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Should Investors Consider Semler Scientific? A Deep Dive with Adu Subramanian

In this week’s podcast, 7investing lead advisor Luke Hallard catches up with health tech expert investor Adu Subramanian to chat about Semler Scientific (NASDAQ: SMLR) -- an exciting $300M healthcare technology business that’s rapidly becoming the standard of care for diagnosing peripheral arterial disease (PAD).

March 8, 2022 – By Samantha Bailey

In this week’s podcast, 7investing lead advisor Luke Hallard catches up with health tech expert investor Adu Subramanian to chat about Semler Scientific (NASDAQ: SMLR) — an exciting $300M healthcare technology business that’s rapidly becoming the standard of care for diagnosing peripheral arterial disease (PAD).

PAD is a condition that affects nearly 20 million Americans, yet it’s estimated that only 25% of cases are diagnosed, resulting in costly interventions, and impacting the quality of life for patients.

The company received FDA approval for its innovative product, QuantaFlo, in 2015, and today revenues are growing via a unique distribution model of selling directly into insurance companies.

In this fun and lively interview, Adu shares his investing thesis for Semler Scientific, breaking down the business model, the incentives for doctors, insurers and patients, and the key financials and investment risks.

Adu Subramanian can be found on Twitter @AduSubramanian, or you can read his full investment thesis at his substack, Medtech and Microcaps.


Luke Hallard  0:09

This is Luke Hallard, Lead Advisor at 7investing, where it is our mission to empower you to invest in your future. We do that by providing monthly stock recommendations for our premium members and educational content that’s freely available to everyone. I joined the 7investing team two months ago, but prior to 7 investing I ran a weekly investing podcast with a close buddy Albert. I’ve been really keen to get back into the podcasting seat. So listeners, I’m hoping you’re going to hear a lot more from me over the next few months. I’m kicking things off by reconnecting with a fantastic guest that Albert and I hosted last August on our old podcast and I’m delighted to bring into the 7investing audience. 7investing, welcome to Adu Subramanian.

Adu Subramanian  0:53

Hey guys, how’s it going?

Luke Hallard  0:54

Adu, it’s really great to connect. Great to see you again looking so youthful and virile and I understand you’re in a bit of a crazy time in your own life right now. What’s going on for you?

Adu Subramanian  1:03

Yes, I do undergraduate at UC Berkeley studying bioengineering and applying to med schools, and those applications are getting started now. The first ones are due in May. So it’s a little bit of a crazy time trying to get those applications in trying to do all my schoolwork at the same time researching stocks.

Luke Hallard  1:20

Hey, we really appreciate you taking some time out of that busy schedule to join the podcast. I hope you’re not jeopardizing your future by chatting to us.

Adu Subramanian  1:27

I might be but at least I do it for something fun.

Luke Hallard  1:31

So you’re, as you say, you’re a keen investor as well as being a med student. How did you get into investing?

Adu Subramanian  1:37

Sure. When I was in high school, my dad gave me some money to play around with for my 17th birthday as senior. I started off just investing in all types of stocks, mainly big tech, things like that. And I really did not know what I was doing. Once I got into college, I found the undergraduate Investment Club. And that was a group of students who are mainly business majors who like talking about stocks, liked investing. And from there, I just naturally grew as an investor just taking time to do more research.

Luke Hallard  2:07

We found you originally by reading your Substack. And I think you came on to the Telescope Investing podcast to chat about a company. I’m still a super fan of Intuitive Surgical. But I see you’ve been looking into a whole bunch of other med tech stocks over the last few months.

Adu Subramanian  2:22

Yep, that’s exactly right. I focus on med tech simply because that’s an exciting thing for me to look at. If you put me in front of a SEC filing of a 10k that’s an oil and gas company, I will fall asleep. You know, right before I go to bed, that’s the stuff I read. Barron’s for med tech? I could stay up and read those. And this just gets me excited.

Luke Hallard  2:40

Fantastic. And we’ve got a couple of lead advisors on the team who are really close to this topic. I really should have invited Maxx or Dana on to give you a proper grilling, but you’re going to get an amateur grilling from me today. And I think we’re going to chat about a company that you’re a fan of: Semler Scientific.

Adu Subramanian  2:55

Yes. Semler Scientific. It’s one of my favorite businesses. It’s had some rough times recently, but I still like the company, so like the major tailwinds is playing into and I’m glad we’re gonna be chatting about today.

Luke Hallard  3:05

So why don’t we kick things off? Why don’t you tell us who Semler Scientific are and what they actually do?

Adu Subramanian  3:09

Sure. Semler Scientific is a medical device company with one flagship product called the QuantaFlo. QuantaFlo is basically a test for peripheral artery disease, a chronic disease of the blood vessels

Luke Hallard  3:22

And tell us a bit more about peripheral arterial disease. Who gets that?

Adu Subramanian  3:26

Sure. A peripheral arterial disease, or PAD, is basically a disease where plaque builds up in your arteries and blocks blood flow to your limbs, mainly your feet and your fingers and things like that. And it’s usually a precursor for much more severe complications such as stroke, heart attack, amputations even. PAD comes in multiple forms of severity, it can come in mild, moderate and severe cases, with each level of severity indicating an increased amount of blockage. The main risk factors for PAD are age and lifestyle factors. So age is the predominant risk factor. If you’re over 65, your risk of PAD is much higher than if you’re under that age. Plus, smoking and obesity are two huge contributors to getting PAD. Anything that might predispose you to have a heart attack or plaque buildup will likely predisposes you to have PAD.

Luke Hallard  4:19

When I read your Substack, I think you said anyone over the age of 50 and you got me worried. I turned 52 months ago, have I got an elevated risk factor for PAD now?

Adu Subramanian  4:28

So that’s the thing, if you’re over 50 and you had other lifestyle conditions like you’re a smoker, you would be at risk for PAD. Luckily, you’re not that camp. So I’m guessing you got a long ways to go.

Luke Hallard  4:37

Thanks, man. But you made me very happy, although this is a condition that’s close to my heart. So I’ve got a family member who has Type 2 diabetes, and he’s got some leg pain as well. So this space in this company is a topic I’m really personally very interested in.

Adu Subramanian  4:51

Yep, exactly like pain or claudication is actually one symptom of PAD even though 50% to 80% of PAD is asymptomatic. For those that do have symptoms, pain is the one that shows up

Luke Hallard  5:03

What’s actually happening with PAD before we get into Semblar. What’s actually happening inside the body?

Adu Subramanian  5:08

Plaque is basically something that can block your arteries. It is made up of calcium and poor lifestyle choices. Usually a bad diet, something like that can narrow your vessels can lead to plaque, getting caught on the sides of those vessels, and progressively building up over time. Imagine plaque as dirt. And whatever lifestyle factors you have are just shovel piling dirt onto this pile, until eventually it gets large enough to block your vessels. And then that becomes a big issue because that’s quite literally a heart attack or needing an amputation.

Luke Hallard  5:42

I know Semler more in the diagnosis phase. But what does the patient do if they have been diagnosed with PAD? What kind of therapies can they have?

Adu Subramanian  5:51

Sure. So for early stage PAD, the therapies are usually behavioral. If you can get somebody who say 50 and a smoker to stop smoking, get out there walking some more, eat a little bit healthier, that’s actually huge intervention to make them live longer to put off any type of surgical care, any type of acute care that might need hospitalizations for late stage PAD where the blockage is severe. There’s a couple of options that are standard of care right now, which are atherectomy, which is basically using a blade to remove the plaque, or stenting, which is using a balloon to open up the vessel, a new treatment, you were actually telling me about this from shockwave medical where they use sonic waves to break up the plaque. And that’s seen some interesting use cases and PAD recently as well.

Luke Hallard  6:36

And it does seem that this is a pretty widespread problem, especially I suppose with the obesity epidemic in the Western world, I guess, increasingly, adults are at higher risk or actually having various levels of severity of PAD.

Adu Subramanian  6:50

Yes. So estimates can put it anywhere from 8 to 20 million Americans have PAD, and that’s for the entire population, though it is concentrated in people who are over 55 over 65 people with risk factors such as obesity, which 36% of adults are obese, and 10% of people smoke who are over 65. So that’s quite a few number of people.

Luke Hallard  7:14

But this is probably a good way to segue into Semler Scientific themselves. And as I understand it, they’ve got a fairly revolutionary test for PAD.

Adu Subramanian  7:23

Yes. So the standard of care testing for PAD is what’s called an Ankle Brachial Index; they basically put a blood pressure cuff around your leg and around your arm, and they’ll measure the blood pressure going into your leg in your arm, and they’ll say, hey, if the pressure is lower in your leg, that means that blood flow is being blocked, that means you have PAD. What Semler does is instead of using a blood pressure cuff, it uses a little finger clip, and it puts it onto your finger or your toe, and it can test how much blood flow is being blocked. The ABI or Ankle Brachial Index requires specialized personnel or referral to another facility, along with other types of interruptions to the workflow. Whereas QuantaFlo is a five minute test that can be plugged into an iPad, and done pretty much anywhere. There are other similar tests to Semler, but the way I’ve understood it, and from my market research, the QuantaFlo test is the easiest to use, and the most user friendly.

Luke Hallard  8:18

And then that does seem to be a key when it’s easier for a nurse or a doctor to administer the test, then that can be done far more cheaply and more conveniently for the patient, rather than the inconvenience of having to book a specialist technician to do the Ankle Brachial test,

Adu Subramanian  8:33

Exactly. Imagine if you walk into your doctor’s office, and they say, Hey, we want to test you for PAD. In the old times with an ankle brachial index, they’d have to either have somebody specialized in the clinic with this equipment to things like that, or they could send you out for a test on a later date, and that’s a hassle. With QuantaFlo, you can come in and take the test, the doctors need to have to administrate it, any type of nurse practitioner can administrate it. And you could do it all in the same day. Eventually, similar wants to be able to both take and read the test within one appointment, you know, get a diagnosis for PAD, and then suggest treatment all within the same appointment.

Luke Hallard  9:10

So it’s cheaper, it’s faster, it’s more convenient. Is it giving the same outcomes as the regular test?

Adu Subramanian  9:15

Yes, in fact, the studies that similar is done and other customers have done show that testing with the QuantaFlo leads to the same accuracies Ankle Brachial Index, and can in some cases, in small percentage of cases be more accurate.

Luke Hallard  9:30

And where’s the wheel slots. So there’s a device and then there’s a bunch of software as well is that the sort of entirety of what it is that they’ve created.

Adu Subramanian  9:37

The interesting part about similar is that they sell the device at cost, meaning that they don’t make any profit off of that. But they sell the software and make all of their profits off of the software leading to high gross margin. That’s interesting.

Luke Hallard  9:48

So it’s kind of aspects of being a bit of a SaaS like model, but there’s a bit of an upfront investment by the hardware.

Adu Subramanian  9:54

They sell the QuantaFlo in a couple ways they can either do it all for a per test fee of about $40 or they can license it to a clinic for a monthly rate of about 400 per month. Patti,

Luke Hallard  10:03

Who are Semler’s customers?  Is it just the doctors?

Adu Subramanian  10:07

No. So their major customers are actually insurance companies. And the reason why is because somewhere plays into a market called the Medicare Advantage market. Basically, Medicare Advantage means that insurance company gets a monthly fee to care for a patient. So let’s say Medicare, instead of paying for every service that a patient gets Medicare will pay United Health Care, let’s say $10,000 a year to United Healthcare for all of the care required for a patient. That means that patient goes the hospital, the United Healthcare has to pay all of that, but they still only get $10,000 from Medicare patient does not go to the hospital, they still get $10,000. At the end of the day, it’s up to United Healthcare to make their profits. However they choose to do. That’s how the Medicare Advantage plans work. Medicare pays insurance companies on a per member per month or per member per year basis for the entirety of caring for that patient.

Luke Hallard  11:02

And I won’t pretend to understand the intricacies of the American health care system. But that sounds quite sensible. It’s going to encourage the right kind of incentives, and hopefully not over treat patients just to generate revenue for hospitals.

Adu Subramanian  11:15

Exactly. So the incentives intended for Medicare Advantage or to shift care into this thing called value based care. And I’m guessing people have heard about that, in terms of, we used to have this thing where fee for service where every time you got something done, you get paid every time you get a treatment, you get paid. Whereas now if you go to Medicare Advantage, this value based care where you get a lump sum payment, and with that lump sum payment, you have to encompass all the care that you need to do wonderful works really well for this for an insurance company for two reasons. One, if you can diagnose PAD early, you can prevent those severe complications later, which are costly. So taking a walk or eating healthier is a lot cheaper intervention than doing atherectomy Or putting in a stent or any type of surgery like that. So if you can prevent or delay those complications by a long time, it’s really useful to test and diagnose somebody with PID early. The other aspect of diagnosing PAD early is actually something called the risk adjustment factor. Medicare Advantage pays a set fee to insurance companies for caring for a patient. But that set fee can be different based on the patient. So say, you have somebody like Luke who’s healthy, doesn’t have lots of comorbidities, his risk factor is low. So UnitedHealthcare get paid, let’s say $10,000. Let’s say there’s somebody else who has a lot of comorbidities, who’s, let’s say older, who’s maybe obese, who maybe has PID, then United Healthcare might get paid $20,000 a year to care for that patient, the risk factor adjustment for PAD is $3,000, a year from Medicare to United Healthcare. So if you have a patient with PAD, that means the United Healthcare gets paid an extra $3,000 to care for him because PAD is associated with these more complicated conditions, and more complicated events, that will lead to higher costs of care.

Luke Hallard  13:06

I kind of see the virtuous circle coming together now because it’s good for patients if they have PAD that they get diagnosed, because then they can then get treatment. And if they do that early enough, the treatment is go for walk and stop eating hamburgers, as opposed to get a heart bypass. It’s good for insurance companies and doctors because the insurers save money because they’re having to deliver less expensive treatments. And then finally, insurance companies get paid more because they’ve diagnosed the patient as having pad, they can get the extra 3000 bucks that they wouldn’t have if the condition was undiagnosed. ,

Adu Subramanian  13:40

Yep, that’s exactly right.

Luke Hallard  13:42

So you mentioned that it’s quite innovative that Semler sell directly to the insurer, is this quite unique? Did they invent this business model?

Adu Subramanian  13:51

I don’t know about invented but it’s certainly the foremost example of it that I can think of most medical device companies sell to doctors sell to clinics, the people that are ultimately using the device, but selling to the insurance company does a couple things. We already said they had high gross margins, the high 80s, low 90s Because they sell software. But they’ve also have really high operating margins, because they don’t have the large marketing expenses. That’s because once they sell into an insurance company, it’s the insurance company’s responsibility to basically roll that out to all their clinics, and roll it out to all their patients similar doesn’t have to sell it to every single doctor in the US, they only had to sell it to a select few number of insurance companies. So then those insurance companies basically do their marketing for them.

Luke Hallard  14:38

Yeah, that’s interesting. I guess they must have a very efficient sales and marketing operation.

Adu Subramanian  14:42

Yes, they do. Last year’s net income margin was in the 20 to 35% range for a company that’s growing at the rate of similar and as a small assembler. It’s something that is unseen. Usually companies with high margins like that are mature, or they’re super large, and they just Some sort of scale, such as Intuitive Surgical, Intuitive Surgical maturity has reached margins where they can have 20 to 30% EBIT margins operating margins were similar is a less than $500 million company. And they’ve achieved this type of margin already.

Luke Hallard  15:17

So why don’t we explore the incentives for the different players in this space a little bit, and perhaps start with insurance companies? Why would an insurance company choose Semler?

Adu Subramanian  15:26

Sure, like I said before, Semler is the most friendly and easiest to use device on the market. But if you look at the return on investment that the insurance company will get, multiple numbers have been put out there, I’ve heard numbers of 50 to 100 times ROI. But that type of ROI only comes from if you can prevent severe treatment, and you can prevent severe treatment, that means that you’re saving 1000s of dollars, if you choose to use just the risk adjustment factor, let’s just look at that, let’s say the insurance company tests for PID, and they get an extra $3,000. For a positive patient of that the requirement for the insurance companies, they have to spend 80% of that caring for the patient, meaning they have $600 left in terms of profit for $40 test, that’s a pretty high ROI, if the prevalence of people that you’re testing is 30%. So that ROI could be really high, especially in high risk populations.

Luke Hallard  16:22

What we like to look at total addressable market. And I think you’ve already given us a sense that this is a very widespread problem in certain demographics. So what does the TAM look like for QuantaFlo?

Adu Subramanian  16:33

I would put the term into two separate buckets. So there’s the first bucket, which is everybody that the American Heart Association recommends be screened. And that’s a total of 80 million people, which is huge. Selmer’s testing nowhere near that number today. But the more immediate TAM which is what I like to look at, is the Medicare Advantage population at risk or PAD. Currently, there are 25 million people in the Medicare Advantage Program, and of that I’d estimate about 20% are high risk for PAD. That’s people who are over 70. That’s people who are smokers. That’s people who are morbidly obese with Type 2 diabetes. 20%, about 6 million of those people are at high risk for PAD. At 6 million people, and $40 per test, that TAM is about $250 million. So that means Semler’s about 20 to 25% penetrated into their core immediate addressable market is how I characterize that

Luke Hallard  17:30

They’ve got other markets open to them as well, right?

Adu Subramanian  17:33

Yes. So this 25 million Medicare Advantage patients doesn’t account for the other 35 million Medicare patients. It doesn’t account for anybody who’s in that 50 to 65 age range, have these risk factors. And that’s how we get up to that 80 million person test, total addressable market.

Luke Hallard  17:51

And as we think about their addressable market, I guess today, they’re a bit of a one trick pony. They’ve got this one device, and I understand it’s patent protected. But that patent expires in 2027. Was in the pipeline? What does the future look like for this company?

Adu Subramanian  18:05

Sure. So one of my favorite things about this company is the levers they might have with insurance companies. But I was talking to a recent med tech founder, actually, who’s from the Bay Area. The hardest part, he said, of any med tech startup or any biotech startup, is it the technical aspects, oftentimes, once you have a clinical issue, and you have a basic idea for device, building, that device takes time, but it’s pretty straightforward. The hardest part is taking this engineer taking the somebody who’s focused on product, and turning them into a salesman, selling the product, into clinics, selling the product into insurance companies getting reimbursement, anything like that. What I like about Semler is that they’ve already built those relationships. They have relationships with insurance companies, they have relationship with clinics, they can extend that to early stage, innovative device companies to accelerate their growth and kind of cross that chasm from having a product into having serious revenue growth.

Luke Hallard  19:04

I had a really nice quote along that line, actually, from my 7investing colleague, Dana Abramovitz, we were chatting just the other day about a different medical device manufacturer. And she said exactly the same thing. She’s worked in this space and she said health tech moves at the speed of trust. If you’ve got those relationships, that really opens doors, Otherwise it’s very hard to, I think as you’re saying, to get a new device to market.

Adu Subramanian  19:30

Yes, it is really hard. I mean, if you’ve ever interacted with a doctor and tried to get them to change practice? It is not an easy thing to do at all. And insurance companies are not in the business of losing money. They need to make sure something works before they use that device.

Luke Hallard  19:46

Semler has a strong leadership team and they’ve got those relationships in place. Do we know yet what their new product ranges look like?

Adu Subramanian  19:54

Sure. So they’ve introduced two new products. One of them is for diabetes, and the other one is for Alzheimer’s. (Inaudible) Alzheimer’s one first, but that’s a little bit more speculative, they’ve made an investment into a company that makes a blood based test for Alzheimer’s. The company is called SYNAPS Dx. And the test is called DISCERN Dx. And the test is for biomarkers that could be early biomarkers of Alzheimer’s disease, as I do more research and as DISCERN Dx gets farther into commercialization, we should learn more about it. It’s interesting test. But I’m still unclear on the utility of it. The other product that they’ve invested is something called Insulin Insights from Mellitus Health. This Insulin Insights is basically a software that can be used by primary care physicians to dose insulin for diabetic patients. Now, here’s where it’s interesting is that I actually don’t really like the way they’re going about introducing this new product. I think that their leverage is introducing new diagnostic products to Medicare Advantage populations in their core customer base. Mellitus Health is a product for the general population of Type 2 diabetics; those guys and girls aren’t always older than 65. They aren’t always in Medicare, or Medicare Advantage. Plus, as a treatment is a completely different paradigm, rather than a diagnosis. If they had introduced a diagnostic product for chronic condition, it would fit much nicer into their core competency and their customer base. It is an interesting software, and I do think that it could we accelerate growth, even if it’s not the direction I’d like to see them go in.

Luke Hallard  21:33

Yes, interesting, isn’t it? I suppose when you see a company exploring new product area, it’s perhaps easy to consider that, okay, call option, some optionality around the stock beyond the existing revenues and growth. But actually, there’s a really small company, they could get distracted and lose focus on their core market. And so exploring other avenues might be a drag if there aren’t significant synergies with the business they’re doing already.

Adu Subramanian  21:57

Exactly. That’s why I’m not a fan of the recent move. But, you know, what do I know, I agree with your assessment that new products can really accelerate growth. But they can also be a drag on overall operational results. If the margins aren’t as high, and you spend a lot of money trying to sell them. They are also developing an internal product. And we should get more info on that later in the year. But they’ve played it close to the chest very good.

Luke Hallard  22:21

But those new product lines aside, this is still a company that’s making earnings with great margins. And they’ve got very strong growth, should we dig into the financials and bit more detail?

Adu Subramanian  22:31

Let’s do that. So we already talked about their margins in terms of a 90% gross margin, because there’s basically selling software, and they can, at scale, I would expect 30 to 40% net margins, because they don’t have lots of selling expenses. Their revenue growth has historically been a 30 to 50% range, but in fact, in the recent quarters has slowed pretty dramatically. And next year, they’re only expecting in that 15 to 20% growth range.

Luke Hallard  22:59

That’s interesting to explain why they’re forecasting such slower growth.

Adu Subramanian  23:03

The recent growth was explained away by seasonality, as their main customers did most of their testing for the year earlier in the year, instead of delaying it till later in the year. Zooming out a little bit, their past two quarters have been have not been great. But their year over a year growth since 2019, it has still been about 28%. So it’s as bad as one would expect. The other thing is going forward, you’ve seen numbers, indicating growth might slow to that 15 to 20% range, or maybe even as low as 10 to 15%. The reason growth may slow to that 15% range is that they’re kind of past testing all the low hanging fruit. So you have at the bottom a bunch of people that you should test, they’re smokers, there’ll be they’re older than 65, boom, we have to test these people, they’re at high risk. But each incremental patient has less of an incentive to test them because they have a less risk of PAD. So you’ve kind of hit that low hanging fruit, or high risk or PAD. And maybe they’re seeing growth slow, simply because they need more clinical evidence that the test will diagnose high rates of PAD. And there isn’t as much clinical evidence as you’d like, in terms of who is at high risk and the effects of having PAD on mortality, or other severe complications.

Luke Hallard  24:20

That is interesting. Is there any recurring aspects of revenue? I guess, once you get tested? Do you have to come back and get retested a couple of years later to see if you’ve moved up in the scale and perhaps into having an actual pet diagnosis?

Adu Subramanian  24:33

Yes. So if you have a severe diagnosis, obviously, you’re going to probably are going to get knee surgery and you’re probably not going to need the test again, simply because you know, that you’ve gotten surgery, you have PAD, you know, it’s an issue. If you have a mild diagnosis, you’re probably going to want to get tested every year, especially if you’re mild to moderate. So then you can understand the disease progression. And you know, are you doing better? Are you doing worse do we need to move to surgery? So there is a recurring revenue aspect for most of these patients who fit in that mild to moderate category.

Luke Hallard  25:04

So you’re an investor in Semler. How did you feel about that guidance? Certainly, if I was invested in a SaaS company and revenue growth or decline to 15%, or perhaps you’re getting quite concerned?

Adu Subramanian  25:15

Sure. So my immediate thoughts were of concern, I was like, Oh, my God, we are slowing revenue growth? Is it competition? Is it this? Is it that? A lot of thoughts running through my head. However, when I zoomed out, where I really went back to was that immediate addressable market, is that I know that we should be testing 6 million people for this disease, those people are at high risk for this disease. And that’s a $250 million market, if seller can capture half of this, they can get to $125 million in revenue based on their core product with those net margins that they have this would put them at, let’s say, $4 to $5 in EPS, and for mature medical device company, this puts them at a 12 times price to earnings ratio. And that’s really low. If you look at mature medical device companies, they usually trade that 20 times range, which I would expect to be fair for similar, if you will, three to five years out. The other thing which kind of allayed some concerns was a recent study published by similars largest customers in collaboration with the Yale School of Medicine, looking at PADtesting in Nevada, they tested less than 50,000 patients in Nevada using quanta flow. And they found about 30% of those patients had some sort of PAD, and having PAD led to maybe a 50 to 100% increase in the rate of severe complications within a year or two years. That data was what we needed to re accelerate growth, and highlight the need for pod testing for their core business.

Luke Hallard  26:52

So essentially, this is just a little bit of a new business and insurers in the market are still kind of figuring it out. And you think that there’s huge latent growth out there? And if the business model stacks up, there’s a significant upside on the stock from his valuation of what $340 million today?

Adu Subramanian  27:11

Yes, exactly. I think that they have ample cash on the balance sheet to support any type of valuation. They’re a profitable company, still growing in a large market with a grid device and strong relationships with customers, I would believe that there’s a floor on the valuation is currently trading at 25 times PE, which is about right for a mature medical device company. And similar, in my opinion, is still a growth II type cup.

Luke Hallard  27:36

We’ll look.  Call me intrigued; it is an interesting company. Let’s explore the risks a little bit before we wrap things up. What could go wrong here?

Adu Subramanian  27:43

Sure. So the main risk that people have focused on is cuts to the Medicare Advantage market, there was a recent report released from the Office of the Inspector General, basically saying that insurers for Medicare Advantage were being paid too much. They were risk adjusting too much. And that practice needs to be cut down. There’s also been articles about how Semler specific code and some of their specific tests for vascular disease has been over tested. But the articles saying that we’re over testing for PAD aren’t accounting for innovation, they’re still using the legacy Ankle Brachial Index, and that large interruption to workflow to justify this overdiagnosis thesis. Whereas in the other report from the officer of the Inspector General, that report specifically looked at adjustments, meaning that this looked at insurance companies going into patients charts, and retro actively trying to risk adjust kind of data mining rather than diagnosing patients with conditions. So put those two together. I do think that Medicare Advantage, and value based care is a trend that can’t be stopped, maybe slowed, but it won’t be stopped in the long term. And silver scientific is a good place for that trend,

Luke Hallard  28:53

Any other key risks that you’re tracking as an investor yourself?

Adu Subramanian  28:57

Sure. So we mentioned the less incremental ROI for additional patients and you can kind of see them hitting that wall. Now, as they go forward, it’ll become more difficult to test those patients. But like I said, laying out those numbers, the ROI is good enough for a sufficiently large population. Another risk you could see is competition. And there’s certainly other devices out there that do you know, simple PAD testing, similar kind of wins because their relationships and the ease of use of their device I see one device has been mentioned as a foe is Medtronic. That one is similar to Semler devices that measures peripheral blood flow, but it’s mainly meant for the operating room. Another device that’s been mentioned is pad det. PADnet and PADnet Xpress. PADnet it’s been around for 20 years. And it is a pretty clunky device and hasn’t seen a lot of growth. They recently introduced a new one called the PADnet Xpress, which looks almost exactly similar to Semler. However, that one’s not FDA approved yet even though it is on the website. One other risk I’d add is Management Risk here in terms of introducing new products. If they don’t introduce synergistic products, they could destroy value from the core business while going on adventures that are not needed extravagant adventures that are value destructive rather than value, accretive. However, on the flip side of that, if they do introduce new products or develop new products that are synergistic with their core customer base, that is immediately accretive to their business. And you can really see them accelerate growth because of the leverage that they have with these insurance companies.

Luke Hallard  30:31

I guess it’s still really early days with this company. And when you invest in any industry, if the company’s got a micro cap valuation of just a few 100 million dollars, well, there’s significant risk on the table. As you’ve pointed out, it’s actually quite unusual to see a profitable company at this stage in its journey.

Adu Subramanian  30:48

Yes, that’s what’s so interesting about Semler is that it is profitable. As a micro cap, you don’t typically see medical device companies who are profitable microcat medical device companies, which is where I invest is usually reserved for charlatans, usually seen as something where unscrupulous people are chasing after dreams rather than people chasing after profits. Semler Scienctific is unique as they have an FDA approved products, they’re growing into a large market. They’re strong relationships, and they’re profitable, with a strong balance sheet.

Luke Hallard  31:19

Well, that was a great roundup, I think you’ve given me food for thought on this investment myself, and hopefully, a lot of value for seven investing subscribers, I’m going to say I think you’re a little unique yourself as well, having a real fascination with investing, but actually working in this space. And soon to be a practitioner, that gives you a real expert advantage. And I know that you’ve used your network in the education sphere to connect with leaders in many of these companies yourself.

Adu Subramanian  31:46

Yes, being a bio engineering student at a prominent US university and being a pre med student, it’s give me a couple advantages. One is that I have a network of people that I can talk to who are in the industry, both engineering and in medicine, that network of people is super useful to get a boots on the ground perspective on anything new that I’m seeing in the investing world.

Luke Hallard  32:09

And I know that you’re not shy in sharing your research with the public. And although we have a great birthday promotion at 7investing right now, if you subscribe today, with the coupon code “birthday”, you’ll get 100 bucks off an annual subscription. Where you can actually get insight from Adu for free. Where would a listener find your stock research online?

Adu Subramanian  32:32

So there’s a couple places to find me. One is on Twitter and the other one is my Substack. My Twitter handle is @AduSubramanian. And my substack is I try to write something on a monthly basis about a new company or my portfolio, or anything interesting that I’m seeing in the medical device in micro cap space.

Luke Hallard  32:57

Well, I’m subscribed and I’ve read your content religiously. But I’ll be expecting you to go a little dark for the next couple of months. Because I guess you’ve got to focus on getting into that medical school, right?

Adu Subramanian  33:06

Yes, that exactly right. For the next couple of months, it’s probably going to be a little less frequent. That before and after, frankly, once I finished applying to medical school, I’m really looking forward to being able to write a lot as I really enjoy that.

Luke Hallard  33:19

Fantastic and if you got a particular school you’re hoping to get into?

Adu Subramanian  33:21

There’s a couple that I’m literally looking into. Duke University has a great health care focused business program, that I could do a joint degree with my MD. Stanford University is another one that we’re trying to get into. But those are really aspirational goals. You know, Georgetown, Duke, Stanford, those are the three that I’ve really tried to get into.

Luke Hallard  33:42

That’s fantastic, I’m a Brit. And I’ve heard of all three of those. So they got to be very illustrious names in that sector. Very, very best of luck.

Adu Subramanian  33:48

Thank you very much.

Luke Hallard  33:49

It was really great connecting today. I’m glad we managed to refresh our relationship. And I do wish you all the best in your application to med school. And we all look forward to hearing more from you in the future.

Adu Subramanian  33:59

Thanks very much. Thanks for being a supporter. I’ve always enjoyed talking to you. An

Luke Hallard  34:02

It was great connecting today. Thanks so much for your time.

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