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Catasys: This Is Bigger Than You Think
Contributed Opinion

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Daniel Carlson Daniel Carlson of Tailwinds Research examines the "blockbuster" implications of a recent announcement about this company's OnTrak program.

Sometimes big news falls on deaf ears. Which, by the way, is one of the reasons I like the micro-cap space. With only a few analysts, if any, focused on a company, meaningful news can often be overlooked for days or weeks. What happened July 23 in Catasys Inc. (CATS:OTCBB) is a classic example of the market not fully grasping the importance of a press release.

In our opinion, the news out of Catasys was game-changing and deserving of a revaluation in the market. Instead, the stock went down. The result of this is a great buying opportunity for those who have yet to get their fill of CATS.

First off, a little background. We have been bullish on Catasys for a long time here at Tailwinds. The main thesis of our recommendation has been the incredible growth opportunity in front of them as they roll out their OnTrak program to larger patient populations. Based on historical numbers, if nothing changes, they are poised to earn $120 million or more in revenue in 2020, up from around $38 million this year. Catasys is a great growth story just starting to unfold.

However, what has always intrigued us, and why we have made this such a large holding here at Tailwinds, is the upside to the story. Yes, Catasys is making great progress in diagnosing and treating mental health disease, but there's an even bigger opportunity here. As we wrote about over a year ago, Catasys is in the process of gaining more access to medical records, and outcomes, than any other company out there.

Here's a portion of what we said at that time:

"If Catasys signs seven of the eight largest health insurers as clients, which they are well on their way to doing. . .and, if these clients continue to roll out OnTrak across their network. . .Catasys could, theoretically, have the patient healthcare data for well over half of all Americans.

"The implications of this are incredibly broad and extend well beyond their OnTrak program and its effectiveness. With more data on patients, including outcomes, Catasys will be able to create many different programs to offer to insurers. The potential of OnTrak is huge; the longer-term potential inherent in them having the most healthcare data on the planet is much bigger."

The July 23 press release, in which the company discussed expanding their capabilities beyond behavioral health conditions, is the start of what we saw coming. Catasys is taking their unprecedented access to medical records and combining it with an industry-leading artificial intelligence (AI) team to start looking for more ways they can help diagnose disease and, thereby, help patients while saving insurers money.

As their CEO, Terren Peizer, stated in the press release:

"The data from healthcare delivery is complex, rarely interoperable and therefore underused. Using the latest techniques in AI and over a decade of research, Catasys has solved these challenges by creating what we believe to be the most valuable technology platform for populations that are care avoidant or not engaging in care. We can now predictively and rapidly identify care avoidant individuals with major chronic disease and those for whom targeted interventions will improve outcomes and reduce the cost of care."

The implications of this are absolutely huge for investors in Catasys. The number of Americans who suffer major chronic disease is a much larger pool than those with only behavioral health disease. These people also cost the healthcare system a lot more money. This is the reason that Peizer said, "Catasys health plan partners have encouraged us to make these new AI capabilities available as soon as possible."

By expanding their offering, Catasys has greatly expanded the number of potential enrollees in their programs. They have also given service providers an increased urgency to sign onto the platform and roll out new territories and diseases.

We believe Catasys will be announcing new programs with healthcare plans soon. OnTrak 2.0, which really leverages the data Catasys has at their fingertips, has been in development for a while. These newfound capabilities will be part of OnTrak 2.0, making it that much more compelling; I suspect we'll start seeing adoption by insurers in the near future.

Meanwhile, the target outreach pool for Catasys has just grown exponentially. And this might only be the tip of the iceberg. What other products will they be able to develop with their AI capabilities? Catasys has access to more healthcare records than anyone, plus a team that knows how to leverage this information. One can imagine numerous other products over time.

Despite this blockbuster announcement, shares of Catasys are have traded down over the last week. What is causing this? I believe there are two reasons for the weakness in CATS. First, former board member David Smith has been a continual seller of shares. As of July 15, he still owned over 1 million shares, despite ongoing sales. This has certainly been an overhang for the stock.

More importantly, the short interest in CATS has been increasing, along with the borrowing rate for shares. I believe the shorts are hurting in this trade and are trying to push shares down. There's been a persistent rumor of a secondary offering—a rumor that Peizer has continually refuted. However, as long as the company burns cash and there's a short position, that rumor will persist.

From our perspective, the sales by Smith and a potential (albeit unlikely) secondary don't worry us. We prefer to look at the big picture here. And, with the July 23 press release, the picture has gotten that much bigger.

Catasys is on the verge of being a powerful force in finding and treating mental, and now physical, health diseases. We eagerly look forward to watching the story unfold over the next several years as bigger rollouts happen, and as CATS continues to diagnose and treat more diseases. The current business is great, but the future remains even bigger than most investors can believe.

Daniel Carlson is the founder and managing member of Tailwinds Research Group and its parent company DFC Advisory Services, which is a licensed registered investment advisor (CRD # 297209). Tailwinds is a microcap focused research company that provides research on and consults to over 20 emerging growth companies in the technology and life sciences arenas. DFC Advisory Services is an RIA that manages money dedicated to investing in the companies covered by Tailwinds. For more information on these two companies and their track record, please see Prior to founding these two entities, Dan spent many years working with small public companies, having been CFO of two public companies and helping finance many others. A 1989 graduate from Tufts University with a degree in Economics, Dan’s formative years in business were spent as an equity trader, first on the Pacific Coast Stock Exchange then on the buyside at several multi-billion dollar firms.

This article was submitted by Tailwinds Research. For more information on Tailwinds Research or on Catasys, please visit

Tailwinds owns stock in Catasys. For a complete list of disclosures, please click here.


1) Daniel Carlson: I, or members of my immediate household or family, own shares of the following companies mentioned in this article: Catasys. I personally am, or members of my immediate household or family are, paid by the following companies mentioned in this article: None. My company has a financial relationship with the following companies referred to in this article: None. Additional disclosures and disclaimers are above. I determined which companies would be included in this article based on my research and understanding of the sector.
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