Don't let its sub-$1 billion market cap fool you: Medical technology company Semler Scientific (SMLR 0.15%) is seeing explosive growth thanks to its successful QuantaFlo product and its software for physicians. QuantaFlo is quickly becoming the industry standard for peripheral artery disease (PAD) testing in patients, and this is likely just the tip of the iceberg for this promising product. Further, Semler may have more product winners in its pipeline to add even more fuel to the company's growth story.
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QuantaFlo's advantage
PAD typically affects individuals ages 65 and up, as plaque-clogged arteries decrease blood flow to the legs and feet. If left untreated, PAD can develop into serious problems, including increased risk of heart attacks, stroke, renal artery disease, and the possible limb amputation. Fortunately, PAD can be treated and reversed if caught early enough. Semler estimates that 8 million to 18 million Americans have PAD, and that roughly 75% of those cases go undiagnosed. Clearly this is a serious disease, and Semler is taking the lead in preventative care through QuantaFlo.
Through clips that attach to patients' fingers and toes, QuantaFlo measures blood flow through the arteries. Using any iPad or tablet, doctors can use Semler's software to retrieve and review this data in mere minutes.
Prior to QuantaFlo, the traditional method of testing for PAD in patients required a vascular technician who used an ankle brachial index with doppler – similar to the pump and strap nurses put around a patient's arm to test blood pressure. These devices alone can range in price from $2,500 to $20,000, and the use of a specialist only makes it more cumbersome and time-consuming for individuals to get tested.
QuantaFlo, on the other hand, can be done by any nurse or doctor in any primary care physician's office, and even at home, in about five minutes. Semler requires no down payment for its device and software, but instead makes money through subscription plans with physician offices, or per-use charges for nurses that care for patients in their own homes. Semler has also shown QuantaFlo to be more accurate than traditional methods in recent studies.
Since Semler's patent for QuantaFlo does not expire until 2027, it would be hard for competitors to create a more competitive product than Semler's anytime soon. Even more so, the time it takes for medical devices to be peer reviewed and receive FDA approval can take years. Also, insurance providers may not support a new product if it is not clearly superior to what is currently available. Semler, being first to market in this niche, has created a significant advantage for itself over others trying to get in.
Proof in the numbers
For a company valued at less than $1 billion in market cap, Semler has been able to post astonishing numbers. It has grown revenue from about $7.4 million in 2016 to over $32 million at year end 2019-about 64% average annual growth. While full-year 2020 financials have not been posted yet, investors can expect the company to continue its impressive growth streak. Management has stated that growth has already surpassed pre-COVID levels – that is with only one product on the market!
Furthermore, this under-the-radar company has been generating a greater-than-30% free cash flow margin. That means for every dollar in revenue it earns, it can keep more than $0.30 as cold, hard cash. Semler is able to achieve such a high margin because it outsources manufacturing of its clips and sensors, and it's already completed most of the related research & development. With those up-front investments taken care of, each additional dollar of revenue is almost pure profit. Even the best businesses only dream of achieving this margin -- on par with the likes of Facebook and surpassing Google.
Better yet, Semler has been able to reinvest all that free cash into opportunities beyond QuantaFlo.
2021 and beyond
Management has been discussing the possibility of new products for several quarters now, a move that would reduce its dependence on QuantaFlo and expand its growth opportunities into new markets.
That day has finally come. As of the third quarter of 2020, management has created four new channels for growth -- three through external agreements, and one that it developed internally.
Semler hasn't released many details about these opportunities, but here's what we know. Two of these new products look to improve aspects of metabolic syndrome, a cluster of conditions that increase risk of heart attacks, strokes, and type II diabetes. With the first new product line management has entered into an agreement to be the exclusive marketer and distributor with a private med-tech company for its products in the US and Puerto Rico. Second, Semler made a loan to a private company working in a different product area from the first. Third, Semler made an investment in the equity of another private company working in a completely different area than the other two. And the last product is one that Semler is developing on its own.
Management did not get into the specifics to avoid "tipping its hand", but it did confirm that all of these new products are FDA approved, clinically validated, and able to be used by primary care physicians in family offices like QuantaFlo can. As investors can see, Semler is doing its job to diversify away from its sole product into new areas, while still focusing on QuantaFlo's growth.
Is Semler a worthy investment?
At the moment, Semler is traded over the counter, but amid its recent push to hire more board members and diversify its product lineup, management has discussed its intention to "uplist" to the NASDAQ at some future point. This could increase investor awareness, potentially driving the stock price up as Semler starts to reach investors' radar.
Semler has also rebounded from COVID and resumed its high growth, while looking to compound that growth into new areas. The combination of continued progress, four new products, and strengthening of its Board of Directors makes 2021 a promising year for this small med-tech company. Any investor looking to get into the med-tech space with a rising star should give Semler a look.
