New Holding – Phreesia

Gareth Campbell - Fund Manager

5 October 2020

New Holding – Phreesia

Phreesia is a healthcare IT business which improves the operational efficiency of care providers and delivers a better experience to patients.

Its main product is a patient intake software which automates many stages of the process which are traditionally completed manually using pen and paper. The second largest business is a payment processing solution which enables the collection of patient’s payments. Its life sciences business delivers targeted advertisements and surveys to patients on the behalf of pharmaceutical companies.

Healthcare IT benefits from long term trends

Phreesia are a beneficiary of some of the strongest secular trends in US healthcare, we believe this should support high industry growth rates for the foreseeable future.

The US healthcare systems is shifting to a value-based care model, increasing the focus on the quality of outcomes over the quantity of care billed. Phreesia enables this by collecting clinical outcome data and patient surveys to give immediate feedback to providers.

As US consumers are increasingly responsible for a higher percentage of their healthcare costs, they have a growing influence over who they choose to provide care and have higher expectations of service quality, this has led to a growing trend of consumerism within US healthcare. Phreesia offer a higher quality service, a simplified payment process and deliver an overall better experience to patients.

US healthcare spending is at unsustainable levels at 17% of GDP compared to a peer average of 10% and according to leading academics around 25% of the budget is wasted. Phreesia have many tools that can improve efficiency and highlight areas of waste. Alongside other healthcare IT providers they are part of the solution so are likely to maintain high growth rates despite potential headwinds to overall healthcare spending.

Why Phreesia?

Phreesia estimate its addressable market at $7 billion, with only $120 million of revenue this year it could continue to grow revenue over 20% annually for the foreseeable future. Its main competition is legacy manual and paper-based systems with a recent survey suggesting less than 30% of solutions are digital.

As a software platform Phreesia can add additional products and services, increasing their value to customers enabling them to increase its average selling price. Currently the basic package Phreesia offer costs around $150 per month, but if you subscribed to all their additional services this would increase to $400 per month.

Software businesses have low marginal costs for supplying additional copies of software, this means they typically have strong operating leverage. This combined with high gross margins currently means we believe Phreesia will generate significant amounts of cash at maturity, despite the low levels of profitability today.

The coronavirus has caused a reduction in patient procedures which has impacted Phreesia’s payment processing revenue causing the business to underperform many of its peers. The core patient software business continues to grow revenue over 20%, with 80% of customers adding payment processing and as the impact of COVID declines patient procedures will increase. For these reasons we think the long-term growth of the business is unchanged and we see this as an opportunity to own a high-quality business with exceptional long-term growth potential.

Barriers to entry

Phreesia are the largest and highest regarded patient intake software business, shown by the fact that it retains over 90% of its customers year after year. Additionally, its investments in R&D and focus on innovation mean that the hurdle to compete against them is constantly rising.

Phreesia’s customer base is highly fragmented with 69% being independent physician groups. Phreesia’s uniqueness is that they are a subscription software business which has standardised integration with all the major healthcare IT providers, this enables them to sell to this market profitably despite the low revenue per provider.

A combination of culture and expertise means that few of Phreesia’s competitors are well positioned to directly compete with it. The largest healthcare IT companies are focused on improving the efficiency of healthcare treatment for sophisticated users such as doctors, they have no expertise in improving the patient or administrator’s user experience. While payment and software peers tend to lack the specialist healthcare knowledge required to succeed.

What we sold to buy Phreesia

After strong performance from many of our technology and healthcare businesses we trimmed some of these positions and that cash was used to add Phreesia to the portfolio.