Summer Series: Volpara Health Technologies (ASX: VHT)

Bryce: [00:01:16] Welcome to another episode of Equity Mates, a podcast where we help you learn to invest in 45 minutes or less. We break down the world of investing from beginning to dividend so that you can hopefully make some returns. My name is Bryce and as always, I'm joined by my Equity Mates Ren. How's it going, bro? [00:01:31][14.8]

Alec: [00:01:31] I'm good. Bryce. How are you? [00:01:32][0.9]

Bryce: [00:01:32] Good night. Good. Always excited to be talking stocks. And today we continue our shallow dives for our summer series with companies that have been suggested by our audience. Yes, we've had some interesting companies over the last few episodes and that does not stop with this episode. We are going to be discussing Valspar v. H.T. is the ticker code, so don't get that confused with the voice over on the New York Stock Exchange, which is the Vanguard health care index fund. [00:02:00][27.7]

Alec: [00:02:00] Yes, I'm [00:02:01][0.5]

Bryce: [00:02:01] hoping that the listener who suggested he didn't want us to be doing a deep dive on that and not faux pas because we didn't specify ASX. [00:02:08][7.2]

Alec: [00:02:09] Oh, I don't know. Do they? They might have given us the name, not the stocktake. [00:02:12][3.5]

Bryce: [00:02:13] How potentially I feel like they gave us the stock ticker. [00:02:16][2.5]

Alec: [00:02:16] Well, if they wanted us to look at an ETF, I mean, interesting. [00:02:20][4.3]

Bryce: [00:02:21] But anyway, we digress again. So Vol Pyra Ren is a New Zealand company actually based over in Wellington. Yeah, it's a research and development company. Health care is the sector that it's in and it specialises in breast imaging analytics. Yes. And analysis products that help to improve the decisions that our doctors and those that are trying to identify breast cancer help them to improve and identify breast cancer diagnosis. [00:02:50][28.9]

Alec: [00:02:51] Yeah, 100 percent. [00:02:51][0.6]

Bryce: [00:02:52] So pretty important. Pretty important business is pretty important to our society. Anything to add to to what it does [00:02:57][5.8]

Alec: [00:02:58] not at this stage. I mean, you summed it up there. It uses artificial intelligence and machine learning to analyse images to try and get better at detecting breast cancer. There's over half a million breast cancer deaths every year. So a big need for it. Yeah, I guess one thing that we will probably get into eventually so we might as well get into now is it seems like what they're they're arguing for is not just better technology, but a certain type of imaging and a certain type of analysis, which I think is contested in the scientific field. Now, this is all you know, we're only doing a shallow dive here. So if you were thinking about investing in this company, you would want to get deeper into this issue and really understand what is going on here. But I'll give you my brief understanding of it. So Bopara is focussed on a risk factor of breast density. And I guess there's a scale that they use of a today where A is the least and still is the most dense. C is considered one point two times more likely than the average woman to have breast cancer. And day is considered two point one times more than the average or six times more likely than that, a class to develop breast cancer. So in a nutshell, they're arguing that this breast density is an important risk factor and it should be considered more and a lot of the technology like this that is focussed on measuring that risk factor. But it seems like it's not universally accepted as an important risk factor. In the twenty nineteen annual report, the CEO lists a number of major studies around the world that support breast density as a major risk factor or critique the current imaging system, which is acronym is by Rud's. So it seems like there is some level of trying to prove that point as well about this is a risk factor. So I just searched breast density for breast cancer and a lot of the information sites sort of talk about how density is a risk factor, but then they put a number of caveats. So for the sake of completeness, I'll read some of them out so density can vary at different points in people's lives. And so and it can be scored differently from one clinic to another. And so it's difficult to draw conclusions around risk based on density alone. Even for people with extreme density, the risk of developing breast cancer is not as high as other well known risk factors. And then many women who don't have density can still develop breast cancer. So I guess that is all to say that not only are they trying to develop and commercialise the technology, but it seems like they're also trying to win a argument. Argument around. Yeah, yeah. Around whether it's the best way. Yeah, yeah. [00:05:52][174.2]

Bryce: [00:05:52] So because it's all about early detection. Right. And they're trying to detect it as early as possible. [00:05:57][4.8]

Alec: [00:05:58] Yes. [00:05:58][0.0]

Bryce: [00:05:58] Yes. So that's where the arguments coming around is. What is the best way to detect it. As early as. [00:06:02][4.3]

Alec: [00:06:03] Yeah. And then I guess their argument is twofold. One, that this is an important risk factor and two, that their technology is the right technology to attack this risk factor. And so to jump ahead to the question that you've been asking at the end. Those sessions, is it in your circle of competence for me, I would say I have no idea about this scientific argument that's going on. Yeah, and it seems that whether this technology works and whether it's cost effective, whether clinics like it is secondary to the broader scientific argument. And so for me at this point, well, outside my circle of competence, because I have no idea how important density is as a risk factor. And it seems that a lot of the company's fortunes depend on that debate. [00:06:46][42.9]

Bryce: [00:06:46] Yeah, I would agree Ren. I don't tend to go to bed and read read up on these sorts of things at night. So certainly outside of my circle of competence as well. But nonetheless, pretty interesting to try and get your head around all of these sorts of things because, you know, they throw it throughout their packs that they've been approved by the FDA and risk assessments and all this sort of stuff, which can be misleading, I guess, in some instances. [00:07:11][24.9]

Alec: [00:07:11] So got to pick you up there. You said that they've been approved by the FDA. It's important the terminology you used if you've read the Theranos book. [00:07:20][8.3]

Bryce: [00:07:20] Yes. And listen to the podcast. [00:07:21][1.1]

Alec: [00:07:22] Yes. The drop out. They haven't been approved by the FDA. They've been cleared by the FDA. So FDA is the Food and Drug Administration in the United States and they have the responsibility for approving drugs, but also medical devices. FDA cleared is when a device is substantially similar to other devices that have already been approved. The FDA doesn't do a thorough examination and they clear it. And that's how Theranos floated along for a while. And then they had some other loophole around being a laboratory. But FDA approved is when the FDA have reviewed specifically and approved. [00:07:58][35.7]

Bryce: [00:07:59] Interesting. And so in this case, it's a clearance. Yes, primarily based on the fact that it's very similar to existing technology and devices out there at the moment, [00:08:08][9.0]

Alec: [00:08:08] because I think Bopara isn't trying to add value in terms of the device itself. It seems the device itself is a means to an end, which is the I and the machine learning use to analyse what's being shown at a better rate than currently exists. [00:08:25][16.6]

Bryce: [00:08:25] So is there long term play here to win the argument so that win the argument against early detection in the best way to do so and then have such a patented product that they sort of cornered the market into using this? [00:08:39][13.8]

Alec: [00:08:40] I don't know. You'd have to you'd have to ask them. [00:08:41][1.6]

Bryce: [00:08:42] Well, they're not hearing [00:08:43][0.7]

Alec: [00:08:44] from what it looks like. They have recently acquired a company, medical reporting software, MERS, and that gives them access to, I think, close to two thousand clinics in the US. And it seems like they've got technology that helps clinics regardless of this broader argument. But then I guess the question is they would also be hoping to sell the specific stuff around density to those clinics as well. Yeah, well, [00:09:10][25.3]

Bryce: [00:09:10] it's interesting, this MERS, medical reporting systems or software, you know, we were talking about APEN and how they used data to feed into IWU. Part of the reason that they brought this MERS was because of the huge amount of data that MERS has already on screened women and how they want to feed that into their eyes to help, I guess, build their technology and strengthen their argument that their way of detection is probably the best. [00:09:37][26.7]

Alec: [00:09:37] So I'm just looking at their list of products. So there's a specific product for power density which relates to that argument that we were talking about before. But they've got a bunch of other ones that look like sort of enterprise software to manage clinics. So faux pas enterprise, Bopara, Enterprise, Day-Day, pay Valpak, Scorecard VOP are alive and then a lung scanning one as well. So it looks like part of the business, which is on density, part of their business, which looks like it's about lungs and then a lot, which is around enterprise software. So I think the strategy is to build software that like clinic management software or be at AI to help breast cancer screening clean. [00:10:21][43.3]

Bryce: [00:10:24] But they might very interesting stuff. Well, how about we move to the financials Ren because we it's worth trying to have a crack at a valuation, despite as we've experienced over the last few companies. This one does have a negative earnings per share as well. So it's going to be a bit difficult to do a DCF. But from what I'm saying, they had revenue from contracts with customers going from two point eight million in 2008 to five million in 2019. Now, that is in New Zealand dollars based over in Wellington. Yeah, gross profit on that four point one million gross profit on on five million in revenue with contracts. However, then you've got to take into consideration operating income, sales and marketing. Once you do all of that, unfortunately, we come out with a bit of a we come out with a loss Ren of eleven point seven million, seven years. So significant loss. Yes. Ouch. [00:11:19][55.1]

Alec: [00:11:20] But I guess, you know, to be expected, is it? Yeah, I think companies that are doing, you know, creating medical devices in a relatively early in their trajectory, that's that's not surprising. True. [00:11:31][10.8]

Bryce: [00:11:31] True. Right. Well, three hundred and ninety two million dollar market cap Ren and it falls in the health care sector. Unfortunately, we can't give it a price to earnings because it's earnings per share are negative, as I said. So as we've discussed previously, we can have a look at, say, price to sales are the key metrics. If I'm looking at what Morningstar have come back with, they have come back with a fair value of one dollar and seventy four cents. It's currently trading at a dollar eighty. So within that [00:12:01][29.6]

Alec: [00:12:01] range, how Morningstar always within the [00:12:03][2.3]

Bryce: [00:12:03] range. It is amazing. And I guess that's why the professionals at it and they also do release these reports every day. So it's a daily update. Right. So I've got yesterday's we're recording on a Saturday here. So I have Friday's updated value. [00:12:18][15.3]

Alec: [00:12:19] Yeah, yeah, yeah. So if we look at price to sales, it looks like in Aussie dollars the made three cents revenue per share and they're trading at a dollar eighty. So sixty price to sales ratio is high, higher than ninety five percent of the companies in its sector. So take that as you will. There's a lot of expectation built into those stock in terms of the discount cash flow or the Roger Montgomery style that we spoke about in our valuation episode, because the losses are expanding and there's no cash flow at the moment. Both of those valuation methods become fraught. [00:12:52][33.4]

Bryce: [00:12:53] Can you just on double back? You said there's a lot of expectation built into the stock. What do you mean by that? [00:12:58][5.8]

Alec: [00:12:59] So given that the market is willing to price it at 60 times its current sales, the market is projecting that that sales number will grow aggressively. [00:13:07][8.7]

Bryce: [00:13:08] And I guess the flip side is that if it doesn't, then we can probably expect to see the market react unfavourably towards it. [00:13:16][7.7]

Alec: [00:13:16] Yes, yes. And we've got to keep in mind that. So the stock sort of launched in twenty sixteen and it's up to 70 percent from there. So it's run a long way. And so, you know, the market are expecting to say something. Yeah. Yeah. [00:13:31][14.3]

Bryce: [00:13:31] So Ren there's one thing that I picked up on and relatively I'm not sure really where it stands, but I'd be interested to get your opinion on it. Ownership of the company by Founders Management Board is a good indication of, you know, they've got skin in the game, they believe in their strategy. They're probably going to be less inclined to focus on the short term incentives, you know, things that probably boost their short term incentives and focus more on the longer term. Total ownership of the company for founders and management is 26 percent. Now, I don't really know where that stands as a whole. I would have thought that if found would be would be more. Ah, it's hard to tell. I don't know. I don't know. [00:14:10][38.8]

Alec: [00:14:10] It's like twenty six percent of the publicly traded company is a lot. It's a good point. It's not like Zuckerberg would earn far less than twenty six percent of Facebook. [00:14:17][7.1]

Bryce: [00:14:18] Oh absolutely. Yeah. But it's also a multi hundred billion dollar company. Yeah. Yes. True. This is a market cap of three hundred million or thereabouts because [00:14:29][11.4]

Alec: [00:14:29] I think like when you list you have to sell shares or you create more [00:14:34][5.0]

Bryce: [00:14:36] dilute your [00:14:36][0.4]

Alec: [00:14:36] own. Yeah. Unless, unless you decide that you're going to subscribe to the IPO, you can maintain your percentage. I think. Twenty six percent is pretty high. [00:14:44][7.9]

Bryce: [00:14:45] Well I mean if it is, that's good news. [00:14:47][1.9]

Alec: [00:14:47] Yeah. Yeah. I would be interested to know though. [00:14:49][1.8]

Bryce: [00:14:49] Well maybe we should try and do some research off there and come back with another episode around the comparison. Yes. With this sort of stuff. [00:14:55][5.3]

Alec: [00:14:55] Yes. Insider ownership. [00:14:56][0.9]

Bryce: [00:14:56] If we're to use this as a gauge for the, you know, investing in companies, it'd be good to know what is that sort of line between, you know, invest. They're not earning enough and perhaps they're too invested in the company, if that's even a thing. [00:15:10][13.4]

Alec: [00:15:10] Yeah, no such thing as too invested in the company. [00:15:12][2.1]

Bryce: [00:15:13] Well, they could earn a hundred percent and then we can invest it all. So true. [00:15:15][2.5]

Alec: [00:15:17] Well if they earn 100 percent, why are they public. [00:15:20][3.1]

Bryce: [00:15:20] They wouldn't be impossible. Is it. [00:15:23][2.8]

Alec: [00:15:24] Yes, no, you could be publicly traded and just buy all the shares and just rather than taking a private stay publicly traded, that is true. And then the share price, I guess, just would never change because, as we know, liquidity in the stock. Well, maybe the ASX has rules around social issue, but maybe it's like you just want to publicly report, which everyone knows how good your company is. Anyway, you'll say if I found a company not selling any shares, but making it public. [00:15:55][31.6]

Bryce: [00:15:56] Well, I guess that's probably it from my point of view, for all power Ren not necessarily something that falls in my circle of competence, but again, an interesting one to try and get head around a few new concepts to learn in there and always a challenge to try and come up with a good thesis with these sorts of companies. Is there anything to add from your end? [00:16:16][19.9]

Alec: [00:16:16] Nothing much. The only thing would be we spoke about its end of 19 revenue, which was reported in March, twenty nineteen in September, twenty nineteen in the six months after its whole F 19 revenue number. So like in terms of growth forecast, I don't know the forecast, but for the year ending March 19, they did four point seventy nine million, Ozon, five million New Zealand. And then in the six months after that, that did six point thirty five Aussie. Wow. So, I mean, we were talking earlier about expectation being built into the stock that even if it keeps building its revenue momentum like that. Yeah, good things tend to happen. [00:16:57][40.9]

Bryce: [00:16:58] Well, keep an eye out, I guess, to see if they do come out with any adjustments to or guidance adjustments, because as we've learnt, the positive guidance adjustments generally mean that the share price is going to, you know, follow in the upward direction for some time to come. So keep an eye on that over the Christmas period going into the New Year reporting season. Good call out last one. Well, we'll leave it there. Another shallow dive complete and we'll pick it up again next episode. Sounds good. [00:16:58][0.0]