Description

Business Background

• Doximity is a digital platform for U.S. medical professionals

• Claims to have 1.8mm physician, NP, and PA members, including >80% of physicians, making it the largest medical-professional-focused network in the country

• Offers professional networking (profiles, career management, search, connect with colleagues - “LinkedIn for doctors”), a personalized/curated newsfeed (articles, videos, CME credits, peer updates, clinical discusions, sponsored content - analogous to Linked of Facebook newsfeeds), and productivity tools (digital signatures, e-fax, messaging, telehealth)

• Member access is free, and the company monetizes the network by giving pharma, health systems, and recruiting firms access to its targeted, verified member population 

• Revenue is ~80% marketing (pharma branded drug campaigns and health systems looking to drive patient referrals), ~20% hiring, and a LSD % in enterprise and individual telehealth solutions

• Doximity claims a TAM of $18.5bn across the platform comprised of 1) $7.3bn in physician-directed pharma marketing spend excluding drug samples, 2) $6.9bn in health system marketing and staffing, and 3) $4.3bn in enterprise and individual telehealth (55k care locations and 1.8mm professionals at average contract sizes)

Summary Thesis

• 80% of revenue comes from Marketing Solutions, which benefited from a once in a lifetime digital shift driven by the complete grounding of pharma field reps and the cancellation / postponement of conferences, both of which Doximity competes with for marketing dollars

• While the secular shift to digital in pharma is underway and is playing catch up versus other industries, there is likely to be an air pocket as the world re-opens

• Declining deferred balances and a falling contribution from new customer additions indicate risks to revenue expectations

• Furthermore, the company does not disclose standard online advertising metrics like MAUs, DAUs, or time spent, perhaps because many of these metrics have sharply reversed as physician and sales rep behavior has normalized

• Valuation is rich as the market capitalizes peak growth and margins with a generous multiple

• Bonus: hedge fund hotel. HFs hold 16% of shares according to CapIQ

Bull Case

• Secular shift to digital

• Heathcare laggs other industries in moving to digital

• Physician-directed, non-sample pharma marketing spend is ~30% digital vs. >60% in other industries

• Doctors were already limiting rep access pre-covid

• Covid forced marketers to shift to digital with their sales forces grounded

• The success of digital in the pandemic accelerated 

• Bear: 

• App data indicate softening engagement

• Pharma is a more complex/educational sale than a sweatshirt on Facebook. Face-to-face sales with reps and at conferences will resume pulling back some portion of marketing budgets and making comps difficult

• Large, underpenetrated TAM

• Healthcare providers are key decision makers, directing >73% of the $4tn in total U.S. healthcare expenditures

• See TAM sizing above

• Bear:

• Only so many physicians spending so much time online on a medical-specific property - engagement is capped relative to a traditional horizontal social network

• Social is only one part of customers’ digital marketing campaigns. Doximity competes with customized campaigns on content-rich sites like Medscape. Marketers will not put all their eggs in one basket

• Doximity does not have access to the full $7.3bn in physician-directed pharma marketing spend - this will never be 100% digital (and could remain well below other industries in terms of penetration), and Doximity will not have 100% share within digital

• Unique and valuable clinical network

• Largest first-party network of verified medical professionals in the U.S. with granular information on work histories, geographic locations, medical specialties/subspecialties, etc.

• Customers can run targeted campaigns that drive superior ROIs, giving Doximity headroom to substantially increase monetization

• Bear: 

• Google “physician database” and the first ad slot is Definitive Healthcare touting “access detailed profiles on 1 million+ physicians” - the space is competitive and other channels exist to reach physicians

• Other online properties can match physician target lists (e.g., LinkedIn) and may have more engaging content (e.g., Medscape), or both

• Some pharma marketers say the ROI is no different than other platforms or is even worse than custom campaigns on content-rich sites

• Don’t forget paid search! Google is still an 800-lb gorilla here where you have a doctor actively searching for drug information

• Subscription revenue business with high visibility

• Existing customers have grown with Doximity by adding additional brands or service lines from their portfolios to the platform

• Customers add different advertising modules (e.g., awareness vs. interactivity)

• Customers move from matching their lists of target physicians to recommended lists from Doximity

• Bear:

• Brands are often managed independently even under one corporate umbrella, meaning that Doximity has to sell each brand

• Covid created a huge pull forward that will be difficult to lap as the revenue base is now much larger, low-hanging fruit has already been captured, and sales forces are mobilized on re-opening

• Advertisers buy on a campaign-by-campaign basis, which is not the same quality of “recurring” revenue as an integrated healthcare IT SaaS revenue stream

• Adjacent opportunities

• Strategic network opens the door to data licensing, scheduling, additional advertising markets (e.g., medical devices)

• Bear:

• Other markets like enterprise IT and telehealth are intensely competitive. It is unclear that Doximity has any advantage akin to having a verified network to target in marketing

• Premium growth and margins warrant premium valuation

• Bear:

• Until it doesn’t 

Deferred Revenue

• Pharma spend on Doximity is based on campaigns that have been prepaid

• Deferreds have declined on an absolute basis and relative to revenue

• Topline is the single most important variable to bulls

• The drain in deferred is more than would be explained by seasonality

• Readthrough is 1) potential slowdown ahead, 2) lower overall visibility, 3) less favorable terms with customers, 4) a capture of residual spend in the December quarter (maybe pharma had held back some marketing $ in anticipation of re-opening but with Omicron pushed that into digital as re-opening timeline became temporarily less clear?) - none of these explanations are great for the company

• The bullish read would be pharma typically buys other media upfront and made sure to secure ad inventory in advance during covid with budget constrained elsewhere. Therefore, the declining deferred today is simply consistent with a shift to typical online ad buying patterns (other online ad businesses don’t have huge deferreds), so Doximity can grow through a declining deferred and this is just a one-time WC headwind

New Customers

• New customer revenue appears to be waning whether you imply totals from the company’s net revenue retention number or pull the disclosed metrics from the company’s MD&A

• In either case, lower new customer revenue increases reliance on expanding existing relationships to meet revenue expectations even as existing customers likely pulled forward large amounts of digital spend

Other Accounting

• Have gotten 103bps margin boost from release of AR allowances since going public

Sample Customer Commentary

Multiple pharma companies have reiterated the importance of their physical sales forces, and within digital have talked about their allocation across multiple platforms and comparable ROIs. Below is a sample of recent commentary from ABBV re: face-to-face.

ABBV Conference Calls

12/1/21:

So we typically probably have usually a marginally or slightly heavier share of voice on principle to begin with. So when COVID hit and everything shut down, we were quite concerned that we would lose that face-to-face share of voice. And we did a couple of things. We reacted, like many of the companies like heavily into new digital technologies, as you highlighted. But the other thing we did is we got back into the field once it was safe, very, very fast.

So we actually saw that the speed of our return to face-to-face plus the digital technologies actually gave us increased share of voice versus some of the competitors. And we see that across the board. It's clearly there in the U.S., but we particularly see it in the international markets. It's quite striking.

11/17/21:

So in terms of overall dynamics from COVID, what we see when we look at our field teams, our field teams are essentially back up to pre-COVID levels of engagement. Now the majority of that is -- has returned to live engagement with our target doctors. It's not completely back to pre-COVID levels, but the rest is being soaked up by virtual visits, new technology approaches, et cetera.

Valuation

• $35 (down ~30%) on ten-year DCF with 15x terminal EV/EBITDA, or 15x FY2023E revenue

• Admittedly more art than science here as so much value resides in terminal value

• Ultimately think revenue misses could occur in next 12 months and would drive a re-rating in a stock that trades at >20x NTM revenue

Risks to Short Thesis

• Marketing Solutions - covid was a real catalyst for pharma digital spend, ongoing digital share gains exceed expectations, and Doximity wins outsized share within digital 

• TAM Expansion - Doximity successfully serves new healthcare customers, licenses data, etc. 

• Other Optionality - strong balance sheet and rich valuation provide optionality on M&A to expand the platform

• Investors Look Through Near Term - overall, not a terrible business, just think expectations are too high

Appendix

Catalyst

Revenue misses