Thesis: With its focus on helping patients suffering from various behavioral health conditions, Catasys is positioned to scale its revenues with top insurance companies at a time when anxiousness is running the highest in years. Cigna rollout would dramatically turn revenues higher and speed up eventual catalysts: positive EBITDA/cash flow.
Disclaimer: While CATS stock has been on a run of recent, I would still like to share the idea as we still like it long-term and it's still our latest idea as I near my vic anniversary.
After 15 years of investment, including almost $200M invested into its A.I. platform and its Human Interaction team, Catasys (https://catasys.com/overview.html) is at inflection point in its behavioral health care business. This slide does a good job of explaining the opportunity:
The company has contracts with 7 of the top 8 insurance companies in the U.S. With Aetna moving toward a nationwide launch in incremental steps, Centene increasing its reach with Catasys this year and Cigna about to go nationwide, Catasys's covered lives # is about to inflect dramatically higher in the coming quarters. After already tripling since the beginning of 2019 to late Q1 2020 to 145k covered lives, the # of covered lives should double the next 12 months. At 300k covered lives, at $6,500 a patient - which the insurance companies pay directly to Catasys for its 12-month tele-health plan of remediation with doctors in its network - 12 months thereafter, the company would be at a $390M annualized run rate.
Last year, it was expected that Cigna would launch nationwide with Catasys after a two-state roll-out went exceedingly well. Unfortunately, for Catasys, protocols were changed within Cigna, which meant a nationwide RFP was required for Catasys to win, which it did. Since then, the timeline for launch was pushed back once again from early January to early April. As such, a timely Cigna rollout in early Q2 is the most important component to the Catasys story in the near-term. The sooner Cigna begins its nationwide rollout, the more dramatic the turn higher in eventual revenues will be, which will also speed up a future significant catalyst: positive EBITDA/positive cash flow. (Side note: In its March 12th call with investors, Catasys's CEO stated they would press release when the nationwide roll-out from Cigna commences. As such, it is important to have a starter position on in the stock just in case they actually begin in early April. Nonetheless, with all the stay at home orders commencing the days after the company's March 12th call, there is also the growing likelihood that Cigna has been pushed back again.)
Here is where consensus stands. While there is risk to 2020 top-line #'s, importantly, there exists a notable dispersion for 2021 #'s and what I think the company will ultimately end up doing; instead of $145M and losing, I think the company will have $160M in revenues and be EBITDA profitable and cash-flow positive:
Notably, while some of the build in revenues comes from Cigna, there is a lot of upside room to numbers once Catasys achieves full scale with Cigna.
Currently, there are 2.4 M shares short. However, I believe the short thesis to be ephemeral. With each passing quarter, the short thesis - which rests on the potential for an equity raise, not to mention the 50/50 possibility that the very high bar of $90M in 2020 revenues may not come to pass - gets weaker. In the next 1-2 quarters, big investors will focus on what is coming in 2021/2022 - dramatic top-line growth and enviable EBITDA/earnings growth, not to mention scaling positive cash flows. The shorts have it wrong and should have covered at $10-$11 but did not. In time, short covering will spur shares higher.
Importantly, Catasys has a defensible moat. Back in November, the company's CEO stated that they had a 12-month technological lead relative to up-starts entering the space. More importantly, the company invested heavily in its Human Interaction platform, doubling the size of the company from 175 people to 450 people the past 15 months. Also, the company has a proven R.O.I. which has been shown from a third party to save large insurers 50% over two years. It should be years before any competitor will be able to challenge Catasys on these three levels. By then, Catasys will be the entrenched player in the space. While they may not keep an exclusive on the 7 of the 8 top insurance plans, they should remain the #1 player with at least 2-4 of them, on a national level.
In the past 12 months, Catasys's management team has been buttressed significantly. They recently brought in a CFO from a multi-billion dollar company to shepherd the company to cash flow positive. They also brought in a new COO who was a top gun at Optum (UNH main sub) and who may end up being the guy to get UNH to roll-out as well. Of note, UNH is not even in my thesis for CATS. They also added a top-notch CTO 18 months ago and a number of other strategic C-level hires. The inflection in talent in Catasys's C-Suite is significant as it helps reduce the risk of screw ups as the company scales into the hundreds of millions in revenues and, also, helps legitimize the actual numbers being reported. They will also help big investors have more comfort in owning CATS, who, while very smart, also has a very quirky CEO at its helm.
In the WHAT IF category, should UNH and HUM both begin to ramp up with Catasys, forward numbers for 2022 and 2023 would quickly veer toward $400M-$600M. With a TAM that is measured $10B-$15B (which I shrunk by two-thirds to a half, relative to CATS deck), $400M-$600M in out-year revenues are not pie-in-the sky estimates:
Currently, there are only two analysts covering Catasys. Revenues are finally poised to scale into the $20M-$30M range the next 3-5 quarters. As revenues inflect, new analysts should pick up coverage on the name this year and next. New eyes on the story will bring in new investors, most of which have never even heard of Catasys.
This 3/25 press release helped gain confidence in the inflection point I foresee: "Catasys, Inc. (NASDAQ: CATS) ("Catasys" or the "Company"), a leading AI-powered and telehealth-enabled, virtualized outpatient healthcare treatment company, today announced that the Company is surpassing a weekly rate of 500 member enrollments for the month of March. Our surging March enrollment and the halving of disenrollment rates to 4.9% have in part been driven by the COVID-19 pandemic. As more states have recently entered the ‘stay at home’ and ‘lockdown’ phase of the pandemic, we anticipate continued and sustained improvements in our enrollment metrics."
After seeing its enrollments scale nicely the past four quarters: Q1 2019: 171 Q2 '19: 828 Q3 '19: 1473 Q4 '19: 1589
Total 2019 Enrollments: 4,061
2020 enrollments are poised to ramp dramatically, again, assuming Cigna goes live nationwide sometime by the end of Q2:
Q1 2020: ~3,200
Q2: '20: ~7k
Q3 '20: ~9.3k
Q4 '20: ~12k
Total 2020 Enrollments: 31,500, up 675% from 2019.
Even if my enrollment numbers are too aggressive by 20%, that still leaves us with 25,000 enrollments this year. While this does not translate linearly into 2021 revenues, at $6,500 a head, 25k enrollments would create an embedded revenue base of $162.5M for 2021, which clearly sets the stage for a nice beat next year, relative to consensus.
As for the stock, it is under-owned. It will not take much new institutional interest to catalyze a decisive break-out to the upside, especially with only 107 funds currently long:
With its focus on helping patients suffering from various behavioral health conditions, Catasys is positioned to scale its revenues with top insurance companies at a time when anxiousness is running the highest in years:
Assuming the company eventually cleans up its balance sheet (which currently has net debt of $21M) and does an equity raise of 3M shares, there will be 20M shares outstanding later this year. As we move past this bear market late this year/early next, CATS's multiple will re-rate dramatically. Let's just start with a 3X Price-to-Sales on $250M in 2022 revenues, in 12-15 months, this would garner a $37.5 PT for the stock. This is my base case.
Upside to $40-$60 could also materialize the next 6-7 quarters, if Cigna goes nationwide more quickly than expected and if UNH and HUM chime in as well.
If Q2 enrollments disappoint dramatically and Cigna is not launched by then, we can evaluate the stock at such time.