Medication management, Pharmacy technology. Medical Technology
(1) Health Care Automation
(2) Autonomous Pharmacy
AVORY BRIEF (5 MIN)
Disclaimer: Avory & Company was an investor in the company above at the time of this writing, however, this may change at any time.
This is not a recommendation of the purchase or sale of any securities mentioned.
ELEVATOR PITCH (30 SECONDS)
The healthcare industry is filled with inefficiencies. At Avory we asked ourselves, what can be done to help? and who is positioned to succeed? Omnicell is founder-led and has been on a multi-decade mission to automate medication management. Over a 20+ year period, Omincell has moved from a single medication product to a platform of solutions wrapped with software and analytics capabilities.
Mission-driven management with a history of execution.
Solution selling as offering broadens. Enterprise services.
High quality, net cash business with +50% market share. Sits in a duopoly with BD.
10-15% organic growth over the next 5-7 years based on XT and new offerings.
High return business with a valuation of around 20x and +15% EBITDA margins.
High barriers are driven by the cost to switch for customers.
FOUNDER LED FOR 20+ YEARS
Randall Lipps: Chief Executive Officer
Randall Lipps is Chairman, President, Chief Executive Officer, and founder of Omnicell. Under his leadership, Omnicell has grown from offering a single product to delivering the most comprehensive portfolio of medication management solutions across the continuum of care. The company is now building on its success in advanced automation, data intelligence, and expert services to fulfill its vision of the Autonomous Pharmacy.
Peter Kuipers: Chief Financial Officer
Peter Kuipers joined Omnicell in August 2015. Mr. Kuipers had served as CFO at Quantcast Corporation, a world leader in applying the power of big data and analytics to digital audience measurement and advertising. Previously he served as Executive Vice President and CFO at The Weather Company (TWC), operating The Weather Channel, weather.com, wunderground.com and its professional services division WSI.
MARKET LEADER IN MEDICATION MANAGEMENT SOLUTIONS
Omnicell became a publicly-traded company in August 2001, and today the company’s award-winning solutions are used in over 5,000 hospitals throughout the world and in over 40,000 institutional and retail pharmacies. The company provides a suite of solutions that help monitor, manage, and distribute medications across care settings. Many of you have likely seen their products inside hospitals and care facilities without realizing it.
EXPANDING PRODUCT PORTFOLIO
Omnicell's products have historically been hardware driven. The various devices appear on the bottom left of the image below. These devices include IV workflow solutions, their XT cabinets, and their XR2 automated robot for large scale pharmacies. We expect more devices and use cases over time as they expand the portfolio. In addition to more devices, they have emphasized a single data platform by which health systems can use the data recorded in the machines for more accurate insights into inventory, diversion, med use, compliance, and overall population health. We believe that the combination of hardware, software, and market share creates a unique data advantage for Omnicell.
The solutions above are driven by the need to protect people and systems from the safety burdens of medication management, along with the financial burden.
Each year the health system is hit with excessive costs related to medication management issues. The image above highlights this. In addition, today 75% of work within a pharmacy is non-clinical.
By going down the path of creating an automated, or partially automated pharmacy, systems can reduce the cost burden of inventory, diversion, theft, and medication errors.
Omnicell is mission-critical to health systems. They provide off-site and onsite advisory services. They also work with group purchasing organizations.
They target health facilities such as hospitals and retail pharmacies. With the increase in mental health issues across the globe, they are now targeting these specialized facilities.
The ability to provide an all in one solution that scales.
They sell direct and through group purchase organizations. Sales cycles tend to last 12-24 months.
They run 48-52% gross margins and 15% EBITDA.
37% of their revenue is reoccurring and the rest comes through devices sales. The main drivers of revenue over the next several years will be from XT cabinet upgrades. These are roughly 7-year cycles and 23% of units have been upgraded. In addition, they expect to sell XR2 robots and IV solutions.
GO TO MARKET STRATEGY
PLATFORM ENHANCES SALES
Omnicell has three main advantages that influence its sales motion. They are already inside over 40,000 retail pharmacies and 50% of hospital systems. Therefore, when they develop a new offering they have reliable upsell opportunities. Omnicell benefits from product market need. Medication management is a priority for hospital systems. This provides Omnicell a seat at the strategic planning table for old and new systems. Lastly, and just as important is their TCO or total cost of ownership for customers. As shown below, these strategic partnerships lead to increased adoption which improves economies of scale. As they increase their product platform, each additional sale should require less spend.
NICHE + LEADER = LARGE SHARE
Omnicell remains a leader within the medication dispensing market. This market is around $1B in annual spending. Their newer XR2 solution is a greenfield opportunity and Omnicell is the most complete solution. In addition, they have a large share of the retail pharmacy market. Combined, this is around a $4-6B market opportunity, with the ability to grab about half of it. Management has guided to $1.5B in revenue by 2024, and we think there is an opportunity to move past that through market share gains along with new products.
Omniecell mainly competes with Becton Dickinson "BD" Pyxis MedStation. They also compete with ARxIUM MedSelect, along with vendors big and small. They have integrations with many of the electronic health software vendors such as EPIC or Cerner. Omnicell has taken a partnership approach as opposed to a walled garden approach to competition.
Intellectual Property: Omnicell is not first to every market, but they have done a fine job at innovating and acquiring when needed to round out their offering. They have know-how in cabinets along with brand trust for medication management. This is crucial to a highly regulated industry.
Switching Costs: In most cases, Omnicell cabinets will be distributed across systems. In addition, they now have IV and Central Pharmacy solutions. A fully adopted solution would be difficult to replace from a competitive standpoint. Also, the setup time is generally 12-18 months which will not be reversed easily by practitioners.
Network Effects: The company does not have network effects at the moment. However, they are developing a deeply integrated analytical platform which we believe could become a data hub for medication analytics. As their network of adoption increases, we believe that each location would benefit independently based on the sum of all the data ingested.
Low-Cost Production: As they continue to scale their offering they will receive increased efficiency driven by scale. We do not see this as a moat, but rather an observation.
ORGANIC GROWTH WITH MARGIN EXPANSION ON THE HORIZON
Omnicell has become a reliable organic grower with a path towards $1.5B in annual revenue along with widening margins. They plan to roll out an analytics software platform that we saw during their investor day. It looks promising if executed, and is not factored into our views at the moment. The company remains well-capitalized after taking on debt years back to fund acquisitions, however, they are now in a net cash position.
Disclaimer: Avory & Company was an investor in the company above at the time of this writing, however, this may change at any time. This is not a recommendation of the purchase or sale of any securities mentioned.