Citi Investment Research has grouped telehealth provider, Teladoc Health (NYSE:TDOC) and membership-based primary care platform 1Life Healthcare (ONEM) among health tech stocks highly exposed to the risk of a recession.
This month, the economists polled by The Wall Street Journal set the occurrence of a U.S. recession over the next 12 months at 28% on average, compared to 18% in January and 13% a year ago.
Commenting on the recessionary effects on health tech firms, Citi analyst Daniel Grosslight argues that companies exposed to the commercial market, such as 1Life Healthcare (ONEM), Teladoc (TDOC) and recently IPO’ed Talkspace (TALK), will have the biggest impact. The analyst attributes this to the unemployment that can lead to outsized membership losses.
However, there are several ways the companies can mitigate the impact. “ONEM’s Medicare-focused Iora business will offset enterprise membership pressure, while TDOC and TALK’s direct to consumer (DTC) Mental Health solutions should act as a recession hedge,” Grosslight wrote.
Meanwhile, the direct-to-consumer mental care segments of Teladoc (TDOC) and Talkspace (TALK) have the potential for rapid growth in a recession as uninsured patients turn to cash-based solutions, according to Citi.
This month, RBC Capital Markets slashed the price target of Teladoc (TDOC) by as much as 44%. Yet, the firm chose to keep the Outperform rating on the stock noting favorable digital traffic data for the company’s mental health services arm, BetterHelp.
Citi analyst Grosslight continues to be positive on other health tech firms with exposure to mental health. The increased prevalence of depression and anxiety in a recessionary environment should favor solutions offered by Hims & Hers Health (HIMS) and telehealth segment of 23andMe (ME), he added.
Despite the adverse effects on OTC products and non-essential prescriptions offered by HIMS and ME’s kit sales and subscription adoption, the shift to cash pay models “would more than offset these recession headwinds,” Grosslight wrote.
Arguing that the shift to Medicare and uninsured customers can hurt margins and squeeze IT budgets, the firm also sees knock-on effects on data and tech providers, Change Healthcare (CHNG), Health Catalyst (HCAT), and Phreesia (PHR). However, in a recessionary environment, the companies are likely to adopt solutions that can raise revenue and streamline patient intake and administrative tasks, according to the analyst.
On the other side of the spectrum, U.K.-based digital healthcare company, Babylon Holding (BBLN), is likely to have the highest benefit in a recession, Grosslight argued, noting that 84% of its U.S. Value-Based Care relies on Medicaid.
However, seeing that most of the names in its coverage could offset the recessionary effects with recurring revenue models and high retention rates, Citi concludes that the health tech space could be largely immune from a mild recession.
Read: Seeking Alpha contributor Sensor Unlimited argues why Health Care Select Sector SPDR Fund ETF (XLV), which represents a broad spectrum of healthcare stocks in the S&P 500, could be a hedge against inflation and market crash.