Semler Scientific
Company overview
Semler is a medical device company specializing in the early detection of Peripheral Arterial Disease (PAD) and Heart Dysfunction (HD). Their primary product for both tests is called QuantaFlo.
Balance sheet & important metrics
The Company has a market cap of $264 million as of writing. They currently have a balance sheet with $56 million in cash and no debt.
Management
Semler is 23% owned by insiders. The CEO is Dr. Wayne Pan, who assumed the position in early 2023 following the resignation of the previous, long tenured, CEO. In addition to high insider ownership, Members of the founding Semler family are still involved in the operation of the company.
Business Model
Semler operates an asset light business. They just completed a streamlining of their workforce and only employ 91 people. Their manufacturing is done by a third party so they have no investments in factories.
Rather than sell to individual medical clinics Semler chose to sell directly to insurance companies. This created some risks, which will be discussed later, but also allows them to scale rapidly. This is a mutually beneficial relationship. Semler gets their products out quickly, and without a lot of marketing, and insurance companies save a lot of money by not using expensive alternatives. Some sources say insurance companies see returns on their investments of 100-150% within a year of adding Semler’s tests. The insurance companies pay doctors to use QuantaFlo instead of other tests, so there is demonstrated value for insurers.
Semler also makes money by supplying software to use their tests. They operate this as a SAAS model which leads to a growing recurring revenue stream.
Growth
Semler has been able to rapidly grow their revenues. Over the last 5 years, Semler has put up a 35% CAGR in revenue growth. Their EPS growth has been less consistent as they invest in various parts of their business. The company has been consistently profitable since 2018, but did see a surge in earnings during 2021 due to Covid. Their earnings are less consistent because they have variable fee software revenues that impact the bottom line.
Going forward the company has several potential growth drivers. Their software revenue continues to grow quickly. Their last earnings report stated the following revenue growth:
Revenues of $53.1 million, an increase of $10.2 million, or 24%, compared to $42.9 million.
Fixed fee software license revenues of $28.5 million, an increase of $3.4 million, or 14%, compared to $25.1 million.
Variable fee software license revenues of $23.2 million, an increase of $6.5 million, or 39% compared to $16.7 million.
Sales of other products of $1.4 million, an increase of $0.3 million, or 35%, compared to $1.1 million.
Semler is looking to diversify into more products. They have taken a minority stake in 3 small companies, and they are also attempting to develop several additional products internally.
Risks
Semler is a micro cap, single product company. As such, they do carry a fair amount of risk. Additionally, since they sell to insurance companies, their sales are concentrated to just a few clients. From their most recent 10K:
“A limited number of customers account for a significant portion of our revenues and accounts receivable. For the year ended December 31, 2022, two customers accounted for 40.4%, and 29.0% of our revenues, and as of December 31, 2022, three customers accounted for 26.8%, 25.9% and 16.8% of our accounts receivable.”
Since the insurance companies save money by using Semler’s products, it is unlikely they would stop buying them, but it is a risk.
Additionally, Semler holds a patent on the technology in QuantaFlo. This patent expires in December of 2027. The company feels that they can continue to protect their product beyond that using trade secrets as well as their software, which can’t be used with other devices. There is also the standard of care to consider. Doctors do not usually adopt new procedures or equipment unless there is a large cost or efficiency gain. Usually the latter. This does give the company some protections beyond 2027.
In early 2023 Medicare announced some changes to the reimbursement rates for the company. There is a risk these rates could change again.
Performance
Semler’s asset light model allows them to put up gaudy returns. Their current gross margin is 92%. Net margins are 25%. Their ROIC is currently 29%. This allows the company to generate a lot of cash. They currently have $56 million in cash, or about 20% of their market cap.
The board has authorized $20 of share buybacks, or a little less than 10% of the market cap. Management also uses the cash to reinvest into new products.
Valuation
Semler is trading well below its historical averages. Its 5 year average P/E is 36 and its currently trading around 15 times. EV/EBIT average is 27 and it is currently trading around 8.8x. Even factoring in that the stock was probably overvalued in 2021, these numbers are very low. Morningstar Q rating has fair value around $55 and Guru focus has it at $57.88. The stock is trading at $39.10 as of writing.
THe author has no position in the stock at this time.
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