MLSS - Milestone Scientific: Buy For The $4 Billion Total Addressable Market

2023-06-15 18:41:42 ET

Summary

• Milestone Scientific offers an innovative product line in the medical and dental segments, including a trademarked solution for Dentists to administer local anesthesia called SingleTooth Anesthesia.
• The company meets key investment criteria such as a large total addressable market, low institutional ownership, and high Quant ratings.
• Despite the high level of risk associated with micro caps, I recommend building a small position in the stock for risk-tolerant investors due to its significant upside potential.

Thesis

I recently opened a position in Milestone Scientific ( MLSS ). This company meets some of my key criteria for an investment like a large total addressable market, low institutional ownership, high quant ratings, and an innovative product line. While micro caps come with their risks, I recommend building a small position in this stock to risk tolerant investors for significant upside potential. In this article, I overview the product, measure the total addressable market, and discuss financials before addressing the risks that come with this buy call.

Product

Milestone Scientific supplies anesthetic administration assistance products in two segments: medical and dental.

Dental

In the dental segment, they have a trademarked solution for administering local anesthesia in the mouth called SingleTooth Anesthesia. In place of a traditional syringe, the computer assisted wand controls the flow of the anesthetic from the needle using real time data to deliver an injection at an optimal rate in order to minimize the patient's pain during the injection and the collateral numbness around the target area. The wand further positions the needle at the appropriate angle to minimize the pressure caused by the outflow of the anesthetic. Milestone Scientific cites 15 academic research papers which collectively demonstrate the patient's preference for SingleTooth Anesthesia, especially in pediatric dentistry.

Medical

In the medical segment, the CompuFlo is designed for epidural procedures, in which the lower stomach area through the upper legs is numbed by administering a shot into a very precise location in the spine. This procedure is common to make delivering a baby less painful for women in labor, and without CompuFlo it can take many tries to successfully perform this procedure, prolonging the patient's pain and taking up a doctor's valuable time. Often times, a catheter will be placed by the anesthesiologist during the epidural procedure to enable future access to deliver medicine to the target area. Milestone's CathCheck offers real time data on the tricky placement of this catheter to help anesthesiologists save time and effort in making decisions during a procedure that fails at a high rate of 8% to 23% according to a paper in the NIH Library of Medicine .

Total Addressable Market

Separately, there are large total addressable markets for the CompuFlo and CathCheck and SingleTooth Anesthesia solutions.

CompuFlo and CathCheck

According to a paper in the New England Journal of Medicine , an estimated 10 to 11 million epidurals are administered annually. About 61% of women have an epidural done during labor according to the latest data from the CDC . At the procedure failure rate mentioned earlier, the market opportunity for these improvements is thus very large. Although product marketing is geared toward labor use cases, the whole market opportunity for epidurals is much larger in the more general pain management scope given that around 3.7 million babies are born in the U.S. each year according to the CDC .

According to the BLS , there are 37,430 anesthesiologists in the U.S. Taking this number, assuming one of each device per anesthesiologist, and multiplying by $10,000 – the best data on price I could find had the price around $13,000 actually – I calculate U.S. revenue potential of $748,600,000. Assuming the same per capita number of anesthesiologists in the developed world, and that the developed world has a population of around 1.2 billion, I estimate that there are about 135,000 anesthesiologists in the whole developed world. With the same price and utilization assumptions, this represents a revenue opportunity of $2,700,000,000 internationally, not including developing nations in the market.

SingleTooth Anesthesia

Dentists generally provide local anesthesia for a variety of procedures. According to the BLS , there are 120,740 dentists in the United States. Taking the price of the SingleTooth Anesthesia price of around $3,000, there is a $362,220,000 revenue opportunity. Again, taking dentists per capita in the U.S. and multiplying by the population of the developed word, I estimate a global total addressable market of 436,409 dentists or a revenue opportunity of $1,309,227,000. I therefore calculate a combined TAM of around $4 billion.

Financials

Quarterly revenue has overall been trending upwards in the long term, although there have been short term peaks and troughs. Milestone has grown quarter-over-quarter over the past three quarters at a rate of 34.5% from Q2 2023 to Q3 2022, about 1% from Q3 to Q4, and 16% into Q1 of 2023. Revenue is estimated to grow at a rate of 2.7% and 3.4% the next two quarters. I believe there is significant potential to beat these low growth rates given that management has implemented a new online sales portal for their SingleTooth Anesthesia in Q1 2023, which grew domestic dental sales by 43% year-over-year upon implementation. Diluted EPS is also in a long-term uptrend, however they have plateaued around -$0.10. In recent years, the shrinkage of losses has been noticeable. EPS are forecast to plateau in the two quarters even after a beat in Q1 2023. It thus seems that expectations are not very high, and the promise of the new sales strategy to drive profitability is attractive to me as an investor.

Net debt is currently negative and has been since around 2014. Milestone has financed its losses by diluting its stock, although in recent quarters the average diluted shares outstanding have begun to plateau. Total assets amount to $12.3 million and total liabilities amount to $2.7 million. Liabilities are almost entirely current, with accounts payable and accrued expenses amounting to $2.6 million. Total assets are mostly current as well, with $6.7 million in cash and short-term investments and $2 million in inventories. I like the liquidity of the company, the relatively low inventory, and that they are able to obtain trade credit in the form of their accounts payable. Of concern is that cash and short term investments are only forecast to finance operations for about five more quarters, assuming there is no growth in negative EPS.

Valuation

Milestone may look pricey based on multiples in the healthcare sector. It trades at 8.4x its book value and at 9.5x its sales. These are well above the sector median. However, Seeking Alpha Quant does not compute a forward price-to-sales ratio. Based on the recent revenue growth and promising market that I describe earlier in this article, I believe Milestone is meaningfully undervalued when looking at its future revenue prospects.

Assuming it can achieve at least the average of its past three quarter-over-quarter growth rates in the next year, I calculate a compound growth rate of 88.5%, much higher than current revenue estimates. If annual revenue grows at this rate, taking current TTM revenue, I calculate one year forward revenue of $16.4 million. That is a price-to-forward revenue ratio of about 4.95, just a bit above the healthcare sector median. Looking farther out, I forecast much higher revenue growth, given a $4 billion TAM. Revenue growth may very well be more explosive with the online sales model, and as dentists compete for business, the product may trend as a key differentiator in superior dental care. Revenue and earnings expectations are quite low, so there is solid potential for share prices to rally on earnings dates in my opinion.

Risks

The primary risk I see is that sales do not grow fast enough to justify SG&A investments, and Milestone is left with unsold inventory and must worsen losses by further diluting shareholders to move inventory. Mitigating this risk is the fact that inventories are currently quite small, at less than 25% of annual sales. This suggests that they are able to turn their inventory over more than once a quarter and that sales is operating efficiently. Another important risk is that healthcare spending decreases in line with a general economic contraction, and certain products that are not a necessity, but merely an improvement don't receive any capital from care provider's budgets. There is also the risk that another company develops a similar product that acts as a substitute, but marathon does currently have a moat as far as I and management know. Finally, it is important to realize that at a technical level, a relatively small amount of capital could move prices dramatically, as this is a micro-cap stock. Volume is not excessively low as tens-of-millions of dollars flow through this name daily, and it is traded on the NYSE, but there is still potential for significant volatility. I thus recommend opening a small position and building it slowly to dollar cost average if necessary. For the record, I still don't have on my full position at current prices.

Conclusion

Milestone Scientific is an exciting company with a promising product, a large market, and strong management. In conclusion, I want to touch briefly on the latter point, as its current CEO has more than 30 years of marketing medical supplies under his belt and has delivered triple digit returns to investors in past leadership roles. Given that this company has such a large runway for revenue and that it has stepped up its growth in recent quarters through new sales strategies, that it has a moat, and is poised for institutional investor interest, I reiterate that Milestone Scientific is a buy.

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