2023-10-06 13:50:04 ET
Summary
- Outset Medical, Inc. is commercializing a new hemodialysis machine for acute care and home settings.
- The company has reduced guidance due to pulling its TabloCart from the market to obtain 510(k) marketing clearance.
- Outset Medical's financial trends show rising revenue, worsening operating income, and high cash burn.
- My near-term outlook on Outset Medical stock is bearish [Sell].
A Quick Take On Outset Medical
Outset Medical, Inc. ( OM ) is commercializing a new hemodialysis machine for acute care and home settings.
I previously wrote about OM with a Hold outlook.
The company has reduced guidance due to pulling its TabloCart from the market to obtain 510(k) marketing clearance.
Given the company's high cash burn and lowered revenue expectations, my outlook on OM is Bearish [Sell].
Outset Medical Overview And Market
San Jose, California-based Outset Medical, Inc. was created to commercialize improved hemodialysis technologies to reduce the infrastructure required to operate traditional dialysis machines.
The firm is led by president and Chief Executive Officer Ms. Leslie Trigg, who has been with the firm since November 2014 and was previously in senior roles at Lutonix, a medical device company acquired by CR Bard.
Outset sells an integrated system called Tablo, which is composed of a console with integrated water purification, a single-use cartridge, and Tablo communications connectivity and data sharing.
An advantage of the system to clinics and other healthcare facilities is that they no longer need a dedicated water cleaning system just for hemodialysis machine purposes.
The company sells the Tablo system for use in either clinical settings or in the home.
Outset generates revenue from selling per-treatment consumable products related to the machine’s operation as well as services via annual service contracts.
According to a 2023 market research report by Grand View Research, the U.S. market for hemodialysis and peritoneal dialysis reached $94.7 billion in value in 2022 and is forecasted to exceed $187 billion by 2030.
The report forecasts a CAGR of 8.9% from 2023 to 2030.
The primary reasons for this expected growth are a rise in the incidence of kidney system failure among an aging population and increased availability of services and new devices.
Also, the chart below shows the historical and projected future growth trajectory for the U.S. hemodialysis and peritoneal dialysis market through 2030:
Grand View Research
Major competitive or other industry participants include:
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Fresenius Medical Care AG
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Baxter
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B. Braun
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Nikkiso
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Nipro
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Quanta.
Outset Medical’s Recent Financial Trends
Total revenue by quarter has risen while operating income by quarter has continued to worsen further into negative territory.
Seeking Alpha
Gross profit margin by quarter has trended higher in recent quarters; Selling and G&A expenses as a percentage of total revenue by quarter have remained high but have fallen in recent quarters:
Seeking Alpha
Earnings per share (Diluted) have continued to produce ever greater losses, as the chart shows below:
Seeking Alpha
(All data in the above charts is GAAP.)
In the past 12 months, OM’s stock price has produced high volatility, ultimately falling 37.73% net-net, as the stock price chart shows here:
Seeking Alpha
For balance sheet results, the firm ended the quarter with $222.8 million in cash, equivalents and short-term investments and $96.6 million in total debt, none of which was categorized as the current portion due within 12 months.
Over the trailing twelve months, free cash used was ($148.3 million), during which capital expenditures were $6.5 million. The company paid $33.4 million in stock-based compensation in the last four quarters, the highest trailing twelve-month figure in the past eleven quarters.
Valuation And Other Metrics For Outset Medical
Below is a table of relevant capitalization and valuation figures for the company:
Measure [TTM] | Amount |
Enterprise Value / Sales | 3.3 |
Enterprise Value / EBITDA | NM |
Price / Sales | 3.8 |
Revenue Growth Rate | 17.4% |
Net Income Margin | -131.7% |
EBITDA % | -125.6% |
Market Capitalization | $541,720,000 |
Enterprise Value | $422,340,000 |
Operating Cash Flow | -$141,750,000 |
Earnings Per Share (Fully Diluted) | -$3.51 |
Free Cash Flow Per Share | -$3.03 |
(Source - Seeking Alpha.)
Sentiment Analysis
The chart below shows the frequency of certain keywords that have been used by management and analysts in the firm’s most recent earnings conference call:
Seeking Alpha
The terms and transcript indicate the company believes it is seeing an improved macro environment compared to last year, with fewer headwinds overall.
Commentary On Outset Medical
In its last earnings call (Source - Seeking Alpha ), covering Q2 2023’s results, management’s prepared remarks highlighted continued revenue growth, margin expansion, and "continued commercial traction."
The firm has signed agreements with a majority of midsized dialysis providers in the U.S. and also launched its first Tablo Home program with a large health system.
Notably, the firm has responded to an FDA warning letter about its San Jose facility and website information.
None of the inspection findings were related to safety or efficacy, and the team remediated the findings quickly.
However, one of the FDA observations was related to its TabloCart with prefiltration potentially requiring a 510(k) clearance. Management has begun that process out of an abundance of caution and has ceased selling that part of the Tablo system.
Total revenue for Q2 2023 rose by 43.4% year-over-year, and gross profit margin increased by 6.2%.
Selling and G&A expenses as a percentage of revenue dropped 34.6% YoY but remained at 101% of revenue, while operating losses were reduced by only 0.5% and were $43.5 million for the quarter.
The company's financial position is only moderate, with liquidity to cover its debt, but the firm is producing very high cash burn, so management will be forced to reduce cash usage.
Looking ahead, 2023 full-year revenue is expected to grow at 25.2% over 2022’s revenue.
If achieved, this would represent a sharp increase in revenue growth rate versus 2022’s growth rate of only 12.6% over 2021.
In the past twelve months, the firm's EV/Sales valuation multiple has risen markedly but fallen by 39% net-net, as the chart from Seeking Alpha shows below:
Seeking Alpha
A potential upside catalyst to the stock could include improved TabloHome uptake, as the firm has achieved its first goal of gaining a major health system adopting this approach.
Management has a twofold strategy of increasing the patient census in each health system "by sending more patients home" and by growing the home dialysis provider footprint to help them set up their own "home" programs.
However, given the loss of revenue from the TabloCart sales stop and the firm’s continued high cash burn, I’m not optimistic about the stock’s outlook in the near term.
My outlook on Outset Medical, Inc. in the near term is Bearish [Sell].
For further details see:
Outset Medical Faces Regulatory Delays Amid Heavy Cash Burn (Rating Downgrade)