If Potentia’s acquisition of booking platform HotDoc works out, then it’s likely that in five years’ time GPs may have significantly less leverage with and influence over their patients.
If you’ve been following my commentary on the HotDoc sale you might be starting to think I know very little about finance and technology… and you might be right.
I said $200 million would be madness. It sold for about $250 million just before Christmas.
Private equity firm Potentia Capital paid just over eight times revenue and at least 30 times EBIDTA, which, notwithstanding my poor financial literacy, is a lot.
In order for the acquisition to work out, HotDoc will need to grow at between 15% and 20% per annum for the next five years, which, again, is a lot.
Notwithstanding, from 2018 to 2025 HotDoc’s annual revenue growth was running between 20% and 25%, so it has the run rate so far.
If you’re PE, this is a pretty good track record on which to base such a deal for a SaaS business, albeit the bigger you get the harder it can get to keep up such a rate, and they will have needed to take into account the risks to maintaining that run rate towards much higher revenues:
What will AI do to the booking platforms, especially since they rely a lot on Google and search today to maintain their patient side acquisition and branding;
Will the patient management platforms keep putting up with the booking engines building out both the patient journey side of value in their systems, and sometimes internal admin efficiency as well? Because if they make the big decision to turn on them in any way, they can turn off the tap of access to GPs altogether and kill them with one swat;
Will the government and its “sharing by default” mantra join with the booking engines to optimise patient access given their web presence and branding, or compete with them, via 1800Medicare, which for all intents does a lot of what the booking engines do – public directory and access to GPs – other than the booking process itself (which they could do);
Will GPs arc up at being disintermediated from their patients via the booking engine strategy of rapidly evolving the patient journey, and now stepping into direct GP provider work, by offering services like telehealth;
What will HotDoc’s two reasonably good competitors – Healthengine and AutoMed Systems do? Interesting side notes on this dynamic are:
ChatGPT thinks Healthengine is a better play and more valuable than HotDoc;
When HotDoc upset GPs initially with their telehealth offering, a lot of practices spoke about deserting them for AutoMed and Healthengine and the transition wasn’t particularly difficult from both a technology and revenue perspective for GP practices.
Upside vs downside
Potentia Capital most likely weighed these not insignificant upside risks, against the downside, and thought it a reasonable bet.
HotDoc is a solid SaaS business, generating good cash with a decent “strategic moat” of a vastly dispersed and large customer base of patients as clients, many of whom have the HotDoc app downloaded on their phone.
HotDoc’s app downloads in particular protects it a lot in the short to mid-term from any misdeeds by Google in terms of access to patients. Google is famous for killing businesses that rely on them as a channel, as are the other big global platforms such as Facebook, Amazon, and the like.
This means that Potentia Capital saw the downside risk as low enough for there to be a high likelihood of it at least getting its money back in a scenario where enough of those risks identified above threaten to scuttle the upside plan in a big way.
That, and between how much equity it puts in versus debt funding, and how much it got management to keep putting in so it had skin in the ongoing success of the business, it probably only fronted $100 million of the price in its own money.
So, a lot of risk on the upside but a very big possible upside if it works, and maybe a low risk on the downside of losing your shirt altogether, probably explains the price.
I admittedly should have thought a bit harder about these dynamics last year when I was saying “madness”, although I still don’t think the upside bet is a great one.
HotDoc branding is everywhere very deliberately, and it has almost certainly led to the high app downloads, which gives the business a lot of short to mid-term protection from disintermediation by Google or any new smart AI plays, both in the big risks list above.
If you are a practice, and you decide you don’t like HotDoc, what risk are you taking on losing patients and revenue if you decide to leave the application, given its huge patient footprint and its internet visibility if you are looking for new patients?
Even if Google turns on both HotDoc and Healthengine via its ability to shift how its users find stuff, especially now it is emphasising its AI summaries, if you have enough patients who have downloaded your app, you have your own direct channel to keep going, at least for a few years.
HotDoc won’t actually say how many active app users it has (downloaded and being used regularly) but it does say it has an overall user base of 13 million patients, which is both good and bad. Good because it’s a lot. Bad because if it’s true there is not much more growth in the user base.
Having said this, in order for Potentia Capital to get a “typically good” PE return, HotDoc will need to grow revenue at about 15-20% per annum for the next five years, which is less than what they’ve grown at for the past seven years, but the bigger you get the harder that revenue growth gets.
If it pulls it off, HotDoc revenues will need to be around the $70 million mark in five years, or maybe less on the revenue side and more on the margin (ratio of profit), like 40% profit not 25%.
It’s still a pretty high bar if you look at other good Saas platform plays in medicine in Australia.
Best Practice, which may not be an entirely relevant comparison, has about a 70% of the GP market in Australia, and some market in specialists and in GPs and allied health in New Zealand, has been around just over 20 years, does not grow at anything like 20% per annum, and has revenues of about $35-40 million, with a much lower margin.
Fish are friends
One irony here for GPs is that, a little like Facebook did many years ago with all its business clients, HotDoc has used GPs to build its huge data base, brand and its app moat, with, arguably, not an entirely equitable return for what the GPs have done for the business if you consider their growth plans.
Facebook was free for years while it vacuumed up clients and the data on their clients then it required businesses to pay to reach the network they built of its own clients. Businesses were stuck because they had themselves built Facebook as a major new channel to clients that they now could not afford to drop.
HotDoc has used GPs and GP practices to market itself widely to patients except, unlike Facebook, HotDoc even charged from the beginning – smart.
Now HotDoc may have the dab hand on patient data and relationships because it has all the patient data, not just that of any single practice or corporate group interacting directly with its patients. If you have all the data you can work a lot of stuff out about patient behaviour and leverage that intel across your wider network.
HotDoc will need to do a lot of that leveraging and probably a lot more data if it is to grow to plan.
Neither HotDoc nor Healthengine are going to be happy with this comparison or assessment. They will say they have offered enormous value to GPs and GP practices via their patient facing software.
They have.
But it is a question of whether GPs have been paid enough for handing over that data and those relationships, especially now that HotDoc has to hit the growth accelerator on revenue and start leveraging all that patient data to, in essence, compete in some respects with GP practices now for patient loyalty and revenue by starting services like telehealth.
Is a patient more beholden and loyal to their booking and telehealth app when they want to see a doctor, or does the doctor’s brand or practice brand override that?
It looks suspiciously like we are at or even past a tipping point on who owns the patient relationship more and who will get the best return going forward on owning that relationship and data.
The answer is complex but there’s definitely a significant shift in brand power towards the consumer-facing app in terms of this relationship already.
This is most especially the case for the younger patient demographic which isn’t really that hassled with doctor shopping – maybe Eucalyptus for weight loss, Instant Scripts for a fast online script or repeat, Hola Health after hours, and then 1800Medicare if they can remember the phone number, and whoever for something where they actually want to talk to a doctor face-to-face.
That’s called commoditisation, and the gatekeeper increasingly is the booking engine, not the GP or GP practice, or the patient management system.
To be fair, no one could really turn around here and say the booking engines are just like Facebook: money hungry, unethical, and don’t care ultimately about the consumer, just the money (yep, that’s Facebook for sure).
The booking engines in fact care the most about patient experience because if they didn’t, and didn’t keep consistently improving the journey into a GP and outside a GP practice and other health provider services, they wouldn’t have a business.
They say the PMS vendors can’t afford to be focused enough on it because they have other key core problems with things like billing and prescribing.
Often they will say as an argument that they will never be cut off by Best Practice or MedicalDirector (which between them own about 90% of all access to GPs) because these patient management vendors aren’t able to dive deep enough on the functionality and work on the complexity of the patient experience and the journey into the provider and back out again, like they can.
And the PMS providers run a market app commission access model. If you want access to a GP your app pays a percentage of revenue on what you make. You’ll recognise this model in the Apple App store business model – pay to play. If the PMS vendors start gating access they will also be gating long term revenue from these important integrations.
It’s probably important to note that, from time to time, Apple blocks an app from its store because it sees it as getting too close to the bone on its own core revenue model.
This should suggest that if HotDoc is targeting a value of something like $880 million in five years’ time – wow, that’s getting near a billion, everyone – PMS vendors must be thinking that maybe their hold on patients is taking too much distribution power and too much of the value chain. And maybe they should get a bigger cut, or take it all themselves somehow.
It’s perhaps a bit of an open question now but I doubt for much longer.
Related
Will they offer enough value so GPs and GP practices don’t turn on them for essentially commoditising GP services without delivering enough return to the GP or the practice?
Will the PMS vendors be okay for booking engines to keep reinforcing their moat with a greater and greater hold on the patient experience and data, and take all that money and value that is apparently on offer ($880 million for HotDoc, maybe more for Healthengine) as opposed to the PMS leveraging their access power to GPs, taking more revenue and reinforcing their own moat?
Owning access and distribution is the name of the game here and if HotDoc is going to pull off a near $900 million valuation tag in five years’ time it can’t muck around in how it gets to that value. It will probably need to be much more powerful in doctor access via their grip on patients than the PMS vendors traditionally have been.
The domination of the PMS vendors in access and distribution is officially in play. Its going to be an interestin few years.
Marketing 101 – or this might happen
Dr Max Mollenkopf, an innovative independent GP and practice owner in Newcastle, doesn’t use any of the mainstream booking engines, although he says that what he does use does not have as good a patient journey functionality as the booking engines currently offer.
He uses a cloud-based PMS (not BP or MD either) that has its own booking engine and patient app and portal, more or less white labelled to his patients.
So, the brand his patients see is him and the practice, not the booking engine.
Might certain GP busineses or even some of the bigger corporates decide that they can leverage the data and brand better by establishing their own direct relationship better using white label software?
Going this way has some downsides though.
Patient acquisition isn’t what you’d get with the booking engines because you obviously can’t afford to be visible on the web like Healthengine or HotDoc can.
But for Dr Mollenkopf, his books are largely full anyway. He doesn’t have a huge problem with patient acquisition or retention because his business model is all around premium face-to-face service.
His view is that he offers a service that can’t be offered by any fly by night telehealth group, a big weight-loss platform type outfit, any virtual provider, or the local corporate offering bulk billing.
His business model is around deep longitudinal engagement with a core demographic of ever-loving patients.
Loving because he is offering a unique and valuable service and brand for a specific and not insignificant patient demographic.
It’s sort of marketing 101, but you don’t see it that much with a lot of independents who feel they are being marginalised and commoditised increasingly by the likes of the big corporates doing bulk billing nearby, the big telehealth providers, the weight loss and other single indication non-Medicare platform providers, and even by 1800Medicare, which has its own default telehealth service.
No, Dr Mollenkopf is doing fine, thank you.
He sees plenty of patients (customers) out there who are buying what he is selling – someone who cares longitudinally in a patient’s journey, whose patients see is a lot more competent to help them make important healthcare decisions over time because of his competence and their long term relationship, and, frankly, who can pay for such a service (because it can’t be done just bulk billing).
And he hasn’t needed third-party provider internet directories or patient owners to do it.
Dr Mollenkopf will also bulk bill when the patient obviously needs that service, and there probably isn’t a suburb in Australia where at some point of time a patient really does need it.
Of course, most independent GPs and GP owners didn’t do marketing 101 or a business course (it should be part of their university curriculum for obvious reasons but still isn’t).
And this is going to get messy.
Essentially, where once the brand of GP was seen to be the high street GP practice with a friendly old family doctor, it’s now splitting into a lot more pieces: independent GP and practice, GP working for a corporate, GP working for Mosh or Eucalyptus, GP working for InstantScripts or Hola Health, GP working for Heidi, GP working for 1800Medicare, GP not working as a GP anymore really (see Creative Careers in Medicine), GP who does a mix of some or all of the above, GP owner, and so on for quite a way.
This fragmentation of GP service provision doesn’t help much with decreasing the velocity with which GP services are being commoditised.
The RACGP tends heavily to live in the past of the independent mid-sized mostly urban based, well off, and often white, GP.
It needs to think a bit harder about this dynamic.
It needs more avatars to model what is really going on here.
The government does too, because paying GPs like Dr Mollekopf, and many like him, who do the hard deep longitudinal patient work, the same as you pay a GP on a quick one-off telehealth consult or a 15-minute (or less) bulk-billing consult, isn’t going to work for the system and patients moving forward.
If this were to keep going unchanged, the vital longitudinal quality part of the GP service spectrum will almost certainly be commoditised entirely out of the picture.
And then we will be in a lot of trouble.
