Two years ago, when we last interviewed SHL Telemedicine Ltd. (SHLTN) joint-CEO Erez Alroy, who is from the family that founded the firm, he declared that he wanted to be number 1 in Germany, the market that has become the main growth engine for the Israeli company. Two years on, SHL is indeed the leading company in its field in Germany, but Alroy is not satisfied with that. "Now I want to widen the gap between us and numbers 2 and 3," he says.
Alroy is a naturally optimistic person, but there are grounds for his ambition. SHL Telemedicine, which has been traded on the Swiss stock market for twelve years, won two tenders by German health funds this year. The first win, in March, was with IKK Sudwest, which has about 700,000 insured persons. The second, in May, was with AOK Bayern, one of Germany's two largest health funds, with four million insured persons. The latter win was a jump up several levels for SHL, and in honor of it the co-managing director of SHL Telemedizin in Germany, Georg F. von Oppen, came to Israel to meet Israeli investors. Together with Erez Alroy and his brother Yariv, who share the CEO position, he is delighted to talk about the terms of the collaboration agreement with AOK and its business potential.
First, some background. SHL Telemedicine, which was founded a quarter of a century ago as a company operating intensive care ambulances (a business that still operates in Israel and accounts for a substantial proportion of the company's revenue), became in the course of time one of the leading companies in the world in the provision of remote monitoring and diagnosis services for congestive heart failure (CHF) and chronic obstructive pulmonary disease (COPD) patients.
CHF manifests itself in reduced ability of the heart to function as an efficient pump receiving blood and sending it to all parts of the body, while COPD means reduced functioning of the lungs as an organ absorbing oxygen and expelling carbon dioxide, as a result of heavy smoking or high exposure to smoke and environmental pollution.
In many Western countries, these two conditions are leading factors in impairment of quality of life, and as causes of death, and so treating them costs health funds a great deal of money. SHL's monitoring solutions, enabling the patient sitting at home to be weighed, to have his or her blood pressure and blood oxygen measured, and even to carry out a partial ECG on themselves, mean a huge financial saving for the health funds, hence SHL's importance to them.
SHL started to penetrate the German market in 2005, and not by chance. Health services in Germany began to undergo comprehensive reform with the aim of sharply reducing the number of funds in Europe's largest economy. The German government decided to stop funding the health funds, compelling them to operate on an economic basis. Funds running deficits were forced to close, or to merge with larger and stronger funds. In this way, the number of funds fell from about 1,000 to about 140 today, with the expectation that in the near future there will be fewer than 100.
This reform suited SHL, with its cost cutting solutions, very well, and so it started to conquer the German market.
There was however a sting in the tail. The consolidation of the funds also held a disadvantage for SHL, which hurt its revenue last year and this year, after it lost an important customer, a fund that merged with another one, resulting in cancellation of its contract with SHL. "Until recently, the contracts with the German health funds would renew annually," explains Yariv Alroy. "When a merger takes place, a contract with a company like SHL is automatically canceled, and there's no-one you can talk to. Therefore, when we signed the contract with AOK, we took care that it should be for five years, not just for one."
And can you be ensure that such cancellations won't recur?
Yariv: "Theoretically, no. In the case of AOK, however, the chances of it being sold to another fund are slight. On the contrary, it is more likely that it will take over other funds, and for us that could become an advantage."
When the Alroy brothers and von Oppen talk about the win in the AOK tender, their eyes shine. That's understandable: Germany is made up of 16 states, divided into 439 districts. About half the population lives in three states, one of these being Bavaria. AOK has a market share of over 40% in Bavaria, hence its relative strength.
SHL will provide its services to COPD patients insured with AOK, while in the case of IKK Sudwest the service will mainly be for CHF patients. The AOK tender win is therefore the largest COPD deal yet made in Germany, and Erez hopes that "this deal will open doors for us to further similar deals."
Is that realistic? After all, there are not many other funds of AOK's order of size?
Erez: "There are two or three more funds like AOK, and we hope that its choice of us will help us reach the smaller funds. Because of its size, AOK is a model for others to follow."
Yariv: "In the end, the reform will mean that there will be about 30 funds in Germany, and some of them will have 2-3 million insured. Our success with AOK can therefore pave the way to other funds, and perhaps not just for one disease."
What then is the economic potential of the agreement with AOK? In Germany alone there are more than 3 million COPD patients. They generate 200,000 hospitalizations annually. Since AOK insures more than 4 million people, it will have about 150,000 COPD patients. "We set a goal of reaching 20,000 out of this total," says Yariv. "Under our contract, our service is measured according to the economic saving it generates for the fund," explains von Oppen, "The cost of hospitalizing one COPD patient in Germany is around €10,000 a year, and we can save 30-50% of this for the insurer. Since we are entitled to half this saving, we can receive €1,500-2,500 per patient a year. In this way, tens of millions of euros a year can be generated in revenue."
The three executives also explain that joining SHL's service is voluntary, but since it is fully subsidized by the health fund, the patient has no reason to refuse to join. "The health industry in Germany turns over $300 billion, 12% of total GDP," says Erez, "We are now starting to reap the plumper and riper fruits of our penetration into Germany."
This optimistic forecast makes SHL's management believe that the company can reach revenue of $100 million within three to five years from now, and not just through the German market. "We plan in the longer-term future to go into Japan and other markets in Asia," Erez says.
Published by Globes [online], Israel business news - www.globes-online.com - on December 4, 2012
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