Write-up by REID HUDSON (NOT Geoff Gannon)
(Geoff’s note: VieMed trades under the symbol “VMD” in Canada and over-the-counter in the U.S. under the symbol “VIEMF”. The stock is a lot more liquid in Canada than in the U.S. However, the price difference between the shares in Canada and the U.S. doesn’t always perfectly reflect the U.S. Dollar to Canadian Dollar exchange rate.)
VieMed Healthcare Inc. operates in the home health space and provides services and equipment to a variety of respiratory patients. Its main market consists of stage 4 COPD patients who are in need of non-invasive ventilation (NIV) therapy to continue living without excessive time spent in a hospital. VieMed also offers a range of sleep apnea, oxygen, and other respiratory solutions to patients. VieMed employs Respiratory Therapists (RTs) to assist patients with the set-up of machines, education, continued monitoring, and other services included in respiratory treatment. The company states that NIV treatment makes up roughly 90% of its business. VieMed is a Canadian listed company that operates in the United States. Its corporate structure consists of a Canadian parent company listed on the TSX called VieMed Healthcare Inc. This parent company is the sole owner of a Delaware incorporated U.S. subsidiary called VieMed Inc. that owns two subsidiaries of its own. The company operates through these two Louisiana based subsidiaries: one called Sleep Management, LLC and the other called Home Sleep Delivered, LLC.
As the graphic above shows, Sleep Management was founded in 2006 by its current CEO Casey Hoyt. It got into the Non-Invasive Ventilator (NIV) market in 2012 and began to focus on COPD, changing its name to VieMed shortly thereafter. After being acquired by PHM, VieMed completed a spin-out in 2017. It was listed on the TSX Venture Exchange mainly because the company that it spun-off from was listed there.
VieMed claims that it cares for more patients with non-invasive ventilators than any other company in the United States. NIVs are non-invasive machines that are used to lessen the effort required to breath. They are primarily used by patients with late-stage COPD and neuromuscular diseases that both make it very difficult to breathe without assistance. These machines are non-invasive as opposed to invasive ventilators that require insertion through the mouth, nose, or directly to the trachea by way of a tracheostomy tube.
Since entering the NIV market, VieMed has grown revenue and active vent patients at a fantastic rate. Its revenue has grown at a CAGR 44% since 2010 and around 29% since its name change in 2014. However, this number is weighed down by a negative year in 2016, when Medicare slashed reimbursement rates for NIVs. Most recently, VieMed grew its top line number 39% in 2018 and around 50% in 2017. The number of active ventilation patients that it serves grew to about 5,905 in 2018, representing a growth rate of about 35% for the year. Active vent patients grew at almost 43% in 2017. While this growth has been impressive, what has been really impressive is the rate at which VieMed generates cash. To understand VieMed’s cash flow, you first need to understand how the company operates and how it has been fueling its growth.
As stated above, VieMed operates in the healthcare services space, providing access to medical equipment and services. This does not mean that VieMed is a manufacturer of the equipment it owns and leases. Rather, it purchases the equipment – which ranges from NIVs, cough assist machines, oxygen tanks, percussion vests, and Positive Airway Pressure (PAP) machines – and then rents it out to its patients. VieMed also offers a range of services to go along with this equipment, such as oxygen therapy, patient monitoring, and home sleep tests. VieMed has traditionally been compensated for its services by private insurers, Medicare, and Medicaid. It has traditionally, like every other NIV provider, been paid a base reimbursement rate by Medicare for its NIV rental and services. I will get into how this is changing later in the article.
VieMed estimates that $50 billion of the U.S. annual healthcare cost is spent on COPD. According to the National Heart, Lung, and Blood Institute (NHLBI), Chronic Obstructive Pulmonary Disease (COPD) is a progressive lung disease that affects 16 million people in the U.S. The NHLBI website states that the disease is estimated to affect many more people who might not even be aware that they have it. VieMed itself estimates that 25 million people in the U.S. are suffering from COPD. Although it is commonly caused by smoking, up to 25% of people with COPD have never smoked. The NHLBI website also states that COPD is the fourth leading cause of death in the United States.
As mentioned earlier, this is a progressive breathing disease, meaning it gets worse over time. VieMed estimates that around 2.5 million Americans have stage 4 COPD, and estimates that around 50% of those (1.25 million) are candidates for the company’s therapy. VieMed states that currently less than 50,000 beneficiaries are using NIV therapy, representing less than 5% market penetration. Most of these statistics are from 2017, so the 2018 numbers may have grown.
The possible population of COPD patients is also growing every day. It is estimated that 10,000 baby boomers turn 65 every day, a demographic segment that represents 26% of the U.S. population. 65 is the age at which U.S. citizens can qualify for Medicare. The majority of COPD patients are elderly.
This is obviously a large addressable market, but what really matters is the level of competition within the market. VieMed estimates that the top ten NIV providers hold 60% of the market share. VieMed itself is the third largest supplier at 8% market share. The two largest providers are Lincare and Apria, who are both subsidiaries of larger parent companies. Both companies offer NIV treatment but do not specialize in the offering like VieMed does. They both offer a range of medical equipment and services and also operate brick and mortar locations. VieMed, on the other hand, does not own or operate any brick and mortar stores, allowing it to run an extremely capital-light operation. The two larger competitors obviously have a larger reach than VieMed, but their lack of specialization might hurt them. Although this is probably not representative, both have majority negative (and recent) online reviews by patients.
On the other end of the spectrum, VieMed competes with a variety of mom-and-pop medical equipment rental companies who don’t really have the scale to challenge VieMed nationally. As far as barriers to entry go, VieMed is operating in a highly regulated environment. One in which a company has to get licensed in every state it operates in. This process can take years, and VieMed is still working on getting licensed in the entire lower 48. Currently, it is licensed in 36 states, and is conducting business in 25. There are different requirements by Medicare for different product lines and navigating the regulatory minefield inherent in this process can be difficult. Furthermore, if a new company wants access to patients that aren’t on Medicare, it must contract with private insurance providers in each state, a feat that is not easily accomplished by a company with little scale. In the first quarter 2018 earnings call, the CEO, Casey Hoyt, stated that the then split between insurance contracts was around 75% Medicare and Medicaid combined and 25% private insurers. Finally, even though VieMed is delivering this service in the home, physicians are the ones who are actually ordering NIV therapy. Establishing relationships with the physicians and case managers in every community is an essential part of accessing new markets. A company must demonstrate the value of the new therapy it is providing for a physician or case manager to change his or her mind. A case manager usually handles all the sourcing of necessary medical equipment and further treatment for patients who are leaving the hospital but still require further care. VieMed is hiring a rapidly growing workforce of sales reps and clinical liaisons to accomplish this goal, and it has also commissioned and published a KPMG study (you can view a slide show about it here) demonstrating the benefits of its NIV therapy. VieMed hired 18 new sales reps in 2018 and now employs roughly 75 sales reps and clinical liaisons.
VieMed runs a very asset-light business that is currently oriented towards growth to capture a share of this massive and unmet need for NIV therapy to treat stage 4 COPD patients. As stated above, the company also offers sleep tests, PAP machines, and percussion vests, but the NIV segment is the largest part of its business. VieMed operates by hiring Respiratory Therapists (RTs) and sales reps. Its RTs are all mobile, travelling to patients’ homes instead of working at a clinic or other type of storefront presence. That is one advantage that VieMed has over its competitors. It does not own or lease patient facing infrastructure. All its remaining capital is free to be reinvested in the growth of the business.
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