Clover Health (IPOC) Breakdown
To all the Equity Contrarians,
Last Sunday, I launched the Community Pick of the week to make sure everyone is part of the process. The results were amazing and I would like to thank you all for participating. This will be a weekly survey that will be sent out every Sunday, so please keep them coming. The responses were rich ranging from growth investments to value investments, and also a desire for ETFs.
The overwhelming choice was narrowed down to a healthcare company that is using technology to personalize healthcare and reduce costs. This company has announced to merge with SPAC IPOC sponsored by Chamath Palihapitiya. Today we will breakdown Clover Health (IPOC), a company that wants to deliver “the right care, in the right place, at the right time, to the right person.”
Clover Health is a health insurance company, offering a Medicare advantage plan to the patients. The company is utilizing its leverage and access to data to shape the healthcare system. The founders, who are technologists and veterans in the healthcare space, realized that currently traditional healthcare is plagued by legacy technology/processes, and focused on financial results. Their conclusion: “Healthcare is broken” and it empowers the wrong people. As a result, the center of their strategy is the deployment of technology that focuses on improving patient health. The company empowers two key groups:
Empowers people with high-quality healthcare and more choices
Empowers physicians with technology tools to deliver personalized, data-driven care
Technology Features: The company’s secret sauce is centered around their software called Clover Assistant, that utilizes machine learning to deliver data-driven patient care. The free software platform is centered on three approaches:
Synthesis: Collects a variety of healthcare data sources (claims data, medical charts, medication data, diagnostic data, and EHR-generated data) that is personalized
Insights: Intelligent engine that utilizes machine learning and clinically driven business rules to produce actional insights.
Action: Physicians will have actional insights that they can deliver at the point of care with patients.
The platform also has introduced telemedicine solutions (office/virtual visits, in-home visits)
The company’s mission is “to improve every life” by empowering physicians to deliver better, personalized, evidence-based care to patients at scale.
Rising costs are an unfortunate reality for the healthcare system in the US. 80% of Americans are suffering from 1+ chronic disease and 68% are suffering from 2+ chronic disease. The total estimated spending in the U.S. healthcare market is $4 trillion and expected to grow to $6.2 trillion by 2028. This spending is a result of a series of challenges that the industry faces:
Incentives are misaligned between health insurance companies, physicians/hospitals, and patients.
Health Insurance Companies are focused on their own profitability by increasing premiums to offset health costs increases. In some severe cases to limit costs they deny health care.
Physicians/Hospitals spend resources on administrative tasks to ensure payment. This removes focus from patient care.
Patients experience the brunt of the system with limited options and poor-quality care.
Fragmented patient data from legacy systems create hurdles regarding personalized health care.
Poor cost-curve and wasteful spending, resulting in reports from the National Academy of Medicine confirming ~30% of health expenditures in 2019 was wasteful amounting to $1.1 trillion.
The industry is demanding next-gen healthcare companies that focus on the following actions:
Breakdown barriers to limited care and ensure high-quality care
Improve cost-curve and reduce wasted spending
Utilize technology platforms to produce data-driven personalized healthcare
Remove friction between physicians and health insurance companies to focus on primary care for patients
Clover is positioned to deliver personalized care and experience through a consumer-facing brand in both the digital and physical world.
Total addressable Medicare Market: 60 million people (65 years older & people with disabilities) amounting to $1 trillion in spending by 2023.
Medicare Advantage Market: $270 billion current spend and expected to grow to $590 billion by 2025
Clover has 8% shares of Medicare Advantage participants across the 34 markets in seven states.
Clover is launching 74 new markets and together with current markets represents 4.2 million in Medicare beneficiaries.
10,000 new people become eligible for Medicare every day which equates to $150M each day, $1B each week, $55B each year.
Business Model Landscape:
The company generates the majority of the revenue based on the number of members enrolled in plans under contract with the Center for Medicare & Medicaid Services. The CMS offers premiums based on enrollment. Additionally, the company also receives revenue directly from enrolled members as well.
Clover utilizes its software platform to accurately capture peoples’ healthcare costs on a timely basis for CMS to ensure revenue to cover the care of patients.
The following customer landscape is created based on the companies “every provider, every member” business model:
The company has 56,815 members across 34 markets, ~73,000 members in 2021E, and ~138,000 members by 2023E
LTV contribution: $5,100 and LTV/CAC: 4.5x
This ratio is high performing due to stable revenue, strong retention, and margin enhancement
The Clover Assistant has delivered a medical care ratio, which measures net medical expenses incurred divided by premiums earned, of 82% from 89.2% in 2020.
For members, the company has created lifetime cost savings of 17% relative to private competitors and 41% relative to Medicare
2,100 physicians use Clover Assistant platform
Competitive Strengths (Moats):
The company aims to improve healthcare with technology as an asset. According to the SEC filings, Clover has identified a series of advantages.
Platform – Clover Assistant: The platform delivers better healthcare outcomes at lower costs. With machine learning, it recognizes evidence-based treatment options and empowers physicians to address them at the point of care. The use of the platform has resulted in 20% fewer emergency room visits and inpatient hospital admissions
Network Effects: As members increase across a greater pool of physician networks, greater insights are created from the machine learning capabilities of the platform. The technology is built to serve all Medicare patients and as a result, will deliver personalized healthcare solutions for patients across the community
Scalability with rapid software improvement: Physicians can onboard within an hour using the Clover software platform. Updates are released on average every three weeks as well to ensure up to date data insights. The cloud-based platform also provides a flexible system which resulted in the telemedicine feature to be built in five days during the pandemic. Physicians have given the platform an NPS of 64, comparable to Netflix and Amazon
Growth Cycle: The company captures and synthesizes data, creates personalized data-driven insights, improves clinical decision making, secures economics with members due to low costs, and ultimately spawns strong organic membership growth
Management Team: The founder-led team has created a mission-driven culture with vast experiences in healthcare and technology. The team contains talent focused on building healthcare technology companies with machine learning, data management, and pharmaceutical/consumer experience. Additionally, the team is composed of individuals with vast clinical expertise.
The company has highlighted certain competitive and operational risks that may affect its performance.
Competition: Medicare Advantage market is highly competitive. Large national insurers like UnitedHealth, Aetna, Humana, Cigna, Blue Cross Blue Shield, and Original Medicare are key competitors. The industry is experiencing high consolidation between large competitors which will pose market share risk.
Membership is Concentrated in few limited markets: 97.6% of members are concentrated in two metropolitan areas in New Jersey. This creates risk in the event of health care regulation changes, benefit costs, and government reimbursement rates.
Government Regulation: Medicare Advantage premiums paid by the federal government currently represent all the revenues. Profitability is highly dependent on government funding for Medicare programs.
Intellectual Property: As of June 30, 2020, the company does not own any U.S. or foreign patents and had 23 U.S. patent applications pending and 7 foreign patent applications pending. The company is currently relying on unpatented internally developed technology
Economics of New Markets: The company will continue its goal to offer affordable and high-quality healthcare to patients with the goal of impact all Medicare patients. With higher health risks in the concentrated membership pool, healthcare plans are at risk of losing their cost-competitive structure with other larger and more diversified health insurance groups.
The company’s founders and executive team are veterans in the healthcare and technology space with the addition of the IPOC team post-merger:
Vivek Garipalli, Co-Founder and CEO: Prior, Vivek founded five health care companies before the age of 40
Andrew Toy, Co-Founder, and CTO: Prior, Toy served as Product Director at Google LLC
Dr. Sophia Cheng, Chief Clinical Information Officer: Prior, Dr. Cheng served as Chief Clinical Innovation Officer at CareMore Health, a subsidiary of Anthem
Dr. Kumar Dharmarajan, Chief Scientific Officer: Prior, Dr. Dharmarajan served as Assistant Professor at Yale’s School of Medicine and research faculty at Yale’s New Haven Hospital Center
Dr. Mark Spektor, Chief Medical Officer: Prior, Dr. Spektor served as Chief Clinical Integration Officer at CarePoint Health System
Post-Merger with Social Capital Holdings ownership will be distributed as follows: 67.6% to existing clover shareholders, 18.7% IPOC shareholders, 9.0% to PIPE investors, and 4.7% IPOC sponsors
The company post-merger with IPOC, Clover will have an Enterprise Value of $3.7 billion.
The company has achieved $462 million in revenue for year 2019, a 31% YoY over the $358 million earned in 2018. More recently the company is expected to earn $670 million in 2020 representing 45% increase YoY. The company is expecting to maintain a CAGR of 37% based on 2023 projections.
As of 12/31/2019, and 2018, the company delivered net incomes of -$364 million and -$202 million. Gross Margins for the business as of 12/31/2019 were around ~2.5% amounting to 12 million. The company is projecting Gross Margins to improve to ~16.3% by 2023 amounting to $281 million.
The company provides the following forecasts:
Revenue - 2023E: $1.7B (41% growth rate)
Adj EBITDA – 2023E: $16M (0.9%)
MCR – 2023E: 84.0%
EV/Revenue – 2023E: 2.1x
Clover plans to continue growth through the following strategies:
Accelerate adoption of Clover Assistant: Physician adoption of platform has grown by 500%+ due to easy implementation and actionable insights
Expand share in existing markets: Spending for member acquisition will increase, increase awareness to shop during Medicare’s annual election period, and deliver low cost health plans
Business Model: Clover wants to utilize a physician-led framework to expand use of Clover Assistant. The company wants to deploy new innovative Medicare payment models such as Direct Contracting
Expansion in New Markets: New partnership with Wal-Mart to make co-branded Clover-Walmart plans in eight George counties that represented 370k Medicare-eligible beneficiaries
You can access and download the detailed report which will include the summary and a company info-graphic for your records.
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Additional resources for all the Equity Contrarians (Leeeetttsss Gooooooo!!!)
Chamath Palihapitiya One Page Analysis
Chamath Palihapitiya CNBC - SQUAWK Exclusive
Clover Health and IPOC Company Filings
Clover Health Investor Presentation
Clover Health Founder Letter
Clover Health Clinician Letter