HTL - Hamilton Thorne

[Cigarbutt]

 

  FT  article - Hungary’s Viktor Orban designates fertility clinics ‘strategic’ sector.

 

https://www.ft.com/content/72f71db2-32ed-11ea-9703-eea0cae3f0de

Any opinion on the net effect on HTL?

 

The state effectively nationalized the fertility clinics sector and that obviously has implications if you want to benefit from IVF through the clinics channel (in some areas). I would offer the opinion that the purchase consideration may have been favorable but I doubt that authorities looked at financial statements. The quasi-Politburo leaders probably looked at the owners and their racial, ideological and personal connection alignment which tends to depict an artificially conceived business environment.

 

 

[longlake95]

I don't think this affects HTL much - yet. I don't think Gynemed does much biz there. It's more to add to the story of the secular headwind that many countries face with falling birth rates and net emmigration. Government funded IVF appears to be a theme that's in the early innings. I don't ever see Canada and the US offering tax free status to mom's who have 4 kids, but Japan and Europe could see something like this.

[Cigarbutt]

^Fair enough and the increasing awareness/coverage issue is likely to be a favorable long-term tailwind. Central family planning policies have a poor record (at all levels with potential implications for investors) and I just hope that the Hungarian model is not exported. If central planners start to meddle with gene editing and IVF cycles, I think the likelihood that we all become morons would be higher. If interested, here's a recent example of a neighboring country's experience with systematic state glorified child-rearing practices:

https://en.wikipedia.org/wiki/Abortion_in_Romania

 

To compensate for my excursion into unhealthy political territory, here are some potentially useful business-oriented additions. The IVF market can be divided into the clinics space and the related equipment space. There's been an unusual amount of investors' interest in both. I don't think the clinics space dynamics are favorable now. There's been consolidation and a lot of money flowing (including from private equity) but despite reasonable expectations about rising demand, the IVF clinics industry has taken (IMO) a wrong track. When kerosene was used for illuminating purposes, the oil industry was stuck in an overcapacity issue. Rockefeller waited long enough to get involved and (forgetting the predatory practices and the genius behind the vision that unforeseen oil by-products were the way of the future), eventually, paid reasonable sums (open to debate but he certainly not paid PE-like multiples) to buyout competitors and reduce capacity but the key to his success was to improve efficiency and lower costs of production in order to offer a good deal (price vs value, sharing some economies of scale with the customer). So, for IVFs, in the US but also globally, clinics have been consolidated paying high prices (and using leverage) with the optimistic hope that increasing demand will meet existing capacity and while doing so adding questionable and very expensive "add-ons". The result, unfortunately is: high costs, worse clinical results and relatively poor customer satisfaction. This is likely to improve but IMO, the IVF clinics space will need more disciplined leaders with vision. The following link covers this aspect:

https://watermark.silverchair.com/hoz017.pdf?token=AQECAHi208BE49Ooan9kkhW_Ercy7Dm3ZL_9Cf3qfKAc485ysgAAAmUwggJhBgkqhkiG9w0BBwagggJSMIICTgIBADCCAkcGCSqGSIb3DQEHATAeBglghkgBZQMEAS4wEQQMDUY0IHx8nTbYUHhEAgEQgIICGIMi1mT4Z6updGrIXH42Eml8nS3-kQ3IPuUu4qC4rO8cO5RbUBvNVQV5Y3ljh_XzRA172ZrXdDaSyrlAxSDqq7G4jXZWTqtkSZqoZn6jMeaWZTj8hRaYcXVau-dTPIBJc79Qu6TMOLM1nTTAyIVG1JCh-fyy_GK8S9pT37uCbpsKx19FbumjAs9E40q2S5h_0pGBvFVYNeWOKCVmB6ayvqscuiH3W1ElR9iTxGTIkcBDA_HUBZtAcn5MxSCQPbEa1T8ONc2epmIBhWFu4y5_ZR3OjTIIBAB_KyeRRaGke_DakXJq4Wqf8tq4iF9kcV_qw9XaUKqbPUCiPB_xLSy3bhpymg_7qjqUJ5HVgXOxseqHZq-YINyeZl004HB7nY-F21rRzVadMVO-vG_rD-2yOL9-nOfedw75XzOCL88oAVamO32hfShCtJ0ZdYJtNsL56quL-StqGy-bUxHRIFCdZYOy7S1vBo0r9mncXBuY8CYC6jia_rX_IXtoMFTCbQug9jbSBsw-3VDgeH0RUF-xNad3ieT2qnMOznwwGFb_IY0FGpsXpphCGFpAE7aKfQN-GohArfy4C8etTTMUwJJ6kfnxGgQJ2TXCSqobIvf6O1U87W7LxPvccGf7oLaxvhJKZdORepxo42FcpTiAB2kWic-iCy6uRPxfiB5sPkcVn9smqaF6Awnp2eZz9IYiCH4TE08Ns6UWheVW

 

The main author, Mr. Gleicher, has vested interests but offers a balanced view and is an interesting fellow.

Side note for Jurgis if he is reading: I understand that our opinions about the outcome of value-based care has, if anything, widened in the last few months so, in the spirit of a constructive debate, I have to strengthen your arguments before destroying them. Ceasarian sections are performed too frequently for various reasons. After some level (about 20% or less?), a Ceaserian section offers no benefit. In 1988, Mr. Gleicher published convincing work about criteria that could be safely and efficiently implemented and that would result in lower rates of C-sections, same outcome scores and lower costs. So, what happened since 1988 (32 years ago)? ---) C-section rates in the US (not much better in Canada and other 'developed' countries) have continued to rise significantly. Perseverance required. end of side note.

 

Players in the equipment (capital equipment and consumables) space such as HTL are only partially affected by the IVF clinics dynamics and they will be able to adapt to succesful innovations and developments that will eventually occur but it may take longer to happen than what the short-term oriented crowd is expecting. Also, the nonspecific capital interest means that acquisition targets are unlikely to be available in today's environment.

 

Of course, you can disregard the above if you can gauge the sentiment or somehow transform the beta into alpha and, for all I know, HTL's price may double or even triple in short order.

[longlake95]

Agreed. Nationalizing clinics is probably the answer. Hungary's experience may prove this. I'm simply looking at the HTL's and Vitro's exposure to a sector with what seems to be improving tail winds. Maybe too simplistic, but it seems to be a no-brainer sector with long growth ahead. Yes, I don't know how good of a business the actual clinics will be, but if PE is attracted then there must be some merit to owning clinics...maybe PE can lever the hell out of them...

 

 

 

 

[Gregmal]

Clinic businesses are different animals than product pushers, entirely. It really doesnt matter what or where IVF gains traction, you will need the consumables and the equipment. Within those areas you will also have a differing mix in terms of quality. I personally dont think the clinics are nearly as solid a way to play this for a number of reasons but if you are so inclined Virtus(not really all that great of a business to date) and Jinxin(still a little early to tell) are more so where you'd wanna look than HTL.

 

In terms of stuff that has nearly nothing to do with any of this, but is related to HTL shareholders, I think looking at the future uplisting should provide holders of shares today, with a meaningful return; available basically just for holding the shares...and independent really of an variance in sector or company fundamentals. From experience, an uplisting typically provides a 20-30% boost to the valuation. Many times more, especially for a high quality business. XPEL for instance, tacked on over 50% entirely due to the OTC/TSX to Nasdaq move.

[Jurgis]

Side note for Jurgis if he is reading: I understand that our opinions about the outcome of value-based care has, if anything, widened in the last few months so, in the spirit of a constructive debate, I have to strengthen your arguments before destroying them. Ceasarian sections are performed too frequently for various reasons. After some level (about 20% or less?), a Ceaserian section offers no benefit. In 1988, Mr. Gleicher published convincing work about criteria that could be safely and efficiently implemented and that would result in lower rates of C-sections, same outcome scores and lower costs. So, what happened since 1988 (32 years ago)? ---) C-section rates in the US (not much better in Canada and other 'developed' countries) have continued to rise significantly. Perseverance required. end of side note.

 

I have no clue why I was mentioned in this.  ::)

I agree that Caesarean (sic) section probably should be used less often.

But I'm not a woman, so it's mostly not for me to say.

I'm all for uterine replicators (cf. Lois McMaster Bujold's Miles Vorkosigan universe: https://adanewmedia.org/2013/11/issue3-baker/ - MAJOR SPOILERS for people who haven't read the books; disclosure: I have not read through that article to the end  ::) ).

 

 

 

In related area, I've recently looked at https://www.lumoptik.com/ as an angel investment. All the usual disclaimers: not a solicitation to buy/sell securities, I am not invested and currently have no financial interest in the company.

[Cigarbutt]

The IVF clinics market is interesting and is, to some extent, relevant to the equipment suppliers. Whatever coverage (public, private or hybrid), IVF clinics will likely remain privately held and possibly the business model will look like DaVita, the dialysis provider, with a part of payments coming from Medicare-like agencies (low profitability but essential to cover fixed costs) and another part of payments coming from private clients (insured or not). However, as far as I can tell (tough to say because the market remains relatively fragmented and most actors are private), returns on investment have been disappointing. For example, IntegraMed, which appears to be the largest entity in the US and which may hold about 15% of the IVF clinics market, had a significant write down on its value in 2018 (2019 not reported yet). It appears that buyers (private equity) may have paid too much and 'synergies' may be long coming.

The IVF clinics are relevant for two reasons: IVF industry credibility and uncertainty for suppliers. Virtus is an example of a large player being accused of false 'success' claims (% of live births) which in no way correspond to the numbers reported in the link provided in a previous post. Jinxin, which runs clinics in China and the US, reports "success" rates above 50% in China and above 60% in the US. Basically clinics are trying to gain market share using unrealistic numbers. Given that the IVF industry is looking to gain more awareness and coverage, it would better if clinics would self-regulate in a credible way. Also, most clinics (especially the larger networks) use technical "add-ons" that have not met satisfactory evidence of efficiency and the extras are more or less forced upon consumers (asymmetric information) and additional costs (high margins) do not result in better results overall. Because of that, suppliers may go into sectors (research, development) that do not produce value and that nonetheless are expected by clinics giving rise to poorer results in the long term as most of these techniques may very well end up being abandoned. It's probably best for suppliers to stay within the generic laser and media businesses and avoid the pre-natal genetic testing and the area of frozen eggs. Overall, in the last few years, HTL has done a good job positioning its business lines IMO.

 

@Jurgis

Apologies for the possible irrelevance and thank you for the feedback (spelling and all). Apparently the word comes Julius Caesar, although he probably did come out 'naturally' and, in Roman times, C-sections were done after the mother was dead (the mother would have died anyways).

Anyways, the IVF specialist, which I referred to, had done work that fit with the general outline that Atul Gawande may be working on (you have expressed some doubts about the Haven outcome, no?). Did you know that Mr. Gawande has led the Delivery Decisions Initiative at Ariadne Labs and is behind the 19% rate frequently quoted for C-sections?

FWIW, I think the 'product' that you mention (epidural equipment, which you don't endorse) has no future. Typically, inserting a catheter for an epidural in pregnant patients is usually not that technically challenging, the gold standard for localization is the outflow of CSF (brain fluid) or the absence of resistance with air injection for the space and significant complications are very rare and would likely not be prevented by the equipment described. Headaches are relatively frequent but, again, would likely not be prevented by the equipment described. Also, and to link back to this thread, epidural pain relief may become irrelevant when your baby can be ordered and delivered from Amazon. 8)

---) back to HTL

[Jurgis]

Cigarbutt,

 

Thanks for your elaboration and comments on epidural product.

[Gregmal]

https://www.hamiltonthorne.ltd/attachments/article/250/HTL%20Feb%2019%202020%20Press%20Reslease%20-%202019%20Preliminary%20Results%20-%20FInal%20QC.pdf

[Gregmal]

Very informative call today. Would recommend anyone interested in this name or the space take a listen.

 

Most notable points I thought were topics of widespread insurance adoptions, in particular new NY law mandating IVF coverage for employers with over 100 employees. And of course that they are evaluating a Nasdaq listing, although I do not believe that is a near term(ie 6 months) thing. All around good stuff. This one has been a total truck the last week of so.

[Gregmal]

Re listening, Ill add a few more things both from the call and inferences from dealing with a few folks quite close to this.

 

Future acquisitions will be of the ilk shown in their presentations which largely consists of companies doing <$20M USD in revenue. An adj. EBITDA multiple of probably 8x or less would be the preferred range.

 

From this, I can confidently deduce two things.

 

One, which is a major, major risk with these types of companies, is that there WILL NOT be any sort of merger of equals or merger with significant integration risks. More so just bolt on type stuff with synergies and cross sell potential. Further, these companies will not be money losers. If we can eliminate those risks, to me, this is significantly safer as an investment.

 

Second, looking at the cash position, LOC, and the current run rate EBITDA, these will be fully funded and there is not likely to be any more dilution from acquisitions. Further conversations Ive had about the benefits of uplisting and the company's views of the subject seem to support this and that is why the company is not rushing on that front.

 

 

[Gregmal]

Another great call today with tons of details. Lots of breakdowns on the biz, application for PPP, China look through, cell media expansion opportunities, and lines of business were they are seeing little disruption. Worth a listen.

 

Q1 est. looked solid, obviously effected by last couple weeks of slowdown, but also some large orders getting pushed through. Only hesitation on my end is ?-ing why they give revenue figure(which was nice) but no adj. EBITDA... I dont think anyone would be shocked if it dipped or hold it against them if its COVID related...maybe since its preliminary they are still "adjusting". Will find out in about a month. Overall one has to be pleased with these guys.

[Cigarbutt]

Another great call today with tons of details. Lots of breakdowns on the biz, application for PPP, China look through, cell media expansion opportunities, and lines of business were they are seeing little disruption. Worth a listen.

Q1 est. looked solid, obviously effected by last couple weeks of slowdown, but also some large orders getting pushed through. Only hesitation on my end is ?-ing why they give revenue figure(which was nice) but no adj. EBITDA... I dont think anyone would be shocked if it dipped or hold it against them if its COVID related...maybe since its preliminary they are still "adjusting". Will find out in about a month. Overall one has to be pleased with these guys.

The IVF market has recently been heavily disrupted by the virus (and by the reactions to the virus). Canadian recommendations are even more strict than in the US but there is talk now about resource re-allocation to less urgent but important needs.

Here's the latest in the US:

Warning: the recommendations are based on expert opinion using best-evidence data and rational analysis..

https://www.asrm.org/news-and-publications/covid-19/statements/patient-management-and-clinical-recommendations-during-the-coronavirus-covid-19-pandemic/

And a quote just for you from another source relating the mental framework used by Dr. Eve C. Feinberg, president of the Society for Reproductive Endocrinology and Infertility and a member of the ASRM’s COVID-19 task force: “The voice of reason behind the (ASRM) recommendation is really based upon the idea of flattening the curve (of) transmission. And when you’re in the midst of a public-health crisis, such as a pandemic, you have to place the priority of care on society and societal good. And sometimes that means that individual autonomy comes second to societal benefit.”

I'd say the virus effect will obliterate profits for a quarter or two. It's the ensuing recession that may postpone some discretionary decisions.

Is there a way the IVF product manufacturers could ask for a bailout? The future of nations is at stake especially with no immigration.

[Gregmal]

I think thats a possibility. They touched on a lot of this today. The clinic mix is about 70% private operators with all currently deemed "essential" businesses. That a lot of the clinics have ultimate authority on what they wish to do but that protocol for most right now is to continue existing cycles and accommodation and then either put off, or prioritize new ones. Mainly, a late 30's woman may be green lighted due to Mother Nature being less favorable to her, than say a 25 year old in good health.

 

They indicated that running the business as normal, with no revenue, they've got about a year and change worth of cash and liquidty before needing outside financing. Applied for $1m ppp loan on day 1 but bank ran out of funds but are optimistic about the second round of funding just approved by congress.

 

They touched on V shaped business and U shaped business as well as the rebound currently occurring in China/Asia and kind of using that as a look thru for what should occur here.

 

One analyst also asked about the recession effects, to which they brought up data from 07-10... US did show cyclicality, however Canda, Europe, and Asia, a lot less, primarily because those countries had a higher rate of assitance/insurance programs...something we've seen develop quite a bit since then over here is the US. So I suppose we'll cross that bridge if and when we get there, but the most important take away form the call is that they are in position to benefit from the aforementioned scenarios because of the balance sheet strength. AND basically laid it out that they are only going to be looked at bolt on acquisitions, rather than anything transformational, given the current risk environment is far different than normal. Basically stuff in the $1M-$5M is what I got out of that.

[Gregmal]

For those interested, I suggest reading the AR and AGM agenda. All signs point toward an uplisting in the near future.

[Gregmal]

Never a fan of dilutive offerings... have to imagine they've got a target lined up. $20M+ cash on hand now

[longlake95]

I would like to see an uplisting....soon...

[Gregmal]

I would like to see an uplisting....soon...

 

I was literally in the middle of replying to you when Sanjeev went on a power trip... but.. here's what I'd say.

 

I have definitely gotten the impression that this last couple month stretch has really hammered home to these guys how important it is to have a major listing given the degree to which their stock price and multiple will impact the companies finances. VITR for instance trades at 30x EBITDA or something like that. I firmly believe they have a deal lined up which is why they just did an ill timed private placement when otherwise they have more than a sufficient cash pile to get by the next few months.

 

But definitely read the documents regarding the AGM you should be receiving in the mail(or probably already have). They expand on the measures being taken which are only relevant if you intend to uplist. This will occur next week. You would figure the uplisting happens Q3 or Q4 assuming the timeline is typical of such events.

[Cigarbutt]

^Take this for what it's worth but Fax Capital is showing interest and explains their rationale:

https://www.faxcapitalcorp.com/images/Shareholder_Information/Presentations/hamilton.pdf

 

[Gregmal]

https://www.globenewswire.com/news-release/2020/08/20/2081326/0/en/Hamilton-Thorne-Reports-Financial-and-Operational-Results-for-the-Quarter-Ended-June-30-2020.html

 

As I have caught myself saying with many other investments and their Q2 results....definitely could have been worse. Didnt get to hear the call as the kids demanded to go swimming, so I hope to review the transcript tonight, but at quick glance, the results seem respectable and the tone going forward, cautious. Hopefully more so the result of Mr. Wolf continuing to be an "underpromise, overdeliver" kind of guy, rather than a truly precarious environment.

[doc75]

I'm just getting acquainted with the company but it seems like Q3 was pretty good, given the circumstances.  But from their comments on the call it looks like the uplisting catalyst is still a ways off.

 

Any thoughts from the more intelligent / better acquainted crowd?

[Gregmal]

The uplisting I would think is probably a back half 2021 event, if I had to make a guess that was 75% based on realistic outcomes, and 25% optimistic. I agree, Q3 was solid, and overall, 100 times out of 100 had you told me things would end up turning out they way they did back in March/April, I would have taken it and run. My only source of complaint is minor at this point. Raising(and thus diluting) at 1.15 is not really acceptable to me when they know they can immediately uplist and get a significantly better valuation and therefor terms on financing. IIRC this was back in August or so...so its more of a grimace and "lets hope they dont do it again" type of thing. I am very eager to see what their preliminary forecasts that they generally deliver in mid February looks like. I think for sure, if they get too cavalier about not uplisting, there will start to be pushback. I hope they are getting the message from some of their shareholders that it is negligent to do future capital raises and especially equity issuances before they uplist. Otherwise, I have no complaints with how they've done things. The comps for the next 4 Qs should be very favorable(minus maybe Q1) for obvious reasons. They have both the recovery benefitting everyone, plus also a full year of acquisition integrations to show off in their results. Insurance pickup should also help as several US places such as NY continue to become more favorable to IVF.

[longlake95]

https://www.hamiltonthorne.ltd/index.php/2021-press-releases/270-hamilton-thorne-appoints-feng-han-to-board-of-directors

 

This seems like very good news. I'm not sure how much business HTL does in China. I'll dig around. Maybe Mr. Han, can help them scale up in China in a big way.

 

 

[Cigarbutt]

^China has a well established and large market (especially the eastern part) with potential for growth (also if you believe that developing will continue to develop).

https://pubmed.ncbi.nlm.nih.gov/32020190/

Vitrolife reported this AM and it looks like 2020 may have been a hiccup and some suggest pent-up demand for babies:

https://mb.cision.com/Main/1031/3283277/1370332.pdf

[Gregmal]

Nice little bolt on acquisition. 

https://www.hamiltonthorne.ltd/index.php/2021-press-releases/277-hamilton-thorne-announces-the-acquisition-of-tek-event-pty-ltd