February 19, 2019 - 7:32pm EST by
2019 2020
Price: 40.00 EPS 1.49 3.06
Shares Out. (in M): 8 P/E 27 13
Market Cap (in $M): 329 P/FCF 0 0
Net Debt (in $M): -3 EBIT 17 36
TEV ($): 320 TEV/EBIT 18.8 8.9

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Please note: This is a micro / small-cap (~$300 million market cap) company that is listed on the OTC.  Current outstanding shares total 6.4 million. Share count in table above includes 1.8 million options that are substantially in the money.  Enterprise value is adjusted for option proceeds.



Semler Scientific is a single-product, medical diagnostics testing company serving the vascular disease market with a predominantly SaaS-oriented business model.  The company has a small market cap, is relatively thinly traded and is listed on the OTC. We expect the company to uplist to NASDAQ during 2019 and look for the company to report revenue and earnings that are substantially above street estimates over the next two years (2019E / 2020E EPS of $1.49 and $3.06, respectively, vs. street consensus of $0.89 and $1.12.).  Moreover, our estimates are fully-taxed, which is NOT the case with street numbers. Our 12-month price target is $60 to $90+ per share (50% to 100%+ upside), based on a target P/E multiple of 20x to 30x 2020E EPS. If we assume it takes an extra year for our thesis to play out, we still arrive at an IRR in the mid-20s (assuming the low-end of our target P/E multiple of 20x).



SMLR’s QuantaFlo system tests for Peripheral Arterial Disease (PAD).  Industry data suggest 8.5 to 18 million Americans have PAD today. Based on the recommendations of the American Cardiology association, American Diabetes Association and American Heart Association, adults 65 and over and adults 50+ with high-risk factors should be tested for vascular disease, specifically PAD.  This suggests a pool of 60 to 70 million adult Americans could be tested for PAD annually.


QuantaFlo offers a convenient alternative to the industry standard ABI Doppler test, which is not typically used in primary care physician offices, due to the time required to perform the test and lack of simplicity.  QuantaFlo is seeing growing adoption by insurance carriers, which represents a powerful form of market validation.


We estimate QuantaFlo is currently 2%-3% penetrated, based on an estimated market size of 250,000 to 350,000 primary care physicians and nurse practitioners.


QuantaFlo enjoys a SaaS business model (75% subscription revenues, with the balance of revenues largely recurring in nature) with highly compelling incremental operating margins, due to its nearly 90% gross margins and the higher operating leverage of its expense structure.  As a result, the company enjoys best in class rule of 40 SaaS metrics.


Moreover, recent hiring checks (growth in headcount and job listings) and management commentary suggest the business is set for continued robust growth in 2019 and beyond.  


It is also worth noting that the only long-term shareholder of size to sell stock in the past five years has been co-founder Herbert Semler (whose last share sale was in September 2017), suggesting that insiders are confident in the outlook for the company.  Taken together, management, insiders and long-term shareholders own 3.45 million shares, representing 42% of fully-converted shares outstanding.




  • PAD is the narrowing or blockage of the vessels (arteries) that carry blood from the heart to the legs, stomach, arms and head.

  • It is primarily caused by the buildup of fatty plaque in the arteries, which is called atherosclerosis. PAD can occur in any blood vessel, but it is more common in the legs than the arms.  

  • A narrowing or blockage of these arteries results in reduced blood flow.

  • This is similar to the narrowing of the arteries in the heart that cause a heart attack or in the carotid arteries that cause a stroke.

  • PAD risks are elevated in persons over the age of 65 or persons over 50 with diabetes or other high-risk factors (smoking, etc.)

  • Independent studies suggest 8.5 to 18 million Americans have PAD.

  • We believe the figure is at least 12 million today.

  • Over 2 million US adults have been diagnosed with PAD.




  • According to a study of 68,000 patients (WSJ), patients with PAD have a 21% chance of suffering a heart attack or stroke, being hospitalized or dying of complications within one year.

  • 40% to 75% of persons having PAD are asymptomatic.

  • In a 5-year study of 7,500 patients, PAD patients had 16% mortality compared to 4% in non-PAD patients.

  • 30k to 150k+ PAD patients undergo some form of amputation each year.

  • PAD patients are at significantly greater risk for heart attack and stroke.

  • In one study, a low ABI ratio (PAD diagnosis) was 92.7% specific for predicting incident coronary heart disease. At five years, 20% of patients with PAD had had a nonfatal myocardial infarction, and 15% to 30% died; three-fourths of these were cardiovascular deaths.

  • Some studies estimate the total annual costs for patients with PAD exceed $21 billion, including nearly $10 billion for hospitalizations. In Medicare alone, one study estimated spending on PAD accounted for more than 2% of all Medicare spending (CardioVascular Coalition.)



Industry Standard – Ankle-Brachial Index Test (ABI)

  • The ABI is a measure of the ratio of the blood pressure taken from a person’s ankles divided by the blood pressure of one’s arms (brachial.)

  • Ratios below 0.9 suggest existence of PAD.

  • Doppler ABI test requires a doppler, ultra-sound gel and blood pressure cuffs.

  • PAD undetectable in 7-8% of cases of patients with non-compressible (i.e. hardened arteries.)

  • Requires manual processes.

  • Typically takes 10 to 25 minutes

  • Industry players: Newman Medical’s simpleABI & ABI 400CL, Summit Vista ABI, Perimed’s Periflux.



  • Semler’s second generation blood volume measurement test was approved in March 2015.

  • The system measures blood volume changes in the extremities using a technique known as volume plethysmography which calculates results automatically via a proprietary software algorithm.

  • Test consists of placing a sensor on the fingers and toes for 15 seconds each.

  • Test takes 2 to 5 minutes to perform.

  • Sensors are connected to the QuantaFlo software platform, which automatically processes and stores results.


Comparing QuantaFlo to traditional ABI

  • In a clinical study the QuantaFlo was compared to the pressure cuff/Doppler probe ABI method.

  • QuantaFlo was 80.2% accurate (n=333 limbs) and Doppler ABI was 79.3% accurate (328=limbs), demonstrating QuantaFlo’s substantially equivalent accuracy in determining the presence of PAD.

  • QuantaFlo is able to measure existence of PAD in patients with non-compressible arteries.




The market for PAD / PAD testing is defined as persons 65 and over and persons 50-64 with a history of smoking and/or diabetes.  This market is estimated at roughly 60 - 70 million people in the US. Within this market segment, 15% to 20%+ are estimated to have PAD.


The target market is primary care physician offices, clinics and nurse practitioners.

  • This market numbers an estimated 250,000 to 350,000.

  • Based on an annual license fee of $6,000, this suggests a market potential of $1.5 billion to $2.1 billion.

  • Secondary Market is home risk assessment (HRA) market.

  • Difficult to size, but potential is significant.

  • The HRA model is priced on a fee per test basis at $40 per QuantaFlo test.


Another way to size the market is to assume that 60 to 70 million US adults are tested annually at a cost of $40 per test.  

  • This yields a $2.4 billion to $2.8 billion TAM.

  • Even if we haircut this by 75%-80%, we arrive at a market opportunity of ~$500 million vs. SMLR estimated revenues of $36 million in 2019 (street consensus is at roughly $30 million).




SMLR markets its QuantaFlo platform through the insurance carriers, home-health risk assessment companies (HRAs), which are effectively distribution arms of the carriers, and other organizations (primary care physicians, hospitals, clinics, etc.)  However, to date, the payers and HRAs account for the overwhelming majority of revenues and growth in the business. This is expected to continue. SMLR currently has only three senior sales and marketing executives.


Semler’s distribution model provides for a highly scalable operating model in comparison with other software/ software-like businesses, where sales and marketing often constitute 25%-50% of reported revenues.  At scale, we expect sales and marketing to represent 15% or less of revenue.


We believe that United Health and Humana are Semler’s two largest customers currently, and we believe the company is continuing to grow with both companies and other carriers and partners.


License fee growth has been driven by insurance carriers paying for software licenses.  We expect carriers to continue to drive license adoption for QuantaFlo and estimate individual QuantaFlo licenses are priced at $5,000 to $6,000 per year.  


Adoption is being driven by a combination of the long-term expected economic savings associated with reduced hospitalization and readmittance and improved health outcomes.  Multiple carriers we have spoken to have suggested that products like QuantaFlo are necessary to help bend the healthcare cost curve. Moreover, QuantaFlo also benefits from Medicare advantage reimbursement.




We estimate that Semler has made about 10 gross hires since June 30, 2018 based on LinkedIn job listings data.  To put that figure into context, Semler had 37 employees at year-end 2017, 39 at 6/30/18, 43 at 9/30/18.


Moreover, the company is currently hiring for nine additional positions, the vast majority of which are sales-oriented positions:


·      Regional Account Managers: Phoenix, Los Angeles, San Antonio, Houston, Seattle, Las Vegas, Spokane

·      Director Product Development: Denver

·      Technical Account Manager: Denver


Assuming the company fills these positions, headcount will have expanded by almost 50% since June 30, 2018.



Several calls with industry executives have validated QuantaFlo’s value proposition:


  • “...potential big opportunity in terms of predictive medicine with this device”

  • “...simplicity of putting it in doctor’s office….don’t need manual expert (or a) trained cardiovascular technician…”

  • “Potential for $50 - $100 million in net present value savings compared to base population.” (for this particular payer client)

  • “...ABI testing usually taking place once they (patient) were pretty severe and had other conditions present…”

  • “...high roi product...”

  • “...test is much easier to do…”

  • “...among easiest tests to administer…”

  • “...high reimbursement…”

  • “...potential for standard of care…”

  • “...rolling it out to 65 and over where we have it….may test it with patients 50 and over”




Third quarter 2018 Earnings Call Transcript:


CEO Doug Murphy-Chutorian:

  • “The third quarter of 2018 was one of our best ever based on achievements by the sales team and the R&D team. Management believes that customer interest in our product is growing impressively (emphasis mine)…”


  • “…In the remainder of 2018 and for the full-year of 2019, we expect to see continued sequential growth and license revenue with occasional outsized spurts of such revenue growth primarily due to larger than usual orders from our largest customers”


  • “…In the remainder of 2018 and for the full year of 2019, we expect license revenue to continue to grow due to the increased numbers of installations from both new and established customers and recurring revenue from the licensing business.”


  • “…Management believes that customer interest in our product is growing. To reiterate, over the next 15 months, we can expect continued sequential growth in license revenue due to our recurrent revenue model with occasional outsized spurts in license revenue growth due to larger than usual orders.”



  • “....I'm guessing there may be some basis for your suggestion that sequential growth can continue and you may be seeing some indications from customers or prospects that there is the potential for some outsized orders in the future. Could you just give us any additional color and what gives you the confidence to make such a bold statement?”


Doug Murphy-Chutorian:

  • “....historically, over the last quarters, ….we have continued growth, sequential growth. Some quarters are outsized quarters. And once again, historically, we said we weren't going to comment about intra-quarter, but we have seen in the past, where we did comment that large orders coming in predominantly late in a quarter and/or ones that required us to interact with the IT departments of our customers who then wanted to put their devices, if you will, in the field on a staggered basis, led to increases of our billing them not upon shipment, but later when the installations were put up.


  • As you know, each of the systems that we have, we know when it is going operational because we get the results of all the tests on a daily basis. So I think that we're just saying we expect to see more of the same, and obviously, I also made the statement that we had a very good quarter. And the third quarter, and, in my opinion, certainly the best of the year so far, we think there's a lot of reason to be optimistic that we have a framework for future growth.”


  • “......The sales team brought in important new clients this quarter, and they also brought in more orders from established clients. So, we're happy in both regards.”




Semler is led by CEO Doug Murphy-Chutorian.  Mr. Murphy has been CEO of the company since 2012 and has been responsible for driving the adoption of QuantaFlo.  Mr. Murphy has over 30 years of operating experience in healthcare, including roles as clinician, academician, inventor, entrepreneur, Chief Executive Officer, Chairman of the Board, and consultant to financial firms.  Mr. Murphy is a named inventor on more than 30 patents, and has guided more than 50 products through various regulatory approval processes. His business career has included extensive involvement in all facets of the medical industry from financial, research and development, manufacturing, marketing and sales, regulatory, reimbursement, and clinical trials. His breadth of healthcare experience includes all major sectors of the industry: medical devices, health services, pharmaceuticals, biotechnology and managed care.  Mr. Murphy is a cardiologist and did his fellowship in Cardiology at the University of Stanford.


Mr. Murphy owns 857,771 shares and options.  In aggregate, senior officers and directors own an aggregate of 974,500 shares and options.  Company founder, Herbert Semler, his son Eric Semler, and largest shareholder William Chang cumulatively own an additional 2.476 million shares.  Taken together, management, insiders and long-term shareholders own 3.45 million shares, representing 42% of fully-converted shares outstanding.


Notably, there has been little insider selling to date.  The only long-term shareholder of size to sell stock in the past five years has been co-founder Herbert Semler (whose last share sale was in September 2017), suggesting that insiders are confident in the outlook for the company.





As a reminder, we estimate that SMLR has penetrated 2% to 3% of the addressable market of primary care physicians and nurse practitioners.  Our projections assume the company can reach a penetration rate of 4% to 7% by 2020.





Semler’s gross margins have risen over 1500 basis points in the past six quarters.  We expect gross margins to soon exceed 90%.





Semler’s incremental operating margins have been over 70% in each of the past two quarters.  This level of operating leverage is highly unusual for most businesses, especially one of such small size.    





We expect margins to continue to rise, although not at the same pace as 2018.    




The table below highlights the unusually attractive financial profile of SMLR’s business model relative to other high margin platform/ software oriented businesses.  In 2019, we expect SMLR’s combined growth and profitability metrics to improve even further.




  • Competition

  • Concentration of revenues from few customers

  • Single product company

  • Changes to ACA, modifications to reimbursements

I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise hold a material investment in the issuer's securities.



  • Broader roll-out by existing and new insurance carrier partners

  • Broader roll-out by existing and new home risk assessment providers

  • Continued movement to preventative care/ value-based model for healthcare

  • Uplisting to NASDAQ likely in 2019

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