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A GOVERNMENT FUNDED SAFE HAVEN TRADE IN A STORMY MARKET
We are going through a rough patch in the market. Nothing seems certain. Everyone is looking for a “safe bet”.
Where can you turn for safety? What companies have businesses out of the eye of the storm?
There are a couple of names that have been weathering the storm extremely well.
Durable Medical Equipment (DME) providers Quipt Home Medical (QIPT – NASDAQ) and Viemed (VMD – NASDAQ) are both near or at 52-week highs! Their charts have been up-and-to-the-right for weeks with little volatility.
Source: Stockcharts.com
In this market, that is telling you something is going on. These are businesses with wind at their back.
How are they doing it?
Four reasons:
- Healthcare – these are not businesses with big sensitivity to the economy
- Cash flow – both generate consistent and health cash flow from operations
- Roll up – they are in a fragmented industry giving room to grow
- Government – reimbursement increases for Medicare should drive revenue growth this year
Let’s get into each.
PATIENT CARE AT HOME
Quipt and Viemed do not operate in the exact same business, but there is a lot of overlap.
Both companies provide DME – non-invasive ventilation equipment like ventilators, oxygen machines, sleep apnea equipment and percussion vests.
Source: Viemed Investor Presentation
These are rented out to patients suffering from respiratory problems.
Apart from the sleep apnea line, these patients are usually very sick people. They often suffer from chronic obstructive pulmonary disease (COPD). COPD is a group of diseases (emphysema and chronic bronchitis for example) that manifest with airflow blockage and breathing-related problems.
In the past, these patients could be stuck in the hospital a very long time. Breathing issues do not resolve easily if they do at all.
Long hospital stays aren’t great for the patient or the hospital—far better to put them in a familiar and more restful environment.
Viemed and Quipt offer just that. They service the patients in their own home (though note that Quipt derives substantial revenue from sleep apnea devices and services).
Multiple studies show this results in better outcomes for the patients.
Source: Viemed Investor Presentation
The patient acquisition model is similar for both businesses. Apart from the sleep apnea patients, these are people that are either already in the hospital or will have to be there shortly. Referring physicians recommend the company as an option to keep the patient at home.
Patients are provided machines to help manage their breathing. They are served by respiratory therapists (RT) that educate them on how to manage their own care and monitor progress. Remote monitoring is used to alert of any problems.
RECURRING REVENUE (OF SORTS)
The majority is revenue from equipment rentals and consumable sales.
For Viemed this largely means the rental of ventilators, as they mainly service patients with COPD.
Viemed derives most of its revenue from renting out ventilators and deploying respiratory therapists. The rest comes from sleep apnea and oxygen therapy machines.
Source: Viemed Investor Presentation
Source: Viemed 10-K
For Quipt, revenue is more equally divided between the rentals of machines (oxygen therapy, CPAP machines for sleep therapy, ventilators) and the sale of replaceable consumables like filters and masks.
Source: Quipt Home Medical MD&A
Quipt generates more revenue from sleep therapies and oxygen therapies than Viemed and less from ventilators.
Source: Quipt Home Medical Investor Presentation
A little over 40% of Quipt’s recurring revenue (in the chart above) comes from respiratory resupplies, which describes replacement parts like filters and masks. The rest is machine rentals.
REVENUE BY REIMBURSEMENT
These are overlapping but not identical businesses.
Their biggest similarity is how they get paid.
This is not a patient pay business. Nearly all the revenue comes from government or private insurance.
Source: Quipt Home Medical Investor Presentation
This is all about reimbursement.
While private insurance is a big part of revenue (over 50% for Quipt, over 40% for Viemed), government insurance (ie Medicare/Medicaid) drives the bus.
In fact, many of Quipt and Viemed’s private insurance agreements are determined by the pay programs from Medicare/Medicaid.
Thus, changes to government reimbursement are a big deal.
Centers for Medicare & Medicaid Services (CMS) announced a few months back that adjustments for inflation would increase for durable medical equipment (DME) products by between 6.4% and 9.1%.
Of course, the key word here is inflation. And most certainly, the cost side of equipment and services has also gone up.
But most of that is already baked in the numbers. Costs went up last year. Now revenue will follow this year.
That combination should mean a nice tailwind for margins.
On their last call Quipt said they believed “the recent CPI adjustment announced will have a meaningful positive impact on our net income as we progress in calendar 2023.”
Viemed said that they expect “around 4% to 5%” lift across all of their revenue while at the same time admitting last quarter that the margin impact of inflation had peaked and even reversed.
More generally, accounting math means even steady margins increase the bottom line. If you used to sell a product for $100 and now you sell it for $110 while keeping the 60% margin constant, you now get $66 instead of $60 dropping down.
COMPETITIVE BIDDING – OFF THE TABLE?
I owned Viemed in my subscriber portfolio what seems like a decade ago – but it was only just before COVID hit. It was originally spun out of a Canadian junior health care stock.
At that time the #1 RISK for the stock (same goes for Quipt) was the competitive bidding program.
What is competitive bidding?
Historically CMS sets prices on DMEs. And as long as you hit that price and are a qualified provider you are good to go. Companies use their physician networks to drive business.
Competitive bidding changes that. The country is divided into bidding areas. If you want to be a CMS supplier, you have to submit a winning bid for that area.
The risks for Viemed and Quipt are:
- A margin squeeze.
- Losing their ability to sell in an area.
It opens up the threat of competitors deciding to sacrifice profitability for market share.
In 2019 the worry was that ventilators, oxygen machines and PAP devices were about to be put on the competitive bidding list.
Then came COVID. Ventilators suddenly became the in demand medical device. CMS decided this was not the time to revamp the system.
In 2020 CMS took 13 product categories off the competitive bidding list for Round 2021 (which set prices until the end of 2023) including most products these companies sell.
We are now coming up to the end of term for Round 2021. Yet the CMS has not announced a new round of competitive bidding.
That likely means competitive bidding is not coming back. At least not in 2024.
Viemed management has pointed out that historically, CMS announces new rounds of competitive bidding 18 months prior to the contract start date. CMS needs to give vendors time to prepare.
Because there has been no announcement, Viemed believes a competitive bidding round for January 1, 2024 is “extremely unlikely”.
Status quo is a good thing here. It means stability of the patient base and of revenue.
GROWTH BY ACQUISITION
These are both companies that have, in the past, grown by taking advantage of their fragmented market.
Quipt is by far the more active of the two. They completed 7 acquisitions last year for more than$25+ million. The company is a true roll-up – acquiring small (and sometimes not so small) operations at attractive multiples to expand their footprint.
Quipt had been unusually quiet on the acquisition front through the second half of 2022 but they broke that silence at the beginning of this year with the acquisition of Great Elm Healthcare (GEHC).
The acquisition of Great Elm fits the usual profile: it is accretive – Quipt acquired the company for ~$80 million with trailing EBITDA of $13 million for about a 6x multiple – and it adds new states to the mix.
The deal with Great Elm will see synergies (about $2 million of savings immediately), allow Quipt to cross-sell products into Great Elm’s footprint and introduce new private insurance relationships across 7 more states from Great Elm.
The combination with Great Elm results in a combined $220 million run rate and $49 million of EBITDA.
Viemed has been less of an acquisitor in the past. Their big acquisition was way back in 2015 when they combined for a short time with Quipt (which was called Patient Home Monitoring at the time). But Viemed appears to be getting back on the acquisition wagon.
On their 3rd quarter call Viemed announced a new M&A team. They said that “while we have not yet completed an acquisition, we see M&A as a major prong of our future growth.”
A FAIR PRICE
After these big runs, are the stocks too expensive to consider?
They have gotten more expensive. But they could easily go higher.
There is growth here, even beyond the one-time reimbursement growth this year.
Quipt has grown revenue by 36% and 41% the last two years. EBITDA margins have been in the 20-21% range the last 3 years.
Source: Quipt Home Medical Investor Presentation
Viemed has been able to grow revenue as well, though the COVID-induced demand for ventilators in 2020 makes it look a little lumpier.
Source: Viemed Investor Presentation
Growth for both companies should be supported by the population aging. The cohort of people over 65 are expected to grow by 30% this decade. Chronic conditions are expected to grow by more than 10%.
Source: Quipt Home Medical Investor Presentation
Both companies generate decent cash from operations. Quipt trades at a tad cheaper valuation – a little over 10x on trailing EV/EBITDA vs just over 12x for Viemed. That difference can be attributed to Quipt’s higher debt levels – about $100 million, while Viemed has a net cash position.
Those valuations do not seem too expensive to me.
You add that up and you may still have a trade here. There is more risk now – especially if rumors about competitive billing surface again – but low-double digit multiples for growth and cash flow does not seem extreme.
If there is a “but” here, it would be that my experience with these stocks, is that they trade like yo-yo’s. Investors love to run them up over a time and then back down again on nothing at all.
Buying here after a big run may not be the best timing. But after a nice correction, I would certainly plan to revisit.
