SMLR - Semler Scientific: Profitable Medical Device Microcap Falling Before Q1 2023 Earnings

2023-05-09 13:38:59 ET

Summary

• After running up over a period of years to >$150, Semler has settled way back as Q1 2023 earnings approach on 05/10/2023.
• Semler enjoys strong profitability metrics with questionable growth.
• Semler's business has struggled to grow product revenues; breakthroughs are possible.
• Medicare issues are potential concerns.

This is my inaugural article on Semler Scientific (SMLR) a microcap medical device company that is working to capitalize on its QuantaFlo device. In this article I review the pros and cons of investing in this interesting company.

Semler shares have rewarded its shareholders well over the years, despite a recent pullback

Semler closed its IPO in 2014 raising a total of ~$10 million. It issued about 1.4 million shares at $7 a share. Its raise was at the lower edge of its anticipated range of $10-15 million.

It has travelled a long way since its IPO as reflected by its price chart below:

Despite its big pullback from $150, its current price of >$25 as I write on 05/07/2023 represents a multi-bagger from its IPO price of $7.00. Why it was so favored is a big mystery. A check of Seeking Alpha's news feed during 2018-19 when Semler's shares rose from its 12/31/2017 close of ~$8.00 to its $48 close on 12/31/2019 reveals no apparent causative factor .

As 2020 progressed Semler's price continued climbing gradually higher. It reached the low $90's as 2020 closed out. It traded >$100 for much of 2021. In 09/2021 Semler took a big step forward when it advanced from trading as a bulletin board stock [OTCQB] to trading on The Nasdaq Capital Market with the trading symbol "SMLR". CEO Murphy-Chutorian advised that the move would:

...enhance liquidity of our shares and to enable the expansion of our stockholder base.

Prior to the announcement, Semler traded towards the low quadrant of a range of $100-$120 with daily share volumes in a general range of 5-50 thousand shares. After it moved to NASDAQ capital markets it traded to its zenith of $153.21 on 10/29/2021 with meager volume of ~48,000. From that point its price declined in big chunks as shown on its chart above until it reached its 05/07/2023 price of ~$25.50.

Seeking Alpha ratings summary panel for Semler is all green

Semler's summary ratings panel is a thing of beauty for Semler bulls. All three ratings are "Buy" except for Wall Street Analysts which are "strong buy":

I always like to drill down a little bit on the quant rating to check out the underlying metrics and to assess how they jive with the fundamentals. In Semler's case, its factor grades again show mostly green with only one yellow in momentum to speak towards a possible future autumning of its performance:

The important grades for Profitability (A+) and Growth (B+) always draw my attention. As accessed on 05/06/2023, Semler's metrics underlying its profitability factor grade are pristine. A report card to die for - of the 13 grades given 7-A+, 3-A, 2-A-. Only a single C to mar the report, that in the ratio of CAPEX to sales.

It comes in at 3.81%, against 4.69%, the sector media for the 1171 stocks that Seeking Alpha tracks in the healthcare equipment sector. This ratio measures a company's capital expenditures per sales dollar. A bull might interpret it as a salutary signal that Semler is being thrifty. A more dour interpretation would be that the company is not investing appropriately for its future.

As for Semler's B+ growth factor grade, its supporting metrics are inconclusive. Of its 19 entries, only 9 have grades assigned. There are a smattering of diverse grades ranging from an A for CAPEX growth to D+ for EBITDA and ROE growth.

In sum, Semler's metrics for profitability are top notch, for growth far less so. It is reporting Q1, 2023 earnings after close of market on 05/10/2023. This report should help evaluate its future growth potential.

Semler has filed a series of 8-F's after its Q4,2022 earnings report. They start with Semler's 03/31/2023 8-F :

...As previously announced, on March 21, 2023, the board of directors of Semler Scientific, Inc., or Semler, appointed Wayne T. Pan, M.D., Ph.D., and current member of the board, as Semler's chief executive officer and president, effective April 3, 2023.

Accordingly, on March 29, 2023, Semler and Dr. Pan entered into an executive employment agreement in connection with his appointment as chief executive officer and president as of April 3, 2023. ...

On 04/06/2023, it filed an 8-F confirming that on 04/01/2023 Semler and its former CEO Dr. Murphy-Chutorian entered into a separation agreement and release. On 04/17/2023 Semler filed an 8-F signed by Dr. Pan as CEO advising of its presentation (the " Presentation ") in connection with the 22nd Annual Needham Virtual Healthcare Conference.

On 04/18/2023 Semler filed an 8-F , again signed by Dr. Pan advising of several arrangements impacting two >5% shareholders and modifying the size and make-up of its BOD. It also advised the deal included non-disparagement and no-litigation provisions.

On 04/28/2023 Semler filed yet another 8-F , this time signed by Dr. Murphy-Chutorian as CEO. It advised:

On April 27, 2023, Semler's board of directors, or the Board, appointed Douglas Murphy-Chutorian, M.D., former chief executive officer and president and current Class III director, as interim chief executive officer and president and as Semler's principal executive officer, effective April 27, 2023. The Board is planning to conduct a global search for a permanent chief executive officer.

Wayne T. Pan, M.D., Ph.D. will no longer serve as chief executive officer and president, and as Class I director, of Semler, as of April 27, 2023. As contemplated by Dr. Pan's employment agreement dated March 31, 2023, he will (i) continue to receive his base salary as though he remained employed for the initial 12-month term of his employment ...

As I write on 05/06/2023, the latest available 8-F was filed 05/02/2023. It advised of the retirement of Semler director Cindy Moon. The announcement indicated that her resignation did not involve any disagreement on any matter relating to Semler's operations, policies or practices.

Semler's legacy product portfolio has had modest market success

The Presentation slide 5 below describes its two QuantaFlo products:

Its legacy QuantaFlo PAD device was introduced to the market in 2011. It has had >10 years to establish its market niche. Its QuantaFlo HD was introduced in late 2022 and was not expected to add to 2022 revenues. During its Q4, 2023 earnings call (the " Call"), it guided for Q1, 2023 revenue in a range from $17.4 million to $17.8 million.

This is a bump in expected revenues of $3.6 million, ~25%, at the centerpoint of the guided range compared to Q1, 2022's revenues of $14 million. Semler did not break down its revenues in its guidance, nor does it do so on its 2022 10-K operating statement excerpted below:

Its aggregate 2022 revenues of ~$56.6 million for a medical device that has been on the market for > 10 years is unimpressive. This is particularly so when you consider the apparent attractions of its business opportunity as described in Presentation slide 11.

Slide 11 calls out the following:

1. more than 400K medical professionals practicing primary care medicine in the U.S;
2. estimated 80+ million people in U.S. who, based on AHA/ACC criteria could be tested;
3. 64 million age 65 or older, with 10,000 people in the U.S. turning 65 every day;
4. of these 80+ million: -28 million are Medicare Advantage, 36 million are Medicare.

If Semler could get traction in this market, its growth concerns would be a thing in the past. Its guidance of a 25% growth for Q1 is certainly encouraging in this regard.

Semler's QuantaFlo PAD device 2023 revenues are unsure

While providing its Q1, 2023 guidance during the Call, Semler declined to provide full year 2023 guidance. Speaking through its Head, Corporate Communication and Business Strategy, it reported:

...CMS issued an advance notice with proposed payment updates for Medicare Advantage programs for 2024, which included some potential changes to treatment of vascular disease under the Medicare Advantage risk adjustment model, creating uncertainty whether all identified patients with PAD will continue to qualify for an increased capitated payment.

She went on to advise of Semler's conviction that:

...QuantaFlo provides important clinical value to our customers in terms of better patient care and potential for future cost savings and identifying positive PAD patients and those with HD. We believe that earlier diagnosis will lead to earlier initiation of preventative intervention and treatment which will save lives and consequently lower health care expenditures.

Nonetheless, citing CEO transition and the anticipated final CMS rate announcement, she held off providing full year guidance. On 04/03/2023 CMS removed screening for peripheral artery disease (PAD) without complications from the Medicare Advantage risk adjustment mode. It knocked Semler's shares down 10%.

Conclusion

Semler's upcoming earnings call will be interesting. What guidance will it issue? Will it feel comfortable in its future to guide beyond Q2, 2023? What breakdown, if any, will it give between QuantaFlo HD and PAD?

If it guides for Q2, 2023 over Q2, 2022 quarterly growth anywhere close to 25%, I will consider it extremely bullish. I am not optimistic. Despite its insistence that QuantaFlo paves the way for better patient outcomes, I am unconvinced.

I am more of the mind as reflected in this comment to a Semler news item on Seeking Alpha:

For further details see: