Semler Scientific is a ~$600M small cap business focused on helping healthcare providers diagnose and treat chronic diseases. To date, the business has one product in market and three other “shots on goal” that represent additional growth opportunities.
Bob - thanks for the comments, very good points. I mostly agree with what you've said.
I too was skeptical of the technology moat, usually technology does not represent a lasting competitive advantage, and I don’t think this case is much different. After speaking with the CEO, I do think it is a stronger interim advantage than I initially suspected, as there are significant trade secrets and IP in building software that analyzes PAD in under 5 minutes. The trick with having the software cloud-based is they have a big data advantage that they can provide back to the insurance companies. Normally when a test is run in a doctor’s office the results go into a patients file and are not aggregated for insurers. QuantaFlo can easily aggregate all of the PAD testing data and provide valuable insights to insurance plans which isn’t an option for most types of healthcare testing. I didn’t fully appreciate that aspect until talking with the management team. This isn’t a benefit that has to be exclusive to Semler, but nonetheless it’s a great selling point.
The key metrics for the software kind of speak for themselves as the company has no churn once QuantaFlo is implemented and the subscription pays for itself every year if only a few patients are diagnosed with PAD per subscription per year.
I mentioned FlowMet as a possible competitor in the article, and think there is bound to be more like it in the coming years. It does appear Semler has a sizeable head start and a superior distribution model, but we’ll see if they end up executing. Also, with less than 5% of the market it’s not as if a few competitors mean the death of QuantaFlo. Either way I do expect any technological edge to wear off over time as it always does, which is why I don’t see technology as their moat. The question is really if they can achieve a widespread standard of care (they’ve apparently already achieved it in areas).
Semler is attempting to dig a standards-based moat which, if successful, can be incredibly valuable. The technology and associated patent gives them the opportunity and runway to dig a standards-based moat, but it does not guarantee they’ll be successful. Time will tell if they’re able to execute, and investors have to weigh the upside of achieving a standard of care in a large part of the PAD testing market against possible risks of competition.
On capital allocation, I would prefer if they could plow 100% of FCF back into high-return projects, but that would also come with major risks that subsequent products are not as successful or high potential as QuantaFlo. I think they’re trying to strike a balance here, they’ve invested in growing the salesforce and also have a number of other products they’re working on bringing to market via the same distribution model. A blessing and a curse of QuantaFlo is that it simply doesn't need that much capital to continue to grow. More so than incremental capital, QuantaFlo just needs time to keep slicing through the layers of bureaucracy at big insurance companies to gain adoption.
Beyond that if they cannot find productive uses for excess cash and they believe a dollar retained will not be as valuable as a dollar distributed, they should return that capital to shareholders. Always a balance between reinvesting in sensible projects versus putting capital at risk just for the sake of reinvesting. No one is perfect but I suspect management is not being foolish with capital allocation given their high levels of ownership, particularly the CEO.
The jury is still out on Semler to me, though I think the company has put itself in a reasonable position to create a lot of value over the coming years if they can continue replicating what has worked over the past several years. Should be a fun one to watch unfold.
Also, "its value is largely in the software that analyzes the test results in the cloud". This seems so fluffy and vague. Why does it have to do the computation in the cloud? A couple of finger sensors and an algorithm is zero moat to Medtronic and their army of sales reps:
Dear Dan, thank you very much for your very interesting write-up! As the share price has dropped to <30 USD it seems like a very interesting opportunity. I am especially concerned about the product and the view of cardiovascular specialists. Did you have a chance to test the product and talk to some Meds in the cardiovascular sphere?
Additionally wondering are they remote only? I didn't find any office / google-maps entry.
What is their cost per test (CEO mentions in 2016 call but hard to figure out from the op costs alone). This # may inform cost per test (CPT reimburses 93923 ~$84 with a ~$71 a professional component. To be profitable they must have sold a ton or charged a good amount (or both).
Bob - thanks for the comments, very good points. I mostly agree with what you've said.
I too was skeptical of the technology moat, usually technology does not represent a lasting competitive advantage, and I don’t think this case is much different. After speaking with the CEO, I do think it is a stronger interim advantage than I initially suspected, as there are significant trade secrets and IP in building software that analyzes PAD in under 5 minutes. The trick with having the software cloud-based is they have a big data advantage that they can provide back to the insurance companies. Normally when a test is run in a doctor’s office the results go into a patients file and are not aggregated for insurers. QuantaFlo can easily aggregate all of the PAD testing data and provide valuable insights to insurance plans which isn’t an option for most types of healthcare testing. I didn’t fully appreciate that aspect until talking with the management team. This isn’t a benefit that has to be exclusive to Semler, but nonetheless it’s a great selling point.
The key metrics for the software kind of speak for themselves as the company has no churn once QuantaFlo is implemented and the subscription pays for itself every year if only a few patients are diagnosed with PAD per subscription per year.
I mentioned FlowMet as a possible competitor in the article, and think there is bound to be more like it in the coming years. It does appear Semler has a sizeable head start and a superior distribution model, but we’ll see if they end up executing. Also, with less than 5% of the market it’s not as if a few competitors mean the death of QuantaFlo. Either way I do expect any technological edge to wear off over time as it always does, which is why I don’t see technology as their moat. The question is really if they can achieve a widespread standard of care (they’ve apparently already achieved it in areas).
Semler is attempting to dig a standards-based moat which, if successful, can be incredibly valuable. The technology and associated patent gives them the opportunity and runway to dig a standards-based moat, but it does not guarantee they’ll be successful. Time will tell if they’re able to execute, and investors have to weigh the upside of achieving a standard of care in a large part of the PAD testing market against possible risks of competition.
On capital allocation, I would prefer if they could plow 100% of FCF back into high-return projects, but that would also come with major risks that subsequent products are not as successful or high potential as QuantaFlo. I think they’re trying to strike a balance here, they’ve invested in growing the salesforce and also have a number of other products they’re working on bringing to market via the same distribution model. A blessing and a curse of QuantaFlo is that it simply doesn't need that much capital to continue to grow. More so than incremental capital, QuantaFlo just needs time to keep slicing through the layers of bureaucracy at big insurance companies to gain adoption.
Beyond that if they cannot find productive uses for excess cash and they believe a dollar retained will not be as valuable as a dollar distributed, they should return that capital to shareholders. Always a balance between reinvesting in sensible projects versus putting capital at risk just for the sake of reinvesting. No one is perfect but I suspect management is not being foolish with capital allocation given their high levels of ownership, particularly the CEO.
The jury is still out on Semler to me, though I think the company has put itself in a reasonable position to create a lot of value over the coming years if they can continue replicating what has worked over the past several years. Should be a fun one to watch unfold.
So Aravt blew up and has to dispose of its Semler 2% ownership. 3 days later the company announces $20m buyback. Why is a company, so early in its growth phase, announcing possible buybacks? Can it not do anything better with this cash? Reinvest in exciting projects that will stave off the patent cliff in 2027? Source: https://www.wsj.com/articles/aravt-global-shutting-down-as-hedge-funds-get-hit-by-unraveling-of-growth-trade-11646908200
Also, "its value is largely in the software that analyzes the test results in the cloud". This seems so fluffy and vague. Why does it have to do the computation in the cloud? A couple of finger sensors and an algorithm is zero moat to Medtronic and their army of sales reps:
https://www.medtronic.com/us-en/healthcare-professionals/products/cardiovascular/intraprocedural-monitoring/flowmet.html
I like Semler's innovative distribution and subscription model via the insurers but this moat is too shallow for me.
Dear Dan, thank you very much for your very interesting write-up! As the share price has dropped to <30 USD it seems like a very interesting opportunity. I am especially concerned about the product and the view of cardiovascular specialists. Did you have a chance to test the product and talk to some Meds in the cardiovascular sphere?
Additionally wondering are they remote only? I didn't find any office / google-maps entry.
Wow. its been a year and the stock is at 27. Any updates to this analysis in the meanwhile?
What is their cost per test (CEO mentions in 2016 call but hard to figure out from the op costs alone). This # may inform cost per test (CPT reimburses 93923 ~$84 with a ~$71 a professional component. To be profitable they must have sold a ton or charged a good amount (or both).