| Smallcap Discoveries
Thoughts on Viemed Sell-Off
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| | Viemed (VMD.TO VIEMF:PINK) is taking a big hit this week. |
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| Over the last two days, shares took a 50% haircut. VMD, you’ll recall, provides in-home respiratory equipment (ventilators) and services to patients with COPD. These patients are end-of-life, and VMD’s services help them live more comfortably – and longer. The market reaction is from reports the Centers for Medicare and Medicaid Services (CMS) is considering placing ventilators in their Competitive Bidding Program (CBP). This is a big deal because 80% of VMD’s revenues come from Medicare reimbursements. The US government can decide at any point to change how much they will pay VMD. This is your biggest risk investing in the stock. This happened in 2016 when the CMS cut ventilator rates 35% overnight. That was a big hit to VMD – and took well over a year to recover. Is it different this time? Very. We caught up with VMD COO Todd Zehner yesterday to put things in perspective. And we came away feeling there’s a lot to think through: |
| 1. Will the competitive bid even go through?
It’s only a consideration at this point. CMS is collecting feedback and VMD has until December 3rd to comment. VMD believes that since ventilators are a service-based business, it’s not a good comp bid fit (like more standard equipment). 2. IF comp bid is decided, when will it take effect?
A moratorium on the competitive bid program begins January 1st, 2019 as CMS works to reform it. A few bad actors gamed the system with lowball bids that hurt equipment providers. Because of this, VMD says January 2021 is earliest we’d see it in effect. 3. What will comp bid to do pricing long-term?
All comp bids means is competitors bid on medical supply/services. In a market with few competitors, this could mean little impact. With lots of similar size competitors, it could be a race to the bottom. 4. What is VMD’s competitive position – not only now, but if and when ventilators are placed under comp bid?
The stronger their position, the more they can absorb price impact. Today, VMD is a top 3 provider – and those 3 control 50% of the market. 5. What portion of their business will be affected by comp bid?
Per VMD’s management, only 25% of their business is in areas that would be subject to comp bid. |
| Now much of the above is uncertain. No one knows for sure what the CMS will do. We have to make assumptions. But if we had to handicap, we’d call the selling extreme. The market is reacting like it’s a 35% price cut across the board. The reality is probably not nearly that bad. Disclosure: Paul, Brandon, and Keith are long VMD.TO
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| | NOTES FROM CALL - 11/20/18 - Did they see it coming? Earlier this summer, MedPac discussed with Congress to put ventilators on comp bed
- Why they don’t believe it will go to bid: hard for Medicare to put in competitive bid, more than piece of equipment, has service component. until we know rules of service side, hard to go to comp bid
- Comp bid doesn’t mean massive price reductions, VMD one of the top 3 providers, they will have scale to compete
- VMD is providing comments with CMS by Dec 3rd, standard process
- If comp bid is decided, VMD will have huge market share by then (2021), feel better they can withstand pricing pressures
- How is this different than two years ago? Then: one day you show up, every claim you are billing is haircut 35%. Huge difference
- Less than 25% of VMD’s business is done in areas that would have competitive bid
- What is purpose of competitive bid program? Program designed to regulate cost, lower amount of suppliers out there. What happened though... low bill bidders, no intention of services, pushed low bid amounts onto real providers. People that won bids went out of business. Small players bankrupted.This is why comp bid is suspended for now
- What are they doing to fix this? Penalties to companies that win bids but don’t service them
- Best case is flat on pricing, worst case they won’t call out a number
- Business as usual for company, working on growing business
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