LFMDP - LifeMD: A GLP-1 Play With A Kicker

2024-01-11 16:49:58 ET

Summary

• LifeMD expects a 38% increase in revenues for 2024, driven by its new telehealth operation for GLP-1 obesity drugs.
• Despite this, the stock is down significantly due to concerns over Eli Lilly direct marketing its GLP-1 obesity drugs. These fears are overblown.
• LifeMD's other operations are growing quickly and it is close to achieving breakeven earnings.
• The WorkSimpli SaaS segment is probably worth the full market cap by itself.

GLP-1 obesity drugs are a new category expected to have a massive total addressable market. Instead of buying one of many expected manufacturers who will battle it out, why not buy a company that sells them all? LifeMD ( LFMD ) does that and a lot more.

Background

LifeMD is essentially three businesses.

Its original business is a telehealth business. Their first brand was ShapiroMD, which sells OTC products for male and female hair loss. ShapiroMD has served more than 265,000 customers and patients since inception and has a 4.9 star Trustpilot rating. RexMD, is a men’s brand for erectile dysfunction, as well as premature ejaculation and hair loss. RexMD is their largest telehealth brand. It is a men’s telehealth platform which has served more than 474,000 customers and patients since inception with a 4.6 star Trustpilot rating. In the first quarter of 2021, the Company launched NavaMD, a tele-dermatology and skincare brand for women. It was acquired Cleared in January, 2022 for $9.1 million including contingent consideration. Cleared is a telehealth brand that provides personalized treatments for allergy, asthma, and immunology.

LifeMD has a new telehealth business launched in the second quarter of 2023 for obesity GLP-1 drugs. While LifeMD has not separated this business out from their legacy telehealth businesses, I do so here because of how quickly it is growing. It needs to be looked at as a standalone. GLP-1’s are a class of drugs previously used for diabetes and just recently started getting approved for obesity. These drugs have created a sensation with total addressable markets probably larger than any other medication. LifeMD reached 16,000 subscribers by the end of the third quarter of 2023 which is an annual revenue rate of $24 million. To give an idea of value, WW ( WW ) purchased Sequence, a telehealth operation, in the first quarter of 2023 for $132 million. It Had 27,000 subscribers at the time of acquisition indicating a value of $78 million for LifeMD’s obesity business as of September 30, 2023.

The final piece is very interesting in and of itself. WorkSimpli is a PDF solutions SaaS business, including HR solutions digital signing proprietary forms and AI technology. It plans to enter additional adjacent markets in 2024. This is a subscription software business that is rapidly growing and solidly profitable. The Board is considering selling it to fund the growth in telehealth. WorkSimpli is 73.32% owned and as shown later in this report is quite valuable.

Recent News

There have been 3 major news items since the third quarter earnings announcement.

On December 13, 2023, it was announced that Medifast ( MED ) will pay LifeMD $10 million for enhancements to LifeMD’s platform for its own use. Medifast additionally purchased 1,224,425 shares of LifeMD for $10 million or $8.17/share. Medifast is one of the largest diet centered companies in the U.S.

On January 4, 2024 Eli Lilly announced a new website called Lilly Direct offering direct home delivery of certain drugs, including its obesity treatment Zepbound . LFMD stock dropped 32% on that day from $7.77 to $5.32. Peer WW also dropped 11% but others in that space didn’t.

Finally on January 8, 2024, management issued 2024 revenue guidance of $195 million to $205 million. It also guided 2024 adjusted EBITDA to $18 to $22 million. The revenues guidance is up 34% from the midpoint of 2023 guidance (4Q not yet reported). It is also a 9% increase to analysts estimates for 2024. Adjusted EBITDA guidance is up 90% from the $10-11 million guided for 2023.

Lilly Direct Competition

LifeMD’s stock price was down 32% on the day of the Lilly announcement. I believe this may have an impact but the reaction is overblown for the following reasons.

1. Eli Lilly is just one of many weight loss drug manufacturers in the market or in clinical trials. LifeMD offers a wide assortment beyond Lilly.

2. The GLP-1 market is huge and just getting started.

3. LFMD is not all about weight loss. In fact, those revenues were just starting to move the needle in the third quarter of last year.

4. Eli Lilly is unlikely to direct sell medications at below the market price its distributors sell for.

5. Insurance should eventually cover GLP-1s for most people so it’s less about pricing and more about convenience and access. Those are LifeMD’s strengths as shown by its online ratings.

6. Eli Lilly does not offer prescriptions. It outsources to telehealth operators for that. That is actually an opportunity for LifeMD.

7. LifeMD CEO Justin Schreiber addressed this issue on January 4th in a Yahoo Finance Video. He said a rising tide raises all boats, Lilly is pricing the same as everyone else, and LifeMD can actually use Lilly Direct for their patients too.

Financial Results and Guidance

Financial results for the last 3 fiscal years and first 3 quarters of 2023 are shown below. LifeMD adds back a lot of items to its adjusted EBITDA I don’t such as; stock compensation, capitalized software and amortization of debt discount. These are real and recurring expenses to shareholders. In the bottom line, I have adjusted management’s adjusted EBITDA to give a better and more conservative adjusted EBITDA.

Revenue growth has been strong, with a CAGR of over 52% a year for 2020-2024 if management’s new $200 million 2024 revenue guidance is used. Most of that growth was organic. As shown above, telehealth revenues were starting to flatten out in early 2023. They picked up again with the introduction of the obesity drugs in the second quarter. WorkSimpli revenues have increased rapidly since being acquired in 2018. It is also solidly profitable and separately managed. Management guided for $50 million of revenues for WorkSimpli in 2023, up 46% from 2022.

My adjusted EBITDA figures have improved rapidly over the period shown but were still showing a negative figure the last 3 quarters.

On January 8, 2024, management issued 2024 revenue guidance to $195-$205 and EBITDA guidance of $18-$22. The chart below shows what that means for management’s and my adjusted EBITDAs for 2024 compared to 2023.

Management guided at the midpoint for $20 million in adjusted EBITDA for 2024. For my disallowed expenses I used 3Q 2023 figures, annualized. As shown above, management’s effective guidance increased my adjusted EBITDA from -$6.7 million in 2023 to $2.9 million in 2024. That number is before adding back things like stock compensation and capitalized software. Most companies expense software.

LifeMD is benefitting from the recent approvals of GLP-1s for obesity. It’s in a better position than many of its telehealth competitors as it’s already established with a relatively large customer base and strong online ratings. GLP-1s are now their largest cross sells. A Look at peer Sequence, mentioned earlier in this article, confirms the rapid obesity segment growth. Sequence was sold to WW in 1Q 2023 when it had 27,000 subscribers. According to WW, it added 8-10,000 subscribers in each of the following 2 quarters. That’s well over 100% annualized growth. LifeMD claimed 400% QoQ growth in 3Q 2023, although off a low base.

The chart below is from Google Trends. It shows huge growth in 2023 for LifeMD. LifeMD is the brand used by the company for its obesity medications but not most other telehealth. Those are sold under the names like RexMD, ShapiroMD and NavaMD.

Balance Sheet

The balance sheet has improved but is still a bit of a concern. The company has little net interest bearing debt, but a lot of preferred stock. The preferred stock had a liquidation value of $47.4 million on September, 30 2023. D ividends are running $3.1 million per year, which is equivalent to 7.5% of the liquidation value per share. Interest bearing debt was $19.3 million on that date, though that should be lower now with the Medifast investment. It had a high interest rate of 13.25%. Cash was $15.3 million on September 30, 2023 bringing net debt to $4.0 million. Tangible net worth was negative $14.4 million. However, I consider the $11.3 million of capitalized software to be intangible, as it can’t be monetized. That puts negative tangible net worth at -$25.5 million. This is before the Medifast $20 million investment.

Catalysts

The company has a number of catalysts that should drive growth going forward.

1. GLP-1 obesity medication approvals – This has been the big driver of growth in the second half of 2023 and the strong guidance. GLP-1s just started getting approved for obesity in 2023 and the total addressable market is huge. Last year Pfizer CEO Bourla estimated it at $92 billion by 2031. JPMorgan Chase says $100 billion by 2030. It’s still very early for this new market. There are increasing offerings and availability of GLP-1 medications. Mounjaro for instance was just approved by the FDA for obesity. LifeMD’s very high Trustpilot ratings place it in a better position than most peers to obtain and retain a significant market share.

2. Insurance – It is likely insurance coverage will be expanded in 2024 for GLP-1 medications. That will bring in more patients who don’t have to come out of pocket for these expensive medications.

3. New partnerships – LifeMD has new growth channels from recent partnerships with Medifast and ASCEND. A recently announced agreement with ASCEND Therapeutics (hormonal and women's health markets) allows ASCEND to use LifeMD's telehealth platform, data capabilities and healthcare marketing expertise to support its products. Medifast is paying $10 million to use their platform plus bought $10 million in LifeMD stock. That’s quite a vote of confidence from one of the largest weight loss companies. These partnerships indicate the value of the platform which LifeMD has spent about $20 million on in the past 3 years. LifeMD is also talking to others.

4. Supply issues - GLP-1 drugs are still facing supply issues. As these diminish that will be a tailwind for LifeMD.

5. WorkSimpli - WorkSimpli is growing rapidly. At the third quarter conference call management guided for 46% growth in 2023, and at least 20% annual growth in 2024, with adjusted EBITDA margins of approximately 30%. Growth has consistently been at least 40% per year the last 3 years. This is a valuable and separately managed division that can be sold or partially IPO’d if needed to fund growth elsewhere.

6. Customer acquisition costs will diminish – Selling and marketing costs were 89% of revenues in 2021, 66% in 2022, and 52% in 2023 to date. Large costs were needed upfront for marketing to bring in subscribers. CAC as a percentage of revenue goes down as many new subscribers stay with them. Management has stated the initial falloff for new GLP-1 subscribers is around 25% to 30% within the first 30 days mostly due to insurance coverage, and the cost of co-pay. After that retention is running 80% to 90%. While more will likely drop off, they are retaining a significant number that won’t require large marketing and onboarding expenses in the future.

7. Other telehealth – LifeMD has had strong growth in its other telehealth in recent years though that appeared to flatten out in early 2023.

Concerns

All companies have issues that need to be understood by investors. Here are the major ones I see for LifeMD.

Eli Lilly direct sales now includes its obesity drug. This is the big one as far as investors are concerned because LifeMD stock dropped 32% on the day this was announced. Eli Lilly uses third parties for the actual prescriptions, which may become an opportunity for LifeMD. Otherwise, I listed a number of reasons earlier why this is an issue but overblown.

The telehealth industry has not proven to be profitable yet when looking at peers such as Hims & Hers ( HIMS ), Teladoc ( TDOC ), Talkspace ( TALK ) and LifeMD. But it is growing relatively quickly. LifeMD was trailing in profitability but may pull ahead now with the obesity medication sales.

LifeMD’s preferred stock has a high balance and is costly.

There has been and will be more dilution. As of September 30, 2023, the following potential additional shares of dilution was outstanding. These numbers are before the 1,224,425 shares sold to Medifast.

Valuation

LifeMD has 3 publicly traded peers who also primarily offer medical care or prescriptions through video or other online methods. These were compared to LifeMD.

All four companies have enjoyed rapid growth with large but diminishing losses. Growth was particularly fast during the pandemic in 2020 and 2021 and has slowed some recently. Teladoc ((TDOC)) is the largest player. It has seen much slower growth recently. At this point it is just a slow growth unprofitable company. That makes it the weakest in this group. Hims & Hers ((HIMS)) is most similar to LifeMD in the services it offers. It also has had similar growth as LifeMD but lower losses. It has a better balance sheet. Talkspace ((TALK)) provides psychiatry and psychotherapy services. Its growth has been slower but steadier, and still quite strong.

There is a big kicker for LifeMD here, the others don’t have. That is WorkSimpli. What is a SaaS software company with strong growth and earnings worth if independent or sold? WorkSimpli is on pace for $12 million in operating income for 2023 with 46% revenue growth per management’s guidance. According to stockanalysis.com, the average PE ratio for publicly traded software companies is currently 46. I believe WorkSimpli would conservatively sell for at least 30x earnings, which after tax is about $10 million. Factoring in LifeMD’s 73.32% ownership, that works out to $220 million, by itself. That is actually the entire market cap of all of LifeMD.

Based on the comparables, and factoring in WorkSimpli, I believe LifeMD should be trading at 2.5x revenues, which are expected to be $200 million for 2024. The current stock price is $5.67 which is a $222 million market cap. At $500 million, the stock price would be $12.75. That is my 1 year price target. If GLP-1 sales continue to grow rapidly, LifeMD could be worth a lot more.

Takeaway

LifeMD stock was recently punished by the market for Eli Lilly’s decision to direct sell its obesity drugs. I believe this is not only unfair, it ignores a number of strengths such as obesity drug sales, WorkSimpli, an improved balance sheet, and new partnerships. WorkSimpli alone is probably worth the current market cap. I recommend a long position in LifeMD. The preferreds are also traded and currently have a yield of 12.2%.

For further details see: