Earnings Call Transcript - LFMD Q2 2023

Operator, Operator

Good afternoon. Thank you for joining us today to discuss the results for LifeMD's Second Quarter ended June 30, 2023. Joining the call today are Justin Schreiber, Chairman and Chief Executive Officer; and Marc Benathen, Chief Financial Officer of LifeMD. Following management's prepared remarks, we will open the call for a question-and-answer session. Before we begin, I would like to remind everyone during this call, the company will make a number of forward-looking statements, which are subject to numerous risks and uncertainties that may cause actual results to differ materially from those projected. Those risks and uncertainties are described in the company's 10-K and 10-Q filings, and we've seen other filings that LifeMD may make with the SEC from time to time. Forward-looking statements made during this call are based on current information available to the company as of today, August 9, 2023. The company assumes no obligation to update or revise any forward-looking statements after today's call, except as required by law. Also, please note that the management will be discussing certain non-GAAP financial measures that the company believes are important in evaluating LifeMD's performance. Details on the relationship between those non-GAAP measures to the most comparable GAAP measures and reconciliations thereof can be found in the press release issued earlier today. Finally, I would like to remind everyone that today's call is being recorded and will be available for replay in the Investor Relations section of the company's website. Now I'd like to turn the call over to LifeMD’s CEO, Justin Schreiber. Please go ahead.

Justin Schreiber, CEO

Thank you, and good afternoon, everyone. After the market closed, we issued a press release announcing our second quarter results and posted an updated corporate presentation on our website at ir.lifemd.com. Our second quarter performance was strong, continuing the momentum established in the first quarter. Our core telehealth business demonstrated double-digit sequential revenue growth once again, and we achieved positive free cash flow ahead of schedule. Additionally, we successfully rolled out our weight management program, which helps patients access GLP-1 medications, such as Wegovy, Ozempic, and Mounjaro. The early results have far surpassed our expectations. I'll speak more about this in a moment. Given the tremendous opportunity ahead of us in weight management and the continued strong performance of our existing telehealth business, we are raising our full-year 2023 revenue guidance to $146 million to $152 million, up from the previous $140 million to $150 million. At the same time, we are modestly reducing our adjusted EBITDA guidance to account for the near-term investments in marketing and our clinical team, which are vital to rapidly scaling this business. We expect these investments to pay off quickly and foresee our weight management program being substantially accretive to both our top and bottom lines beginning in 2024. For the remainder of the year, LifeMD remains focused on four key initiatives that we believe will continue to drive meaningful value for our shareholders. First is the launch of our direct-to-consumer weight management program, which we officially rolled out this past April. As I mentioned, while still early, the weight management business is off to an incredible start with the strongest unit economics of any of our telehealth offerings to date. In a very short period, we've amassed over 5,000 active patient subscribers translating to an annual run rate of over $7 million in recurring revenue. We're aiming to scale this offering rapidly with the goal of increasing our Q2 average of approximately 100 new patients per day to 400 patients to 500 patients per day by year-end. We believe our offering is truly differentiated from the competition. Our weight management program stands apart as it's not just a vehicle for selling GLP-1 Therapeutics. Instead, it's a comprehensive package that is fully integrated with our primary care services, offering a holistic blend of diagnostics, physician visits, lab work, lifestyle support, and access to GLP-1 for eligible patients. For these services, LifeMD patients subscribe quarterly at approximately $129 per month. Additionally, by requiring synchronous virtual visits with our physicians, we can provide comprehensive care to our patients and gain valuable data on coexisting conditions. Our preliminary forecast suggests that this program could significantly enhance our 2024 revenues and EBITDA. Second, during the quarter, we continued to make significant progress in securing high-value partnerships. Building off the unique telemedicine-driven capabilities LifeMD offers in weight management, we launched two exciting partnerships with national companies in the health, wellness, and weight management segments. We are very excited to be aligned with these premier partners to combine our tremendous telehealth capabilities with their unique nutritional and coaching core competencies to maximize patient outcomes. We believe these initial pilot partnerships can serve as an extremely valuable jumping-off point for future B2B partnerships in this area. Looking ahead, we see ample opportunity to expand upon these and other new partnerships leveraging the unique capabilities of LifeMD's telehealth platform and our affiliated medical group. For the third key initiative, we're making substantial progress towards accepting private insurance within our virtual primary care platform. Initially, we aim to accept insurance from private insurance providers within our top 10 states by the end of the year. Alongside a team of regulatory and compliance experts, we've also begun preliminary work on Medicare acceptance. We believe these efforts represent significant and valuable expansion opportunities for our primary care platform. Finally, our existing lifestyle healthcare businesses anchored by our Men's Health brand, RexMD and our WorkSimpli subsidiary continued to outperform. As we guided to last year, we spent considerable time in 2022 refining the unit economics and ad spend investment in RexMD to focus not only on high-growth areas, but also on highly profitable patient cohorts. While this required us to take a small step back in 2022 in terms of sequential revenue growth, we returned to such growth in the first quarter of 2023 and continue to deliver against that momentum. Second quarter revenue for RexMD was up 10% sequentially and represents the second consecutive quarter of double-digit sequential growth. We expect to deliver high single-digit sequential revenue growth on a go-forward basis, with year-over-year growth for the balance of 2023 exceeding 20% for our existing lifestyle businesses. Our WorkSimpli subsidiary continued to deliver strong results with revenue growing 66% and subscribers growing 35% versus the prior year. These businesses remain incredibly profitable, with both achieving net contribution margins in excess of 30% during the second quarter, including corporate costs. With that, I'll turn the call over to our CFO, Marc Benathen, who will provide a summary of our financial results.

Marc Benathen, CFO

Thank you, Justin, and good afternoon, everyone. LifeMD's momentum continued with our strong financial performance in the second quarter. We not only grew consolidated net revenues to a record $35.9 million, exceeding guidance, but we also achieved positive free cash flow for the first time in the company's history and ahead of our expectations. At the same time, we launched our weight management program with significant success right out of the gate. Our early estimates indicate that this offering will be substantially accretive to our top and bottom lines beginning in 2024. Now turning to results for the second quarter of 2023. As I mentioned, revenue in the second quarter totaled $35.9 million, an increase of 18% compared with the same quarter a year ago and up 9% versus the first quarter. Total telehealth net revenues grew 11% sequentially. Net revenues from LifeMD branded primary care products and services, including weight management, increased 122% sequentially versus the first quarter and accounted for nearly 8% of total telehealth revenues in the second quarter, up from 4% of revenues in the first quarter. Subscriber growth remained very strong with the number of telehealth active subscribers increasing 15% to more than 192,000, and WorkSimpli active subscribers increasing 35% to over 171,000, both versus the year-ago period. As Justin mentioned, WorkSimpli revenue was $13.6 million in the second quarter, an increase of 66% from the year-ago period. The percentage of total revenue that came from recurring subscriptions increased to a record 95% of total net revenues. Gross margin for the second quarter was 87%, up 200 basis points versus the prior year period. Gross profit for the quarter totaled $31.4 million, an increase of 22% from the year-ago period. Operating expenses for the second quarter totaled $36.3 million, a decrease of $2.4 million versus the year-ago period, reflecting reductions in both selling and marketing expenses and G&A expenses, driven by the slight rationalization of headcount executed in 2022 and a $1.2 million decrease in stock-based compensation. Operating expenses in the second quarter included $5.2 million of non-cash expenses associated with stock-based compensation, write-off, non-cash interest, depreciation, and amortization expenses. Our GAAP net loss attributable to common stockholders for the second quarter totaled $7.5 million or a loss of $0.23 per share. This compares to a GAAP net loss attributable to common stockholders of $13.8 million or a loss of $0.45 per share in the second quarter of 2022. Adjusted EPS is a non-GAAP financial measure that excludes non-cash expenses, dividends, insurance acceptance readiness, litigation expense, non-controlling interest, M&A expenses, financing, transaction costs, and foreign currency translation. Reflecting those adjustments, non-GAAP diluted EPS for the second quarter of 2023 was $0.05 per share compared with a loss of $0.22 per share in the same year-ago period. Adjusted EBITDA, a non-GAAP financial measure that excludes the same items I just noted for adjusted EPS, totaled a gain of $1.7 million in the second quarter of 2023. This compares with an adjusted EBITDA loss of $6.9 million in the same year-ago quarter. Adjusted EBITDA was lower than our quarterly guidance primarily due to the investments we made to support the growth of our weight management program and our performance in new patient acquisition for this business and our core lifestyle businesses. Cash and cash equivalents totaled $11.9 million as of June 30, 2023, and reflected positive free cash flow of $2.3 million during the second quarter. As a result of the very strong early results from the weight management program launch and continued strength in our existing businesses, we are raising our full-year revenue guidance to $146 million to $152 million, up from our previous guidance of $140 million to $150 million. We also are slightly lowering our adjusted EBITDA guidance to $10 million to $13 million versus $12 million to $18 million previously, reflecting near-term investments required to scale patient acquisition and the clinical team for our weight management program. For the third quarter, we are guiding revenue to be between $37.5 million and $38.5 million, with adjusted EBITDA between $2.5 million and $3.5 million. We believe the strength of our balance sheet and profitability of our current operations will more than adequately allow us to fund the growth in our business. This wraps up our financial results. I'd now like to turn the call back over to Justin.

Justin Schreiber, CEO

Thanks, Marc. To summarize, LifeMD has delivered another strong quarter and made substantial strides towards our strategic goals. The launch of our weight management program within primary care provides another tremendous vehicle to accelerate top-line growth beyond our previous expectations and drive significant bottom line in 2024. Our core lifestyle healthcare businesses, along with our WorkSimpli subsidiary, continue to make robust contributions to our profits. Moreover, we're witnessing a surge in interest from potential partners looking to harness our best-in-class telehealth platform to bolster their growth. In closing, I would like to thank the entire LifeMD team for their hard work and for continuing to drive our outstanding financial performance and sustained business momentum. With that, I would like to open the call for Q&A.

Operator, Operator

Our first question comes from David Larsen with BTIG. Please go ahead.

David Larsen, Analyst

Justin and Marc, congratulations on a strong quarter. Could you elaborate on the weight management program and GLP-1? You mentioned the total revenue contribution for the quarter; could you repeat that? Additionally, could you provide more details on which drugs are being prescribed and the process involved? For instance, do patients receive these prescriptions every quarter? Do they need to consult their primary care physicians on a monthly or quarterly basis? Is prior authorization required? Are these cash payments? Any further information about the nature of the drugs would be greatly appreciated. Thank you.

Justin Schreiber, CEO

Yes, David, this is Justin. I'll start, and then Marc can also discuss some of the revenue figures related to that business segment. The program is structured so that patients pay for the first quarter upfront. Often, they receive a discount on the first quarter. The three most commonly prescribed medications when suitable for the patient are Wegovy, Ozempic, and Mounjaro. After onboarding, patients see a physician within three days. We have significantly expanded our medical group to meet the increased demand for these therapies. During onboarding, patients are assisted by our medical assistant team and our tech platform. We conduct electronic benefit verification for all the drugs to determine coverage. If required, we also handle prior authorization. Currently, we observe that 20% to 30% of patients' insurance covers one of these medications in some form. We are continually exploring new technologies and are in discussions with several partners to enhance this process. A crucial long-term competitive advantage for LifeMD in securing coverage for these therapies is our physician network and providers being in-network initially across the 10 largest states, and eventually throughout all 50 states. This will distinguish LifeMD from the competition. Additionally, we are actively working on building a compliance infrastructure to assist Medicare patients in gaining access to these therapies in 2024, which we are very excited about. We believe this will serve as a substantial growth driver for us in the future.

Marc Benathen, CFO

This is Marc. Just on the revenue piece. So pure weight management, excluding any other virtual primary care or any products in Virtual Primary Care was about $500,000 of cash revenue in the quarter. We only started marketing it in late April, and it's typically a quarterly subscription that rebuilds after that initial quarter for subsequent three-month periods. With that, we ended up having to defer a lot of that revenue. We're actually building up a pretty healthy deferred revenue balance, which is why the cash flow from this business was substantially better than the GAAP recognition. So, we only recognized a little bit over $100,000 of revenue in the quarter and deferred another $400,000. We came out of the quarter with just under 3,000 active patients on weight management by the end of June. Sitting here today, we're over 5,000, and that's growing pretty rapidly with the average person paying about $129 a month. So, we expect to see a pretty significant snowball effect financially from this business.

David Larsen, Analyst

Okay. I think I heard you say that the primary care business was like 8% of revenue in Q2, up from 4% in Q1. Is that correct?

Marc Benathen, CFO

That is correct. That includes all the primary care business. So that's Virtual Primary Care plus weight management essentially.

David Larsen, Analyst

Okay. So, we're talking about like maybe $2 million a quarter, which is actually, I think, very good, right? $8 million a year is what the state is right now?

Marc Benathen, CFO

For virtual primary care, including weight loss, that's correct. Of that $2 million, there was only about $150,000 in Q2 that was recognized for weight loss. But as I mentioned, the billings for weight loss were substantially higher. We deferred down to today about $400,000 of deferred revenue, which will be recognized this quarter, and the billings are increasing pretty significantly as we acquire more subscribers.

David Larsen, Analyst

Okay. And then what do you expect the annual run rate to be for weight loss or GLP-1 by Q4, let's call it, December of '23. Any sense for that or guess for that?

Marc Benathen, CFO

Yes. I mean it's probably in the range of, just pull up that figure. I mean you're probably looking at on a monthly basis around $1.5 million to $2 million per month, which, if you multiply that out, $20 million to $25 million.

David Larsen, Analyst

That's quite significant. You're suggesting a potential 20% annual increase in product revenue from weight management alone. Have you shared pricing details for these various products? Do they fluctuate based on your negotiations? If that's not publicly available information, I completely understand.

Marc Benathen, CFO

We're not disclosing publicly on the product, but we're not charging our patients for the product. Basically, the $129 a month is for services. So, you're paying for the weight management program. Essentially, you're paying for the physician services. As part of that, our physicians will attempt to get you approval for GLP-1, of which they have a good success rate. If there's no insurance approval for that, you can obviously cash pay for those GLP-1s as well. But what we're actually earning revenue on is the service that we are providing to our patients, providing access to GLP-1s as one of those services within weight management. There's obviously a big draw from a lot of patients.

David Larsen, Analyst

Okay. I want to be respectful of the other analysts on the call, and I don't want to take up too much time. But are you providing access to compounded medications for these members? And what percentage of the mix would be compounded medications, and is there a difference between the branded GLP-1 products and/or compounded medications?

Justin Schreiber, CEO

David, this is Justin. I will address that. I prefer not to delve into the distinctions between compounded therapies and branded therapies. What’s crucial is that we always aim to place patients on a branded GLP-1 product. We invest significant efforts to ensure that happens for each patient. When patients are not covered for the therapy and cannot afford it, we partner with a compounding pharmacy that is very compliance-focused and sources some of these ingredients from FDA-approved wholesalers. We connect patients to this compounding pharmacy when their insurance denies coverage. I believe most patients who are not covered for these therapies are opting for the compounded option. We prioritize access and supporting patients in obtaining a therapy that clearly delivers remarkable results for them. We are optimistic about the potential for expanded coverage for these therapies, allowing us to place more patients on branded therapy in the future. I can assure you that our patients using the compounded therapy are very satisfied with it, and the partnership is thriving.

David Larsen, Analyst

Okay. I'll hop back in the queue. Congratulations on a great quarter.

Operator, Operator

Our next question comes from Sarah James of Cantor Fitzgerald. Please go ahead.

Sarah James, Analyst

Thank you. And congrats on a great quarter. I was hoping you could help us understand what your longevity assumptions are for the 2023 guidance. And as you talked about sort of what the run rate could look like? How many months of subscription do you assume your weight management clinic members are staying with you?

Marc Benathen, CFO

We are not sharing that information publicly at this time because it's still early, and we prefer to base our statements on actual data. What I can mention is that we anticipate a significant decrease in our model from the first month to the twelfth month, not because we think that's what will actually occur, as we evaluated this very conservatively. Even using that assumption—where we're expecting to retain around 10% or less by the end of the first year, which we believe will be much higher—we still foresee this business generating tens of millions of dollars in revenue next year and maintaining reasonably healthy EBITDA margins, likely in the low double digits.

Justin Schreiber, CEO

We're currently focusing on developing custom food plans for patients who are either starting therapy or transitioning off of it. This includes various coaching options because we don't believe that patients will remain on these therapies indefinitely. Our aim is to create a comprehensive offering that integrates food, coaching, therapies, and primary care. We anticipate that patients may cycle on and off therapy, so we want to provide a solution that supports them throughout their weight loss journey.

Sarah James, Analyst

Sure. And is this a book that you look at as having a cross-sell opportunity, or because primary care is fully integrated into the clinic, there would be no need to try to cross-sell on a traditional primary care basis?

Justin Schreiber, CEO

I believe that cross-selling is extremely important. It has the potential to be a downside as well. One of the unique approaches LifeMD is taking, which our major competitors are not, is requiring every patient to participate in a 20-minute virtual consultation with one of our exceptional providers. This increases our costs significantly and requires us to expand the medical team considerably. However, I believe this investment will be worthwhile. We also have additional weight loss offerings that we can cross-sell beyond just food. I'm confident that our patients are forming strong relationships with our doctors and nurse practitioners, and I see many other services we could provide them. I believe they will want to continue their involvement with LifeMD in various ways.

Sarah James, Analyst

And last question here. You talked about the insurance coverage of the GLP-1 in the context of coverage in some fashion. And I guess I had always just thought of it as a binary yes or no on coverage. Can you give a little bit of color on what you meant by that if it's not binary?

Justin Schreiber, CEO

Can you give me a little bit more color on specifically what you're asking? I'm not sure I follow the question.

Sarah James, Analyst

Yes. So, you talked about the success rate that you're getting with insurance coverage of some of the weight loss medications like Mounjaro, Wegovy, and you talked about it as coverage in some fashion. And I was just wondering what that meant because I typically think of the payers either covering it or not covering it, making, I guess, no decision on whether they're going to reimburse it.

Justin Schreiber, CEO

I'm making some assumptions here. We've been in contact with major patient support organizations that assist patients in securing coverage for these therapies on a daily basis. The environment is continually evolving, and the outlook on coverage is unclear; plans might provide coverage one day and not the next. However, I believe that having our affiliated providers in-network with these plans will be beneficial. Navigating the prior authorization process should help patients obtain coverage. Many of these large providers may prefer in-network providers over out-of-network ones. But this is somewhat speculative, as there is still uncertainty about how and when coverage for these therapies will increase.