Shares of 1Life Healthcare — parent company of One Medical, a San Francisco-based provider of healthcare membership services — has taken investors on a bumpy ride since it went public two years ago next week.
How so? Investors who bought in at its IPO watched the stock rise 173% to peak at about $60 last February, only to lose 84% of that value to open January 24 at $9.70 — about 56% below its IPO price.
Does One Medical’s loss of stock market value make its shares a buy? Despite some positive aspects to the story — notably a large market and rapid top-line growth, I am siding with those who are betting that its shares will keep going down.
(I have no financial interest in the securities mentioned in this post).
One Medical’s Big Market Opportunity and Rapid Growth
One Medical provides healthcare membership services — including “walk-in immunizations and lab services, behavioral health, women's health, men’s health, LGBTQ+ care, pediatrics, sports medicine, lifestyle, and wellbeing programs,” according to the Wall Street Journal.
One Medical was founded in 2002 by Tom Lee, an MD who was previously chief medical officer for Epocrates. As I wrote in in June 2020, Lee’s vision was to match treatment and care to each patient’s health philosophy, motivations and preferences.
By 2012, One Medical had grown to 60 clinics — raising $180 million in venture capital at an estimated $1 billion valuation — before Lee was kicked upstairs to executive chairman. In July 2017, Amir Dan Rubin — an executive from UnitedHealth Group’s Optum division — took over One Medical as CEO.
The company is targeting a very large market opportunity. One Medical’s prospectus estimated that the U.S. primary care market generated roughly $260 billion in 2019 revenues — $159 billion of which came from commercially insured patients.
Having captured about 3% of the commercial market opportunity — in the nine markets ($34 billion in revenue) — One Medical said it had room to grow.
In June 2021, One Medical made a significant acquisition to expand its share of the Medicare market. According to the Boston Globe, One Medical forked over $2.1 billion worth of stock to acquire Boston’s Iora Health — which charged a fixed monthly rate to some 38,000 patients over 65.
The deal was envisioned as a way to expand the combined company into 28 markets and give it a member base of more than 630,000 people.
Sadly, Iora shareholders — which include Christopher McKown, the husband of Fidelity CEO Abby Johnson, and Fidelity Investments, owner of 14.3% of Iora — have suffered considerably since the deal was announced.
That’s because between June and September — when the deal closed — its value fell 33% to $1.4 billion as One Medical stock dropped by a third from about $36 to $24. Since then One Medical’s stock has lost another 56%. Iora shareholders controlled 27% of the company last September, according to mobihealthnews.
One Medical has enjoyed substantial revenue growth. According to its third quarter 2021 Earnings Call Transcript, Dan Rubin said the company’s revenue rose 49% to $151 million — $3 million above the high end of its updated guidance and it “ended the quarter with 715,000 members, 18,000 above the high end of our updated guidance from September 1, up 40%.”
He also noted that One Medical’s total addressable market was 235% higher than it was in January 2020. Dan Rubin told investors last November that One Medical was targeting an $870 billion market opportunity with access to “nearly 40% of the US population in the markets in which we'll be operating.”
For the full year 2021, One Medical forecast a revenue range of $606 million to $615 million — the midpoint of which would be about 62% more than its 2020 revenue. According to FIERCEHealthcare, at a January 11 JPMorgan conference, Dan Rubin did not update that guidance.
He was optimistic about the company’s potential for growth thanks to its long-term relationships with patients. As he told the JPMorgan conference participants, in 2021, “members engaged an average 19 times digitally and in-person with One Medical providers.”
One Medical’s Huge Losses and Bearish Analyst Calls
The problem for One Medical investors is the higher costs associated with its growth. For the third quarter of 2021, One Medical’s net loss surged 4.8-fold to $78.6 million.
A significant source of the higher losses is an increase in the number of its members who are at risk. As Dan Rubin told investors, in the third quarter, 32,000 members were at-risk — through Medicare Advantage and other Medicare risk models — 43% more than in the first quarter.
Along with a rise in revenue, such members led One Medical to pay higher claims.
How so? In September, fewer than 5% of its members were at-risk, yet a fifth of its revenue in the quarter — $30.5 million worth, came from Medicare, according to HealthCareDive.
That led to a relatively high medical loss ratio — One Medical’s claims paid divided by capitated Medicare revenue — of 87%. This does not bode well for future care margins which Dan Rubin said would “decline further in the next quarter as Q3 only included Iora from Sept. 1 onward.”
If there is any good news here, it is that as of September, One Medical had a decent cash cushion. Its $590 million in cash and short-term investments would last about 3.5 years were the company to continue to burn through free cash flow at the $56 million rate it consumed in the third quarter.
But investors will have to look beyond the current quarter for relief. On January 19, Zacks added One Medical to its strong sell list in the wake of a 6% 2022 downward earnings revision over the last 60 days.
At the end of 2021, short-interest in OneMedical rose 13% to 10.2%, according to the Journal. Those betting that its stock will fall may be on to something.
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