Yet Another Value Podcast - Cove Street Capital on Viemed (VMD)

Episode Date: April 19, 2021

Eugene Robin and Andrew Leaf from Cove Street discuss their investment in Viemed. Viemed targets organic growth rates over 30%, yet the company only trades for ~15x free cash flow. Andrew and Eugene lay out their case for why the market is wrong on this one, including why VMD's business model is advantaged versus their competitors and why they aren't scare of a Medicare cut in the near to medium term.Cove Street's first podcast appearance on Viasat (VSAT): https://youtu.be/Otw0oWvuhdU​Chapters0:00​ Intro1:10​ Viemed overview4:30​ Typical use case for VMD's ventilators7:35​ Discussion of COPD market12:35​ How VMD's business model is different than peers24:20​ Why is the market valuing a 30% organic growth business at 15x free cash flow?33:20​ Medicare cut risks and what happened in 201639:10​ VMD's acquisition potential42:00​ VMD's moat with hiring therapists47:00​ Discussing VMD's bad debt expense50:00​ COVID's impact on VMD53:30​ Cove Street's price target59:40​ Parting thoughts

Hello and welcome to the Yet Another Value Podcast. I'm your host, Andrew Walker. And with me today, I'm excited to have two people from Coe Street. Making his second appearance on the podcast is Eugene Robin. Eugene is a principal and research analyst over there. And then making his first appearance is Andrew Leaf. Andrew is a research analyst at Coastreet. Gentlemen, how's it going? Good. Thank you for having us. Great. Well, hey, Eugene, it's great to have you back. Andrew, it's great to have you on for the first time. Let me start the podcast the way I do every podcast. And that's that's by pitching you to my guests. You know, people can go look at the first podcast that Eugene and I did on ViyaSat for a full pitch. But what I would say is CoStreet does great fundamental research. The first podcast we did, I thought was great. The response was really great to it. So it's just tremendous to have you guys back on.

You know, the first podcast got a lot of feedback. And I think people are going to be really excited to hear from you guys. So with that, let's turn it over and start talking about the company we're going to talk about today. The company is ViMed. the tick here is VMD. I'll just go ahead and do a disclosure that this is a little bit on the smaller side,

around 300, 350 million market cap. Cove Street obviously has a position in this. So let's just have that disclosure out the way so we don't have to worry about that. That said, Andrew, maybe you can kick us off. Why are you guys so interested in VMD? And, you know, what is it? Sure, yeah. So I'll give you the overview of the opportunity and then we can go into the fundamentals,

which we love discussing. So Viomed is the largest provider of not. invasive ventilators in the country. They do this an asset light model through a network of respiratory therapists. It's a great business with good margins, high free cash flow generation, good return on assets, but extremely underfollowed. This was spun out of a TSX ventures company in 2017, and at the time they had 50 million of revenue. But the interesting part is they're in a really, really high growth area. They're growing at about 40% K-GER pre-COVID. And we really like this opportunity because we see a pretty clear pathway for the company in the next, you know, three, three and a half

years to double its EBITDA. And so, you know, that would take the stock, which is trading around $10 today, closer to $18, in our estimation. And we think there's a large market opportunity for them. And this is very small. And so they have a large runway. You know, we're looking at, you know, they serve about 7,500 patients today where the whole patients that they could serve is about 1.25 million. So it is a smaller company, as you mentioned at the beginning, but the interesting part is there's just so much runway and so much market share and high growth of the actual market itself for them to grow into. In terms of, yeah, go ahead, Gigi. Yeah, I was going to say where we found it, and we've developed like a small circle of

competence hopefully around DME. There's actually a minor plug to anyone who cares about microland. There's another microcap called Great Elm group, not Great Em capital, which is GECC, but GEG. And within it is a DME business that, you know, it's not, it's actually on the CPAP side, so not the vents. But if you just did, you know, kind of a private market value, on that side alone, it's the entirety of the market cap. And then you get the various things, including a billion dollar in a well for free. So that's my little plug there. And yes, disclosure, we do own that as well.

But anyway, doing work on that is actually how we came across the parent company of this was just pro tech, we don't want to trade it on the TSX ventures. And then these guys spun out. I just tracked them for a little bit and eventually, you know, we started to do a deeper dive because when they got and they converted from Canadian Gap to U.S. Gap, there's some little nuances that were changed. But when they started showing clean financials, you actually saw the power of the business model come through. And that's actually where we entered and, you know, kind of did a little more work on them. slowly over time kind of built up a position. So I'll let Andrew kind of, or either Andrew, either you want to ask questions or Andrew is going to be the pitchman here.

Great. Well, Andrew, I guess the first thing is, look, you said it. This is a ventilators at home, but, you know, why, what is the typical use case for when somebody, you know, somebody, I think Medicare is there 60% of revenues if I remember correctly, but Medicare comes to them, a patient comes them, whatever, they needed. What is somebody getting onto a ventilator at home? What's the typical use case for that? Great question. And so the typical use case is for, it's called, it's late stage or stage for chronic obstructive pulmonary disease, COPD. So these are patients who have just really, you know, trouble time breathing. And they need to be set up on this device in order to, you know, this tends to be more closer to end of life, but this is to help them

breathe, them be a little bit more ambulatory and improve, you know, end-of-life care. And this is particularly well served in the home, so you don't have to be in a hospital setting for this, so it's more comfortable. But the real reason why we got interested in, I think, stepping back, we should go into what non-invasive ventilators are and, um, you know, how that industry sort of started. Yep, please go ahead. So non-invasive ventilators, you know, in the early 2010 range was kind of, you know,

brought to market by a couple companies, ResMed and Phillips. And what the real efficacy of this product was, was that these late stage COPD patients were visiting the emergency room four to six times a year. and that cost the health care system anywhere from, you know, $50,000 to $60,000 annually. And they started putting patients on this NIV, and not only did it improve the patient's quality of life, it brought down the cost to serve that patient to $12,000 annually. And so there was not only real efficacy here, there was a large cost saving to the system. And so that got a lot of health care providers really interested in this device.

because it made not only economic sense, but also better service of care. And so as the market developed, people realize that this is best served in home. And so it really developed around home health as well, which was another large growing market. And for reference, and if you go just YouTube non-invasive ventilators, the reason why it's served nicely in home, but you have to have a lot of services around it for setup is because it's a pretty large setup. It's a pretty complex setup, not something you want to do over YouTube. As a patient, you really need someone in the house helping you do it. And so that's where the service component comes in.

And that's why Viomed in particular is we view more as a service company than a quote-unquote distributor. Yep, that's great. I want to turn back to COPD for a second. So going on a ventilator is obviously you're not going to do this here if you're kind of normal or something. right. This is for stage four COPD, which my understanding is COPD. You know, it's generally people who smoked all their lives are going to get COPD. That's the vast majority of cases. And you're going on ventilator with stage four.

So I guess the first question is, you know, these guys, I've read their investor presentation. They say, hey, COPD, it's later stage in life, baby boomers and that type of stuff. 10,000 new baby boomers every day. We're going to have a really growing market. I guess my pushback to that would be, hey, this is for stage four COPD patients. Right. So what about stage one, two, and three? What are, what are the prevention measures? I mean, smoking rates are obviously going down. I don't think we're talking about smoking rates going down affecting their next five year runway. But I start saying, hey, smoking rates down. So in the long term, maybe there's less EOPD patients. And in the medium term, if we can treat stage one, two, three, maybe there are less stage four. So there's a less need for ventilators at home. So like, what are the alternative treatments that could prevent this? And how do you guys think about that risk? So the, you know, my response to that would be that, you know, they're sort of serving the patients as they come in today

and what we're dealing with in today's environment. Well, I think we should invest more in preventative care and help patients while they're in stage one, stage two, stage three, our health care system's not really good at doing that. Our health care system's more good at, you know, is better at serving the patient as the need arises. And so, you know, as we sort of stated earlier, you know, this is, you know, a decently large patient set of 1.25 million. That's, by the way, 50% of late stage COPD patients. The other 50%

don't necessarily have chronic respiratory failure, meaning they don't have to go into the hospital because they're respiratory systems failing. And so, you know, we view this sort of as a a good way to serve that patient set. And, you know, similar to, you know, you can make, you know, the same argument for dialysis, right? And you look at, you know, the model of DeVita and those large companies. And it's just sort of where we are, it's sort of the state of the country as it, you know, as it relates to the health of the country.

And they serve it as best as possible as it comes along. I don't know if you do have something to add to that. Yeah, I'm just, I would answer that by saying that it's a degenerative disease. So at the time that you're in stage late 2 and 3, it's not about curing you. It's about improving the quality of life, right? And this is the key point here is the NIVs. They're not going to cure anyone, right? It's more about, especially for stage 4, having a better, you know, last year to two years of your life, right?

And it's nothing, you know, for the patient, it helps with, you know, the terrible aspects of COPD and at least gives them some respite, I guess, from the inevitability of death. And obviously from the healthcare perspective from the system, if you, if their studies are correct, right, and you reduce hospitalizations by like 42% or whatever they say, it certainly decreases the overall cost to the taxpayers. And I think that's really the key here is. And I, and I, agree with you, right? I mean, I think our generation is less likely to be a smoker. So all else being equal, you know, is that an infinite funnel of answers, of course, no. But I don't,

as far as I remember researching COPD, it doesn't seem like there's like a, you know, a magic cure-all that forestalls the eventuality of where you are. Because with bronchitis and emphysema, as you mentioned, are like, you know, you acquire the hostile, 50 years of smoking. And so just because, I mean, you're just going to be in a very, you know, maybe not as bad of COPD, but you're still going to have it. And they're, you know, they also make the point that while, you know, the insurance carriers aren't really ready to apply reimbursements for earlier stage COPD patients, NIVs could be used for, you know, stage one, two, and three, just how CPAPs.

you know, are so, you know, preventative for people who have apnea and, you know, I'm on the borderline of having sleep apnea, right? So there's a lot of younger folks that use CPAP. So it's very similar in the sense that, you know, it's more of an insurance cost calculation versus a lack of a growing market in terms of NIVs. Perfect. Let me ask you something about the business model. So you guys mentioned that I again went through their their investor day and one of the things they pitch is hey we are much more of a service model right we're going in we're contracting with service people they're going in their house I think they even said like they're in there so much that they're almost a part of the family at that point right and they said and I believe you you live to as well

that's different than a lot of the people who they're competing with who are more just hey we rent the we rent the ventilator to the customer and everything so I guess my two questions there it would be, A, how are competitors just kind of renting out ventilators? It seems like you would need someone to kind of service those ventilators. And B, how does that different, how does their differentiated model? How does that play out, whether it's improved reimbursement, improved customer retention, NPS, whatever it is, but kind of just talking about how their model is differentiated. Sure.

So they, you know, the company they spun out of, was sort of the, it was a DME company that the largest competitors, Apprian LIMCare, look like, you know, look like. And so it's probably better to start with what, you know, an Appri and LYNC care looks like. They are servicing the hot, servicing physicians. So you go in and let's say a physician as a patient and they need, you know, a ventilator, but they also need a wheelchair and some other home health items. The physician will refer them to Napriel-LIN care, and they will provide all of those needs. So they need to basically have the full line of products that anyone needs in home health,

which is much more capital-intensive business. You need to have distribution locations near hospitals so you can easily serve the patients, all those products. Also, on top of that, you know, the people delivering these. products at home are not all all the time respiratory therapists. Sometimes, you know, if you're dropping off oxygen tanks or something like that, you might, there's no need to have an RT, as they're called, drop that off. So Viomed's model is completely different. They're going into the physician and say, you know, we are only focused on this one patient set. One, they're

educating the physician on why the patient set needs the NIV. And then two, they are fully servicing that physician and making it as easy as possible for that physician to manage that late stage COPD patient, which can be a harder patient set, as we previously alluded to, going in the emergency room, you know, four times a year. And so physicians love that because it's increasing the service of care. And it's also lessening the burden, you know, it's putting more of the care burden onto Viomed and delivering it in a good way. And so it's a win-win. And so that's kind of their differentiator. It's that higher level of service, which they're able to deliver in a differentiated way because they have none of the legacy DME business model that they've got to

also focus on. A salesperson for a legacy DME company has to sell a whole line of products and convince the physician to sign up for that. Well, Viomed only needs them to agree to the respiratory piece. And so we really think that's actually the differentiator in why they're growing faster than the market, one, and two, they're also helping expand the market because their RTs are going into hospitals where they're not using IVs and actually educating the physicians on how to use them. Perfect. Eugene, did you want to add anything there? No, I mean, I think Andrew encapsulated it well. I'd say that's untrue. terms of growth to their business model, I would, you know, let's call it brick and mortar

light, meaning apprehendland care and those folks typically set up little distribution centers. And I mean, they're not, they're not huge warehouses. They're literally, you know, four walls and some people in them with some hardware. but they don't view the actual sale as a service sale. It's more of a equipment sale plus you get for like apps and whatnot. You get like the resupply side, right? That's what everyone goes for because in the end, the money is in the,

and this is how Resmond makes their money. It's not from the initial sale. It's actually from the ancillary things, the new mask, the new tube, the new whatever, right? And so these, the DMEs also act in that sense, in that way, they consider the, the customer to be almost like a distribution endpoint as opposed to someone to service and care for. And I think Viomed does a better job at going to the physician saying, look, you know, we understand that you care about the quality of care and reimbursement rates are, you know, going towards... proving out that you can actually help the actual inpatient as opposed to just, you know, charge for them. And so that's what we do, right? We, we send someone there. We make sure they're okay.

We can, we continuously ping them. We make sure they're in compliance with CMS regulations. That's the one thing I think Andrew didn't mention is that, you know, in order to get paid for the first 90 days, you have to prove out that they're there, the patient is using the equipment, the way that they're supposed to. If you can't do that, if there's no actual, like, real audit trail or kind of service model there, then you're going to get cut off from CMS. And that's a big pain in the butt for the physician. And so the way that Viomed competes, too, is saying, like, go with us. You don't have to, you just will never hear from whoever, you know, ever again. And we'll take the patient over as our own, you know that they're in good hands because we care about them

and obviously there's a financial incentive for them to do so. So I think that's really the differentiator of the model. It's a minor thing, but oddly enough, if you look at the way that the bigger companies behave, being that service-oriented focus is actually a significant differentiator and allows them to land. In terms of growth, I mean, you know, they're now I think they're licensed in every state, but they're, I would say, 38 out of the 50, that's where they're real positioned. And then out of those 38, maybe only like 20 of them, they're really actually well distributed. So there's a massive runway of them landing, getting a respiratory therapist, employed, trained, and then, you know, hitting the hospital market and then kind of educating.

and then finally, you know, getting that kind of lead gen and sales throughput that they've been really, really good at the markets that they started. Yeah, no, I know I want to get into that massive runway in a second because I feel like I'm a sucker. Like here's a company that's growing, they've grown what, organically 40% per year for the past couple years. And this year they're saying, hey, because of headwinds, maybe we'll start off 20 and get back to 40.

And I'm over here asking you about reimbursement rates and stuff. But I do want to ask a couple more there. And then we can maybe dive into the sex here stuff. So I guess my two other questions would be, one, their model versus a lot of their competitors is much more service driven. Are they getting better reimbursement rates because they're providing more service? Or, you know, I've definitely seen this. And people have seen this in the past, CMS Medicare reimbursement. It can be wonky. And it's like, hey, we're actually sending a service provider out to someone's house, you know, improving quality of life versus the other guys just

sending them a ventilator or whatever, but the reimbursement rates the same. So are they getting better reimbursement because of their service? So they are not. These rates are set by CMS and they're not getting better rates. And to answer that question, so what, you know, the reason why, you know, their higher level of service has, you know, clearly in the physician's mind, a higher economic value in that, they're winning by just sort of growing and gaining market share in what we know to be a unit economic positive model.

So their low-cost way of delivering this asset light, you know, gives them that competitive advantage where, you know, they can still get the same rates as everyone else and still, you know, have good economics, but then also win more revenue through that. So that's how we view it versus sort of getting into them providing more service and getting paid more that they don't and they don't need to do that for their economy. I think we're losing Andrew a little bit. Eugene, do you want to hop in? Yeah, I mean, I guess it's what he said. The real, I mean, it is sad. I mean, it's an indictment of the healthcare system in general, but there is no differentiator in terms of what you get per,

per patient versus someone who's less service intensive. I mean, I think Andrew hit on the point that The point is that they don't have any sort of additional overhead that one of the larger guys would have. I mean, because the larger guys are effectively full, full scale, full service distributors, meaning like, you know, they have bedpans and wheelchairs and beds and whatever. And so if you don't have any of that and you just focus on being a good service provider, it allows you to, as I mentioned before, differentiate on not like that whole quality of service levels. But, you know, the little minor nuance here is because they're also constantly in the home versus like an apria or lung care, they can all optimize their capital expenditures.

And what I mean by that is, you know, it's unfortunate that this is one of those weird industries where when we say churn, it literally means someone's passed away. So when customers churn, they actually take the equipment back and can refurbish. And so they optimize and get better economics than some of the bigger players because their ability to kind of recycle and reuse and use the benefits of their route system to their advantage in the way that they do the economics of it and whatever. And yes, even though, yeah, CMS isn't care whether or not you're a good player, you know, you know, you can say that you provide service, but the quality of it, you know, CMS doesn't differentiate. It's only a problem in the sense of maybe future reimbursement risk, right, where CMS says, well, we don't think we're getting the quality of care for what we're paying. And so we're going to cut it as they did in like 2016. you know, Andrew will take, you know, I think, dive into maybe why that's a little bit different now. So I think, yeah, I mean, that's, it's unfortunate, but it is what it is.

They try hard and they do better than the competitors, but they don't actually get that better or any differentiated pricing. Cool. Let me see. So we've gone a little bit in the weeds. And actually, I do want to talk Medicare reimbursement risk in a second and what happened in 2016 because I think it's support. But let's actually zoom out a little bit here, right? Like, I look at this company, 300 million markets. cap 350, whatever, free cash flow last year, and I'm just defining this as CFO less cap X, $22 million. They're targeting 40% growth. And not only are they targeting, they've actually been able to grow organically 30, 40% for the last several years, right? So when I look at this and I say, something that's growing 30 to 40%, this company right now is trading at what, 15 times free cash flow? That's something, you generally get that multiple if you're growing 0%, right?

this thing's growing 30 to 40 percent is stuff that grows that quickly. Yeah, it's kind of kept X heavy because they actually have to go buy ventilators and stuff. But they're putting up great returns on capital, great growth. I mean, if you just gave this number, if I showed this to a normal person, blind company valuation, they'd probably look at them and say, oh, that's a software as a service business that's investing a lot into hardware. And I would pay 80 times free cash flow for it, 100 times free cash flow for it. Right. So what is the market missing here? Why is the market, why is the market putting some risk on this company where they're saying, yeah, you're growing quickly, yeah, you're growing with great economics. We don't, we think there's something unsustainable here.

We're only going to value at 15 times free cash flow. Sure. So not to segue into CMS reimbursement risk, but I think that would be. It all ends up that CMS reimbursement risk. Exactly. And so you kind of alluded to this already, but in 20 years for when they, for non-invasive ventilators. And what happened with during COVID was they were actually removed from non-invasive ventilators, were removed from the bidding process, and so the pricing remains stable.

And interestingly, so the way for listeners, the way CMS bidding works is, you know, it's called round 2021 of bidding. This was what was happening. And it's kind of, you know, it's about a year and a half ahead of time before it goes to bidding, you know, you figure out what items are on this list. And when non-invasive ventilators were put on this list, there was actually major backlash by the industry because of the efficacy of the product and people think that people should be being served more economically in home. And what this resulted in, actually, and you can look at up, HR 4945, 180 legislators, both parties signed on and said, let's keep NIVs out of bidding. And so there's a real efficacy here where we think that it's being recognized by the market that this is, you know, possibly could be excluded out of the next round, but is definitely excluded out of this round because of COVID.

On top of that, if you look at this latest round, you know, the first thing to be excluded in April 2020 was NIVs and then subsequently PAPS and oxygen were excluded after. And so this was sort of looked at as a higher efficacy product that's better for the overall health care system. And so it was almost immediately removed. I mean, April 2020 is pretty quick for CMS to move on that. And so we think that is probably the biggest underlying risk to the growth trajectory. But the counter to that would be they have the best economic model, their asset light. And so not to mention, by the way, we would have to talk about this, but since they are the largest

provider in the country, they have better economics. And so they can buy ventilators for, you know, a large percent cheaper than mom and pops were buying in low volume. And so if CMS comes out in the next bidding round and really lowers pricing, their market share is going to rapidly increase because they're the lowest cost model and they're going to be able to serve all these other people where unfortunately a lot of these mom and pops and regional players might go out a business like you saw with Papps, but we have a high conviction that there'll be the last man standing if that does happen. So just real quick, I mean, in the end, you cannot dismiss CMS and pricing risk. I mean, the DME, the history of it has always been that anything that

grows quickly gets pinged and put on the radar by CMS. And traditionally, they've done, you know, some would say crazy things by saying like arbitrary, 25. percent cut and just everyone eat it. They did that last to CPAPs and actually destroyed CPAP business models and effectively impaired a lot of people for almost a decade, really until from 2006 until in maybe 2014. Those entities that were growing really quickly before that had just horrific problems and, you know, service issues and business. But what CMS saw when they did that to the CPAP side was that the actual quality of care

and the billability for specifically rural areas suffered. And they changed the way that they went about the price downs, right? And they did this competitive bid. The irony, of course, is the reason why they took out, you know, PAPS and whatnot this time around is because everyone came in at, you know, 30 to 40% higher bids. So the lowest, you know, clearing price was 30 to 40% higher than what CMS is reimbursing people today. And that's why they said, well, just kidding, guys, you know, I'll just keep things

as they are. And, and again, the reason why is because, you know, CMS, CMS does things, like I said, sometimes arbitrarily, but they also, they're not stupid. They learn from prior mistakes. And I think the PAPSite actually was illuminating for a lot of people within CMS and say, the, they had them say, look, we can't do this or else people aren't just, they're just not going to provide the care. And they're going to, you know, I don't know what's worse, right? You get your cost savings or you have a bunch of people who can't actually get access to the care because of the distributors and whatever went out of business.

So that's one thing. And then I would also add that, and we didn't talk about this, but I think, while they by that gets the same reimbursement that's also not necessarily true because if you're more exposed to rural America you get higher reimbursement rates right and that's that's one of those weird you know things that people don't think about but even whether it's in broadband or or healthcare folks in the sticks get subsidized by everyone else because it's just you know it's impossible to build a cell tower to for you know you so that you can get 5G coverage for eight people out in the middle of Iowa. It's the same thing for DMEs. You know, they being CMS, will not hurt rural providers as much as they would, like someone who's in L.A., right? And, you know, for better for worse, KC. and team started in Lafayette, Louisiana,

and their core markets really are, I don't know if Andrew knows the number, I forget what they are rural versus urban, but they're not in like, you know, the top 10 MSAs, right? It might be in Indianapolis, but they're not in like, you know, San Francisco or Oakland or anywhere here, actually. But so that's a little caveat that I just want to throw in there. Go ahead. Sorry, real quick, just to add to that, because I think this is an important point. There's also a differentiator between, you know,

NIV and CPAPs and BIPs where NIV is more of a life and death device. This is extending life. This is, you know, they just came out of the study. There's a 38% immediate reduction in risk of death with NIV. And so a lot of times CMS treats that differently than a device that, you know, just improves quality of life versus this is actually extending life. and helping, you know, this high-risk category. And so while we have no idea what, you know, the outcome of the next bidding process will be,

or when it, you know, we think that, you know, as we mentioned for a couple other reasons, it might be excluded. And if it's not excluded, we think this company is even nimble enough to deal with it as well. Yeah. And then I just continued on the reimbursement risk. I think we've talked about, but I don't think we've fully touched on so far. 2016, there was a big Medicare cut. EBIDA went from $11 million to $2 million.

Revenue dropped about $10 million as well. I think it was $35 to $27 million. So, you know, both EBITI and revenue dropped $8 to $9 million. You can kind of look at that and say, oh, Medicare cut straight through to the bottom line, right? And I think your first thought is when you look at that, you say, oh, if there's another Medicare cut, it's going to hit these guys just as hard. So how can I get comfortable that I'm not about to see all of my earnings wiped out from Medicare cut? So actually, I think you guys have addressed that point. I just want to make sure we talk about what drove the Medicare cut in 2016 and kind of why did they cut?

How did their competitors, you know, it is kind of interesting. If they go from 11 to 2 million in a cut, but all your competitors go from 5 million to negative 10 million, that's pretty interesting because I think you guys mentioned they can take sharing that. So let's talk about the 2016 Medicare cut real quick. Okay. Sure. So 2016 Medicare cut, you know, as we've talked about, this was just sort of what you saw with CPAPs previously. And Medicare or CMS tends to look at the highest growing categories and indiscriminately cut pricing on the fastest growing segments, which makes sense because there can be a lot of, you know, issues. with, you know, certain devices that might not be, you know, have high efficacy or just growing because there's a good, you know, sales team around that or something. And so, again, with NIV in particular, we think there's a differentiated, different, there's a

difference here where it's a higher efficacy product for life and death. And the research we've done is shown that there is, there is a lot of buildup, especially, Washington to get this out of bidding next round. But again, that definitely will dampen, you know, until we fully know what that looks like. It'll, it'll, it could dampen prospects and get people, you know, less excited about the stock. And so to your point, though, of what happened in 2016, a lot of the, it just sort of, it actually didn't really hamper the growth that much. A lot of the, I mean, for that year it did, but then a lot of people, you know, re-evaluated what, you know, what the new pricing was and then just made that economic model profitable. Viomed being one of those companies still growing at 40 percent and regaining those economics.

And so, you know, the question always is, is, you know, if that happened, if that same cut happened again, one that was pretty large cut, we'd think the next one would be less so and more manageable. But if that large cut happened again, you'd want to be with the most nimble asset-like company serving this product. That's the one you want to invest in not in the asset-heavy company delivering those products. Two things. One, we do embed within our expectation, even though there's like a three-year window of status quo, we do embed a price down that's going to happen. And I don't, again, I think it'd just be foolish not to. I think investors should be aware that CMS will get to this area again because it is just such a high growth area. So that's one thing.

I think the 2016 number was way too high in terms of, I think it was blended 35% down. And again, as I mentioned before, CMS isn't stupid. it, they understand that when they did that, what it actually did to a lot of the mom and pop players and who actually are, you know, oftentimes the local DME provider, it destroyed their economics and it was a big problem for them. And so we, speaking to the, you know, head of regulatory affairs at Apria and some other folks, no one in the industry thinks that that would happen again, mainly because of the, I think, you know, lobbying efforts from both sides of the aisle. This is, again, one of those weird things that Democrats and Republicans can actually agree on.

So that's one thing. And then second of all, if you look at the revenue mix for the company and you just exclude the COVID one-time sale bump that they got this year, you get a sense of like, okay, well, these guys aren't. going to take 100%, you know, it won't be 100% flow through because it's no longer 100% about NIVs, the progression of vests and I think three or four various other equipment, pieces of equipment they sell. You know, over time, it's not, I think three years from now, while NIVs will lead the way for internal growth, it's not going to be, you know, 100% flow through because they will become a little more diversified of their product offerings. And I think Andrew, we'll go into, again, why this is so interesting because of the route elements of it and the fact that they, you know, they can technically bring a much bigger bag of stuff to sell to folks that have, you know, COPD because there's a lot of other issues that they may have underlying that Viavet could be in a perfect position to offer up services for.

Cool. Let's build on that. So I have a couple more downsides I want to talk about, but I think this is a nice transition, too. Look, we're talking downsides. This is a company that grows 40% per year. Maybe that slows down at some point because of a DME cut or something. But I do think there's also, hey, they're so focused on this one market and you look at it and you say, I feel like there's probably growth bolts on opportunities.

And it doesn't sound like they're going to be distributing every DMA, but these guys haven't really done an acquisition. I think they've got some technology that they're trying to start up. But when you guys look at this, how do you think about the opportunity? here to go by, you know, a, they're serving a lot of COPD. I don't know, to move into treating phase two or phase one COPD patients or, you know, something else. How do you guys look at the growth opportunity in inorganic growth here? We think there's a ton of opportunity for inorganic growth. They've got a, you know, net cash from the balance sheet. So they have no leverage. So they have the ability to do that as well. But to hit on what,

you just said, and what we think the really exciting opportunity here is for them to go into, you know, other subsets outside of NIV. So taking a step back for a second, because it's important to understand the model, if Viomed wants to enter a new state, you know, they've got to get all the license, et cetera, but really to start operations, they need to hire a single respiratory therapist. They drop ship a NIV to that therapist. The therapist then in their car drops off the item. I mean, that's how asset light it is. And that, and they can, you know, spin up greenfield business just that easily. And so they have the systems, the technology, and the operations to do that. And so if you could take that and apply it to, you know, any other field even, you know, not just

talking with a pulmonologist, but some other type of doctor and some other type of device, that's a really interesting model. And, you know, if they execute properly long term, you know, 10 years, they could be just a home health company for, you know, high-touch devices. So we think that's really interesting. Now, shorter term, what that looks like is they actually just announced they're coming out with Viomed clinical services. So 50% of late stage COPD patients suffer from anxiety and depression. So they're also going to help serve those patients with, you know, their psychiatry needs, and that can be delivered through not an RT, but a psychiatrist or another type of clinician. And so it's such a flexible model, and there's so many different ways for them to

add on to it. We just think what they've done so far is so amazing growing this quickly, this asset light, and are excited to see what they come up with in the future for, you know, in that same sort of route model. You mentioned they're an asset light company. And The way they grow is they go to a respiratory therapist. They say, hey, come work for us. The person signs up. They drop ship them a ventilator. And then the person goes to probably a pulmonologist and says, hey, give me your COPD patients.

I'll sign them up. I'll do everything. I'm going to give them great care. And that's how they grow. I guess why does a respiratory therapist come to work with them? And, you know, what's to stop? You and I, we look at this business and say, hey, it's growing 40% per year. I mean, we just go buy some ventilators.

We go on LinkedIn. We look up everyone who's. working for them and we go to the respiratory therapist and say, hey, we'll give you a 20% pay bump. Here's a ventilator. Go to town and we'll, we kind of poach some of their business that way. So how are they grabbing them and what stops people from poaching them? So that's a great question. So they are, you know, just that they are organically just through the normal recruitment

processes bringing on RTs that either have a presence already in the space or or in the geographic area or, you know, they are building a great reputation in the field for highest service, highest patient care. And so that's attracting new RTs as well. What makes, what's sort of their moat and why, you know, if we went and went to go and, you know, poach an RT from them and, you know, get them to service a patient, well, one, we need the license and certificates for that particular state. And so that's why I see a lot of large regional players because or state players and mom and pops because there's a capital, you know, you've got to put some capital up front and some time to get those certificates and licenses. Number two, we would be paying a lot more for that

ventilator than they are. They're the largest technically distributor, even though we think of them as a service company, of these devices. And so we'd be paying up a lot more for those devices. And then thirdly, and we actually haven't even touched on this yet, one of the most interesting part of their models, which you don't see at a lot of other DME companies, is once the device is delivered to a patient and that patient no longer needs it, they can send that back to headquarters or wherever they refurbish these ventilators, completely refurbish it. they break it down completely clean every piece all up to standards and then send it out again. And so now you have a 6,000 piece of equipment that you paid for up front that you're now using on multiple patients.

And so why is that an advantage? Like why couldn't, again, if you and I started that, it seems like that would be an obvious thing for us to do. You know, I kind of think of Elon Musk with SpaceX where NASA was sending rockets into the air and then they never used them again. And he was kind of like, hey, that's a, you know, $2 billion piece of equipment. Why don't we just land it and try and reuse it? And it seems to me if all of their competitors aren't reusing their ventilators, it's very similar to that. So why is that an edge for them? So why it's an edge for them on top, it's two sort of different questions.

So why it's an edge for them compared to their competitors? It's an edge for them compared to their competitors because they are only selling this device, which can be used across multiple patients while their customers have to sell devices that are single use or that cannot be refurbished. So that's why we say asset light. They're heavier cap X because they've got to pay for these products and then maybe get a little sale or lower margin sale and then can't refurbish it.

And then why, you know, you and I couldn't do it. We could, but there's a certain amount of scale you need to justify the spend of, you know, having six technicians full-time refurbishing these. I mean, let's say, you know, if we had, you know, 100 patients or whatnot, you know, how many, you know, the, they're the, you might, you might have one technician that's not being utilized that much. And so, um, when, as you scale more and more, um, you get a lot of different benefits. That's a really interesting point. So their scale

lets them hire a technician who can then refurbish those things. So their scale enables the, it enables them to get the technician who can then refurbish. So a startup can't hire that technician. They don't have enough ventilators, they don't have enough things to support them, they can't do the refurbishment. That's super interesting. Eugene, did you want to hop in here at all? Or can I keep kind of moving down my question list? Keep going. Okay, great. I guess my last question, you know, a long, long time ago, I worked for a private equity shop covering health care. And I always had two red flags that I remember going to Investment Committee in this. It had just been beaten our heads so much because we'd always see bankrupt companies in the

Medicare reimbursement face. And the first red flag was if their margin, if their EBITOM margins were above approaching the mid to high teens. That was always signs for a Medicare cat was coming. I think we've addressed Medicare cut. These guys are approaching mid-teens. I think we've addressed that so we don't need to talk that. The second one was a really high bad debt expense, right? Because if most of your revenues coming from Medicare and you're having a really high bad debt expense, there's something, there could be something.

I'm saying there is. There could be something. These guys, and they've addressed that they said, hey, we typically do 10% of revenue as bad debt. People, I've heard them on the calls. People say, why isn't it one or two percent, given how much Medicare exposure? They've addressed it, but I was hoping you guys could just go a little bit further into it because that red flag just really always sticks up to me. I mean, I would just say that if you go across the DME world and whether you look at Adapt Health

or, I mean, I phrase a little bit different, but PTQ, I talked great on all. talk to a couple of privates. Then typical numbers are between six and ten. It is what it is. I mean, obviously, there is a higher probability that the average customer here is of a lower socioeconomic background and a higher likelihood that, you know, whatever. some payments aren't going to be made because there's still there's still a co-pay right the co-insurance issue here that even if you are covered you know even if you have private health insurance or

whatever you're still not going to be able to pay for even the co-insurance side so you know it is what it is right it's part of the the cost of doing business and it's included within their financials i think you know for modeling purposes just listen to what they're say and I don't think they're trying to hide anything. It's funny, under Canadian Gap, it used to be broken out, but now they report net numbers because U.S. Gap doesn't allow that. So, you know, you can just assume that, you know, it's fairly consistent. You can go back in, you know, five-year history and see that it doesn't really bounce around

a lot. I know there's certainly, you could do some tricky. stuff with revenue recognition if you really wanted to but they've never taught and the CFO there he doesn't there's no indication that they're like that and obviously one of the key things that you can track is just the uh you know cashful conversion ratio between uh EBITDA is reported as and from their capital from operations i think any sort of divergence would signal uh they're messing around with the accounting and I just, I haven't seen that. I don't think if you have anything else to add.

That all makes sense to me. I just, my old investment committee, that would have been the first question that would have come up. And I just couldn't, I couldn't not ask it because it's just been ingrained into me so much. Let me quickly on COVID, you can't say, these guys are doing ventilators at home, right? And obviously, COVID has had an impact. They've talked about, I believe they do some stuff with contact tracing as well. You know, you guys have mentioned it.

I think COVID certainly helped them. they probably got some relationships from COVID just because they had ventilators. They had experience with ventilators. I think they were sending some technicians to teach hospitals and stuff, how to use ventilators and stuff. So obviously that's a one-time bump, but I think it could create a little bit of extra sustainable value just from those relations to everything. I'm probably making this more of into softball than I meant to, but maybe just quickly

address how COVID impacted their business top on the upside and downside and how that will impact them going forward. it's a great question and I'm glad we have a chance to address it for anyone who's looking at the financials so essentially what happened last year is they had you know they had a lot of they have a lot of ventilator equipment and you can and they break this out in their sales and you can see a massive bump in just equipment sales so they were just purely selling this equipment to hospitals or anyone who needed it during the height of COVID that was mainly in the first three months of COVID, where they did the majority of those sales. And that helped, I mean, that expanded

margins a bit and that also boosted sales a ton. And so the way you really have to look at this is, you know, look at the core, NIV business and economics and sort of ignore that one-time equipment sales. It was great for cash flow generation for last year, but we're not expecting that going forward. Interestingly, and this is why, if you, you look at what the expectations for 2021 is and why revenues are down, partially it's down because they don't have those equipment sales. But if you actually look at the organic patient growth over the past couple quarters, it's actually been pretty stagnant. And the reason for that is because there's main sales points in the hospital. And a lot of these hospitals have

been shut down and they have been able to get to that sales point and educate those physicians on or pulmonologists on NIVs. And so there's also kind of a buildup here, you know, sort of this loaded spring of they're still hiring RTs and new geographies, onboarding them, getting them up to speed on how to sell

on how to explain the product, but they're sitting and they can't get into the hospital. And so once the economy reopens up, they're going to have a money and you read through their earnings calls, you know, they're still hiring these RTs. So they're going to have all these RTs that they didn't have before pre-COVID.

And, you know, if they, if those ramp up to, you know, what a normalized RT serves, you know, a number of patients that a normalized Viomed, you know, RT serves, you know, the continuation of growth will be massive. And that's what we're really excited about. And so there actually is an interesting partner where it's a COVID economy reopening story because their main, you know, the main place where they get people to get onto the product has been shut down for a while now. I want to be cognizant of time because we're approaching an hour.

I think we've done a nice job here. But I just want to end this with one question. And I'll let you guys kind of wrap it up with last thoughts. But at the beginning of the show, when we were opening up, I think you guys said, hey, we think this could be, you mentioned $18 on the stock. I can't remember the particulars of them. You said $18. And, hey, nobody's going to complain about $18 if it hits that because the stock is a little

under 10 as I look at that, you know, if it is 18, I think there's going to be a lot of very happy people. But I do look at that and I say, again, 15 times free cash flow right now, we're talking 30 to 40 percent organic growth. We discussed really accretive acquisition opportunities at some point, all of these different goodies, right? And obviously there's the CMS risk, all that type of stuff. But I just want to ask you guys, like, when we're talking a reasonable bull case, you know, why are we talking, why did you mention 18? Why didn't we mention 40? Why didn't we mention 35? something like that. And again, not trying to be too softball, but I did want to ask, what is that coming from? So we're looking in the medium term for that price target. Why we're excited and

interested in this business is the longer term. We view this as a potential, what we call compounder of a business that generates high free cash flow and they can take that free cash flow and reinvest it at a high rate of return on investment. capital. And that's sort of the, you know, the holy grail of investing. Because if they can do that and find the outlet for that capital and, you know, invest that at a good return, you know, 18 would be three years. There could be a lot higher price, you know, five years, 10 years down the line. And you could, you know, this could be a multi-bagger opportunity. So that's what we're thinking much longer term. But we don't want to get too excited about that because we want to,

we're focused on the nearer-term opportunities they have, but we're pretty excited about longer-term prospects, too. Fantastic. Eugene, go ahead. Yeah, I'll just say that due to the CMS factor and their current form, I don't think it would be fair for anyone to expect that, you know, $35 value. However, and Andrew kind of hit upon this. what they're trying with as an example of the behavioral health right uh they're trying to create

new markets for what i consider to be their route system because to me this is just a a route service entity that happens to have an equipment or hardware component that um you know they use as a way to acquire a potential clients but in essence what they are is a It's a service and route business. And what else can they do? That is the great unknown. I know we haven't mentioned or talked about the people side of here, but I think it's an important thing to look at.

And Casey and his crew have done all of this organically. And it's very rare to find entities nowadays that don't rely on a roll-up economic, especially in DME, to kind of a, you know, know, to show investors like how good and smart they are. These guys are scrappy. They've done wacky things before. They try things. They fail at some things.

They're, you know, but that's who they are. They're entrepreneurs. And they're positioned pretty well for where, if you think about where healthcare is going, getting people out of hospitals, keeping people out of hospitals, minimizing the cost of the overall system, there's so much that they can do if they have the footprint within special, you know, these geographies,

because again, a lot of them are rural, and a lot of those rural geographies do need a lot of, you know, kind of more hands-on surrecy approaches versus trying to get people into the hospitals which are failing rapidly in many parts of rural America. So, you know, there's just a lot of, I would say not on the spreadsheet optionality that's embedded within their actual business model.

That it's very difficult to, you know, say like, well, I think they're going to be X. We know what we know. You know, I think we have a pretty good understanding of where NIVs and their percussion chests and the best, sorry, and the various other, you know, kind of PAPs and whatever else that they sell, we understand that business we understand the risks of it and I think we can get a pretty good approximation of fair value what we can't tell anyone with any degree of certainty other than to say like you know in Casey we trust in terms of his scheming and ability to you know run much faster and better than the bigger guys is that you know what else can they do what else can they do with that customer list what else can they do with the physician touch

points that they have. What else can be with the hospital touch points that they have? I mean, it really, you know, if you think about it in a long-term perspective, this could be an incredibly interesting business in many, many different ways. Yeah. You know, as we come to the end of it, I look at it and I say, hey, you know, when I was prepping for this, I was focused on Medicare risk and all this sort of stuff. And again, maybe I'm just missing the four, maybe not just me, the market, everyone is missing the forest trees. Like, this is a 30 to 40% growth. business that, you know, it's led by its founder and they've grown to over a hundred million

in sales through completely organic growth. It's like, if this was a software business, you know, every person on Twitter would be just lavishing this company with praise and everything. And I think maybe it's because it's headquartered in Lafayette, which I'm from New Orleans, I love Lafayette. I've been out there. There's some great food out there. But, you know, founder owner operator trading net 15 times cash flow, 40% organic growth, like kind of surprising you're not hearing anything more about that. Again, got to be cognizant of the time, but I want to get, is there anything here on the downside, upside, anything that either of you, Eugene, I'll start with you and then I'll start an over-changer, either of you kind of wish we had or you just want to

leave the listeners with as a parting thought. I think we look at our investments through the lens of business value in people. I think we spend most of this time talking about the business fundamentals. The value is what it is, I think, on, on a returns on invested capital basis. It's a very good business. And the value is, I believe, I mean, this is our investable premise that it compounds, right?

As they add more products to sell, as they add more services to sell, as they increase their overall footprint by dropping down to new locations, that runway is so immense that, again, they're pipsqueaks, right? This is, we're talking about, you know, fly on not even the horses like the I don't know the amount of it's right yep this is an incredibly

small business with motivated incentivized people that care a lot and have shown themselves to be pretty good stewards of capital not doing anything stupid and they're dabbling and investing some software but that software actually is is it helps with a customer acquisition so I I look at it as more of a, again, they're just scrappy. They do very interesting things and they think about the long term. And honestly, I think they won't be around in a public sense in five years because, you know, they're one of the bigger entities will eventually gobble them up. And it'll be unfortunate, I think, but, you know, I don't know.

I think that just the business value in people, the P-side, that's everything, lines up to be favorable in terms of a risk for a role profile for his business. Andrew, did you want to add anything there? Yeah. So the one thing I'd like to add is, you know, at Cove Street, we are value investors at heart. And so it pains us to sometimes, you know, find a 30 to 40% grower. And, you know, because normally, as you mentioned, it's not trading it 15 times free cash flow.

And so, you know, it's weird for us sometimes to come on and be like, you know, oh, look at this 30, 40% grower when normally we're looking at things that grow, significantly less than that. 34%. Yeah. Exactly. And so, you know, classic growth at a reasonable price, I really think, sort of a GARP investment of, you know, here. And that's what got us interested, you know, just the execution here to be able to grow something this quickly, organically. We see a lot of future value that you don't really have to pay for today. And so that really sums it up. We're not looking to invest at 80 times free cash flow on a 30, 40% grower of software. But, you know, this is more in our wheelhouse.

Perfect, perfect. Well, guys, this has been so much fun. I would say, I feel like I was so focused on the Medicare risk, but you guys have done such a great job of alleviating that. And again, 40% growth 15 times cash flow. Andrew, great to have you on the podcast for the first time. We'll have to have you back at some point. Great to have a fellow Andrew on Eugene.

We've done bias at. done via med. Maybe we could do Viacom next time. Maybe we could do Vendee next time. We'll just keep the VEyes going. But great to have you on for a second time. Appreciate you guys both coming on and look forward to talking to you soon. Thanks, Andrew. Thanks again.