2023 State of Investments 

A conversation with Stephanie Davis, Sr. Managing Director, Healthcare Technology & Distribution, SVB Securities, and Sanjula Jain, Ph.D., SVP, Market Strategy and Chief Research Officer, Trilliant Health

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Sanjula Jain, Ph.D.: Well, it's a pleasure to have Stephanie Davis of SVB Securities. Stephanie, thanks for being here.

Stephanie Davis: Thank you for having me on the program; I appreciate it, Sanjula.

Sanjula Jain, Ph.D.: So, you are constantly evaluating the market and thinking about all the trends and consuming a ton of data. What's the latest in how you're viewing the world heading into Q1 of next year?

Stephanie Davis: Well, it's been a really tough year over here on the public markets; I'm not going to lie, it's been a lot of downside and all my publicly traded equities, a lot of frozen IPO processes that probably could have happened. Debt doesn't look as attractive as interest rates are going up. For a lot of my space, especially in healthcare technology, because they are cash-burning industries that don't really have a lot of profitability yet, that interest rate going up equation makes their terminal value go down. So, there are a lot of concerns about what happens next.

Sanjula Jain, Ph.D.: How do you see the market preparing for that, if at all?

Stephanie Davis: Folks have just pulled back. At this point, especially end of the year, as investors are looking to lock in some of their gains, no one's putting capital to work. Even stories that make a lot of sense, folks are saying; you know what, not my year to put on risk right now. Next year as they start to look at where they could position themselves or heed a little bit more risk on momentum as we get into January. But even then, it's mostly the safe place. If you're a name with EBITDA, if you are a name that feels like a safe haven, I expect you're probably going to be in a pretty crowded wall.

Sanjula Jain, Ph.D.: Wow. Where are you seeing the potential investment opportunities over the next year, given some of these market pressures?

Stephanie Davis: I normally like to make calls that are very counter to the market; I don't think this is the right tape  for that. If you're a shorter-term investor, you're trying to call quarters. I think a lot of the consensus longs and consensus shorts are for a reason, right? I think if you look at short interest, TelaDoc has some of the higher short interest in our space, and GoodRx has some of the higher short interest in our space, both at 20%. That's fair, there is a lot of risk to their out-year numbers and folks don't want to get involved in that. So I understand.

On the flip side, about the crowded longs, it's the names of a steady beat-and-raise story. Health equity feels very stable - they’re a rising interest rates play.  R1RCM, a play on outsourced revenue cycle management, that also feels very safe. I understand why a lot of investors are calling me on that now. Now, if you're a longer-term investor, this is where a lot of money gets made, though, because if you can take a three-year view or a five-year view, you have some extremely high-quality assets trading near their all-time lows, so I never miss a sale.

Sanjula Jain, Ph.D.: Wow. Well, so you and I have had this conversation all the time where your world is foreign to me, right? I don't know the first thing about making an investment. But I think a lot about…

Stephanie Davis: You do research, too. But I don't get your side. This is perfect. We both have no idea what we’re doing.

Sanjula Jain, Ph.D.: I’m just an academic, publishing different trends. But you're looking at a lot of different healthcare data points across sectors, what are some things that you're seeing that you don't think the market is even scratching the surface on, even beginning to think about right now?

Stephanie Davis: You know, I thought your report that came out on the macro healthcare trends was really interesting because it shows that supply and demand is not an issue that's going away anytime soon, right? There's going to be a lot of innovation. Frankly, to me, that kind of favors some of my more click-and-mortar models, because it sounds like a lot of the hospitals are going to need to look at these assets and wonder if that's a place they should be in. So, we've seen Amazon buy One Medical, for example, and we probably will see more movement in the space. As funding dries up in my sector, I expect more marriages for money.

Sanjula Jain, Ph.D.: That makes a lot of sense. You and I have also talked about telehealth before. In the report, we have some updates on telehealth data. Do you see biases and companies and leaders that are kind of working in services that are specifically virtual care, that is kind of ignoring the data? Like I know I get a lot of, "Oh, well, the data is wrong." I always say, well, show me a counterpoint, right? That doesn't seem to be kind of on the table. So, what are you hearing from leaders in spaces where they're making these based on some assumptions, some directional trends, and kind of maybe some headlines but really not a fully baked, data-driven evaluation?

Stephanie Davis: Any way you cut it, telehealth is adopted more than it was before the pandemic, but especially the way you look at data, the way I look at data, it's not just a question of adoption levels; it’s the question of incremental adoption.

I think a lot of folks look at the market they say we have double-digit utilization now in telehealth in the hospital systems. Before that, it was single digit at best if we want to stretch it for the most forward-looking institutions. That should be something. On a growth level, it might not be because who hasn't adopted telemedicine? It's 2022. You haven't adopted telemedicine yet in your hospital system? Where were you for the past two years?

Looking from a growth perspective, it could be a little bit more challenging. It's why you're seeing so much short interest on TelaDoc. There's a lot of concern about it. I do think your views of supply and demand make sense. Now I do have to make a stock pitch; I do have to go and look at this and say there was a stock call in it, you know, I'm market performing on Teladoc right now, but 25 bucks, it's kind of near where it was during the IPO. I look at this and think, you know if I want to be a long-term investor, telehealth is more real than it was 10 years ago.

Sanjula Jain, Ph.D.: Right. I think a couple of us were having this conversation earlier, where it's not about the telehealth is good or bad, or it is promising or not promising; it's just about being realistic about the bounds of the nature of the market and how fast it's growing and the rate of change. I think that seems to be a little bit of a disconnect.

Stephanie Davis: At the end of the day, it's another modality of care, right? Everyone has already adopted it. We are all familiar with it; there's no longer a barrier of unfamiliarity for the consumer. So now, it's a question of what we do with it. I think I've always viewed telemedicine as the advent of email for doctors because they could only ever do anything face-to-face. I thought that was crazy. But email makes your life more efficient. Do you say you do email work and normal work? No.

Sanjula Jain, Ph.D.: That’s a really good analogy. I like that. I could ask you questions for hours. But I guess maybe I'll land with this. What do you think about this shifting payer mix? So we're talking a lot about aging demographics, some of the economic conditions that mean we're going to see a lot more Medicare and Medicaid, how does that affect kind of investments in these new age digital health companies and the opportunities available to them?

Stephanie Davis: I thought that was one of the most astute observations in your report. The fact of the matter is most of us are making money within the healthcare and healthcare technology space off the commercially insured population. If that population is shrinking, there is a shrinking pool of dollars. Now, while I do think that's going to create a headwind and utilization for some of these different components in the space, I do wonder if that also creates an opportunity, right? As long as you have a shrinking pool of commercial dollars, does that mean we need to go outside of targeting the wealthy well, and into targeting Medicare and Medicaid populations and health tech and expanding our business models? Probably. From a societal standpoint, that's a good thing.

I love this report; you put together the whole outlook of the trends and macro themes changing the healthcare economy because when I write a research report, I kind of make a thesis call, I have stock calls, and all my space is it a buy, a sell, is it a hold. Then I kind of build something around it. This felt very different. What was your impetus for putting this together?

Sanjula Jain, Ph.D.: Honestly, Stephanie, it's a little bit of a couple of years in the making. I used to be in rooms with executive leaders, all the time, right? Whether it's CFOs or CEOs, I was just new to healthcare, and I was just trying to understand, what are they thinking about. What are their priorities? But most importantly, how are they making decisions? Along the years listening...

Stephanie Davis: Did you realize they didn't have a lot backing the decisions?

Sanjula Jain, Ph.D.: Yes, exactly. Right. So, everybody would group there and share a slide about this is what we're doing. We know we've seen patient satisfaction improve. But I could never get clear answers about how you came to that decision. Right? How did you model that decision?

At the time, it was me thinking, well, if I want to personally be a meaningful, productive member of the healthcare community, I don't know how I would make a recommendation to someone, right?

Because here I'm thinking, oh, these people are just really smart. They are just coming up with these assumptions, and it's right; they know what they're doing. But there was never really data behind it. I ultimately went into academia and got a Ph.D., because I felt like if I knew if I personally wanted to make a recommendation, I needed to have data because I couldn't do it without it. Right? I needed a toolkit.

Stephanie Davis: You don’t go for the truthiness that my people go for, right?

Sanjula Jain, Ph.D.: I couldn’t go by an anecdote I didn't have…

Stephanie Davis: Sentiment seems oversold; let's go for this.

Sanjula Jain, Ph.D.: The thing was, right, I didn't have 30 years of experience running a hospital. Therefore, I just picked up a few things. That was a lot of what I was hearing. I'm not trying to diminish the leadership of these individuals, but it just truly felt like we were all kind of following the leader. This organization is doing this, and therefore we shouldn't do this.

As I was doing research in academia, I felt like there was this big disconnect between the awesome work my academic colleagues were doing and the realities of day-to-day business, right? We all know there's a lag between awesome things that you see published in JAMA and actually being able to apply that to any policy recommendation or any business decision.

So my goal has always been, how do we apply the rigor of academic research in a way that is usable and digestible for a lot of the decision-makers that ultimately have the ability to make that decision? This Mary Meeker style report; I hope I get to meet Mary Meeker one day because I'm a huge fan of hers. But I think it's really fascinating that she puts out a landscape for an entire sector. I felt like there was a gap in healthcare because everybody was writing something with a very specific vantage point, right? So you've got academic research, on the one hand, that's really narrow, very specific, which is really valuable. But it's also on outdated data, right? It's usually a one-to-two-year lag; it's not consumable for actual real-time decision-making. Then in an industry, you've got subsector things like investment research, right? You've got a lot of people publishing things on how much we are investing in these areas, which is really, really important, but…

Stephanie Davis: Because they are stock calls. Everything I make is a 12-month call, right? If you want to change the industry or you want to do something in healthcare, do not make an investment based on my 12-month stock call. This is saving lives in the future.

Sanjula Jain, Ph.D.: Right? Then, there are people that are doing public opinion research, and I am trained in doing survey research, which I think is fascinating. It's like, well, here's what healthcare consumers want and need, and then you got retail players putting out something there.

So everyone is kind of putting something out with a very niche subtopic focus. Usually, the authors of those research pieces have a bias, right? They're representing an organization that has a vested interest in telehealth, so they are going to put out a telehealth survey, right, or your McKinsey….

Stephanie Davis: It’s amazing that all of the telehealth commission surveys show that telehealth is 110% of utilization.

Sanjula Jain, Ph.D.: So it's a long-winded way of saying I just have felt like there's this gap of okay to support these conversations; I'm not an expert on how to run these effective businesses, right? I don't have that domain expertise. But I felt like all of our conversations and making strategic decisions were lacking a foundational fact set. The thought was you can’t boil the whole ocean down. But as a starting point, let's put together some national trends that have really rigorous and robust data. That is objective, right? It's real-time. It's not what I think what you think; it's not what she thinks from a survey. It's truly the facts of what's actually happening. It's pretty recent, right?

We're seeing things happening in somewhat real-time. Let's just start seeing if there are things that are emerging that maybe are counterintuitive to what we think, right? So, half the time, my team and I don't even know what we're looking for. We're not actually going in with a clear hypothesis. Well, it maybe is that research methodology we might have a couple of assumptions. But usually, it's just pure curiosity.

Usually, the starting point is okay; these 10 headlines have said, x, let's see if that's actually true. At scale, at a national level, does it vary by the market? Does it vary by population? Does it vary by organization? So then that usually leads down to a bunch of exploratory analyses. It's a really messy process. But then along the way, we kind of pulled together, okay, there are some themes emerging here. These might actually be things that should be relevant going forward.

So it's not a perfectly linear thing. But really, the motivation behind it was we're just lacking a national fact set for some basics, right? When we talk about the commercially insured population or everyone talks about physician burnout, like, sure, the double AMC puts out some statistics. But it's an open challenge if anyone can show me this like I don't think anyone has been able to say, we looked at all the physicians with an NPI in America and actually track them in real-time in where they're practicing and what they're doing. Anyone else who probably has that data isn't really using it for these types of purposes. So I'm just fortunate to be kind of this academic research work that has the luxury of this really awesome toolkit to just publish research on any variety of topics.

Stephanie Davis: Now, I asked you this on stage; I'd be curious to ask you again. Your report is very post-apocalyptic, right? It shows that there are a lot of challenges coming up in the healthcare industry. If you're a provider, you should be scared. What advice would you give to one of these hospital executives saying, I've read your report; now what?

Sanjula Jain, Ph.D.: Honestly, anything going forward is going to have to be different than what you've done for the last 20/30 years. I think there's a lot of acceptance and maybe skepticism; things are changing. They're different. But I think the state of urgency and rate of change is the big disconnect. And so, there may be okay, yeah, things are talking, and everybody's talking about even providers, right? Everybody's sitting there saying volumes are down, revenues down, and they're really focused on solutions that are more bandaids, to be honest, right? They're not actually looking at the root cause.

So what I would say to anybody is, this is a lot of these foundational root causes or things that will get you to the root cause. Going forward, we can't keep putting bandaids over things. The root cause problem is that the commercially insured population is declining. That's what you depend on revenue for…

Stephanie Davis: Paying people to get them inside the hospitals isn't going to help, right? Hey, get your women's health checkup. She's not as many of us.

Sanjula Jain, Ph.D.: You fundamentally have to come to terms with the way in which you were operating before cannot be possible going forward and if it is, you are just going to lose, right? The game has changed. I think that's the message, right? We are now playing a very different healthcare game than we've been playing for the last 20 or 30 years. In step one, you have to learn the game. You have to learn the rules of the game. I think a lot of this data starts framing these are your parameters. Then we'll start shifting to actually playing the game, but it’s time to start playing; the clock is ticking.

Stephanie Davis: Tick tock. Oh, that is perfect. She has a wonderful report out right now. It tells you the rules of the game and what you should be doing with it. Thank you.