liberator medil

7/22/2019 Liberator Medil

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embarrassing to talk about. I wa s just reading an article about how sal es o r pornography skyrocketed with th e inventionof th e VCR since before you had to si t in a theatre with others in public to ge t t ha t product - which is more limited to die-ha rd fans. . .

Liberator also is th e po in t o f "capture" fo r t hi s val ue fo r two reasons. First is that t he cus tome r s don' t even c ar e a bou thow much they pay because they're no t paying. So as long as their customer service is good (which is a huge point ofeffort for them) then the cus tomers have no reason to shif t to another provider seeking a better price. Second, th eproducts are interchangeable - they carry over 5000 - so the vendors can't demand a higher margin. Additionally to thispoint th e reimbursed price is regulated by Medicare, so there is no pr ice competition.In terms of "hard to copy" - th e two key things about Liberator that fit this description a re t he logistical difficulties ofbilling Medicare and th e execution factor on customer service and stocking and shipping. While some businesses prosperbecause of some unique asse t o r brand, most ar e all about execution. In particular, this is a business that can bescrewed up easily with poor execution du e to th e thorough audits , et c with Medicare billing. The founder is the maincompetitive advantage here who has been doing this exact business for 20 years with an incredibly proven track record.I visited th e company in Florida in January looking to se e things that might have looked disorganized or have th epotential to ge t to that point and was incredibly impressed how well run the place is and how much people seem to likeworking there (important considering how large a factor customer service is). They are very anticipatory of their growthand have made sure to build capacity ahead of their revenue so they don't ge t overwhelmed. Billing Medicare requireskeeping detailed customer records and I understand that any time they have been denied; they have always been ableto win in th e end .

Of course, the key risk here is the payerconcentration (Medicare is 80%/ private insurance-copay is 20%)^Medicarehas been jgxperimenting with competitive bidding processes in certain industries to lower their costs. Most recently wa swTtFTdiabetes products in Florida^ which has begun to change the landscape of that market and make it less interesting.While this is certainly a risk, I think it is insignificant for a player as small as Liberator because they are focused ontrying to be a leader in smaller niche markets. The catheter market for Medicare is currently about $200M or so whereasdiabetes products is over $2B. IfMedicareacts rationally and goes after the bigger savings targets, they should beunder the radar for a long time - it would probably cost more to conduct a competitive bidding study than the endsavings for something like catheters. I should not too that the reimbursement rates for catheter products has nevergone down and has gone up roughly with inflationfor the last 10 years according to the company.So, given all that qualitative stuff, what's it cost and wJiaJ^s-tt-worth^^^They currently have 45M shares out, and say anothfl0M warrantsjpd options so 55M shares to be conservative(some cash would come in from these so it would be a bit lowertising treasury method) at $1.26 as of the last close or


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capacity up front so it's probably overstated right now. In that case, theycould maybe_get net margins as high as 15-16%^ ' ' 'Conservative: PE of 15 = 165M mkt cap / 55M shares = $3.00/share in 2 yearsMost optimistically for 2013 I'd sa y a target price of 20X PE and 16% net margins = 20*16M/55M shares = $5.80A key point here is that it would be very difficult to imagine revenues decreasing due to the highly recurring nature - theconditions they sell products for last indefinitely and they don 't even need to bill their end customers, just Medicare.Also, an important accounting note is how they capitalize their advertising. While of course I'd like to see all advertisingexpensed, they_expense halftheiraj^rtisjng jnjjiejirst yearand the other half over the next3 (so expensed over4y arsjLolaTj. I think this is fair given how solid the recurring revenue is but this will lead to cash flow being lower as longas they are growing, similar to a retail store or manufacturer needing to expand working capital. The advertising is^direct response so they have solid data on how high the return on investments and they could easily justify far moreaggressive capitalization under GAAP and choose not to. Were they to decrease advertising expense to a maintenancelevel (as opposed to aggressive growth currently), their current PE would be under 10 I'm quite sure.So in summary, Liberator is a rapidly growing (40%+) medical supply company that has just in the last 12 monthspassed the point of requiring equity financing. Their leader owns 1/3 of the stock and has done this play before withg re a t s uc ce ss and will repeat it.

Va r i a n t V i ew-Medicare could slash reimbursement r a tes-Old people could have earlier than expected deaths or move into nursing homes (they sell to end customers, not oldfolks homes)- In ternal screw ups / ball dropping due to rapid growth-Increases TV advertising rates (has been happening as economy recovers)-More competition in catheter space from better funded / bigger competi tors-Old people don't watch much TV anymore, change to Internet/talking to other old peopleV a lu a ti on Me tr ic s(Units inmillions, except for per share data or if otherwise noted.)

Valuation Multiples Data Multiple Valuation Multiples Data Multiplerading Statis t icsPrice At Recommendat ionPrice target

1.26 P /4.00

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C omm e n t s

Steven Roge (R. W. Roge & Company, Inc.)posted about 1 year ago - 02/14/2011 at 07:44PMNice f ind!

It looks like changes in working capital prevented them from becoming FCF positive in 2010, not surprising sincethey are growing rapidly. Any idea of what % of revenue will drop to FCF as this company matures?Regards,

S t e v e n

Ryan Morris (Meson Capital Partners)pos ted abou t 1 year ago - 02/14/2011 at 07:50pmThe only significant difference between net income and FCF for this company is going to be the advertisingcapitalization. They don't really have any significant capital expenditures since it's just a fairly capital-lightwarehouse and call center. If they stopped growing the FCF = net income, if they grow revenues by 50% in a yearand increase ad spending the same amount, then it would work out to something like a difference of net income -FCF = ~25% of ad spending that year. That's all for growth though, so on a maintenance level, they are expensingmore advertising than the ' treading water level'. If they expensed all advertising up front then FCF and Net incomewould be equal.Sorry for th e long answer, I hope that makes sense .Christian Alpers (Trans-Atlantic Group, Inc.)posted about 1 year ago - 02/14/2011 at 08:10PMYes, very nice write-up. But tough to get into, due to liquidity being very narrow.Ryan Morris (Meson Capital Partners)


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Paras Dagli (Private Fund)posted abou t 1 year ago - 02/15/2011 at 08:iiAMI never looked into th e details of ROCM and why it wasn't able to deliver. Mainly because I was never impressed w/management. I think the biggest i ssue was C.R. Bard owned a major ity of th e market share. Bard was able to use itsmarket share and established relationships w/ providers to keep ROCM out of the hospital network. ROCM alwayshad a chance to get into the direct-to-consumer market but it never seemed to be able to break through."Supported by its strong sales force, Coloplast had over 50% of the market in 2009, with C.R. Bard, Astra Tech,Rusch, and Hollister also accounting for a notable share in this segment that year. A substantial sales force isnecessary to develop appropriate relationships with health care providers in order to ensure that prescriptions arebeing written specificallyfor a manufacturer's device and with distributors in order to ensure that they promotespecific devices to end users. The dominant presence of larger competitors in this market and their existingrelationships with health care providersand distributorsmay therefore prevent smaller competitors from entering orbeing more successful in this segment."http://www.news-medical.net/news/20101026/Medicare-reimbursement-changes-increase-demand-for-intermittent-catheters.aspx

Although I think Liberatoris focused on the direct-to-consumer market (this is from myquick read on Liberator),whereas CR Bard is focused on the direct-to-providers. It would be interesting to get a break down of these 2markets .

Matthew Goodman (Praetorian Capital)posted 4 months ago - 10/12/2011 at08:44PMDo you believe this story is as appealing as whenyou first wrote it up? any changes to note? have you averageddown?

Shaun Noll, CFA (Stirling Capital Management)posted 4 months ago - 10/12/2011 at 08:58PMnot sure about Ryan but certainly still looks interesting to me and I bought a little today, nice to see some small


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Example Position: LBMHa Liberator Medical sells recurring use medical products using direct

advertising. Founded and 1/3 owned by Mark Liberatore who createdand sold Liberty Medical - currently a $600M+ business.Revenue is growing by 30%+/year, currently trades near IX sales, compsall at 2X sales with minimal growth.Net Income distorted because of advertising expense treatment, pro formatrades at 6X PE. 9$QS0* * le^Ju ^*z^*f

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