MLSS - Milestone Scientific: Sales Could Start To Snowball

2023-06-10 23:52:58 ET

Summary

• The shift to online sales in their dental business produced unexpectedly fast results with revenue and gross margin up sharply and more to come.
• Most if not all of the pieces necessary for CompuFlo sales to take off are now in place, sales could start to snowball this year.
• In years to come, CompuFlo could even become the standard of care.
• So we favor the odds for the company to get on a sustained sales ramp, but it's not a given yet.

Milestone Scientific ( MLSS ) supplies pressure-sensing drug delivery systems in two segments. Their legacy dental segment, which they basically use as a cash cow as they exert most effort on advancing the CompuFlo, a device that takes the guesswork out of epidurals for baby deliveries, an area that suffered from a 5% morbidity rate with all the human and financial consequences attached to that (see here for examples).

This is an update on or previous articles ( here and here ). The company experienced all-around good news lately:

• The company received CPT code 3 for reimbursement .
• The company received FDA approval for using CompuFlo for use in the thoracic region of the spine, including the cervical thoracic junction, opening up the pain management market.
• The company received SAM (U.S. Government System for Award Management) registration and is actively pursuing U.S. federal supply service approval for the CompuFlo
• The company switching its Dental business to a DTC model via an internet portal.

We actually dealt with most of these in our previous article , here is just an update.

Dental

The shift in business model to terminate its relationship with its main distributor Henry Schein and pursue a more direct relationship with customers (including DSOs or dental service organizations). through an online website seems to have gotten off to a very promising start:

• Domestic sales increased by 47%
• Overall company gross margin increased by 1100bp to 73% with the increase ascribed to the dental business model change and further improvements coming.
• It generated $600K of operating income on a stand-alone basis, an 81% increase over Q1/22.

From the Q1CC :

we saw, of course a negative effect in the fourth quarter last year as Henry Schein ordered less products than normally. But we were very pleased that the – it was offset by an enhanced penetration in the current existing Henry Schein customer base or distributor base during the first quarter, and that has resulted in significantly success and growth of our revenues within the domestic market.

All-in-all, this seems an extremely successful introduction, boosting growth and gross margin at the same time, and given the fact that despite this being a legacy business, the dental market is really quite underpenetrated, there is plenty of market to gain still, both in the US but also very much abroad.

Pain Clinics

This is a market with a much shorter sales cycle compared to epidurals for childbirth. However, it does depend more on reimbursement as (Q1CC):

in labor and delivery, the costs of the consumables, they are absorbed by the overall cost for labor and delivery procedure at the hospital.

The FDA's approval of the CompuFlo for the thoracic region of the spine has certainly helped to increase the interest of pain management clinics as the morbidity rates attached to these procedures are Q1CC:

much higher than in the lumber spine region at 17% and 30%, respectively, due to the difficulties accessing the epidural space.

The company already won a couple of pain clinics as customers like the regenerative sports and spine center in Tualatin led by Dr. Jimmy Hubert, Oregon, and two other practices led by Dr. Brad Sisson and Dr. Didier Demesmin. In Q2 an additional pain clinic was added as a customer.

Reimbursement

The level 3 CPT code that has been established and went into effect from January 1 this year is for technologies that integrate AI to place an epidural needle but management is unaware of any other device besides the CompuFlo that meets these criteria.

The CPT code helps, but reimbursement, especially from private payers, isn't a given just yet. The company relies on a number of clinics to get reimbursement off the ground (Q1CC):

it is important that we identify those clinicians that are evaluating as we have reported now three clinics, I think in the recent media releases that assist us and are also interested in sending in the billing and coding materials to the health care insurance providers, that is very important. As I said earlier, we are not entitled to have direct contact with the clinicians on pricing or the quality or what they are submitting to the healthcare insurance providers. We can only help them by giving them the right documentation on our products so that they have everything available to submit that.

The three clinicians from different pain management clinics mentioned above are helping here to get the ball rolling. The company cannot interfere with the clinics' efforts, so they have to educate them beforehand, which is what they are doing.

The idea is to create a domino effect with reimbursement success spurring use of the CompuFlo, leading to more reimbursement success.

SAM

After being granted registration with the U.S. government system for award management, the company is pursuing Federal Supply Service approval, which would provide uniform pricing across government agencies.

Distribution

The company is expanding its domestic and international distribution network, both for its dental business (the STA or Single Tooth Anesthesia System) as well as the CompuFlo.

For the dental business, they engaged with TEKMIKA Health Technologies as the exclusive distributor of the STA system in Brazil, the third largest dental market in the world.

They also engaged Sweden & Martina as exclusive distributors for Italy, France, Spain, and Portugal.

Financials

• Domestic dental business sales increased by $443K while and international sales declined by $186K and sales in China declined by $360K. The
• CompuFlo is still a work in progress
• Gross margin +1100bp to 73%
• Operating loss was $600K (down from $1.9M in Q1/22) due to higher gross margins and lower OpEx, both improvements are set to continue.
• Cash use was $2M but due to working capital, cash use will decline each quarter
• Cash at the end of Q1 was $6.7M

The company isn't bleeding huge amounts of cash and given the strong start of their online sales in their dental business, cash bleed could decline.

Encouraging is further that the Q1 cash outflow of $2M was much larger than the net loss ($1.32M) and to a substantial effect part of changes in working capital, namely:

• Accounts receivable ($218K)
• Inventories ($246K)
• Accounts payable ($279K)
• Accounts payable related party ($352K)

This means that the real cash burn is considerably smaller ($905K) as it's reasonable to assume they will not continue to need more working capital. On the other hand, they don't have a huge amount of cash left ($6.7M), on the present cash burn they'll run out by the end of this year.

Risk

Despite promising developments with the new dental business model and the early wins in the pain management market, there are two obvious risks:

• A slow uptake in one or both segments.
• The company might very well need new finance.

The second is a logical outcome of the first and it's entirely possible, although we are inclined to say that if they continue on their present trajectory with the improvement in dental and the inroads in pain management (and perhaps boosted by reimbursement progress), they could also very well avoid this and become cash flow positive.

Valuation

With 70M shares (and another 2.5M from performance pay coming) the market cap is $72.5M (at $1 per share) and an EV of $65.8M, which produces a rather steep sales multiple on expected sales of $11.2M this year.

Conclusion

Just like Artesio, Milestone might have hit on something with the shift towards online sales as the first results are very encouraging. However, the wait is still on for the CompuFlo to take off, although most of the elements that could produce such a lift-off are already in place.

Once it starts, it could very well snowball so we're not too worried about the high sales multiples. With still plenty of market to go at in their dental business, which generates a stream of high-margin recurring revenues, and the CompuFlo having a shot at becoming the standard of care, in a few years this company can easily be worth a multiple of today's market capitalization.

While it's certainly not a given, one increasingly has to favor the odds.

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