Review of Systems: A One Medical S-1 Teardown

Nisarg Patel
Jan 28 · 7 min read

This week, One Medical (Nasdaq: ONEM) will be the first “next-generation” primary care company to enter the public markets. Others have been growing quietly–but steadily–under a wave of private financing (Oak Street, Iora, Firefly, ChenMed, Forward, Cityblock, arguably Oscar) or have been acquired (CareMore, acquired by Anthem). I’m a big believer in redesigning health care delivery and applying novel financial models and technology to improve the way patient’s receive care, and One Medical’s pioneering role in this space is worth dissecting.

With a wave of brick-and-mortar (read: low gross margin) startups facing questions about their SaaS-multiple IPO valuations (e.g. WeWork, Casper, SmileDirectClub, Peloton), I was curious if the same investor dynamic and scrutiny held up for a health care company.

One Medical’s S-1 opens with their vision to “delight millions of members with better health and better care while reducing the total cost of care.”

Do their numbers stack up to their vision?

Let’s start with the basics first:

Forty-five percent of 18–29 year olds don’t have a primary care physician, and most often cite the reasons as inconvenience and opaque prices. One Medical, whose value-add to members is convenience, serves as an attractive alternative to traditional primary care.

Members pay a $199 annual subscription to access One Medical’s primary care physicians and services, including same-day appointments, virtual messaging with physicians, and easy access to personal health information. The $38M One Medical earned in Q1–Q3 ’19 subscription revenue (~20% of total revenue) is part of what the company sees as justification for its proposed SaaS-multiple valuation.

The company has 77 offices in major metropolitan areas, including Boston, Chicago, Los Angeles, New York, Phoenix, San Diego, Seattle, the San Francisco Bay Area, and Washington, D.C., with plans to open in Atlanta, Orange County, and Portland.

Next, the numbers:

One Medical has raised $402.5M in equity funding, was valued at ~$1.5B in its last private financing, and has most recently traded at nearly $2B in secondary markets. It’s filing to raise $263M in an IPO of common stock with a post-money valuation between $1.7–1.9B.

Looking at the hard Q1–Q3 ’19 numbers alone (Q4 numbers were provided in a range of values), we see:

  • Revenue: $198.9M (28.6% higher than same period in 2018)
  • Net Loss: $34.2M (18% higher than same period 2018)
  • Membership: 397,000 members (23% increase over 09/2018) and 6000 enterprise clients
  • Costs of Care: $118M [59% of revenue] ($100M in same period 2018, or 65%)
  • 89% retention rate for consumer members, 97% retention for enterprise clients.
  • Google accounts for ~10% of 1M’s net revenue
  • >95% of members were commercially insured

What do these mean for the company’ strategy moving forward?

1. Unit Economics & Growth

Over the last year, One Medical’s revenue growth increased 29% and its gross margins increased from 35% to 40%. However, S&M expenses increased 100% and G&A increased 34% over the same period.

Examining sales efficiency by annual revenue over the prior year’s S&M expenses, sales efficiency dropped from 1.87 to 1.72 from 2018 to 2019.

Unsurprisingly, estimated CAC has risen from ~$200 (2017), to ~$350 (2018), to ~$565 (2019). Given estimated ~$655 per-member-per-year revenue on 40% gross margins in CY 2019, this translates to a ~2.2 year payback period.

Arguably, rather than spread the footprint of the current business, it may be financially strategic for One Medical to consider how they can grow existing contracts, i.e. individual memberships and enterprise clients, via planned expansions into pediatrics and mental health. These could spread out existing fixed costs, the clinics and some staff, into new sources of recurring revenue.

The unit economics of mental health care represent another challenge; clinic visit frequency is not correlated to mental health care progression and/or quality, but that’s beyond the scope of this piece.

Yet, One Medical plans to more than double its primary care footprint, from $34 billion to $81 billion, by expanding from its 9 current markets to the 51 largest metropolitan statistical areas (MSAs).

On first glance, geographical expansion beyond their current markets, urban centers like New York, Los Angeles, and San Francisco that are packed with young, high-income knowledge workers, seems unlikely to offer a significant customer acquisition opportunity. However, recent urban migration, largely in response to costs of living, illustrates movement towards moderately sized cities like St. Louis and Columbus. Whether the population density and projected revenue from individual memberships in those areas is enough to justify the geographic expansion is uncertain.

Source: ValuePenguin/LendingTree

One Medical’s strongest advantage when considering growth is its brand, which is also an argument for horizontal, geographic expansion at the expense of short-term profitability. If One Medical is synonymous with metropolitan primary care, it could make its case as the front door to health care. This would also increase its attractiveness to health networks for partnership revenue (header #3 below).

Outside of traditional primary care, their primary competition will be retail clinics with massive existing footprints (e.g. CVS MinuteClinic, Walgreens, Walmart) and cheaper on-demand prices, as well as Urgent Care centers in the same MSAs.

Source: CNBC

2. Cost Savings

Based on CY 2019 numbers, One Medical averages $55 PMPM including both employer and patient out-of-pocket spending. This is nearly double commercial PMPM spend, on average ~$25–30 lower.

Source: Oregon.gov

At a nearly 2x premium relative to average PMPM costs for employers, One Medical has to either a) prove their service offers cost savings to employers that compete traditional health plans economically or b) provide enough employee satisfaction and retention to justify additional employer spending.

For one client, ONEM claims to reduce direct costs by 3.5% PMPM, but whether that is enough to justify the premium is up for debate.

My guess here is that the additional $25–30PMPM less $16 PMPM means employers are spending on avg $11–14 PMPM more for One Medical benefits with the justification of employee satisfaction and retention. This is where One Medical’s Net Promoter Score of 90 becomes compelling.

A side note: One Medical’s pricing, services, and brand seemingly fit into the Equinox/Barry’s/Lululemon category of companies capitalizing on the growing trend of conspicuous lifestyle and wellness projection. There’s likely an opportunity for a future partnership there.

3. Partnership Revenue Mix

Most interesting to me is One Medical’s steadily increasing partnership revenue.

Their partnership arrangement with health systems sounds similar to the affiliation agreements that traditional medical practices sign to bill insurers the higher rates previously negotiated by large hospitals. Essentially, One Medical could bill patients at higher hospital rates and then split the revenue with their hospital partner. This would effectively increase costs for both employers and patients via higher insurance premiums.

Given that partnership revenue has steadily been an increasing share of One Medical’s top-line revenue mix, the company could piggyback off the monopoly power of local health system networks to command higher service prices year over year, indirectly leading to higher costs for members.

With no upstarts or political winds looking to stop the pricing power of health systems in the near-term, One Medical has a clear path to revenue growth even without a corresponding geographic coverage expansion.

4. Valuation

One Medical expects to price its shares between $14 and $16, valuing the company between $1.71–1.96B postmoney, or between 6–7x revenue and $23–24M per clinic. There’s significant growth opportunity for the company, but a SaaS valuation for a low gross margin business with largely non-recurrent revenue leaves it feeling expensive. These characteristics also make it difficult to find a public comp, with Teladoc or Livongo being the closest, albeit without the massive fixed costs, and HCA feeling a bit too simplistic.

Conclusion:

I’m interested in seeing how the public markets reach to the first public next-generation primary care company, but I think One Medical’s low margins and drop in sales efficiency will hurt it’s expected SaaS-like valuation in the short-term.

Higher service rates from partnership revenue should increase total PMPM year over year and have the potential to transform the company into the country’s first national primary care brand, but premiums may eventually strain enterprise clients in MSAs with looser labor markets, particularly as more large businesses move to self-funded, i.e. Administrative Services Only, plans.

Finally, I’m curious to see how One Medical’s public performance affects other primary care startups, particularly their movement between commercial, Managed Medicaid, and Medicare Advantage and the variable care delivery incentives and PMPM spend associated with each.


As always, hoping to continue the conversation with interested readers. Reach out on twitter @nxpatel. I’d love to hear your thoughts.

Related corporate strategy pieces:

Nisarg Patel

Written by

Resident Surgeon at UCSF. Healthcare @bessemervp. Alum @harvardmed, @ycombinator. Views my own.

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