• Brett Schafer

Doximity: Not So Deep Dive

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Show Notes

Ryan) What they do: Doximity is the leading digital platform for medical professionals in the US. And so they do a few different things, but their mobile app is a lot like a standard social network comprised of medical professionals. And like most social networks, it’s free for US medical professionals to join. Then once someone joins, they gain access to Doximity’s core tools which include 3 different categories of functions:

  1. A professional network: (Building a profile, connecting with colleagues, search capabilities so you can find other physicians by name or expertise or stuff like that, and then career management so setting up job notifications and finding careers, also includes a student component) That part reminds me a lot of Linkedin

  2. Newsfeed: This part of Doximity is a little more traditional social media sites and probably close to what everyone was seeing over the last year. It includes Medical Articles, Medical Videos, updates on peers/colleagues, clinical discussions, and then sponsored content which is where they make the bulk of their money)

  3. Productivity: This is much more unique to Doximity as opposed to a linkedin or Twitter. Medical communication today is kind of antiquated, it’s a lot of legacy systems because communication has to be HIPPA compliant. So this set of digital tools includes eSignatures, digital faxes, secure messaging, dialer free and dialer pro which Brett will talk about).

For context, more than 80% of physicians in the US are on Doximity, so it’s already past sort of the user acquisition process. And the CEO actually highlighted a good use case/demonstration of the value that Doximity provides in an interview. He said they had a physician on the platform who had a patient that was bitten by a lab monkey and the lab monkey had been infected and there were only about 5 people in the world that would have known what to do on this and they were able to find them on Doximity, send them a note, and get advice.

(Ryan) History: Jeff Tangney is the founder and CEO. And he says he didn’t have much of a choice in choosing his career route. He had 2 physician roommates at Stanford while he was a palm pilot amateur programmer and he started a company called Epocrates in the middle of the dot com bubble. Epocrates eventually went public but was later acquired for a little less than $300 million. In 2010 he then started Doximity with the goal of solving a specific problem for doctors. He wanted to make communication and information sharing for medical experts easier and faster.

He’s talked about this saying before. “We can’t make it profitable to hoard patient information”. And so that’s really what building Doximity was all about. It looks like Doximity has only raised about $82M in private rounds and it has probably helped that Tangney had money from Epocrates. And doximity went public in June, so a little over a month ago.

(Brett) Industry/Landscape/Competition:

  1. I believe this is a bit of a “zero to one” company so tough to identify competitors

  2. From what I looked up online: Zest Health, Sermo, Healthgrades, and DXY are all competitors. However with 80% market share in core demographic they may not have any true competitors

  3. Some other forms of potential competition: Traditional media/social networks (especially LinkedIn), Office/other communication products, and nothing (i.e. a doctor not using any service)

  4. Within telehealth they compete with all the Teladoc products and others, although this is a small part of their business

  5. They are also competing for pharma and healthcare advertising, which essentially means all other advertisers

  6. They estimate: $18.5 billion TAM, broken into three parts: pharma marketing ($7.3 billion), U.S. health system marketing ($6.9 billion), software telehealth ($4.3 billion)

(Brad) Management and Ownership:

CEO and Co-Founder is Jeff Tangney

– Former President, Co-founder and COO of Epocrates a mobile drug & disease guide used by half of physicians in the states

– Grew it to $100 million in sales and $20 million in EBITDA

– Was there for 11 years

– Got started as an I banker at Goldman Sachs

– 85 Glassdoor reviews and a 93% approval rating

CFO Anna Bryson extremely young just 31 years old

– Former VP of strategic finance at Doximity before the promotion

– Founded ACB Capital investment advisory firm

– Traded bonds for Royal Bank of Scotland Business

CCO Joseph Kleine (commercial)

– Former SVP at WebMD

– Former Chief Commercial Officer at Sharecare

– Former Chief Commercial Officer at Epocrates

Ownership after the offering

– That same class a/b structure with b getting 10X the voting power of A and all insiders having ownership in class b shares

– Tangney owns 32.9% of the float and 32.4% of the voting power

– Emergence Capital and InterWest partners together own 26.5% of shares and 26.2% of voting power

– altogether directors/insiders/execs owns 60% of the float and 59.8% of the voting power

(Brett) Valuation:

  1. Market cap of $10.5 billion, ticker DOCS

  2. EV closer to $10 billion after the IPO cash raise

  3. Trailing EV/s of 48.3 (sigh)

  4. Trailing EV/GP of 56.9

  5. Trailing EV/FCF of 128

  6. Don’t have exact numbers but there was some decently harsh share dilution in the years coming to the IPO. This can change when public but something investors should track

(Ryan) Earnings:

  1. 2021 revenue or their last full year prior to coming public was ~$207M, up 78% YoY (Revenue comes from 3 sources, Marketing, Hiring, and Telehealth Solutions)

  2. 80% of revenue comes from the marketing component

  3. 85% gross margin

  4. Operating margin 26%

  5. Net revenue retention rate of 153%

  6. 38% FCF margins

  7. 3.5% of revenue is spent on SBC

Non-financial:

  1. 1.8 million medical professional members

  2. Number of customers contributing more than $100,000

(Brad) Balance sheet and liquidity:

– 66 million in cash and more marketable securities for another $80 million but raised another 600 million in the IPO

– the phases “interest expense” “credit revolver” “credit line” “line of credit” cannot be found in the S1. Hinted at taking on more debt but none on the balance sheet

– OCF positive

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Anecdotal Evidence:

Future growth opportunities:

  1. (Ryan) Maybe a physician dating app. More seriously and this is kind of pie in the sky thinking, but in order to fill the current valuation, I would say they need to find new categories to provide similar services to. I know it’s a big jump, but that’s maybe a big picture thing.

  2. (Brett) Telehealth services. This is called Dialer. 63 million telehealth visits in FY 2021, which is much more than Teladoc. Seems like a great funnel to add on these type of digital services, and looking at how little revenue it currently brings in I believe Dialer probably has strong pricing power

  3. (Brad) International expansion seems like it could be in the cards for them. Called it out as a hypothetical several times throughout the S1

Highlights and lowlights:

  1. (Ryan) Highlights: I like the CEO a lot and Doximity clearly provides a lot of value to physicians and pharmaceutical manufacturers. Lowlight: Where do you go from here? They’ve pretty much hit saturation within the physicians market. With 80% of physicians on the platform, you’d think pharmaceutical manufacturers would already be eager to spend.

  2. (Brett) Highlights: Great history of efficient use of funds, profitable, moat feels very obvious but I could be missing something, lowlights: The market opportunity. How much of a niche is this?

  3. (Brad) The scale this company possesses is very impressive & the fact that it got here while being FCF positive is admirable. We hear a lot about data advantages but those advantages come from a scale advantage and this company has that. Low Light is that Teladoc Microsoft partnership paired with the other mega caps gunning for HC marketshare who specialize in the types of products this company specializes in. it’s the main lowlight I have to consider as a shareholder of TDOC & GDRX. Same thing here. Not a deal-breaker but a bar-raiser.

Bull Case:

  1. (Ryan) They have to do everything right. They need to find ways to expand that top of the funnel, add new monetization methods, add more spending customers, and just constantly add new features/functions. I mean they’re market cap is getting near the value of their entire TAM.

  2. (Brett) We all know with the high valuation that sales growth is going to need to continue. But from a business case, I think you need to expect high pick-up from non-core users like PT, nurses, psychologists and strong expansion for revenue from non-advertising business like telehealth (there’s plenty of other services that could be added on top).

  3. (Brad) Mega-cap tech can’t do whatever this company can do for whatever reason and it becomes more & more ubiquitous in HC systems. I think to earn the valuation it needs to provide strong returns from here it needs to figure out a way to monetize physicians a little more effectively like it does with PBMs and HC systems paying for its commercial products. The value seems to be there so it doesn’t seem out of the question to charge a little bit more

Bear Case:

  1. (Ryan) Well they clearly have a moat. I don’t see anyone disrupting that to be honest. However, that doesn’t make it a good investment. My bear case is that this is an absurd valuation. 

  2. (Brett) This business looks great. But not all stocks trade at the same earnings or sales multiple, and valuation could seriously eat into all business growth here. 

  3. (Brad) Margins erode as competition comes (you can say this for every high growth high margin disruptor) and it can’t compound at a 35-40% rate while expanding margins it needs to, to generate strong returns.

Our Tuesday Not So Deep Dives are sponsored by Potential Multibaggers. Looking for stocks that have the potential to go up 10x over 10 years? Check-out Potential Multibaggers on Seeking Alpha or on Twitter @FromValue

Disclosure: The authors and podcast guests are not financial advisors. Brett Schafer and Ryan Henderson are portfolio managers at Arch Capital. Clients of Arch Capital may hold securities discussed on this podcast.

#DOCS

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