2023-11-12 07:00:00 ET
Summary
- LifeMD's weight management program has attracted over 16K subscribers in two quarters, producing $24M in annual recurring revenue run rate already, and this is only the beginning.
- Goldman Sachs argues that GLP-1 drugs are going to 16-fold by 2030 and LifeMD is a prime way to play this megatrend.
- There are multiple additional catalysts lined up to keep the weight management growth going, if not accelerating.
- LifeMD's financials are strong, with an 87% gross margin, positive operational cash flow, and potential for very significant revenue growth in 2024.
When we first took a position in LifeMD ( LFMD ) early this year it looked like an interesting turnaround candidate with improving cash flow and a cheap valuation. That indeed it was.
They were also innovative, with their VPC (Virtual Private Care) platform introducing consults for a host (200+) conditions and the platform is apparently so good that it can be licensed to third parties in what is their B2B business.
Two such partners (ASCEND Therapeutics and IQVIA) are already in the bag and there are more in the works. The consults are provided by their affiliated medical group:
Another boost will come as they will enroll their affiliated medical group in commercial insurance plans , with the bill for the first consult out in Q4 and national coverage following next year, with predictable effects (Q3CC, our emphasis):
we expect it to significantly lower the out-of-pocket cost of our services to our patients and to be a big driver of overall patient satisfaction and retention .
The company expects to have broad coverage in 10 states in Q1/24 and their experience in getting these will accelerate coverage in the rest of the US. Government insurance plans are going to follow (Q3CC, our emphasis):
we have already begun building an industry-leading compliance infrastructure for Medicare participation and anticipate being prepared to launch and scale this as soon as it makes sense for our patients and our business.
The company's legacy business, RexMD (men's health), and a few other brands are still growing nicely at 12% in Q3 producing a net margin of 38%, and they will introduce some new products here next year like heart health and hormone replacement therapy.
Then there is the odd one out in the form of WorkSimpli, which started out as an online PdF converter but has evolved into a (Q3CC):
diversified workplace services business, including HR solutions digital signing proprietary forms, AI technology and plans to enter additional adjacent markets in 2024.
It almost runs itself, touting gross margins at 97% and not surprisingly generating significant cash flow. They are still considering selling their 73% stake in WorkSimpli.
Weight management
But when we bought our first tranche of shares early this year we could not have imagined what was to come, the company's weight management which is experiencing hypergrowth.
First, you might want to ponder the opportunity here, from Goldman Sachs (our emphasis):
Earlier this year, the global market for anti-obesity medications (AOMs) reached $6 billion on an annualized basis. By 2030, it could grow by more than 16 times to $100 billion , according to Goldman Sachs Research... The chronic weight management market is undergoing an inflection, in our view, with potential for solid growth ahead and a peak opportunity that, by our estimates, could ultimately yield some of the highest grossing drugs of all time
From nothing in Q1 the WM program. It ended Q3 with 10K subscribers, quadrupling its revenue sequentially. At the time of the CC, this increased to 16K subscribers already, at $129M a month which is good for an ARR of $24M+.
Management believes that it will double again in Q4 which would produce an ARR in the order of $30M+ perhaps even approaching $40M. They also believe that the growth is actually accelerating, as many come through referrals from family/friends in the program. There are also a host of catalysts and growth drivers lined up:
- Brand recognition ; The company is becoming more widely known for its weight management and many clients come through referrals from members.
- Insurance ; We already discussed above how the company is putting the infrastructure together to process insurance claims (first private insurers followed by Government programs), and at the same time insurance coverage for some of these GLP-1 drugs will expand.
- Availability ; At present, there are shortages of these drugs but these are likely to start easing.
- New GLP-1 drugs coming ; There are new GLP1-drugs coming into the market like Mounjaro from Eli Lilly which was approved on the day of the Q3CC by the FDA, and generic Liraglutide, see below.
- New growth channels via partnerships , LifeMD is working on partnerships with some of the biggest diet companies in the US, and they expect these to help with insurance coverage as well. They had pilot projects with Medifast or a Nutrisystem and others that weren't disclosed. They are also talking to manufacturers of CGM (continuous glucose monitoring) devices and will bolt on technological solutions that help patients track their eating habits and metabolic health. The company already has a partnership with Particle Health
- Pricing ; With more options and better availability, prices are likely to come down.
- Retention is way better than management modeled at first, when they modeled 90% of patients off after one year. There is a 25-30% drop-off in the first month (see below) but after that 80-90% remain so far, but it's early days for definite conclusions. So far so good.
- Cross-selling ; Weight Management is the number one service that is cross-sold to RexMD patients and management expects this to "dramatically accelerate" in 2024.
With respect to generic Liraglutide (from Biospace , our emphasis):
Novo Nordisk’s liraglutide recombinant injections have patents expiring at the end of this year and in the first half of 2024. This includes the primary patent for diabetes drug Victoza, which brought in $1.8 billion in 2022. Teva, Pfizer and Mylan are expected to launch their generic liraglutide products in June 2024 , per SEC filings . Sandoz is also cleared to launch its version of Victoza in 2024.
Management is expecting to have a supply agreement in place by Q1 with the manufacturer of generic Liraglutide.
With respect to retention , there is a 25-30% falloff in the first month as people are confronted with the cost and lack of insurance and some don't qualify but signed up as they put in a false date of birth and then get caught out when their ID is checked as LifeMD doesn't prescribe or treat patients that are of Medicare age (but they will when they turn on formally its Medicare program, which is in the works).
There are reports of some cowboy practices with respect to GLP-1 drug prescriptions, but LifeMD is pretty careful (Q3CC):
So we adhere very strongly to the label, that's on these medications. So patients that are between 27 and 30 BMI that don't have at least one comorbidity, a LifeMD affiliated provider will not prescribe them the medications. Obviously, patients that are under a 27 BMI, we will not prescribe the medications to them.
The company has a partnership with Particle Health to use EPRs to assist in decision-making and determine eligibility :
The joint research study found that Particle’s API platform was able to compliantly review patient health histories collected from electronic health records ((EHR)) to contextualize data effectively and efficiently, and potentially facilitate informed decision-making, streamline patient triage and determine eligibility for treatment with Glucagon-Like Peptide-1 (GLP-1) drugs.
With a yearend exit ARR rate exceeding $30M, we'll leave it to your imagination what the exit ARR rate in 2024 will be, given the above catalysts and the momentum that this business has created in short-order (Q3CC):
The weight management revenue has the potential to grow extremely substantially every single quarter going forward for the foreseeable future. Is it going to quadruple every single quarter? No, as the numbers get bigger, obviously, you would end up with a completely insane number.
However, I do expect in the next quarter to see in weight management more than 100% sequential growth so the revenue more than doubling quarter on quarter. And I do expect to see very heightened growth next year versus this year. This will all be factored into the guidance that we provide for 2024 in the beginning of 2024.
So when management comes out with their 2024 guidance early next year this is going to be a fun moment for investors.
Financials
LFMD IR presentation
Management is guiding $10M-$11M in adjusted EBITDA for FY23 despite $4M of deferred revenue related to weight management resulting from the GAAP-required amortization of fully paid subscription amounts over their initial time period.
Gross margin keeps expanding and despite investments in the weight management program and marketing it, S&M costs are on a downward slope:
The model contains considerable operational leverage which is masked by the above-mentioned $4M in deferred revenue and the $4.6M investments in the weight management program. Without the latter OpEx would have been flat for the year.
Operational cash flow was positive at $1.07M and the company had $15.3M in cash at the end of Q3, we have no worries here.
Valuation
There are more shares coming:
LFMD 10-Q
So with a possible 47.7M shares fully diluted the company has a market cap (at $7 per share) of $334M so the shares trade at 2.2x FY23 EV/S but we believe FY24 revenue will top $200M and possibly even significantly higher, given the momentum and potential of their weight management program so the EV/S is going to come down significantly.
Conclusion
At the minimum, every possible dip in the shares should be bought. The company has a tremendous opportunity with its weight management business, which made a blistering start.
There are a host of factors conspiring to keep the growth high, if not accelerating it in the near future, such as insurance coverage, partnerships, and cross-selling opportunities, with retention way better than expected so far.
GLP-1 drugs are going to be blockbusters, the market is going to 16-fold according to Goldman Sachs. LFMD is a pretty good way to play this megatrend.
We almost forget the rest of the business, but that's doing pretty well also and has moved into positive operational cash flow creation already. We're especially interested to see the effects of insurance coverage on their VPC platform and the growth in their B2B business.
We think 2.2x FY23 EVS isn't expensive for a company generating 87% gross margin and operating leverage kicking in, but on next year's revenue that multiple is much lower so we think there are no valuation concerns and the shares have room to run further, despite the blistering rally already this year.
For further details see:
LifeMD Is The Stock To Play The Mega GLP-1 Drug Trend