Talkspace, Inc. (TALK) Earnings Call Transcript & Summary

Thank you, everyone, for joining us. My name is Doretta Mistras, and I'm a Managing Director in the Healthcare Group at Citi. We are very lucky today to be joined by the management of Talkspace. Talkspace is a leading virtual behavioral health platform that is revolutionizing behavioral health care and addressing the vast unmet and growing demand for mental health services. The company recently became public via a $1.4 billion SPAC merger with Hudson Executive Corp in January of 2021. With us today, we are pleased to have Oren Frank and Mark Hirschhorn. Oren is the Co-Founder and CEO of Talkspace; and prior to joining Talkspace in 2012, Oren held several positions at McCann Worldgroup, a global marketing services company. Mark has been the President, COO and CFO of Talkspace since 2020, and previously, Mark served as COO and CFO of Teladoc and was instrumental in the growth of the business from $10 million in revenue when he joined in 2012 to over $500 million in revenue when he left. Before we dive into Q&A, Oren, I think it would be helpful to provide the audience with an overview of Talkspace.

Absolutely. Thank you, Doretta, and thanks, everyone, who is listening in today. Just a little bit a few minutes about Talkspace, and I actually start with what Doretta mentioned, which is the market, and we strongly believe that behavioral health is a huge and underserved market that has been treated a little bit like the kind of relative that no one is sure they want to invite for thanksgiving for too many decades. And it was always treated as, yes, we also have behavioral health if you buy some other products and services from us. And that's kind of defocusing the prioritization and neglect led to a huge pandemic, and I'm not talking about COVID. I'm talking about the second pandemic of behavioral health. And even before COVID drove, I would say, both the acuity and the number of cases of behavioral and mental health issues in the United States and elsewhere, dramatically higher through the last year, this category was suffering way before that. And if I had to reduce it into 2 main areas, it suffered from 2 major issues. One is lack of access, where just about 40% of the people that need behavioral health care get any form of access. So over 60% -- that's absolutely 0 which is unheard of. If you apply that to cardiology, will be in a very, very bad situation. And the second part, I would say that the quality of the outcomes, the clinical outcomes of the treatment courses that apply to behavioral health were less than desirable. It's probably the understatement of this meeting. So that is the background to the establishment and to launch -- the launch of Talkspace in 2012, where we built a technology company. We're another services company, a technology company that built up, I would say, designed to build a purpose solution to address the major issues of behavioral health. By applying, I would say, completely and legacy-free thinking, both in terms of the modality, the distribution of the services, the way we measure clinical outcomes and the scale. I'll give you about a couple of comparison that I think will help understand. So in face-to-face or traditional modalities of behavioral health care, both in psychotherapy and in psychiatry, you will usually take, I would say, 2 to 3 weeks in terms of psychotherapy and sometimes months in psychiatry to actually get to a session with mental health provider. We do it in hours and almost 100% on the same day. So our ability to find and match a member, a patient with a licensed mental health provider is orders of magnitude better. In terms of tenure and tenure is absolutely critical or continuity in care, people who visit the face-to-face therapies across the United States, typically stay for just under 2 sessions, 2 weeks. That is far less than the desirable number of around 3 months, which is needed. It's a kind of tenure that's needed to generate good clinical outcomes. In our consumer go to business, we reach over 5 months. So again, really, really difficult to compare with the level of tenure that is being achieved or the continuity of care that is being achieved by the traditional modality. And those 2 things, the combination of access and of very good engagement that leads to long-term relationship along with a set of technologies that optimize clinical decision-making for the providers lead to the most important goal for Talkspace, which is extremely strong clinical outcomes at a very, very large scale. We have a set of research that shows that we deliver equal or better outcomes for the most common conditions, so depression, anxiety and others, that we do it at a very large scale, and we can actually do it at roughly the half of the time and the money that needed -- that are needed to achieve, I would say, similar outcomes through the traditional distribution of behavioral health care. Talkspace has 2 go to markets. We started as a direct-to-consumer company in 2012. And we are very busy building a consumer brand because we think it's a large opportunity to drive trust and preference. And also it's very helpful to remove stigma, which is still unfortunately pretty common. And we also have a more nascent B2B or enterprise go to market that is being led by Mark, who joined us as Doretta mentioned just over a year ago, and that has been growing very, very fast. We work directly with large employers. We work with the largest plans, health insurance plans in the country, both in EAP and in managed behavioral health care. And we see a very strong, I would say, synergy between those 2 go to markets where we can achieve the kind of access and ubiquity that we want, which is essentially every person in the United States and elsewhere, can access Talkspace, whether paying out-of-pocket or being covered by an EAP or an employer or their medical benefits carrier. So they have multiple avenues into very quickly, very effectively and very conveniently utilizing behavioral health services at the highest level of clinical care. So I'll stop here. I hope it wasn't too long, and I'll hand it back over to Doretta. Thank you.

Great. Thanks, Oren. And really you and Talkspace are one of the first companies to address behavioral health virtually. Can you tell us a little bit about maybe the genesis of the Talkspace and why you founded the company?

Yes. So actually, my co-founder and myself, we are a couple, we've been married for many years. Our first, I would say, interaction with psychotherapy was an extremely positive one many years ago in which we went to couples therapy. After our relationship was not all that was, I would say, printed in the brochure at the time, and we found the notion of psychotherapy in face-to-face and in couples therapy, one-on-one in couples extremely helpful and valuable. And quite a few years later, we looked into how come so few people on a, I would say, on a country basis are utilizing and accessing that. And we're strong -- we still strongly believe that this could be a huge driver in the quality of life of relationships of the way we experience, what's happening to us to billions of people around the world. And when we started looking at it, we very quickly -- today, it's, of course, completely understood. But we very quickly figured out that virtual care or remote care is a particularly good fit for behavioral health care because it is essentially a conversation, whether we work with the psychotherapists or with the psychiatrist, you usually do not need an X-ray or you don't need a blood test or even the provider doesn't even have to fill your stomach to diagnose you. And it is essentially an exchange of information of know-how of experiences that can be had remotely as effectively. And to be honest, at this point in time, I'm not sure there's not more effectively than in a face-to-face settings. Of course, many of the entry barriers to the traditional distribution of modality of behavioral health care are almost built into the fact that historically, you needed to drive somewhere and spend an hour in an office setting, talking someone to -- in face-to-face setting. It is very expensive. It's very inconvenient, and it reduces one of the, I would say, generates a few of the most prominent problems in that, which is your -- only accessible to providers, which are within a reasonable geographical distance from where you're at. That reduces the availability and the variety of talents around you dramatically. And it also beyond just the number of providers, we all know that it's very difficult to know who is a great psychotherapist, who is a great one for Mark or for Doretta or for myself, those will be different people to create a really qualitatively driven matching on a hyperlocal modality is almost impossible. That's another reason why virtual care is such a good fit. The end of it, we strongly believe that a vast majority, I would say, between 70 and 80 cases, percent of the cases or the sessions or the treatment courses that are needed for behavioral health care can and should be and will eventually be delivered virtually.

Great. I think one of the statistics that really stands out in my mind is that I think you've mentioned previously that 60% of Talkspace members are really in therapy for the first time. And so as you think about the 70 billion current total addressable TAM, the real kind of global opportunity is north of $480 billion. Kind of talk a little bit about the TAM, what type of market share do you think you can kind of achieve in this market because it really is vast?

It is vast. And I think the numbers here are very interesting because if we look at very simple data points that everyone completely agrees upon, we can see that around 1 in 4 of every audience will suffer a clinical level or a diagnosable mental health issue every year. So 25 out of 100. That will give you around 70 million Americans that are in need of care every year. Now this number, unfortunately, is preCOVID. And we know now that COVID has driven a huge increase in both acuity and, I would say, the number of mental health cases across the United States and the world, and some people are talking about 50% prevalence in the last year. But even if we stay at the 1 in 4 or the 25% or the 70 million Americans, if you look at those, as I mentioned before, you will see that 60% of them receive zero care. So if we look at that 70 million -- 70 billion number that you mentioned, which actually portends to outpatient existing market, so psychotherapy and psychiatry in the United States, in a way, it represents only 40% of the true market because the rest of the market that should have some level of access is currently locked. That is -- that was one of the basic, I would say, mission -- parts of the vision, mission of Talkspace in the beginning, which is to make this much more accessible. Why people are not accessing psychotherapy and psychiatry more? We all know it's very expensive. It's very inconvenient. There's a level of stigma. You don't know where to get the right referral from -- even if you got the referral, you're going to need to do probably 7 to 10 phone calls to find an available session somewhere and its going to be in 2 weeks' time, somewhere in the burbs. By the time you get to that scheduled session, you will have said -- maybe you will have said to yourself, well, you know what, I think I can handle it myself. Well, you know what, I'm not sure I want to talk to this therapist, and you will probably -- 1/3 of the people won't even show up for their first meeting. So that funnel is very clear for us. So from very early on, as you kindly mentioned, we measured how many people are we seeing that are first-time in therapy of psychiatry approved that number has historically always been more than 60% and correlates well with our vision of behavioral health and psychotherapy for all, but it also shows you that the point of view about the market, which is if we could actually access all the people in need of care, it's at least -- it's 1.5 to 2.0x larger than the market than we see today. And that is even before we look at psychotherapy more as a lifestyle choice and not necessarily as a help line because I personally believe that anyone in through their life course can benefit from psychotherapy, even if they never -- luckily never made it into the clinical threshold, so to say because you can improve your relationship and you can improve your understanding of how you make choices in life and whether you made the right career choices, everyone and anyone around the world can benefit from psychotherapy. So if we go back to the TAM, that 70 billion represents the current market. We think that the locked market is significantly higher for the clinical threshold audience. But if you look above that and beyond that, it's actually a far larger market than that. Now what market share can we get? Well, you look at our deck, we -- you will see -- and at our projections, you will see that we are pretty conservative, and we are pretty, I would say, in line of our past performance, which has been extremely good. So we draw a line into the future. But the truth is that potentially is, as you said, is endless.

Great. And part of that growth has certainly -- the current pandemic has certainly accelerated both the rise of telemedicine, but also put a spotlight on mental health. How has COVID impacted Talkspace? And do you think that acceleration of growth is sustainable in the long term?

Mark?

I think COVID has permanently impacted the perception of platforms that can enable people to reach the appropriate levels of care. I think they will forever now be incorporated in people's plans to most likely not return to the established protocols, which were principally looking at and ensuring that people can be seen in person for the majority of their visits. I think it's completely flipped on its head, where most of the polling that's come out and the querying of populations for both psychiatry and psychotherapy, have noted that they do not intend to return to traditional office settings. And 70% of the individuals polled noted that the luxury of having the opportunity to remain in their home or any other place that they prefer to receive this type of care will most likely make up the majority of the care they receive. So now the frequency of going to see somebody in person will be most likely reduced. And individuals as a result of this acceleration of knowledge and trust and awareness of these tools that can be leveraged to make this a much easier experience will most likely introduce people who, as Oren referred to, represent that giant unlocked market potential.

Great. And with not only new users, I think we've also seen the emergence of additional kind of players in the market. What differentiates Talkspace from some of the other services currently available?

I think, Oren, you're on mute if you wanted to respond.

I'm sorry. Yes, you're on mute is probably the most common phrase in the world for this year. I think as I mentioned in the beginning, we are purpose built, and we are a technology company. And I think this gives us a very unique approach into how we code and build solutions. The largest group of employees within Talkspace are actually software engineers. They are -- we are not a services company that has an IT department. And therefore, what we built is a platform, and it is extremely scalable. And I think many of the challenges of traditional health care players is how do they scale quality solutions when they approach larger markets and largest cohorts of -- larger cohorts of patients. And when you look at that, we have decided to focus on a few areas, and I'm going back to the basics. So the way we design and build the platform and the distribution modality allows that level of access, hours instead of weeks, et cetera, et cetera, et cetera. Secondly, we actually focus only on evidence-based care and are aiming at the highest clinical outcomes that we can achieve. Unlike some of the other players in this market, we never use coaches or some subclinical licensure types. We only work with licensed credentialed and vetted psychotherapists or psychiatrists or nurse practitioners. Because we work with the largest health plans, we have to credential them according to NCQA. We're being audited by the largest plans. And we have developed, I would say, a set of technologies and management practices that allows us to manage the clinical network in a way that I don't think that any current behavioral health player, whether a traditional one or a new one can replicate or is doing the way we are. And I'll give you a couple of examples. We use evidence-based care outcome measures for every patient on the platform. Those are condition-specific tracking tools that allow us to understand whether a certain patient have achieved remission and positive clinical outcomes, and we can understand whether it worked for them or not. We can, of course, understand whether the therapists or the psychiatrists that worked with them performed well enough. And therefore, we can aggregate those outcomes in a form of a ranking system or a scorecard for our entire clinical network. That allows us to match the people that are delivering the best clinical outcomes to the patients with their respective clinical conditions. So we make sure that the match, which I mentioned before, is not just a local and accessibility driven, it's also qualitatively driven. Of course, we can use that to, I would say, drive more patients and members to the best scoring clinicians and actually retrain or manage out the ones that are not good enough. So -- and we can do that at any scale. We actually doubled Talkspace through the months of COVID. And we still remained at the same quality output and at the same matching rate, still being capable to find a provider in your state of residence within a few hours, always in the same day. And I think that is a testimony to the way we manage the clinical network. On top of that, we use technologies for a couple of additional areas. One is we built a complete, I would say, practice management solutions for the providers that are working with us that automates a lot of the workload. One of the reasons many behavior health providers are less -- not very enthusiastic to work with insurance plans is because there is a lot of, I would say, administrative workload, which we completely automated and built for them. And last but not least, we use a set of machine learning tools, also known as AI in order to drive more efficient, more efficacious clinical decision making. Those are decision support tools for the therapists and the psychiatrists. They never replace them. They just use, I would say, the aggregated know-how and experience of the entire system that treated the millions of people in order to help them make better decisions. That leads again to 2 things. One is very clear clinical quality output that we see in a long series of clinical researchers and also very, very strong efficiency, as I mentioned before, in our ability to deliver a very strong outcome for less money and less time and actually far higher satisfaction, both on the provider and the user side. That technology enabled a very scalable approach, which was specifically designed and built to address behavioral health is not something that we see within the capabilities, the current capabilities of any of our direct competitors.

Great. I'd like to dig in a little bit on the business model. So on the direct-to-consumer side, you have 3 levels of membership options. Can you talk a little bit about the option available and what the mix looks like and how it kind of shifts -- it potentially shifts over time for a patient?

Yes. So essentially, the way we go-to-market direct-to-consumer is we want to customize the experience according to the members' preference and what is a good fit for them. And it ranges from the modality, which is based mostly or almost absolutely on asynchronous communications. So sending text messages, videos, audio recordings, pictures, PDFs, whatever, what have you in order to communicate between the provider and the patients. There is a mid tier, which is a mix between asynchronous and live modalities. And there is another tier which is essentially a weekly live session. So a more similar proxy to the traditional delivery of care, augmented between the sessions with asynchronous communications. Why is this important? For 2 -- for a few main reasons. The asynchronous modality allows for a far higher and more frequent level of engagement between a provider and a patient. That drives better and faster relationship building that drives far better tenure, longer tenure, and that drives far better clinical outcomes because, as I mentioned early on, you have to reach, I would say, between 8 and 14 weeks. So let's focus on the right 12 weeks of treatment in order to optimize your clinical outcomes. If you just go for a couple of weeks, you're just wasting your time and money because you're not going to see any remission. So that asynchronous part of our modality is extremely valuable for that. If you look at the usage or utilization patterns, you will find, not very surprisingly that younger people and or people that are first time in therapy will tend to focus more on the purely asynchronous. People that have never been to face-to-face sessions. They're not married to that idea that you have to talk to someone for 4 to 5 minutes, face-to-face, and they make do with the a signals and very happy with it. People that have been to face-to-face therapy before will find a live session, whether video or audio, a better proxy for their experience, they will choose that. I think going back to the core mission of what we're trying to achieve is that the clinical outcomes, if you look at all those 3 plans are exactly the same. So if we have to go back and associate modality with clinical efficacy, there will be 0 correlation. I would, at this point in time with the amount of data that we acquired and learned over the years will tell you it is the quality and the intensity of the engagement between the provider and the patient that determines the quality of the relationship, and therefore, the potential for clinical outcomes, whether they use a video or audio or messaging or perhaps smoke science is probably far less important.

Great. And how does this business -- how does the business model differ on the B2B side?

The B2B side is comprised of 2 principal channels. One is the direct to employer, where our sales force are in collaboration with a health plan, we'll approach a large employer, and we will provide them with access to any of the plans or something that they would actually like to create from those that Oren just shared, plus perhaps a combination of adding psychiatry, lasting, other self-help content, and they are going to be contracted under a multiyear agreement on a PEPM basis. In general, looking at about $3.50. Actuarially, we end up seeing in the first year, probably 1% to 5% utilization. We've kept the respective clients so that regardless of their utilization, they have no additional exposure. For our health plan clients, it's all fee-for-service based on their managed behavior health options, and were also written into clearly, millions of EAP offerings as well. Those are also priced out on session basis and a session is defined as 1 week. You should think of those prices being very similar to the retail price to the consumer, somewhere around $80, $85 a week for access through the EAP or the managed behavioral health services, which EAP, of course, is 100% subsidized by the employer. Therefore, you remove that barrier of access. And as we all know, EAPs have been woefully inadequate from a utilization perspective for many years. And clearly, our ability to match somebody and begin providing therapy in almost all cases, on the same day, makes us obviously far greater appeal and much more valuable to the EAP providers. On the managed behavioral health side, outside of perhaps a small co-pay, the majority of the cost to access Talkspace is also subsidized by either the payer who views us as a network throughout the United States at one fixed rate or based on the benefit design of the employer, there could be some type of cost-sharing there.