Investment Thesis
Reliq Health Technologies (OTCQB:RQHTF) is a small-cap health IT company that is poised for hyper growth over the next few years with an attractive subscription based model that has potential to generate high profit margins. The company appears to be fully valued based on the current stock price of USD $1.80 with the price not allowing for any execution risk. Investors should keep an eye out for any pullback to establish a long position.
Company Overview
RHT is a health IT company focused on servicing the community care market. For those not familiar with the term community care, this relates to the continuing care required by a patient outside of a hospital setting. The company’s market cap at the time of writing this article was USD $162M.
Product
RHT has developed a mobile health platform called iUGO care which provides remote in-home patient monitoring capabilities and allows for:
- Two-way communication between patients and health providers (virtual care)
- Monitoring of patients’ health related activities within the home such as adherence to medication schedule, recording sleeping patterns and other data. The platform allows for integration with off the shelf devices such as Amazon Echo, wearables, sensors and other biometric devices which can automate data collection.
- Automatic audible reminders for patients to take their medication, record weight, refill medication etc.
- Ability for the patient’s entire circle of health providers and family to access critical data and identify imminent issues proactively which can avoid the need for hospital readmission
Business Model and Recent Success
RHT’s target market includes care providers outside of hospitals including long term care facilities, family practices and home care agencies. The draw for care providers and the end users is a reduction in overall cost and is discussed in more detail in the next section. The Company offers its platform on a subscription basis with a charge attached to each patient using the platform. The company does not sell the associated hardware the cost of which is borne by its enterprise clients. The subscription fee for the software qualifies for reimbursement under medicare/medicaid using the new CMS billing code for Chronic Care Management (99490). The cost associated with most of the associated hardware is also reimbursable through CMS. Most clients are currently employing a hybrid model that uses a combination of RHT’s platform, monitoring hardware and care workers with the goal of moving towards a more automated model.
After undertaking a series of successful pilots, the company has signed contracts with several care providers (including Paz Home Health and Rio Grande ACO) with the potential of deploying the platform for 50,000 patients under current contracts. The company is aiming to service 80,500 patients on its platform by 2020. The revenue per patient is typically USD $50 per month.
A future revenue stream for the company can be derived from big data analytics for care providers and health facilities as the company builds its data repository by servicing an increasing number of patients.
The following resources provide further details on the company:
Industry Overview and Analysis
Size and Opportunity
The CDC estimates that 50% of all adults in the US suffer from one or more chronic health condition. As such, chronic diseases account for ~80% of all healthcare spending. This has led to the need for cost effective health treatments that lead towards reduced hospital readmissions which are costly for payers (medicare, insurance companies, private payers etc.). In fact, Medicare/Medicaid are now penalizing hospitals for patient readmissions before 30 days. All these factors have increased the popularity of effective home based monitoring and treatment with the community care market estimated to be ~$30B today, growing to ~$43B by 2019.
Competition
Given the size and opportunity within the community care and the healthcare IT market in general, several companies have embarked on creating solutions that cater to this space. Based on a high level review of various solutions in the telemedicine segment, it does appear that RHT has a more mature solution compared to others and certainly has a first mover advantage with respect to targeting LTC and home care providers (vs. hospitals that have longer sales cycles and complex implementations). However, with any growth industry, competitors/imitators will eventually crowd the space to get a piece of the pie putting pressure on long term growth. The key for RHT is speed to market and they seem to have executed well given the large opportunities they have already secured and claim to have a strong pipeline. A few other names that I came across in this space include American Well, MDlive and SnapMD (see an extended list here). Apple also has some telemedicine solutions and may look to expand these in the future. In Canada, which is a market RHT is aiming to expand into, TELUS Health provides a home healthcare monitoring platform. In addition to IT focused companies, government organizations may also look to develop their own regional platforms. For example, the City of San Antonio has contracted RHT to develop a white label version of their platform. Although this will result in one-time revenue for the company, it is not aligned with the long term goal of maximizing recurring revenue. Other examples of companies that can implement their own telemedicine platforms include equipment manufacturers and distributors. I recently wrote about Patient Home Monitoring which distributes and rents home monitoring equipment and has endeavored to develop its own telemedicine platform after completing a successful pilot.
Threat of New Entrants
As mentioned above, several players are looking to develop solutions in the community care space and the threat of new entrants is fairly high. There are some barriers to entry in this space such as upfront development costs however the individual features required by these platforms are quite ubiquitous such as two-way video chat, push notifications, voice recognition etc.
Buyer Power
Enterprise customers in the Healthcare IT space generally have very high negotiation leverage when dealing with small companies such as RHT and are able to underwrite favorable contract terms. Although the target market for RHT has shorter sales cycles and less complex implementations associated with it, this also means that contracts will be less sticky due to the relative ease of switching for customers. Having said that, the more RHT penetrates the patient population for each enterprise customer, the higher switching costs will become even though speed of implementation is dictated by the customers as they bear all the hardware and most of the training costs. The switching costs are also lowered by the fact that RHT’s platform does not require RHT specific hardware and can integrate with off the shelf devices. This means that a similar product that enters the market in the future can easily integrate with equipment that customers already have. Again, the key for RHT is speed of implementation.
Supplier Power
Supplier power in this industry is also relatively high since the key “suppliers” for companies such as RHT would be developers and consultants who have specialized knowledge and require a high level of compensation. High quality talent in the IT space is generally quite expensive. This can put pressure on margins in the long term as the company scales.
Overall Impact on RHT
Overall, I think RHT is well positioned for hyper growth over the next few years given the market growth rate and their first mover advantage. Longer term growth and profitability will come under pressure similar to other SaaS industries as competition enters the market and the product matures. For comparison purposes, I look to the home security market where incumbents such as Alarm.com (ALRM) are under pressure from new entrants such as DIY security systems and larger players such as Google and Amazon entering this lucrative market.
Growth Catalysts and Risks
Catalysts
- Overall growth in the community care market as discussed at length in the previous section
- The company has already signed contracts with several enterprise clients and boasts of a strong pipeline. Given the general size of these clients, the patient base has the potential to grow significantly on the back of one or two new deals.
- RHT is working on opportunities outside of the US, namely in Canada and UK where the government bears a significantly larger portion of healthcare expenses. Selling to these clients involves longer sales cycles and generally lower margins however the overall volume opportunity could be massive. Keep in mind that the company has Canadian roots and potentially strong relationships within the region
- The company plans to undertake some MA activity and there will be opportunities to “buy patients” from other companies and bring them onto the iUGO platform thus driving operating synergies
- Given the growth in community care, RHT could get acquired by a bigger health IT player such as Cerner or Allscripts
Risks
- Although the company has undertaken successful pilots that have led to contracts, the scrutiny is always higher when customers are actually paying. The platform is still in its early stages and may require further fine tuning as its patient base scales leading to unexpected costs
- As mentioned previously, enterprise clients have significant leverage over smaller health IT suppliers and control the speed of deployment. Given the very short history of use, the clients could delay or postpone further deployment if they are facing adoption challenges. It is not clear whether the clients have committed in their contracts to deploy the product to their entire patient base
- Medicare reimbursement cuts could severely impact the business
- Increasing competition especially if RHT is able to show success through high margins. I expect many imitators to rush in with similar products.
Overall Impact on RHT
I believe short term catalysts outweigh risk factors however longer term prospects may come under threat from increased competition.
Valuation
If you were looking at the market cap chart of RHT (below) over the past year without knowing what you were looking at, you may be inclined to think this represents a crypto currency:
Source: Capital IQ
Being a value investor, this leads me to believe that the market has built in very high expectations of the company’s future growth without regard to many of the risks I discussed above especially given that revenue generation to date has been anemic with no indication of profit margins. I will attempt to test this theory in my valuation analysis below.
Given the recent contracts the company has signed along with a strong pipeline, I am not too concerned about top-line growth. In fact I believe there could be additional upside beyond the 80,500 patients the company expects to service by 2020. They key for me is how profitably this company can operate. Since the company is in early stages, it is not currently profitable and therefore we must compare to other established SaaS and Health IT companies to get an idea of standard EBITDA margins:
Source: Capital IQ
To demonstrate the inherent risk in RHT’s current share price, I will apply a higher EBITDA % and multiple vs. the comp set above to derive a target price.
Source: Capital IQ and author calculations
Keep in mind that the above valuation assumes that patient ramp-up under current contracts will follow management’s plan with minimal execution risk. Of course on the other hand, there could be additional upside to the subscriber levels if a new contract is signed in the near future.
Source: Author calculations
Several factors will pressure RHT’s margins as the business scales:
- RD costs to fine tune the platform and add new features that will likely be needed as competitors come into the market
- Higher marketing costs to scale the business. The current growth is coming through customer referrals and in order to support the rich multiple and future growth rate expectations, marketing efforts will need an uplift
- Higher SGA costs. Current CEO salary is CAD $55,000 (quarterly) and other executives are even lower. Even though these employees are receiving stock based comp, the base salaries may need to increase as the company scales and revenues increase. Also, other expenses such as audit fees will increase in the future.
Conclusion
The company is poised to capitalize on the near term growth in the community care market and will likely enter a hyper growth phase over the next few years. Investors should keep an eye on the rate of subscriber onboarding and factors impacting EBITDA margins. The current price appears rich and investors should wait for a pullback to establish a long position.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Editor’s Note: This article covers one or more stocks trading at less than $1 per share and/or with less than a $100 million market cap. Please be aware of the risks associated with these stocks.
Article source: https://seekingalpha.com/article/4148461-emerging-health-play-reliq-health-technologies-richly-valued-cash-cow-making