The calm before the storm
Two months ago, we published an article on the current landscape of the $30 billion physical therapy market, and how eWellness (OTCQB:EWLL) could disrupt the field with its compelling telemedicine platform. Despite the promise of the company's technology, we suggested that investors hold off until a liquid market developed in order to avoid the volatility from illiquidity. As expected, as shares began to trade, the valuation of the company fell from $70 million and consolidated at $13 million.
Consider the timing of this substantial correction; the company is about to enter its pivotal "make or break" year. With the addition of a key opinion leader in the physical therapy space, continued expansion of its core product offering, and information expected from currently run pilot programs, eWellness appears to be well prepared for its product launch this year. Robust positive news flow in conjunction with the liquid market should drive share price steadily higher, especially as more investors begin to take notice.
The broken physical therapy market
Note: For a more thorough understanding of the physical therapy market, we encourage you to read our earlier piece.
To the uninitiated, the physical therapy market wouldn't sound particularly sexy or exciting. Despite remaining largely out of the spotlight, physical therapy is a $30 billion industry within the US. Driven by the increase in sedentary lifestyles, professions that promote said lifestyles, and the growing senior population, this market continues to grow seven percent annually. Despite how developed the physical therapy market is, it has continued to elude consolidation. With the largest 50 competitors forming less than a quarter of the market, and thousands of independent practices vying for a piece of the pie, the industry remains extremely fragmented.
This is highly unusual, particularly for any market that has existed for over a few decades. It's evident that no participant has been able to develop a competitive advantage and the reasons are clear-cut. The traditional physical therapy business model is still a brick and mortar business that face these salient constraints:
- High overhead: Successful clinics require real estate in a populated area with ground access to ensure patient ease of access. Not only is this real estate expensive, but also subjects the business to potentially unwanted fluctuations in rent prices.
- Very poor labor scaling: Although belonging to the first point, this is salient enough concern to merit its own bullet. Physical therapy treatment typically takes the form of 1 to 1, patient to therapist, sessions. This not only limits the amount of business a therapist can do per day, but necessitates additional staffing spend if the clinic wants to grow its business.
- Standardized payment: Although changes in health care policy have fostered the growth of the physical therapy market with the encouragement of earlier discharge of patients, patient billing has consolidated around health insurance reimbursement. Due to this consolidation, clinics lack any effective pricing power, and must accept the rates set by these insurance companies in order to receive payment, standardizing the payment received by all clinics.
These factors converge to reveal the highly unfavorable business model PT clinics currently operate in order to generate a profit. The formula for growth is extremely linear, strictly requiring additional real estate or staff upon reaching the "saturation point" (where all therapists are booked for the day). US Physical Therapy (NASDAQ:USPH) exemplifies this growth model with its systematic acquisitions of clinics.
To make matters worse, a substantial percentage of patients fail to complete their course of treatment, further diminishing the earning potential of the clinic. The current system is broken and poorly equipped to address the continued growth and necessity for physical treatment.
Evolving Beyond Brick and Mortar: eWellness
eWellness is a healthcare-focused tech company with the potential to disrupt the $30 billion physical therapy industry. Unlike companies like US Physical Therapy, eWellness completely lacks a brick and mortar business. Instead, the company has developed a proprietary telemedicine platform, PHZIO, as a platform that physical therapy clinics can use to expand their business beyond the constraints of the brick and mortar model.
PHZIO is a web based cloud service that empowers both therapists and patients with the ability to complete treatment sessions remotely over the Internet. The product consists of a library of treatment protocols developed in-house, by CEO physical therapist Darwin Fogt, which therapists can use to design a treatment regimen tailor-made for each patient. PHZIO leverages improvements in technology to provide therapists the ability to monitor each of their patients in real time, allowing the business model to scale to a 1-to-many model. These features are packaged into all-in-one offering that also provides necessary services such as patient management, business metrics, reports, and billing. Most importantly, the digital treatment protocols are completely insurance reimbursable, validating the efficacy of the product.
Preliminary trial runs and launches have generated positive findings, with 20% higher adherence and a 30% increase in practice reported. These early results bode well for PHZIO, as the company continues to proceed with its product launch planned later this year.
Favorable Tailwinds And Key Developments
First Mover Advantage
As PHZIO enters the marketplace in the following months, we expect it to benefit greatly from its first-mover status in the digital physical therapy marketplace. Given the harsh business environment, it is hard to foresee a scenario with an unenthusiastic product launch. As far as our research could tell, there are currently no other companies developing a telemedicine platform, which should afford it a premium amount of time to develop sales traction. The only loose competition exists in the form of private company WebPT, which offers a suite of cloud-based services for patient documentation, scheduling, practice management, and billing for PT clinics. Although WebPT is established in the space, its product fails to offer the same economies of scale PHZIO can provide.
The Baby Boomer Opportunity
Although just recently overtaken by Gen X'ers as America's largest generation, the US is due for a surge of aging baby boomers. The Census Bureau currently projects that by the time the youngest baby boomers reach age 65 in 2029, the boomer population will total 61.3 million. As a result, the elderly population (age 65 and older) will balloon to comprise roughly 20% of the US population, a huge increase from the 14% reported in 2012. This second "boom" should be considered in conjunction with the rapid increase in the number of hip replacement surgeries performed per year in the US, which more than doubled in the decade between 2000 and 2010. With the trend expected to continue, this foreshadows a huge increase in demand for physical therapists over the following years. We hypothesize that the current physical therapy business model will be unable to absorb this influx of new patients. Given the fragmented nature of the market, blind expansion in response will most likely be inefficient and will most likely damage the profitability of clinics across the US. However, the adoption of PHZIO should allow clinics across the US to comfortably absorb this flood of new patients.
In a recent press release, eWellness is already positioned to address this market. The company anticipated the release of two treatment programs in July 2016, which include a total knee and hip replacement exercise program. "These hip and knee programs have been designed to be integrated into any hospital or medical group's Medicare CMS bundled payment model for post-acute physical therapy." This should be wildly relevant given that that the average hospital stay for total hip replacement patients has shrunk from five to four days, thus increasing the necessity for physical therapy.
New Addressable Markets
Another potential interesting feature of the PHZIO platform may be the ability to provide quality physical therapy regimens to patients outside of the clinic network. Late last month, the company launched a comprehensive corporate wellness program utilizing a 6-month PHZIO program to approximately 100 employees at a Los Angeles based university. With endpoints based on body weight index, bodily coordination, and physical strength, the results should be relatively objective transparent. The results of the 6-month program are anticipated to be published in January 2017, with a mid-point overview this October.
If a meaningful reduction in BMI is demonstrated, it stands to reason that these programs will be fully reimbursable by health insurance companies given that obesity is a well-recognized risk factor in morbidity. Positive data from this corporate wellness program would not only validate the efficacy of the PHZIO platform, but may open the door to a potentially massive corporate wellness market. Given the interconnected nature of colleges, encouraging results may lead to adoption of the program in several other institutions and businesses.
Preparing For Launch: "Can You Hear Me Now?"
As part of first mover advantage, eWellness will have to deal with the task of introducing the novel concept of telemedicine to the well-established brick mortar physical therapy community. Although the benefits are clearly defined, many clinic owners may display hesitation in electing to adopt a new business model.
As such, the company will have to strongly rely on the relationships developed by the CEO, Darwin Fogt, an accomplished physical therapist operating in New York and Los Angeles. Perhaps in preparation for the coming launch, the company appointed Daniel Mills as Chairman of Key Outreach Committee in April of this year. Mills is a well-known physical therapist who currently serves as the Vice President of the Private Practice Section of the American Physical Therapy Association. The APTA is the country's leading professional organization for physical therapists representing over 93,000 member physical therapists, physical therapist assistants and students of physical therapy.
Daniel Mills is one of the key opinion leaders in the PT industry within the US, and his role as chairman of the company's outreach committee should be instrumental in attracting clinics to sign up for the PHZIO platform. The key roles held in eWellness by two prominent physical therapists should signal PHZIO as a technology platform designed by and for physical therapists.
DTC DWAC Eligibility Increases Liquidity
When we first covered this company, we urged readers to hold off on taking a position due to the profound lack of liquidity. Hopefully, all of you took the advice and held off. Just recently, the company became approved for DTC DWAC/FAST eligibility. This development has served to greatly improve the liquidity of the company with a relatively liquid market trading around its current valuation. Although the company is still largely under the radar, with many investors yet to hear about the story, we believe the correction and the approval of DTC DWAC/FAST status has served to largely eliminate liquidity risk from its former levels.
Radically Different Business And Growth model
It's clear by this point that eWellness has a completely different business and monetization model compared nearly every other company operating within the field. Given the cloud-based nature of the PHZIO platform, the monetization model should be expected to be a combination of licensing and subscription based income sources.
The company's press release on Daniel Mills states:
eWellness' goal is for Mr. Mills to attract licensees for the Company's PHZIO telemedicine and assist eWellness with attaining its growth target of 2,600 plus PT licensee users by 2020. Our estimates indicate that a PT user base of this size could translate into $110 million per year in top line revenue for eWellness with 90% gross margins.
Although these numbers may seem excessive, when one considers that there are over 204,000 practicing physical therapists within the US today, you'll find that the company is assuming an extremely modest 1.27% penetration rate over the next four years. If we continue this train of thought, you'll find that assuming the company gets paid $14/session, the $110 million per year is achieved by each physical therapist working 8.35 sessions per day, or 11.7 sessions per weekday. The incredibly meek assumptions required to reach the figure of $110 million per year strongly implies that any meaningful traction or gains in the therapist's ability to treat additional patients could send the figures much higher. Not to mention, the incredible margins enjoyed by cloud companies also apply to eWellness, translating much of the revenue into cold profit.
Again, if physical therapists are able to look past the novelty of the platform, it's hard to see why they wouldn't embrace PHZIO. By adopting the cloud service, clinics would be able to increase the number of patient visits, increase revenue generated per square foot, provide more thorough quality of care, and reduce staffing spend. Anyway you cut it, it seems like a win-win for all parties involved.
Re-evaluating the risks
As just discussed, liquidity risk seems to be no longer an issue. However, there are two main risks that could severely hurt the outlook of the company.
Regulatory risk: Telemedicine is a completely new frontier for physical therapy. Physical therapy is a market that is almost entirely dependent on health insurance reimbursement, although PHZIO is currently fully reimbursed by insurance organizations, changes to the regulatory environment that affect how telemedicine is reimbursed could be potentially fatal for eWellness.
Operating/financing risk: The Company has yet to generate any profits, and as such principally relies on raising capital in order to continue operations. Given eWellness' low cash balance, if the company is unable to raise additional funds or unable to do so at acceptable terms, this may jeopardize the company. Based on a recent 8-k, eWellness appears to be staying afloat by raising capital at reasonable terms through the sale of stock, warrants, and the issuance of promissory notes to funds and private investors.
Potential uplisting in 2017
Despite the company's current valuation, meaningful progress demonstrated over the following 8-12 months may prime the company for uplisting to a major exchange like NASDAQ in 2017. With this in mind, here are the requirements for uplisting to the NASDAQ CM:
Under these requirements, eWellness has a number of options for potentially uplisting.
With product launch expected this year, if the company is able to acquire only 50 of the 2,600 licensee target for 2020 over the following year, eWellness will generate well over $2 million in revenue which will translate to well over $1 million in pre-tax income. Although it will fail to qualify as income for the previous year, progress on this minimal level should easily drive the market value of the publicly held stock to levels that will allow for uplisting.
If the company is able to uplist, share price and the trading volume should increase dramatically from the increased visibility of the stock. In addition to the catalysts slated for this year, keep an eye out for an S-1 filing. As shown through companies such as Advaxis and Organovo, an S-1 filing often hints that an uplisting may be around the corner.
We believe the correction has created a substantial opportunity for risk-savvy investors. With a veritable well of clearly defined catalysts over the next 12 months, eWellness is poised to appreciate tremendously over this time frame, and should be strongly considered as a hidden gem for the diversified portfolio.
Catalysts looking forward
The following is a list we have compiled of all the catalysts investors should be looking forward for eWellness:
- Initiation of print advertising campaign in physical therapy magazines
- Initiation of outreach campaign to physical therapists by opinion leader Daniel Mills
- October 2016 Mid-Point efficacy data in Los Angeles university corporate wellness program
- Official launch of PHZIO product in Q4 2016
- January 2017 End-Point data results from LA university corporate wellness program
- Q4 2016 Quarterly filing indicating increasing revenue
- Potential uplisting in 2017
Disclosure: I am/we are long EWLL.
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.