US$18BN Baxter extends US reseller deal with ONE, expands to Canada.

Disclosure: S3 Consortium Pty Ltd (the Company) and Associated Entities own 5,322,333 ONE shares at the time of publishing this article. The Company has been engaged by ONE to share our commentary on the progress of our Investment in ONE over time.

Its US$18BN partner just signed up for two more years.

All to keep pace with an even bigger fish who has snapped up more than 50 companies in the last decade.

The race to modernise US hospitals is on, and our Investment is right in the thick of it.

Today our health tech Investment and 2021 Tech Pick of the Year, Oneview Healthcare (ASX:ONE) released its quarterly report.

Revenues were up 191% on the same time last year.

We aren't going to jump up and down too much about this because it was mainly from delayed payments from last quarter that have been recognised in this reporting quarter.

BUT...

What really grabbed our attention is the announcement of a 2 year extension to ONE’s “value added reseller” agreement with the US$18BN hospital bed and medical device supplier Baxter International.

(Source)

The deal also expanded scope outside of the USA region to now also include Canada - a positive signal that the ONE-Baxter relationship is progressing.

Baxter is a US$18BN NYSE listed global hospital bed maker (amongst a bunch of other medical products).

One of its biggest competitors is the US$134BN capped Stryker (who also sells hospital beds, and is also NYSE listed), who is making some aggressive moves in the M&A space.

A few weeks ago Stryker acquired care.ai which delivers virtual care workflows and smart room technology (sound familiar?)

Here is a 5 minute reminder of why we think Baxter is the ideal partner for ONE’s future growth...

5 minute reminder:

Who is Baxter:

NYSE listed Baxter International is a US$18BN capped US (and global) hospital supply giant which sells an enormous range of medical products to hospitals.

This includes hospital beds, after Baxter closed an acquisition of hospital bed maker Hillrom for US$10.5BN in 2021.

Baxter’s beds and other products are already in thousands of hospitals in the US and around the world.

In fact if you look closely at the hospital bed and other essential items like IV delivery tools and surgical equipment in any hospital room in Australia, you are bound to find the Baxter logo on them.

We estimate there are more than 500,000 hospital beds in Baxter's network in the US alone.

Ok, Baxter is a giant hospital bed supplier - What does ONE do?

ONE’s technology connects a patient in a hospital bed to nurses, meal service, medical images and records, educational content, entertainment and other in room systems to help make the hospital run better.

ONE’s bedside tech:

ONE sells its technology to hospitals and other healthcare facilities under a yearly recurring recurring revenue model.

ONE currently has 18,590 contracted hospital beds paying a yearly licence fee to use the ONE tech.

ONE’s share price has re-rated from 6c to over 30c after growing from ~9,000 contracted beds three years ago to now 18,590 contracted beds today.

The fit between ONE and Baxter:

Baxter and ONE have a Value Added Reseller (VAR) agreement where Baxter resells ONE's technology as part of its existing offering to customers.

Baxter could have up to ~75% of the US hospital bed market, meaning it could have at least 500,000 beds in its network.

Baxter wants to retain clients and sell more products to new hospitals, and keep ahead of its competition by adding digital tech to its product suite.

ONE wants to sell its hospital bedside tech onto as many hospital beds as possible to grow from its current 18,590 contracted beds... and expand into the giant US market.

The basic idea is that Baxter gets value by bolting on ONE’s bedside tech onto its new hospital bed sales, or upsells it to existing customers.

ONE gets to leverage Baxter’s giant global sales team and existing relationships into hospitals to accelerate its sales velocity

Sounds good.. is it working?

The partnership deal was signed in June 2023:

The original Value Added Reseller (VAR) agreement was signed in June 2023 and was for a period of two years. Baxter International re-sells ONE’s technology as a “value add” in its existing offering to its customers:

(Source)

Read our initial commentary about the Baxter-ONE deal here.

Today we learned that the deal has been extended by Baxter for a further 2 years AND expanded to Canada too - which is a very positive sign for the relationship.

So what traction had the partnership delivered before today’s update?

Partnership Traction BEFORE today:

The best summary of traction to date is probably from listening to ONE CEO James Fitter deliver the ONE H1 investor update call that happened 8 weeks ago, which we wrote about here.

Here’s some of the key takeaways:

• James talked about the developments with Baxter over the last two weeks before the call. He mentioned ONE was preparing for joint meetings in the coming weeks with Baxter across five major health systems (Florida, Tennessee, Kentucky and 2x California).
• We also found out about the first joint Request For Proposals submitted with Baxter. James mentioned there were 100 different opportunities in Baxter’s pipeline that had the potential to add ONE’s offerings to thousands of beds in the US (as of this quarter there are now 139 opportunities - more on this below). ONE also confirmed the hire of a new Vice President of sales in the US, responding to inbound interest through Baxter.

5 weeks ago Baxter liked ONE enough to go “internet official” launching ONE on its website - this is a big deal for such a large company like Baxter - we wrote more about it here.

Also, Baxter has already delivered two deals for ONE:

(Source)

The announcement of the two year extension today noted that two Baxter customers have deployed a ONE product in the past week, and a new purchase order has come through for ONE’s “full suite” of products.

This is good traction, and we want to see more purchase orders roll through.

New things we learned in today’s announcement:

Today ONE announced that the Baxter deal has been extended by two years to July 2027.

An early decision to continue the deal - this is only 15 months into the first 2 year term of the deal - a very positive sign.

Here are our takeaways from this extension:

• Extension by two years - Baxter must see real value in ONE’s products so we’re happy to see Baxter locking away the deal for longer
• Expansion to Canada - the expanded geography of the deal should yield a wider “net” for ONE to secure new deals through.
• There are now 139 deals now in the pipe, 39 more previously in the August 2024 investor call Jame said was 100 in the half yearly results call (read our article, and listen to the call here)

Now we wait for these increased 139 pipeline opportunities to convert into new deals and contracted beds for ONE.

Why is Baxter interested in ONE?

Part of why we think Baxter is very interested in expanding its relationship with ONE is due to two pressing factors.

First, is the need for hospitals to modernise - Baxter has previously signalled in its earnings presentations that it is going hard at improving its tech offerings so that it maintains market share.

Second, is the fact that if Baxter doesn’t keep pace on the tech front, its competitors will step in to provide these modernised products and services, ultimately eating into Baxter’s market share.

Baxter’s key competitor in the US healthcare market is the US$134BN capped Stryker which is a massive medical technology company.

Baxter and Stryker are major producers of hospital beds:

How to differentiate yourself from competitors when selling hospital beds?

Bolt on some digital technology to improve the patient experience and hospital staff efficiency.

Stryker has been on an almighty acquisition spree making 54 acquisitions in the last decade or so, with an average deal value of US$743M. (Source)

Recently Stryker has been scooping up tech companies left right and centre to improve its offering - meaning Baxter needs to rise to the challenge by adding complementary products and services as well.

Two very interesting recent acquisition by Stryker include:

• $3BN for a hospital staff communications platform called Vocera, and
• an undisclosed amount a few weeks ago for a company that does “AI-assisted virtual care workflows” called care.ai:

(“patient care and experience” - again, sounds familiar?)

Baxter's value added reseller deal with ONE allows Baxter to compete against Stryker with its own digital bedside patient experience and workflow optimisation technology solution.

Now for the “quick” quick reminder:

The Baxter deal extension today is a positive sign and shows that Baxter sees value in the continued relationship with ONE.

There are 139 Baxter led sales opportunities for ONE - 39 added in the last two months since ONE’s half yearly results call.

Baxter wants to build out its tech offering, and with Stryker moving fast on M&A to add tech to their hospital bed, we think Baxter will lean into ONE’s tech to keep its edge in the market.

Today we are also going to take a bit of a deeper look into recent M&A in this space.

Now we certainly aren’t saying Baxter is going to acquire ONE - it’s still way too early in the partnership to infer anything like this, but if things go well who knows?

’As investors we like to examine what is possible from our Investments, so here goes...

M&A from Baxter’s competitors...

Earlier in today’s note, we mentioned the M&A happening in the Medtech sector.

M&A was also a topic that was brought up on ONE’s recent half-yearly conference call.

In the Q&A section of the call (starting at ~51:00), an MST analyst asked about M&A across ONE’s competitors.

MST Access recently released an excellent research report for ONE with a price target of $0.61 - you check out that full report here: August 8th 2024 ONE MST Report)

In the investor call, ONE CEO James Fitter briefly touched on the two takeovers in the sector but was quick to highlight that the more interesting M&A deals were happening at the Baxter level (the multi-billion dollar market leaders).

James discussed the acquisitions by Stryker (one of Baxter’s competitors) in the virtual care/bedside tech space and how it shows the bigger players see value in offerings like ONE’s.

Stryker and Baxter are the two biggest hospital bed makers in the world:

(Hill-Rom is owned by Baxter)

(ONE is bedside tech that connects the patient in the bed to the rest of the hospital systems)

A big part of the Stryker growth strategy has been M&A deals... lots of them.

Aggressive M&A from a competitor like Stryker would definitely be getting Baxter’s attention.

If your biggest competitor is going hard on tech deals to improve its product offering - it would definitely become harder to sit and do nothing.

Especially for something like a hospital bed where sales are probably made on the margins...

Hospital beds are the centrepiece of hospital rooms but the differentiation happens on the margins - the tech that sits around it.

All of the technology that sits around a bed is what can be the differentiator in a company's product offering - so the tech can be an important way of getting ahead of a competitor.

While Stryker’s been going hard on acquisitions, Baxter looks to have taken a slightly different approach when it comes to ONE.

The ONE and Baxter deal for now is a Value Added Reseller Agreement (VAR), where the companies collaborate to integrate and sell the combined products.

As part of the ONE & Baxter deal, Baxter installed ONE’s product into a “customer experience centre”.

(Think of these as display homes where builders show prospective home buyers what type of home they can build for them).

Then Baxter got to train its sales teams and bring them up to speed with the product offerings as well as how they integrate with Baxter’s existing offering.

It's a good way to test if the relationship works without a huge upfront cost to Baxter.

Now, signing an extension and adding a new market (Canada) is a pretty good sign to us that Baxter obviously likes what they are seeing OR the feedback they are getting on ONE’s products is strong.

Again, we note the partnership has already built up an “internal pipeline of 139 opportunities”.

(Source)

We think the partnership will add a lot of value to ONE’s product offering - now to see those 139 pipeline opportunities start converting to contracts for ONE.

Speaking of Baxter integrating ONE’s products into its product offerings...

For those who are new to ONE - here is a reminder...

Think of ONE’s tech as a single touch screen at your hospital bed where you can:

• Have virtual consultations with relevant medical specialists - local and worldwide.
• Control all aspects of your room - bed, lighting, temperature.
• Order food, watch movies, and get a nurse's attention - like the screen you get in your airline seat when flying.
• Interact with tailored rehab, education and training videos - for a patients specific health situation and;
• Monitor your health outcomes - Doctors and nurses will have better info on you, replacing the clipboards, pen and paper currently used for this.

Here is what Oneview’s tech looks like at the patient's bedside:

For years, ONE was selling its tech embedded in custom hardware.

ONE has had to contend with the logistics of hardware, tablets, and monitor screen arms to physically install its tech in a hospital room.

(ONE is still selling hardware - like a digital door sign and digital whiteboard which we really like, but the core tech has evolved...)

Recently ONE launched a “bring your own device” (“BYOD”) solution - called “MyStay” where patients can bring their own phone or tablet to a hospital and plug straight into ONE’s platform on arrival.

We think the BYOD solution is where the next phase of exponential growth could come from for ONE.

Instead of having to convince hospitals to make upfront investments on hardware, ONE only needs to show that its technology will streamline a Hospital’s process AND that its tech will improve workflows.

After making the sale, the implementation will also be super easy with no hardware installation that needs to be done.

(Source)

Read more about ONE’s MyStay in this note: Baxter is Coming... and so is BYOD.

We think that with Baxter onboard to get ONE’s product into the hands of customers, ONE is currently set up to scale fast. We are hoping that as ONE scales it achieves our Big Bet which is as follows:

Our ONE Big Bet

“ONE will sign on enough new hospital beds at an accelerating rate to achieve a $1BN valuation (based on 5x to 10x forward annual recurring revenue) and be acquired by a large health tech provider.”

NOTE: our “Big Bet” is what we HOPE the ultimate success scenario looks like for this particular Investment over the long term (3+ years). There is a lot of work to be done, many risks involved, and it will require a significant amount of luck. There is no guarantee that it will ever come true. Some of these risks we list in our ONE Investment Memo.

How does today’s news impact our ONE Investment Memo?

Today’s deal means ONE extends the VAR with Baxter for an additional two years.

This adds weight to one of the key reasons we are Invested in ONE.

Value Added Reseller agreement with largest hospital bed supplier in US

ONE now has an initial 2 year “value added reseller agreement” with the largest hospital bed supplier in the US (Baxter International).

Under the agreement, Baxter will sell ONE’s technology to certain customers in Baxters’ current customer base (~75% of the US hospital bed market). Given the market reach of Baxter, this agreement could unlock significant growth in contracted beds for ONE.

Source: “Why We Invested” - 22 September 2023 ONE Investment Memo

What are the risks for ONE right now?

The two key risks to our ONE Investment in the short term are “sales risk” and “funding risk”.

Sales Risk because there is no guarantee that ONE hits sales guidance that is in the market (and likely to be priced into the company’s valuation).

There is also a chance that the sales pipeline won't convert as quickly as we would like.

Large institutions like hospitals don’t tend to adopt new technology very often and the sales cycle can be long.

This feature of ONE’s customer base can cause delays in sales that drag out over a long time.

Macro factors in the market including a recession can cause a reduction in spending on new technology, affecting ONE’s ability to make sales.

Funding risk is also one thing we think could impact ONE’s share price in the near term.

ONE ended the September quarter with a cash balance of ~€4.7M (~$7.7M). If this continues to fall as ONE can’t make quick enough progress to operating cashflow breakeven, then a capital raise may be required at some point in the future.

Our ONE Investment Memo

In our ONE Investment Memo you’ll find:

• Key objectives for ONE
• Why we Invested in ONE
• The key risks to our Investment Thesis
• Our Investment Plan