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- [00:00]
Matt Russell
This episode is brought to you by Portrait. It's the AI research system that I.
- [00:05]
Podcast Host / Narrator
Used to prepare for today's episode and for all business breakdowns episodes. Portrait was built by former buy side investors and they understand great investing isn't just about having more information from low quality sources. It's about having the right information organized the right way. And if you listen to the show, you appreciate Diligence consists of many things Diving into the history of a business, framing the nuanced competitive dynamics, tracking key signposts around your thesis.
- [00:37]
Matt Russell
And historically that would take up material.
- [00:40]
Podcast Host / Narrator
Time that you do not have. But Portrait is basically like adding an army of analysts to your team. It's powered by an AI system specifically designed for investment research workflows so you get nuanced idea generation. Portrait assesses the same types of qualitative attributes that we discuss on this show and that can help identify businesses which fit your frameworks. Portrait also customizes research report generation and I used Portrait to generate a primer and lay out bold bear cases ahead of today's episode to help frame the conversation. And third, there's intelligent thesis monitoring and that's where Portrait assesses thousands of data points across value chains each day, extracting the insights driving the business again. All this work would typically take hours and hours and hours. It's at your fingertips now. Visit portraitresearch.com to start your free trial today.
- [01:46]
Podcast Announcer
This is Business Breakdowns. Business Breakdowns is a series of conversations within business investors and operators diving deep into a single business. For each business, we explore its history, its business model, its competitive advantages, and what makes it tick.
- [02:05]
We believe every business has lessons and secrets that investors and operators can learn from and we are here to bring them to you. To find more episodes of breakdowns, check out joincolasis.com all opinions expressed by hosts and podcast guests are solely their own opinions. Hosts, podcast guests, their employers or affiliates may maintain positions in the securities discussed in this podcast. This podcast is for informational purposes only and should not be relied upon as a basis for investment decisions.
- [02:34]
Matt Russell
This is Matt Russell and today we.
- [02:37]
Podcast Host / Narrator
Are breaking down one of the more impressive B2B media businesses that I have come across and that is Doximity. It's been called the LinkedIn for doctors and with 80% of doctors on their platform, I think that's a fair categorization. But Jim Jones, partner and analyst at William Blair Asset Management, helped explain exactly how this one works as a business. So Jim gets into the community engine that works around medical professionals and for medical professionals and yes there is a social network, but it's the add ons like the required continued education that doctors can do on platform script signing and all of those little tools that make a doctor or medical professional's life much easier. But the revenue engine is advertising and you can probably imagine why this audience would be so valuable to a certain set of companies. But Jim gets into the nuance of how that spend works, why this is the business model that they've chosen. And I can tell you when I was in the weeds of Colossus operations, I always looked at B2B media as the most attractive model and Doximity's story is the perfect example of why. Now please enjoy this breakdown of Doximity.
- [04:02]
Matt Russell
All right Jim, I am excited to have you here to cover Doximity. As I was just telling you before we hit record, it's one that somewhat near and dear to my heart in terms of this idea of taking a professional community and building a great business around it. And I don't think it's particularly well known to many people walking the streets. To a lesser extent it might be known to investors. But maybe you could just kick us off with an introduction to how you would describe what Doximity does, who uses it, all those details to paint a picture for the business.
- [04:37]
Jim Jones
Excited to be here. Doximity may not be known by the common person walking around the street, but physicians know who Doximity is. It's a digital workflow platform that is purpose built for healthcare professionals. Doctors, registered nurses, graduating students, nurse practitioners, physician assistants. Those are the people that are on the platform and they spend a lot of time on the platform.
- [05:06]
Matt Russell
What are the use cases for them in a day to day? Obviously it's going to be different for someone still in school versus the doctor or surgeon or whoever might be using it that's in the workforce. But what would be some of the day to day use cases for them in terms of how they're using Doximity when they log in?
- [05:26]
Jim Jones
It started as a LinkedIn for doctors. There was little social networking, medical referrals, job postings. Over time they've added a number of technologies that are more in the doctor's workflows. Now it's a platform with capabilities that are similar to DocuSign, Zoom, Slack, a newsfeed, New York Times sort of thing, and then increasingly scribe functionality and ChatGPT. We're taking a bunch of household technologies and putting them on the platform to the investor would be like a Bloomberg or a factset that you're just on all the time. To the advertiser, it's more like a Facebook because doctors will tell you who they are. I'm a radiologist in Milwaukee. Then advertisers know exactly who they're targeting and can direct at the right place.
- [06:31]
Matt Russell
In terms of the business model itself, what does it look like in terms of subscription revenue? Is it primarily ad based revenue? How do they approach that?
- [06:41]
Jim Jones
It's primarily ad based revenue. The idea is that we want to have the doctors and the medical professionals on the platform as often as possible, giving eyeballs and spending time on the platform. And then Big Pharma will advertise their drugs to the prescribing doctors.
- [07:02]
Matt Russell
Makes sense. When you know where the fish are, you can fish in that pond. You mentioned when they launched, it was a social network, primarily the LinkedIn for the medical professional. When was that and what was the storyline for evolving over the years? How much history is there in this business?
- [07:20]
Jim Jones
The current CEO, Jeff, he had a previous business, Apocrates and Apocrates helped doctors make decisions about prescriptions and patient safety while on the go. So it was kind of a digital drug reference guide that was founded in the late 1990s as mobile phones were becoming a thing. Eventually went public and then ultimately sold to Athenahealth. He started Doximity in 2010 with a guy named Nate Gross and a woman named Sherry Buck. Really focused on the intersection of technology and healthcare. And then they went public in 2021.
- [08:01]
Matt Russell
There's a definite history just in terms of the founder being around this space and probably understanding the pain points. Still somewhat of a youthful business in terms of being founded within the past 15 years and a shorter public lifespan than that. In terms of competition in this space, what exists, forget about LinkedIn, that's going to be a different bucket and way more generalists. Do they have other competitors in the medical professional network space?
- [08:31]
Jim Jones
There are competitors. So when you think about how pharma companies are trying to reach doctors, historically it's been banner ads trying to chase doctors as consumers, trying to find them on golf.com or other places. Pharma rep can be viewed as competitors. So pharma reps going into the hospitals and trying to educate the doctors on recent studies or drugs that are coming out. There's a bunch of point solutions. There's telehealth providers and there's newsfeed providers. What Doximity is, is really taking a lot of those point solutions and putting them on a platform so that the hospital or the doctors have one platform and have all of the services available to them.
- [09:21]
Matt Russell
When I think about the doctors interacting with who is advertising towards them, but also trying to take in information from the network itself, what does that look like? If I'm a doctor, can I do independent research in terms of new medicine that's out there? Is that something that's offered and how does that interact with the advertising? Because obviously you always have this balance of the information and what's being fed to you. Sponsored content, educational content, all of that. I'd just be curious to hear how they've approached that and found that effective balance.
- [10:01]
Jim Jones
Right now they show one ad in every 11 news items. The business started as this social networking, LinkedIn like and then over time they added a news feed. So there's thousands of new pieces of information that come out broadly across the healthcare space. Doximity will basically use machine learning to help filter out the news that's relevant to you. You're not sifting through thousands and thousands of articles that may or may not be relevant to your specific practice. They call it cutting the scut. Just sort of enables doctors to get through that stuff quickly. The business evolved even further is okay. Now we have all these eyeballs reading their daily news. You get the CME credits by reading these documents in order to maintain your licenses. That was the first step into the quote unquote workflow. And then they started adding workflow tools that help the productivity of the doctors. Digital signing, HIPAA compliant documents that can be signed and digitally faxed. Secured messaging. Doctors can't just message other doctors using traditional text message. So they implemented that the telehealth business. They are lowering the technology bar for the patients, making it very easy for the doctor to call the patient. Call that patient. You can select, hey, I want the caller ID to say this is the hospital calling. So that the patient doesn't necessarily have your cell phone and can call you at all hours of the day, but at the same time the patient knows that it's the hospital calling and they're dramatically more likely to pick up the phone. They're very Dr. Specific, unapologetically very focused on the Dr. First maintaining their time and respecting their time. These products that they come out with are very targeted at increasing Dr. Productivity.
- [12:08]
Matt Russell
Seems very logical to me that the Dr. Would be the highest value target of an advertiser as well. So just keeping that customer happy and satisfied is particularly important from that side of the business perspective. Do they monetize any of those add on solutions as they're rolling them out? Because it does feel like the DocuSign esque, the HIPAA compliance, all of those productivity tools can make a material difference. They're going to increase the stickiness of you using the platform, which is a net benefit to the advertising business. But I'm just curious if they've explored monetizing any of those add on tools.
- [12:47]
Jim Jones
They'll sell enterprise agreements to hospital systems to get all the doctors on the dialer pro. But doctors can use all the tools for free. If your system doesn't necessarily have an enterprise agreement, then doctors can use the tools for free. But most of the revenue comes from pharma advertising to the doctors as opposed to the hospital systems.
- [13:10]
Matt Russell
What has the trend line look for that in terms of advertising spend coming from pharma. I know it's just always high, but I'm sure there's some cyclicality to it. Are there any secular trends in that ad bucket that are worth noting? Because it feels like the most obvious KPI here.
- [13:30]
Jim Jones
The market grows about 5 to 7% per year. That's because there's secular shift to digital from traditional sources of advertising. The healthcare industry is pretty far behind the rest of the economy in terms of how far we've gone digital. And it makes some sense. The healthcare industry, specifically pharma, has an army of salespeople that are going into hospitals that a lot of industries just don't have that. The latest numbers I saw are that Digital advertising is 75% penetrated in most parts of the economy and we're about half that in healthcare. There's a long Runway of shift that needs to happen. It helps that you can identify the ROI when you put a TV commercial on. You have no idea if that consumer saw the ad and then fulfilled a script or not. But it's very clear. We target a group of doctors and then we buy third party data to see who's getting the prescriptions. Being able to see the ROI is driving that shift to digital. The rate at which pharma will move over is the governing factor there.
- [14:46]
Matt Russell
Meta and Google, obviously there's an eyeball thing going on there. They built quite impressive businesses on the back of that thesis alone. The ability to measure the roi. Your ad spend so certainly checks out. I was reading this negative investor report. Covid. You obviously had all those sales reps basically grounded, weren't able to visit hospitals. Therefore there was this big need for Doximity. Was there anything noteworthy that came out of revenue from that time period where naturally you would expect to see a big push into a channel like Doximity? Was there Any hiccup or breaking of that trend as you merged out, what did the revenue trajectory look like through that period of time?
- [15:31]
Jim Jones
Your instinct is right on. During COVID this was an absolute necessary tool coming out of the COVID it probably pushed some pharma into the digital channel maybe a little faster than they would have gone otherwise. I think opened their eyes to the effectiveness. During COVID hospitals were shut down. Pharma reps weren't allowed to go in. What we see now is an increasing number of doctors that are what's called no see doctors where they don't want you to bring them in a box of donuts and talk about their drugs anymore or take the doctor out for a steak dinner. It's almost generational that that's not how people are being marketed to or prefer to be marketed to these days.
- [16:16]
Matt Russell
The medical sales profession is quite unique. Would you expect in terms of that share shift over time you mentioned? Still quite far behind most other industries or just the economy broadly. In terms of digital ads as a percentage of total, would that be the natural place where you see share gains coming from from the medical sales profession? Is it split evenly from traditional linear advertising, print advertising? Where would you expect it to come from the most?
- [16:51]
Jim Jones
It's coming from a few different areas. The pharma reps will have fewer of those going forward. Banner ads and print, more traditional sources. Increasingly, consumer advertising will be moving over. There was an executive order to really clamp down on what needs to go into a TV commercial for pharmaceuticals advertised to the consumer. In essence, you need to add 30 seconds to the commercial and talk about all the risks. It sounds a lot less appealing after 30 seconds. Of all the things that could go wrong, the ROI or the attractiveness of that channel is decreasing with this executive order. Pharma spends about $10 billion a year in direct to consumer marketing. Today, direct to the physician is about 7 billion. This is a pretty big shift in terms of where the dollars were going historically, both from within the HCP channel and then also now stealing from other buckets as well?
- [17:58]
Matt Russell
You mentioned the numbers on the overall market growth being quite healthy. Multiples of GDP growth. Has there been any periods of time where you've seen a material pullback or would there be anything that could represent a threat to overall pharma ad spend that would be noteworthy to keep in the back of your mind, the pharma.
- [18:22]
Jim Jones
Companies, they're operating on an ROI basis as well. So if there was discussion of tariffs, there's a push to have U.S. consumers on fewer drugs. I'd say if the profitability of pharma takes a hit, then they will likely spend fewer dollars advertising for their drugs. If there are caps on prices or whatever may drive lower profitability to pharma would flow through to advertising and therefore doximity.
- [18:53]
Matt Russell
Before we get into the profitability metrics of doximity, I'm curious if they have done anything as it relates to in person events. This is somewhat of my media community audience brain going back into that world. But it's a common attachment to these types of businesses to have trade shows or things of that nature. Is that ever anything they've explored or noodled with, dipping their toes into the live space, event space, anything along those lines?
- [19:25]
Jim Jones
They don't do, to my knowledge, a whole lot of that. They have a board of directors of doctors that they bring in once a year and they get ideas from the doctors on what would be helpful to you, what would help productivity. And I think that's a 36 hour meeting on an annual basis that is just brainstorming and throwing stuff against the wall. And Doximity implements and gets a lot of ideas from that weekend excursion.
- [19:56]
Matt Russell
Always good to have design partners in the business. On the margin side of the equation, how does this stack up? It sounds very technology based, so I would assume that there's some impressive numbers here, but can you just give us a snapshot of the margin profile of the business and whether that's materially changed over the years?
- [20:16]
Jim Jones
It is impressive. The gross margins are about 90% EBITDA margins are 55. They're just placing ads on their platform to the eyeballs. So as the eyeballs grow, the inventory grows, there's not a whole lot of expense required on their side to place that ad. Because they're generating 55% EBITDA margins and 54% operating margins, they're able to recycle back into R and D without really disrupting the margin profile of the business. Because margins are so high they're able to reinvest. And that also means that as the top line grows and they continue to take market share and more dollars move into their world, the incremental margins are incredibly high, which also just fuels the growth.
- [21:10]
Matt Russell
Do they have much excess cash? I would assume, as you mentioned, they've been building out this suite of different productivity tools to the doctors. That's going to be a high ROI investment, I think just to reduce churn. Do they have excess cash that would go back to shareholders that they would use for M and A? How do they think about capital allocation more broadly once it goes beyond reinvesting in a business.
- [21:35]
Jim Jones
I think they have about a $900 million in net cash today, so that's about $5 a share. They use that cash to. They've been buying back stock the last few years, but also making acquisitions. They're making acquisitions to increase the engagement of the doctors on the platform, continue to give them new tools. They recently bought an AI engine that is now going to be used for clinical reference. For the tools you're getting your news feed and then you're making phone calls and signing documents. And now you're going to be increasingly using the platform for medical reference, clinical reference, and also for scribing your appointments with your patient.
- [22:21]
Matt Russell
On the AI point, there's obvious ways that incumbents can adopt AI into their systems. And as it stands today, In November of 2025, I would expect that most of agentic AI is just a benefit to existing corporations, more than a threat to. But medicine and the medical field is a very interesting study here because I think when people question where AI could have the biggest impact it is in the medical profession, maybe that's more in the research side of things. But how have they framed both the risk and the opportunity? And then how have you thought about this? Because you have to think about it both as a risk and as an opportunity as it relates to AI, starting with the risks.
- [23:04]
Jim Jones
If there are point solutions that have much better reference or are giving you more succinct answers or direct to the point, or are wildly better, then that's certainly a risk. Doximity has made their platform on technology that's good enough. And that almost makes it sound like it's not great. It doesn't necessarily need to be the number one telehealth provider and the number one transcriber. As long as on the platform I can get it all in one place and it's effective, then that proves to win the day. The exciting thing about this clinical reference tool is just the amount of time now that doctors will be spending on the platform goes up quite a bit. The Scribe tool makes doctors incredibly happy because they're not spending their evenings writing reports or putting together charts. The AI can do that for them.
- [24:06]
Matt Russell
When you think about the secular growth or shift towards more digital seems very obvious to me in terms of being part of the upside case here. Are there other things that you would add into that? Getting more of that wallet share onto the platform? But is there other things that you would point to or does it all revolve around that they're in the right.
- [24:30]
Jim Jones
Place in the right time from a market growth perspective. As the industry moves digital, the wallet share is real. They have some charts in their investor presentation that will show you the number of big brands. Call them over $100 million over time and the number of brands is increasing over time. Within that chart you can see their wallet share of those big brands and you can see how that over time we have 10% of the wallet share and moving up to plus 50. And you can see how over time that's shifting because of the roi. Other industries might move faster given the ROI that they're seeing, but it's just a lot more measured in pharma. They recently launched what they call the portal, which is something that gives pharma real time feedback on how their ads are doing. That's just another way for them to gain wallet share because as brands are seeing, oh, this ad is doing well, we're getting the scripts, then they can add. On top of that, we talked about the CTV market moving their direction and then also new customers, increasingly new biotech, new pharma customers are launching digital first. They don't have an army of salespeople to begin with. They move to doximity earlier in their maturation process than they have historically. If you want to dream the dream, they're currently largely just in pharma, but could theoretically move into medtech and diagnostic companies as well. They've got a lot of row in front of them, a lot of row to hoe with the pharma companies. So I think that's a little bit of an afterthought at the moment, but certainly adds to the Runway.
- [26:22]
Matt Russell
I still have this idea in the back of my head that even if it's a small dollar amount of subscription revenue that could come in, it is the very basic investor brain of subscription revenue and attractiveness to that in five years from now. If they were doing something that was subscription based for doctors or their user base, would that be very surprising to you?
- [26:48]
Jim Jones
It wouldn't be surprising if they started charging. The doctors are really at the system level most likely, and I would guess it would be largely for the AI tools because they're adding so much value. The last thing that they want to do is upset doctors or give them a reason to leave the platform because it's just very Dr. Centric and they understand that keeping their engagement is probably the number one KPI. So long as you don't give them a reason to lose engagement. That's probably the Better way to lean.
- [27:24]
Matt Russell
On the alternate side of the equation is just from a risk perspective. What would stand out the most to you in terms of risk to this thesis playing out? Or what is most top of mind when you think about risks that could potentially play out?
- [27:40]
Jim Jones
Staying ahead of what the doctors want and need, you gotta be forward looking on what is most important to saving them time and increasing productivity. If there's a misstep there, that could be a problem and it leads to doctor engagement on the platform. If there's a competitor that somehow steals all the eyeballs or starts to chip away at them, that's going to be the first signs of some slowdown or some potential competition that's going to impact the business.
- [28:11]
Matt Russell
I think they have 80% share of doctors, some crazy market share numbers. Does that come up often where there's new competition entering the market? Or some of these that are making noise or showing some impact that is worth monitoring?
- [28:28]
Jim Jones
They're point solutions for the most part. There are constantly point solutions that are coming to the market trying to garner attention from doctors. The platform is really the differentiator. It's having all the point solutions on one place that's open all day long is the moat that keeps the point solutions from taking attention. If you have a point solution that is just far and away better than anything else, then maybe you do that outside the platform. What Doximity is doing is just trying to be good enough to keep you on there.
- [29:06]
Matt Russell
There's a bar in terms of how much better something needs to be in order to get you away from the one stop shop. It's a unique business. There's not an obvious public company that perfectly matches what they do. So when you think about this from valuing it, whether it's comps analysis or anything like that, how do you even approach thinking through a valuation framework when it sits in such a unique niche of the market?
- [29:34]
Jim Jones
I think it always comes back to cash flows. Comps analysis is potentially interesting, but I look at the business on its own and look at the cash flows and the growth opportunity and the moat around the business to try to assess for this level of cash flow, this level of growth and this expected duration of the growth, what am I willing to pay for that? And that's how I think through valuation a lot of the sell side will use price to sales multiples. I think price to sales multiples were invited for companies that had no earnings and cash flows and just a way to get your arms around what could be. This business already has that it's got great margins, it's got great cash flows. 1% of revenues go back into capex. I put a multiple on the cash flows and based on how long that I see this long secular shift happening and the rate at growth, there's a long secular shift and then they're going to add share on top of that. I try to make an assessment of how much share they can take on top of the secular shift and put a multiple on the cash flows.
- [30:43]
Matt Russell
I can at least acknowledge a price to sales multiple on a business with 90% gross margins. But when you have actual cash flow to use to approach it, that certainly makes sense from a market perspective. With these niche businesses you often will have dislocations. Does the market treat it like a software business? Do they treat it like an advertising business? Do you have any sense just of how you think the market looks at doximity and goes about valuing it?
- [31:15]
Jim Jones
I think it's traditionally covered by some software, some health care. In a way, people may think of it as ad tech in the sense that they can report a great quarter. People don't give them necessarily credit that that's going to continue in quarters forthcoming. I view it as the value proposition to the advertisers is getting higher as the engagement gets higher. That's leading to strength in the quarter or strength so far this year. Because it's related to ad tech and the history of ad tech, people may be a little wary on giving credit for duration of growth. I view it a little differently in that it's the platform that happens to monetize ad tech. So long as the platform's there with engagement, then we can feel comfortable that they'll be able to capitalize on this long Runway ahead of them.
- [32:18]
Matt Russell
It makes sense from all sides of the spectrum in terms of where there might be a variant view. This has been fascinating. I got to learn more about a business that I was very interested in already. We close out the conversations with a key lesson that you might be able to pull away from this particular business and apply elsewhere. Is there anything that stands out from doximity that you think is useful from a framework perspective or just a broad lesson that you took away?
- [32:44]
Jim Jones
I think value proposition to the customer matters a lot. The doctor Centric nature of doximity is not just something that they say, it's something that they do and care a lot about. When you can combine high value proposition to the customer with a long Runway, you throw in strong incremental margins. On top of that, it's a recipe for rapidly increasing earnings power of the business when you get those things operating together. So long as they can maintain the engagement of the platform in order to capitalize on that Runway, things can get pretty good pretty quickly.
- [33:25]
Matt Russell
Well, thank you, Jim. I appreciate you joining us today and sharing the knowledge and educating me a little bit more on what I love.
- [33:32]
Jim Jones
It was a lot of fun. Thanks, Matt.
- [33:34]
Podcast Announcer
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