Quick Take

Outset Medical (OM) has filed to raise $175 million from the sale of its common stock in an IPO, according to an amended registration statement.

The company has developed an improved kidney dialysis device for institutional and home use.

OM is growing quickly from a low base but is producing high operating losses and cash burn and the IPO appears very highly priced, so I’ll pass for now.

Company & Technology

San Jose, California-based Outset was founded to design improved hemodialysis technologies to reduce the infrastructure required to operate traditional dialysis machines.

Management is headed by president and Chief Executive Officer Ms. Leslie Trigg, who has been with the firm since November 2014 and was previously in several senior roles at Lutonix, a medical device company acquired by CR Bard.

Below is a brief overview video of the firm’s system:

Source: Health+Commerce

The company sells its integrated system, called Tablo, which is composed of a console with integrated water purification, a single use cartridge and Tablo connectivity and data sharing.

The benefit of the system to clinics and other healthcare facilities is that they no longer need a dedicated water cleaning system just for hemodialysis machined purposes.

Outset has received at least $538 million from investors including Warburg Pincus, Fidelity, D1 Capital Partners, T. Rowe Price affiliates, Aurora Investment, Partner Fund Management and Perceptive Life Sciences.

Customer Acquisition

The firm sells the Tablo system for use in either clinical settings or in the home.

In addition, the firm generates revenue from selling per-treatment consumable products related to its operation as well as services via annual service contracts.

Sales & Marketing expenses as a percentage of total revenue have been dropping as revenues have increased, as the figures below indicate:

READ ALSO  'Dual circulation' correct way forward

Sales & Marketing

Expenses vs. Revenue

Period

Percentage

Six Mos. Ended June 30, 2020

87.3%

2019

134.4%

2018

562.0%

Source: Company registration statement

The Sales & Marketing efficiency rate, defined as how many dollars of additional new revenue are generated by each dollar of Sales & Marketing spend, rose to 0.8x in the most recent reporting period, as shown in the table below:

Sales & Marketing

Efficiency Rate

Period

Multiple

Six Mos. Ended June 30, 2020

0.8

2019

0.6

Source: Company registration statement

Market & Competition

According to a 2017 market research report by Grand View Research, the U.S. market for hemodialysis and peritoneal dialysis reached $60 billion in value in 2015.

The report forecasts a CAGR of 6.0% from 2015 to 2025.

The main drivers for this expected growth are a rise in the incidence of renal system failure among an aging population and increased availability of services and new devices.

Also, North America accounted for 35% of total revenue in 2015, while the Asia Pacific region is expected to grow at the fastest rate by region through 2025.

Major competitive or other industry participants include:

Financial Performance

Outset’s recent financial results can be summarized as follows:

Below are relevant financial results derived from the firm’s registration statement:

Total Revenue

Period

Total Revenue

% Variance vs. Prior

Six Mos. Ended June 30, 2020

$ 18,932,000

253.0%

2019

$ 15,078,000

651.3%

2018

$ 2,007,000

Gross Profit (Loss)

Period

Gross Profit (Loss)

% Variance vs. Prior

Six Mos. Ended June 30, 2020

$ (8,328,000)

-14.4%

2019

$ (17,802,000)

191.1%

2018

$ (6,115,000)

Gross Margin

Period

Gross Margin

Six Mos. Ended June 30, 2020

-43.99%

2019

-118.07%

2018

-304.68%

Operating Profit (Loss)

Period

Operating Profit (Loss)

Operating Margin

Six Mos. Ended June 30, 2020

$ (45,119,000)

-238.3%

2019

$ (70,307,000)

-466.3%

2018

$ (46,563,000)

-2320.0%

Net Income (Loss)

Period

Net Income (Loss)

Six Mos. Ended June 30, 2020

$ (47,155,000)

2019

$ (68,279,000)

2018

$ (49,755,000)

Cash Flow From Operations

Period

Cash Flow From Operations

Six Mos. Ended June 30, 2020

$ (44,059,000)

2019

$ (70,292,000)

2018

$ (46,442,000)

(Glossary Of Terms)

READ ALSO  Brazil’s IPO market on track for biggest year since 2007

Source: Company registration statement

As of June 30, 2020, Outset had $148.4 million in cash and $67.2 million in total liabilities.

Free cash flow during the twelve months ended June 30, 2020, was negative ($81.8 million).

IPO Details

OM intends to sell 7.6 million shares of common stock at a midpoint price of $23.00 per share for gross proceeds of approximately $175 million, not including the sale of customary underwriter options.

Assuming a successful IPO at the midpoint of the proposed price range, the company’s enterprise value at IPO would approximate $791.9 million.

Excluding effects of underwriter options and private placement shares or restricted stock, if any, the float to outstanding shares ratio will be approximately 19.19%.

Per the firm’s most recent regulatory filing, the firm plans to use the net proceeds as follows:

approximately $77 million to expand our sales and support organization;

approximately $34 million for research and development activities; and

the remainder for working capital and other general corporate purposes.

Management’s presentation of the company roadshow is available here.

Listed underwriters of the IPO are BofA Securities, Morgan Stanley, Goldman Sachs, SVB Leerink, and Stifel.

Commentary

Outset is seeking public investment to continue commercialization of its Tablo dialysis system.

OM recently received approval to place the system into end user homes, increasing the total addressable market significantly.

The firm’s financials show strong revenue growth from a low base, high operating losses and operating cash burn.

Sales and marketing expenses as a percentage of total revenue have been dropping and the company’s sales and marketing efficiency rate has grown, even during the Covid-19 pandemic.

READ ALSO  Is It Time to Hit the Panic Button? SchiffGold Friday Gold Wrap Sept. 25, 2020

The market opportunity for dialysis is extremely large and expected to grow at a moderate rate in percentage terms, but substantial growth in nominal terms.

As to valuation, management is asking IPO investors to pay an EV/Revenue multiple of 27.6x.

By comparison, a Q4 2019 valuation study by Mercer Capital for the Medical Devices and Healthcare Technology sectors indicated a 3Q 2019 high multiple of 9.05x and 6.65x respectively.

While I expect Outset to continue its growth trajectory, I have strong concerns about paying such an apparent 3x to 4x premium at IPO, especially for a firm that is producing such high and increasing operating losses and operating cash burn.

Expected IPO Pricing Date: September 14, 2020.

Gain Insight and actionable information on U.S. IPOs with IPO Edge research.

Members of IPO Edge get the latest IPO research, news, and industry analysis. Get started with a free trial!

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Editor’s Note: This article covers one or more microcap stocks. Please be aware of the risks associated with these stocks.



Via SeekingAlpha.com