subscription revenues. Noteworthily, this mode of operation is somewhat similar to SaaS (software as a service) companies like Snowflake ( SNOW ) which operates a cloud-based data platform to enable customers to derive business insights. In this case, one key metric that measures the revenue generated from existing customers over a set period is Net Revenue Retention or NRR as it not only accounts for customer churn but also for upgrades, and downgrades of existing plans. This metric was 142% for Snowflake during its latest financial results reported at the end of August, compared to a high of 158% in 2021 at the peak of Covid-led digital transformation.

In sharp contrast, Augmedix's NRR has increased from 136% in the first quarter of 2023 to 148% in Q2, indicating strong business growth potential from the current customer base of clinicians, in turn implying that its products are increasingly being adopted within the health system. Now, selling more to existing customers entails relatively lower costs of sales, which goes a step further in positioning the company to reach profitability, which is one of the management's top priorities.

A Buy after considering Opportunities and Risks

In conclusion, this thesis has made the case for an investment in Augmedix by highlighting its generative-AI-powered hands-free charting tool while also showing that it is making sustained progress in existing product lines. The company has also improved gross margins by more than 3% during its latest reporting quarter.

More importantly, for a company that uses cash in operations instead of generating money, an improvement was noted at the end of June made possible through an injection of cash in the form of new equity from HCA Healthcare and Redmile Group as part of the deal. In addition, an extension of a term loan facility and the finalization of a $5 million equity line of credit have bolstered the company’s liquidity position. This said, the company is not immune to volatility, but, it does constitute a compelling buy at the current price given the value of its technology in the medical field.

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