2024-01-09 09:16:58 ET
Summary
- Inari Medical's shares have been lagging since going public in 2020, but recent margin expansion and solid sales growth make it worth following.
- The company's sales have been steadily increasing since product launch in 2018, approaching half a billion in 2023.
- Inari recently acquired LimFlow for $250 million, which could be a significant growth driver, although it will impact near-term earnings and reduce the net cash position.
Over the summer, I believed that shares of Inari Medical ( NARI ) were approaching interesting levels, as shares have been lagging since early 2021.
The lagging share price action looked interesting in combination with a continuation of sales growth, albeit margins have seen some pressure. Modest losses were no immediate concerns given the strength of the balance sheet, yet margin expansion was needed to drive appeal.
Margin expansion arrived in recent quarters, with the company posting break-even results in the meantime. This looks solid in combination with solid topline growth and an interesting deal. These developments keep me interested and wanting to follow the story in 2024.
Going Back To Day One
Inari is a medical device company which focuses on the development of products for people which suffer from venous diseases. The company marketed two minimally invasive catheter-based thrombectomy devices when it went public. These clot-removing therapies have seen greater commercial traction since its debut in 2018, driven by greater effectiveness to drugs and other therapies.
Revenues of these products came in at $7 million in their debut year, rose to $51 million in 2019, and rose to $27 million in the first quarter of 2020, comfortably surpassing a hundred million run rate.
Going public at $19 per share, the resulting $900 million valuation was not too demanding given the topline sales numbers and the growth, certainly not as the valuation included a $150 million net cash position. This was certainly the case as the company already achieved profitability, in fact it was solidly profitable.
Hence, I was not surprised to see shares more than double to $43 in their first days of trading, as shares actually broke the $100 mark early in 2021, after which a period of stagnation started.
Expectations Come Down
A $120 stock in 2021 fell to the $60 mark in the summer of 2023, with expectations cut in half despite a continuation of growth. Early in 2022, Inari reported that it essentially doubled its 2021 sales to $277 million. While this was impressive, operating earnings actually fell from $18 million in 2020 to $10 million in 2021, mostly due to R&D expenses tripling to $50 million.
The company guided for 2022 sales to grow to $350-$360 million, but it did not provide a margin guidance. In the end, sales grew to $383 million, but worrisome was that a GAAP operating loss of $28 million was reported, and this could not be attributed to higher R&D expenses this time.
Further growth was seen in 2023 with sales seen up to $470-$480 million, yet the margin picture remained ambiguous. A 34% increase in first quarter sales to $116 million was still accompanied by a $5 million operating loss. Trading at $58 in June, the 55 million share represented a $3.2 billion equity valuation, a number which included over $300 million in net cash, as the company hiked the midpoint of the full year sales guidance to $483 million.
This left me a bit in doubt. Trading at less than 6x sales, while sales growth was solid, that looked quite compelling, but the company was posting losses. That needed to revert in order to provide some support, but my targeted entry levels in the $40s never arrived.
Trading Range Bound
Since the summer, shares of the company have largely traded in a $50-$70 range, now trading at $64 per share.
In August, Inari reported that it grew second quarter sales by 28% to $119 million, yet the real achievement was seen on the bottom line, with operating losses narrowing to just $1.5 million, with the solid returns prompting the business to grow full year sales to a midpoint of $487 million.
In November, third quarter sales were reported up 31% to $126 million as operating profits were reported at $2.1 million, with net interest income resulting in even larger net earnings. Greater momentum triggered the company into hiking the midpoint of the full year sales guidance to $491.5 million. This implies a midpoint of $130 million in fourth quarter sales, as the loss making operations have essentially come in around break-even results here.
Alongside the third quarter earnings report, the company announced a $250 million cash deal for LimFlow, a provider in limb salvage for patients suffering from chronic limb-threatening ischemia. The company recently obtained FDA approval for its Transcatheter Arterialization of Deep Veins system. The deal was expected to close in the fourth quarter, as it did, with milestone payments related to commercial and reimbursement milestones potentially increasing that deal tag by another $165 million in the years to come.
Valuation Thoughts
With 58 million shares trading at $64, the market value of the firm has risen to $3.7 billion, while the net cash position has essentially been evaporated after the deal with LimFlow, certainly if we factor in contingency payments (potentially) due.
This deal looks very interesting, yet it will weigh on near term earnings, and it furthermore takes a huge bite out of the net cash position. On the conference call, management indicated that the deal will delay anticipated profitability to the second half of 2025, and this comes after the company has just regained profitability here.
Despite the concerns, the potential looks interesting, as it could provide another growth driver to Inari here, as the increase in the share price means that multiples have expanded to over 7x sales, which is still interesting given the 30% growth rates, although some margin work remains to be done.
All in all, Inari remains a very interesting business and stock to watch, as the deal looks quite interesting, making it worthwhile to keep track of the commercial traction of LimFlow in 2024. For now, I am not yet willing to commit at these levels, but shares deserve a prominent spot on my watch list here.
For further details see:
Inari Medical: Interesting Times