BioTelemetry: Still Undervalued Despite Pandemic Headwinds
Summary
- BioTelemetry presents a strong investment case despite being in danger of finally breaking a cycle of 30+ consecutive quarters of top line revenue growth.
- In fact, the reduction in sales caused by COVID-19 has caused analysts' forecasts to become too pessimistic, I believe.
- BioTelemetry is a leader in the cardiac monitoring field with a strong range of devices and an IP protected, FDA-endorsed proprietary data analytics algorithm.
- The company's strategic acquisitions are beginning to bear fruit and the lucrative diabetes market beckons.
- My analysis suggests BioTelemetry is significantly undervalued and ought to be trading as high as $65. I remain bullish.
- This idea was discussed in more depth with members of my private investing community, Haggerston BioHealth. Get started today »
Investment Thesis
BioTelemetry 5-year share price performance. Source: TradingView
BioTelemetry (NASDAQ:BEAT) stock has suffered worse than most from the effects of the coronavirus pandemic, falling by 47% in March from a 1-year peak of $54 to $28.5, but the stock has recovered well, despite management's warnings on lower-than-expected Q2 revenues and its withdrawal of FY20 guidance. The trading price at time of writing is $46.
I believe that the stock has further upside potential to realize and that the current price and market cap undervalue BioTelemetry - a medical technology company specializing in remote cardiac monitoring - as a business.
Although management may not be providing specific forward guidance, analysts have estimated that sales revenues in Q220 will come in at around $86m, representing a 23% annual, and 24% sequential decline. Full-year revenues have been estimated at ~$430m, or a 2.2% year-on-year decline, whilst estimates of 2021 revenues are significantly higher, at ~$529m - a 23% increase on 2020.
I broadly agree these estimates based on management's bullish comments about growth in the first 2 months of 2020 before coronavirus hit, causing significant disruption to the business, but have a suspicion they are still somewhat low given what the company can achieve in the remainder of this year and over the longer term.
Pre-coronavirus, BioTelemetry had forecast, and was witnessing double-digit growth in 2020 and a significant increase in EBITDA margin, hence I forecast that growth between 2019 - 2021 may be as high as 20%, and by plugging ~9% growth between 2021 and 2025 into a DCF model we arrive at a fair value price for BioTelemetry stock >$66 when EBITDA margin is increased to 34% as per management guidance. An optimistic scenario could even see the stock break $100 in the next 18 months.
Whilst this may be a little too optimistic it serves to illustrate that at current price the company represents a buying opportunity given its diverse and progressive product lines, specialist expertise, and growing addressable market. Although I have some concerns around the company's market dynamism, I remain bullish about the company's long-term prospects since even if sales become stagnant (unlikely in my view), it would still warrant a higher valuation.
In the rest of this article I will provide further justification for this thesis by exploring the company in more detail and discussing its growth and price catalysts.
Company Overview
BioTelemetry is a very solid performer in its markets which include cardiac monitoring, centralized core laboratory services for clinical trials, remote blood glucose monitoring, and original equipment manufacturing, although the company is predominantly focused upon cardiac monitoring, earning ~85% of its revenues from this source.
BioTelemetry offers a range of cardiac monitoring services designed to help cardiologists, electrophysiologists, neurologists and primary care physicians to detect arrhythmias or heart rhythm disorders and to monitor the functionality of implantable cardiac devices.
BioTelemetry cardiac monitoring product suite. Source: BioTelemetry investor presentation Sep' 19.
These include a patient management platform that incorporates wireless data transmission and a proprietary, IP protected FDA-cleared algorithm, 24-hour monitoring centers, and a range of medical devices that include mobile cardiac telemetry ("MCT") devices, Holter monitors, pacemakers International Normalized Ratio ("INR"), implantable loop recorders ("ILR"), and other implantables.
BioTelemetry generally uses its own monitoring devices in combination with its platform which is how it generates the majority of its revenues. The company also operates a Research division which provides centralized core laboratory services, cardiac monitoring, imaging services, consulting and data management and generates ~12% of the company's revenues annually.
In January 2019 BioTelemetry acquired remote monitoring startup Geneva Healthcare for a total consideration of ~$65m, which the company sees as its route into the $1bn domestic implantable cardiac device monitoring market, as well as being of value to physicians as a means of managing data from implantable devices. Geneva's portal is additionally compatible with devices made by major Pharma companies including Medtronic (MDT), Abbott (ABT) and Boston Scientific (BSX).
BioTelemetry says (in its 2019 10K submission) that it earns around 35% of its revenues via Medicare reimbursement. The company estimates that its total addressable market ("TAM") is worth $2.5bn and claims to have the highest diagnostic yield, turnaround times and levels of patient compliance currently in the industry.
The company is led by industry veteran Joseph Capper who joined from Home Diagnostics (NASDAQ:HDIX) in 2010. The company's Chairman is Kirk Gorman, who spent 13 years at Jefferson Health System previous to joining BioTelemetry, where he was Vice President and Chief Financial Officer.
Recent Performance
Prior to Q319, BioTelemetry had posted 30 consecutive quarters of year-on-year revenue growth and the company posted 10% top line revenue growth in 2019, earning $439m, and making a net profit of $29.4m - 29% less than in 2018, with EPS declining from $1.23 to $0.67. This was put down to significant investments made by management into infrastructure which, it says, ought to result in significantly higher EBITDA margins going forward.
In Q120 BioTelemetry earned top line revenues of $113m (up 1% sequentially and 9% year-on-year) and posted net profits of $7.1m (up 350% sequentially but down 39% year-on-year) with EPS of $0.2. Management told analysts on its earnings call that the company had been on track to earn >$117m but fell victim to the economic slowdown that hit in mid-March, which reduced cardiology visits by as much as 60% in certain parts of the US, as doctors increasingly turned to tele-health models.
Performance across business lines was described as "excellent", with Mobile Cardiac Outpatient Telemetry ("MCOT") nearly reaching double-digit growth, management says, and extended Holter wear experiencing triple digit growth before the drop-off began. Geneva also out-performed during the period, with new account activations increasing 45% sequentially, whilst the research division achieved growth of 7%.
As such, management felt the company was on track for full-year revenues >$0.5bn with a 20% contribution from Geneva, which would have beaten its own forecasts of ~$483m, but now looks likely to fall well short of that figure with analysts predicting that full year sales may not exceed 2019's figure of $439m (I forecast >$450m as explained below).
Management say they expect Q220 revenues from the cardiac monitoring business to be down by 30% based on performance data from April, but also say they will be able to reduce operating costs to ensure that BioTelemetry remains EBITDA positive. Hence, in my view, provided coronavirus headwinds continue to reduce and (hopefully) disappear entirely, the company is likely to come roaring back in the latter half of the year as it meets its demand backlog, and may well surprise analysts by outperforming their somewhat gloomy forecasts, responsible for a drop in BioTelemetry's share from $47 to $40 shortly after the Q220 results were announced.
Strategy
As mentioned, BioTelemetry management is confident that it has industry-leading monitoring capabilities and that its products provide the most cost-effective solutions for clients and patients. The company sees Geneva as a key element of its future growth and has educated its 100-strong direct sales force on how to use the system, as well as adding a Geneva sales manager to cover each of its 12 key regions.
BioTelemetry is also gaining leverage within think tanks and advisory groups such as the Remote Cardiac Service Provider Group ("RCSPG") whose current President is BioTelemetry's Senior Vice President of Medical Affairs, and who in turn advocates with organizations such as the American Telemedicine Association and Centers for Medicaid and Medicare ("CMS") to secure more widespread acceptance of remote diagnostic services.
Diabetes is another very interesting area for the company to explore, given the explosive success of continuous glucose monitoring ("CGM") device makers such as Dexcom (DXCM) (my note here), Medtronic, and Abbott (my note here) and the multi-billion dollar market opportunity. BioTelemetry has launched a new division - BioTel Care - to investigate how to provide outcome-driven, data analytics solutions in this market.
A Good News Story Capable Of Delivering A Big Quarter
BioTelemetry isn't a company that generates much news flow outside of its quarterly updates, and, as mentioned, Q220 results are likely to be down significantly year-on-year - at least in terms of top line revenues.
The company was also slightly stung by a collaboration with Apple (AAPL) in 2019 (covered in more detail here) that looked promising but did not ultimately result in any further ongoing collaboration - the reason, in my opinion, for it being unable to sustain price highs of $55 after the project ended with no plans for a follow-up or extension of the work.
Whilst the company may lack wow-factor or a truly x-factor product, overall, I believe BioTelemetry is an ongoing good news story. The company is profit generating, is not burdened by debt (debt of $120m represents less than 1x EBITDA) and develops and sells market-leading technology into growing markets. The cardiac monitoring market is forecast to reach $25bn by 2024 growing at a CAGR of 3.9%, whilst the market for medical devices is expected to reach an estimated $432.6 billion by 2025, growing at a CAGR of 4.1%.
Based on fundamental analysis of discounted cash flows, BioTelemetry - by my calculation - appears to be significantly undervalued and hence it is my belief that a blockbuster quarter for the company is imminent, and may occur - if not in Q3 or Q4 this year, then certainly at some point in 2021 barring some unforeseen circumstance.
Competitors and risks
BioTelemetry operates in a congested and fragmented market dominated by regional players, but as we can see below, it is comfortably the largest operator in the cardiac monitoring field.
BioTelemetry competitors. Source: Owler.
This allows the company to dictate terms somewhat and, as it has done in the past with Geneva Healthcare, imaging service provider VirtualScopics, Swiss-based remote technology developer LifeWatch, and several others, add promising startups and potential competitors to its portfolio via acquisitions.
The biggest risks that I can see on the horizon for BioTelemetry are that it fails to build on its current promise, and is either overtaken by a smaller competitor with better technology, or blown out of the water by a much larger company entering the cardiac monitoring space.
In all honesty, I cannot see that happening in the foreseeable future given that the medical device market has high barriers to entry and it requires significant expertise to operate successfully within it. If anything, BioTelemetry is more likely to be acquired at a substantial premium to its current valuation than challenged for supremacy by a well-resourced new market entrant.
Besides these risks, BioTelemetry must make sure that its growth does not become stagnant or the company begin to rest upon its laurels, but under current management, I do not really see that happening either. As mentioned earlier, the company has grown in every quarter for the past 7 years, and as it gets larger, the growth becomes ever more meaningful and impressive.
Fair Value Price
BioTelemetry investment ratios historical and forecast. Source: my table using company historical financials and forecasts + my assumptions.
Using DCF analysis, it is not hard to present a powerful case that BioTelemetry stock is significantly undervalued.
BioTelemetry financial forecasts. Source: my table using company historical financials and forecasts + my assumptions.
Based on management's expectation that cardiac monitoring sales will be down by 30% in Q220 and using analysts' forecasts from Zacks (which I have raised slightly to $450m owing to my belief that OPEX will be shaved in Q2 and market tailwinds will be strong in Q3 and Q4), as mentioned in my intro I forecast 20% top line revenue growth between 2019 and 2021, resulting in revenues of $529m at the end of 2021 - in line with current forecasts.
Given the growth in its core market, and the momentum provided by Geneva and also LifeWatch, I forecast sales growth of 9% between 2021 and 2025 with 2025 revenues coming in at $740m - a modest increase when we consider there are other powerful catalysts such as the expansion into diabetes monitoring and the company's acquisition-led expansion.
I have been quite generous with OPEX, using the company's initial 2020 forecast that gross margins will be ~65% and EBITDA margin ~35% of revenues, and, using a tax rate of 25%, arrive at a net profit figure of $253m by 2025, EPS of $7.4 and a forward P/E ratio of 7x - implying that the price may rise as this is a very low figure. Companies in the medical equipment and supplies industry typically have ratios >30x.
The 2025 free cash flow I estimate to be $300m, and using a WACC of 13.4% (expected market return is as high as 12%) and beta of 1.23 I arrive at a firm value of $2.24bn and a fair value price of $66.
Conclusion
BioTelemetry may not be the most glamorous of companies but what it may lack in dynamism it more than makes up for in consistency of recurring revenues, strength of business model and market share dominance, in my view.
I hope I have demonstrated that the stock is fundamentally undervalued by many measures and that, despite the hit to its revenues in Q120 and probable hit in Q220 there is no doubt that this can be put down to the "black swan" event of the coronavirus pandemic.
Additionally, the company has put the "disappointment" of its Apple trial - which promised much but ultimately delivered little of value to the company - firmly behind it, absorbed the share price hit, and continued to go about its business. If is far from inconceivable that BioTelemetry could agree a similar partnership in due course as health monitoring is an industry that the GAFA companies and other technology giants see as a complementary long-term target, eyeing, for example, opportunities within cloud computing, AI, and electronic medical records
I feel that BioTelemetry is capable of springing a surprise with a stellar set of earnings in the short-to-medium term. It may be that, if Q220 results disappoint, the share price takes a further short-term hit, hence investors may wish to wait for a lower entry point.
Personally, I believe the best option with BioTelemetry is to take a position sooner rather than later, since the company's comeback trail is clear for all to see, and yet, where the market is concerned, it appears to be hiding in plain sight.
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This article was written by
Edmund Ingham is a biotech consultant. He has been covering biotech, healthcare, and pharma for over 5 years, and has put together detailed reports of over 1,000 companies. He leads the investing group Haggerston BioHealth.
The group is for both novice and experienced biotech investors. It provides catalysts to look out for and buy and sell ratings. It also provides product sales and forecasts for all the Big Pharmas, forecasting, integrated financial statements, discounted cash flow analysis and market by market analysis. Learn more.Analyst’s Disclosure: I am/we are long DXCM, ABT. 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.
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