fotostorm/E+ via Getty Images
fotostorm/E+ via Getty Images
LifeStance Health Group, Inc. (NASDAQ:LFST) completed its Initial Public Offering ("IPO") in June 2021, raising ~$720m via the issuance of 40m shares priced at $18 per share. Post-IPO, the company achieved a market cap of ~$7.9bn.
LifeStance was founded in Bellevue, Washington, in 2017. However, in 2020, the private equity firm TPG Capital invested $1.2bn to acquire a majority stake in the company, moving its headquarters to Scottsdale, Arizona. Post-IPO, TPG, and two more PE firms, Summit Partners and Silversmith Capital Partners, owned ~66% of LifeStance shares between them.
According to the company's 2023 annual report / 10K submission, released yesterday, LifeStance is:
dedicated to improving the lives of our patients by reimagining mental health through a tech-enabled in-person and virtual care delivery model built to expand access and affordability, improve outcomes and lower overall healthcare costs.
The 10K discusses its business as follows:
We employed 6,645 licensed mental health clinicians through our subsidiaries and supported practices in 33 states as of December 31, 2023. Our clinicians offer patients a comprehensive, multidisciplinary suite of mental health services, spanning psychiatric evaluations and treatment, psychological and neuropsychological testing, and individual, family and group therapy.
We treat a broad range of mental health conditions, including anxiety, depression, bipolar disorder, eating disorders, psychotic disorders and post-traumatic stress disorder. Patients can receive care virtually through our online delivery platform or in-person at one of our conveniently located centers.
Through our payor relationships, including national agreements with multiple payors, patients can utilize their in-network benefits when they receive care from one of our clinicians, enhancing access and affordability.
In 2020, 2021 and 2022, LifeStance generated respectively $377m, $668m and $860m of revenues, making net losses of $(38m), $(307m) and $(216m) in each year respectively. This mixed performance of strong revenue growth versus heavy losses has led to a drop in the share price of >55% since IPO, with stock trading as low as <$6 earlier this year.
LifeStance released its Q4, and full-year 2023 earnings yesterday, triggering a much needed share price rally, to nearly $9 per share - up 30% for the day.
Summarizing the headline figures, Q4 revenues increased 22% year-on-year to $281m, while 2023 revenues increased 23% year-on-year, to $1.06bn. LifeStance's clinician base increased 18%, to 6,645 clinicians, with >1k added across the full year. In the fourth quarter, visit volumes increased by 20% to 1.8m, and across the full year, increased by 20% to 6.9m.
LifeStance recorded a net loss of $(45m) in Q4, and a net loss of $(186m) across the full year. Adjusted EBITDA was positive in Q4 and 2023 as a whole, being $20m and $59m respectively.
LifeStance also provided guidance for 2024, for revenues of $1.19bn -$1.24bn - a year-on-year uplift of ~15% at the midpoint of guidance, and for adjusted EBITDA of $80m - $90m, up ~44% year-on-year at the midpoint of guidance. On an earnings call to discuss the results, Chief Financial Officer Dave Bourdon commented:
I am excited to announce that we expect to achieve a company milestone by generating positive free cash flow for full year 2024. This will be driven by improved profitability and lower capital expenditures as we continue to strategically moderate the opening of de novo centers.
We expect leverage to come down significantly this year and anticipate net leverage to be below 2.5x by the end of the year. We continue to have sufficient financial capacity to run the business, and we do not intend to raise additional debt or equity in 2024.
The company ended 2023 with cash of $78.8 million and net long-term debt of $280.3 million.
When TPG made its >$1bn investment into LifeStance, the share prices of numerous "telehealth" or "virtual care" public companies were buoyant, and the nascent industry, during the pandemic lockdown period, had the perfect opportunity to show that virtual care could work, and that meeting your physician, psychiatrist, counsellor or mental health champion need not necessarily be face-to-face.
Unfortunately, three years on, and the performance of most public telehealth companies has been disastrous. Babylon Health, a United Kingdom-based virtual care pioneer that was listed on the New York Stock Exchange in 2021, saw shares fall from a high of $272.5 to <$1, before the company delisted amid bankruptcy fears. UpHealth (UPH), which listed on the Nasdaq via a Special Purpose Acquisition Company ("SPAC"), has been delisted due to its market cap falling below $15m.
Talkspace, a platform designed to connect patients to licensed mental health professionals, has seen shares decline >71% in value since listing. Shares of American Well Corporation (AMWL), a provider of online healthcare services, are down >90% during the past five years, and shares of Ontrak, a provider of data analytics based behavioral health management, are down >98% over five years. Teladoc Health (TDOC) saw shares fall >20% after reporting underwhelming results, and its share price has sunk 95% since reaching highs of >$290 during the pandemic lockdown period.
It seems that the idea of "virtual care" ultimately did not appeal to patients, physicians, health insurers, or Wall Street, although in fairness to LifeStance, the one area in which companies have had some success with this approach is mental health, which LifeStance's business is exclusively focused upon.
Teladoc Health earned almost 50% of its revenues - >$1.1bn - from its "Better Help" segment in 2023, focused on mental health, and it seems that this is a type of virtual platform that is capable of engaging users, who may find it easier to discuss their condition virtually, from the comfort of their own surroundings, as opposed to face-to-face.
With that said, it's also important to note that LifeStance offers face-to-face meetings as well as virtual - according to its annual report, the company has "successfully opened 351 de novo centers and completed 93 acquisitions of existing practices," and now has 575 centers in total, which patients / customers are free to visit for consultations."
I have been unable to find a breakdown of how many of LifeStance's visits are completed virtually, versus face-to-face, or whether clinicians are required to work out of a center, as opposed to from home or a private office, but if we consider that the company says "our typical de novo center comprises 3,500 to 4,500 square feet and 10 to 12 clinician exam rooms," we can multiply 575 centers, by 11 exam rooms, by let's say 6 examinations per clinician per day, and conclude that LifeStance could conduct a maximum of ~38k face-to-face, or virtual consultations per day.
We can also surmise that there is space for nearly all of its ~6.6k physicians to work out of a center, and that the company has overall capacity to complete ~10.3m face-to-face consultations every year (38k multiplied by 75% of 365 days, to account for weekends and holidays). That is substantially more than the number of visits completed in 2023 - 6.9m.
With that said, LifeStance notes in its annual report:
In 2023, the Company announced a strategic re-focus, to prioritize resources and close certain centers as a direct result of changes to the Company's business model driven by a shift to more virtual visits initiated by the COVID-19 pandemic. During the year ended December 31, 2023, the Company substantially completed a significant reduction in physical space and exited several underoccupied offices by both negotiating terminations of and abandoning certain real estate leases.
Presumably, LifeStance leases the vast majority, or all of its centers, therefore, encouraging staff to work from home appears to be one way in which the company could substantially reduce its overheads, reduce its heavy net losses, and move towards profitability. Therefore, it would make sense for the company to want to complete more consultations virtually.
It is not quite so easy as that, however. As I have noted above, although companies have had some success providing virtual mental health services, the jury remains out on whether patients are amenable to this type of consultation. Additionally, LifeStance notes in its 10K that:
From time to time, we may operate in states that have not adopted laws related to parity between reimbursement rates for virtual services and in-person care, as presently less than half of states require reimbursement of payment parity for telehealth
In fairness, LifeStance adds that "currently, our reimbursement rates for virtual services and in-person care are substantially similar," supporting the view that reducing investment in property leases, and creating a model where clinicians provide consultations virtually from their homes or places of work, would help reduce losses, and move the company towards profitability.
Reimbursement itself is also absolutely key to LifeStance's success, or otherwise. The company notes in its 2023 annual report:
Private third-party payors pay for the services that we provide to many of our patients. During the year ended December 31, 2023, 95% of our patients were insured as of their latest visit. If any commercial third-party payors reduce their reimbursement rates or elect not to cover some or all of our services, our business, results of operations and financial condition may be harmed.
For the year ended December 31, 2023, 91% of our revenue was derived from patients with commercial in-network payors, 4% of our revenue was derived from patients with government payors, 4% of our revenue was derived from patients on a self-pay basis and 1% of our revenue was derived from non-patient services.
In short, it seems that vast majority of LifeStance's patients / customers do have to directly pay for their consultations, which are reimbursed via insurance plans, the vast majority of which are commercial plans. An interesting question would be how many members would continue to seek consultations if there was no reimbursement in place i.e. how highly do they rate the quality of service received?
LifeStance also notes that:
"two payors individually exceeded 10% of our total revenue for the year ended December 31, 2023: UnitedHealthcare (UNH) and Elevance Health (ELV) comprising 19% and 13% of our total revenue, respectively."
That is nearly one third of all revenues, therefore, should either of these two insurers make adjustments to reimbursements - perhaps in response to a shift towards "virtual care" as opposed to face-to-face, LifeStance may find its revenues shrinking, even if its costs are decreasing.
One further issue to consider is the way that clinicians are incentivized to complete as many consultations as possible in order to earn more. Since clinicians (presumably) are unable to pick and choose their clients, or control pricing (which is dictated by LifeStance), the only way they can increase their earning potential is by persuading clients to complete as many consultations as possible. This strikes me as a potential risk to the quality of services provided and the ability of clinicians to provide an impartial service.
After considering LifeStance's business and performance in some depth, I am not sure that my long-term outlook for the company is positive.
There are some positive elements - the forward price to sales ratio is <3x, which is a competitive ratio, although only if the company can find a way to make itself profitable.
The simple fact seems to be that the business model is not profitable, however. When TPG made its >$1bn investment into LifeStance in 2020 and took the company public the following year, it was at a time when there was huge enthusiasm around the potential for "virtual care," but that enthusiasm has dampened significantly and the majority of listed companies operating in this space have failed.
LifeStance invested heavily in acquiring premises to conduct consultations from, both virtually and face-to-face, but this has resulted in overheads becoming too high, and made the company loss-making, so it is now attempting to reverse this process.
One option - an option the company is apparently taking - is to close down centers and allow clinicians to work from home, conducting more and more consultations virtually, but this may well affect the quality of the service provide, or cause health insurers to reduce the reimbursement they provide.
It may also impact the quality of clinician LifeStance is able to attract - additionally, clinicians are incentivized by LifeStance to focus on quantity not quality of service, potentially impacting their ability to perform their jobs to a high standard.
All things considered, although I can understand why TPG made a massive bet on investing in LifeStance at a time when the company appeared well placed to capitalize on a fast growing industry, I can also understand why it has struggled to drive profitability three years after going public, and why the share price has fallen as a result.
Although LifeStance has fared much better than other "telehealth" companies, this may be due to the fact it was offering in-person as well as virtual care, and if the company attempts to move towards virtual, I don't see how this will improve its chances for success, given the issues I have discussed above.
Finally, the company is indebted, with total liabilities of $681m as of the end of 2023, including long-term debt of $280m, and $181m of debt related to capital leases, against a cash position of just $79m, and total current assets of $226m.
Admittedly, management says it has no need to raise funding or borrow cash in 2024, but in my view at least, it seems as if the company's business model is stuck between a rock and hard place, within a failing industry. Therefore, I'd be skeptical about LifeStance's ability to finish 2024 with a higher share price than it has today.
If I held stock, I'd likely opt to sell after this min-rally on 2023 earnings.