OMCL - Omnicell, Inc.

[glorysk87]

I stumbled across this company this week and my initial thought is that it looks interesting, but I'm severely lacking in knowledge about the addressable market and I'm hoping to get some feedback from others here.

 

Omnicell designs and sells systems to automate the supply and dispensing of medications and pharmacy supplies.  They have a pretty diverse product portfolio, but if you really boil it down they are basically selling large vending machines that automate the distribution process for medicines.  Whereas previously a hospital would need to send a prescription over to a pharmacist and then wait hours/days for the pharmacist to deliver the order, Omnicell's system basically keeps medicine in stock in a secure cabinet, and allows nurses/doctors/etc to get the medicine they need quickly and easily by scanning in a prescription and swiping their fingerprint to unlock a bay that contains the appropriate medicine and dosage.  There's obviously more to their product lineup than that, but the bottom line is that they're in the business of automating medical supplies.

 

What attracted me to the company is that they offer their customers a solid cost benefit - they reduce the manpower, labor hours, and overhead required in the current supply chain process.  In an environment where hospitals are desperately trying to lower costs, this is a great product.  In my anecdotal research, I've observed feedback that most of the nurses/doctors who have used Omnicell or Pyxis systems really do like them as it makes their lives easier.  In addition, this is a significant capital expenditure for a hospital, so once the product is in place it is unlikely that it will be switched out for a competitors product. This makes the customers relatively sticky.  Add in the possibility of recurring revenue streams from the sale of consumable items (this is where I get a bit confused - ie. what are the consumable items that OMCL talks about) and it appears to be an attractive business.

 

They have no debt, solid cash flow, and surprisingly they dont trade at a nosebleed multiple.

 

My concerns:

 

1) They earn revenue in two main ways - one is the sale of the actual physical systems which are a large capital outlay for the hospital.  Two is the sale of consumable products. I can't find much information on what the consumable products are.  Are they required to use the larger system or are they not a critical piece? If they're not and their main source of revenue is simply system sales, then is there a point in the near future where the market becomes saturated? I can see a point where they run out of customers to sell systems to and the revenue growth dries up.

 

2) Competitors - there are a ton of competitors out there. The main one is Pyxis (owned by Becton Dickinson), but there are many other smaller companies.  I cannot determine if there's any significant competitive advantage to Omnicell's systems vs. other competitors products.

 

Any feedback is welcome - I haven't talked to IR or the management team yet as this is a relatively new idea so I don't have any special insight here, but figured I'd post what appears to be an attractive business in an effort to get others' opinions.

[Guest Schwab711]

http://learnhealthtech.com/automated-dispensing-cabinets/

https://open.epic.com/Operational/SupplyManagement

 

I think Epic is a helpful indicator because they control a large % of >400 bed hospitals in the country (with roughly 50% of providers on their system). Would be interesting to know if OMCL is gaining or losing market share in this category or with Epic.

 

Pyxis was everywhere and Epic used to recommend it.

[glorysk87]

As far as I can tell OMCL is gaining market share (mainly taking it from Pyxis).  I'm not sure what you mean by gaining/losing share with Epic though?

[Guest Schwab711]

As far as I can tell OMCL is gaining market share (mainly taking it from Pyxis).  I'm not sure what you mean by gaining/losing share with Epic though?

 

Automating any healthcare process has more to do with reliability than functionality. Think aircraft or mainframes. Most of these machines are sold/leased to the largest hospitals. These machines must communicate with whatever EMR the hospital group is using, which tends to be Epic for the largest hospitals. If you see a reverse in market share then I would think it's a pretty strong indicator since nearly every large hospital uses 1 of 2 EMRs (Epic/Cerner).

 

It seems like OMCL's machines are the better choice on paper, but I'm guessing Pyxis originally took market share lead because of reliability and ease of connectivity. If OMCL can catch up (or has) in that regard then they could be poised to take market share moving forward because of what appears to be better functionality. I'm just trying to brain-storm what would change the status quo in an industry that hates change.

 

What prevents these machines from becoming commoditized in the near-future?

[glorysk87]

Gotcha.  Pyxis originally took market share lead because they were the first to market - they had no competitors.  OMCL came in and started rolling up various businesses to expand their product offering, unified the OS and compatibility across all of it, and then began to take market share.

 

Nothing prevents them from being commoditized, but my thought is that they're large capital outlays for the hospitals so there's a relatively low chance of them being replaced by a competitor once purchased and installed.  If there's a recurring revenue stream associated with the install base (consumables/inputs, etc) then the economic model is pretty strong.