December Quarter results
Despite another quarter of significant cash burn, there is a lot to like about the results and commentary released today.
December was the first quarter that saw signs of revenue from the initial lab-in-lab sites, with revenue of $112k, which was just shy of my estimate of $120k in my valuation straw. The one off R&D Rebate ensured that outflows were capped at ~$1.8m, but it does mean there'll be an increased outflow next quarter of about $3m before revenue.
On the surface those numbers look horrific, but a surprise announcement that a further 7 sites have been contracted, bringing the total to 36, combined with what is essentially a now a proven successful lab-in-lab launch, means that we should start to rapidly see sales increase in the next quarter.
Additionally, based on the lead times offered to us in the past, this quarter's results suggest that the lab-in-lab model can be up and running quicker than anticipated. The March quarter should therefore yield results from about 11 fully operational sites on minimum quotas, with an additional 5 getting started. Based on that projection, a $500k Qtr seems very achievable provided the minimums are met.
Cash balance remains fairly strong at > $6m – although another cap. raise looks likely in 6 months time – however that could well be the last one before profitability.
Lastly, a minor reduction in capex due to larger groups not needing additional scanners meant a slight decrease in expenditure from the Sept. qtr, which combined with rising revenue, is encouraging.
All in all this is still a risky company in its infancy, but I think the worst of the growing pains are now well and truly behind it.
The probability of a rapid acceleration in revenue from here is extremely likely in my view, given we know the lab-in-lab now works – it looks like a reasonable entry point for any following this one, but I would urge you to size positions appropriately ahead of any real uptick in revenue. For what it's worth, I would look to increase my position size if the next quarter sees those revenue numbers at, or over, the $500k mark.
Earlier this week and announced today to market, Oventus have been supplying first responders in certain districts of the US with Optima devices who would typically use CPAP machines. https://blackburnnews.com/windsor/windsor-news/2020/04/21/firefighters-told-not-use-cpap-machines-pandemic/
The catalyst for the donation appears to be that evidence for CPAP ‘aerosolising’ COVID-19 droplets – although still unclear – is rising, with the American Academy of Sleep Medicine (AASM) suggesting recently that droplets may spread through the exhalation port. They further suggest that either CPAP users stop using their machines, or switch to an alternative for the time being.
Putting aside the horrific prospect of people catching, and dying, from this virus through their CPAP machines, this could be an extraordinary opportunity for companies like Somnomed (ASX:SOM) and Oventus to capitalise on the temporary switch, by onboarding CPAP users, potentially for life.
To make things even more intriguing, and I need to dig deeper here to understand the timelines, but it appears that a Dr. Strong – who recently sold his device company and practise to Somnomed – is the one praising the O2Vent as part of this donation. A local radio interview with Dr. Strong on the recent donation has him singing the O2Vent’s praises, going as far to say his devices were never this good! https://www.iheartradio.ca/am800/audio/the-dan-macdonald-show-dental-appliances-for-first-responders-1.12209645?mode=Article
I’m not expecting any miracles these next two quarters as receipts lag the underlying performance, however this is encouraging stuff.
Management (suspect at the behest of shareholders based on wording) finally clarified exactly how investor should be thinking about the financial implications of its most recent contract win. Essentially 7 new sites with potential for more (potential undisclosed) if successful, not to mention likelihood or being able to subcontract out the existing model to other regional sleep groups under a master agreement. Overall a positive announcement as my valuation does assume for continued contract wins (post FY20) so with this they are technically ahead in terms of (my own) contract pipeline however key for now remains on contract implementation speed being maintained and subsequent sales ramp up to truly gauge broader patient feedback. The fact that there is strong takeup from sleep groups continues to be a great vote of confidence for the company and its products.
Using contracted minimums for 50 locations *800 USD/unit *30 units/month/location *12months/year = Rev implied US$9.6m, or AU$14.1m
I would think it reasonable to suggest/assume that locations would want to remain clear of any contracted minimum, otherwise the business relationship would not be viable for customers over the long term, and I think it is a reasonable assumption to make that there will be discrepancy between larger contracts 'dragging' the average sales per location well above contracted minimums.
It appears (see valuation) that in stating that breakeven can be achieved by signing around 50 locations, the company is pricing in sales of 35 units per month per location, at ~30% incremental net margin for new products sold.
Staff costs per quarter have increased 50% since last financial year and to date still only recording sales of $112k for most recent quarter. Sales and marketing spend has increased 3 fold.
Assuming that gross margin can be maintained and that fixed costs will increase 50% in signing first 50 locations, at 100 sites we are looking at additional AU$24.7m rev (50 additional locations * 35 units/month * 800USD/unit *12 months/year / 0.68 AUDUSD) at 30% incremental net margin = AU$7.41m earnings.
Assuming tax rate ~0% initially given retained losses / R&D incentive, sales target of 100 locations by FY2024, p/e ratio of 30 and discount rate of 15%, implied EV = AU$116m
Company is burning $2m per quarter in cash, with currently $6m at bank. Assuming breakeven by FY21, they may need up to an additional $6m. At $0.30 per share, this would place an additional 20m shares on issue.
Existing shares on issue 130.5m, + ~6m options, strike price beginning at $0.403
$116m / 156.5m shares = $0.74 per share
If target reached FY23, EV = AU$136.5m; ~$0.87 per share
If target reached FY25, EV = AU$98.6m; ~$0.63 per share
Assuming that the company can sign 100 locations in 4 years, produce sales approx. 35 units per month per site, generate gross margins in the order of 50%, keep fixed costs controlled and successfully raise some additional funding over the coming 6 months - we now have a reasonable range of intrinsic value estimates.
Given how early stage that OVN is (and indeed, the valuation is based on an almost $50m revenue year as compared to last FY of $337k) it is extremely difficult to predict how this will play out. The product seems innovative and unique, protected by patenting to 2032 and early indication is that lab to lab locations are rushing to sign up. There are additional attachments and Gen II models in the works for a surprise to the upside or even sales of existing units could exceed expectation, however so much is unknown, hence the higher 15% discount rate.
Generally, I look to steer clear of opportunities where I could shoot myself in the foot, and there is a very real chance that the product may never take off given the existing efficacy of CPAP machines, any real effort to replicate a similar product or increase the comfortability of existing solutions by well funded competitors $RMD, $SOM is a key risk to the investment case that could see the company worth very little, if not $0. I also look in general to avoid funding risk as this provides leverage to any wider market downturn.
For my personal portfolio, I think that the risks in $OVN are too high to take a position, however I think the opportunity is worthy of a place in my strawman scorecard.
Historically, there is support around $0.26, so I will be looking to add in the coming weeks around $0.30
NB: All other open strawman picks I currently hold a position.
Oventus March Quarterly Update and Cap. raise
Not a great deal of good news in this Quarterly, with headline numbers taking a deep hit from sleep centre closures in the states.
Receipts from customers of just $78k fell well short of my $150-200k target from tracking patient flow, with the reduction almost certainly due to disruptions from COVID19. Commentary that 'booked revenue' for Q3 was at $160k is encouraging, but I think it unlikely next quarter will be much better. A large proportion of that revenue will vanish along with the patients that shift their priorities from sleep to putting food on the table.
Cash outflows were slashed by 35%, and it should be even lower this coming quarter due to lower staffing costs and lack of travel, so it's good to see Chris ensuring the cash burn is reduced. He has signalled that he needs boots on the ground in the states to keep the LIL rollout continuing, but with most centres shut and their attention elsewhere, it's clearly a longer term strategy to maintain momentum.
Talk of "actions taken to secure access to non-dilutive funding from the Australian and US governments" almost certainly means they've applied for JobKeeper payments and the equivalent stimulus overseas, and that may actually be what props up the thesis here for the time being.
Sale of their final 3D printer also brought in $300k of proceeds, and ends the period of in-house manufacturing, leaving the Oregon factory as the primary supplier.
Finally, Oventus ended the quarter with $4.26m cash on hand, with about 2 quarters left of funding which not surprisingly smeans the company needs to raise more capital.
A $4.65m placement and $2m SPP to existing shareholders was announced on Friday, at a price of $0.24 with the sweetener of a free 1 for 2 option at a strike price of $0.36 and an expiry of 30 June 2021.
Timing of the raise, coupled with the release of the 4C whilst in the halt and a minor pump the day before with shade thrown on CPAP (evidence is still unclear that CPAP aerosolises droplets yet), was a little underhand. However I can appreciate why the company would do such a thing given the SP was bouncing around everywhere.
Two good things to note were that all directors "intend" to participate (although only ~$85k worth of new shares) and that the SPP terms for retail are good. Existing holders can apply for up to $30k worth of new shares, with a minimum application of $3k.
The exercise of all options in future would in theory give Oventus another $5m to play with and finance the company for about 6 more months. Combined with the cash on hand, placement and SPP funds, this would give Oventus another 1.5 years or so of funding. 2 years if you add in government stimulus. That might actually take us to profibility and perhaps one more raise before the ship steadies.
Holders will need to DYOR, but it looks reasonably attractive to me, although I would hasten to add that Oventus is still a very high risk play. It's impossible to know where the SP will be in a year. Either way, the closing date for offers in the SPP is June 15, so there's plenty of time to decide. There may also be some very attractive valuations on other businesses by then too – something to keep in mind.
Whilst the trajectory of patient flow, site launches and deal funnel numbers in the attaching slide deck remain encouraging, I think there is an element of 'wait and see' for the time being that wasn't present before COVID 19. I remain optimistic about the long-term growth story I see playing out here, but world-wide site closures means it has been set back at least 6 months, probably closer to 12.
Up close and personal dentistry – particularly elective procedures which this is unfortunately – may remain a bit on the nose for a while, even after things begin to reopen. The rapid growth will take time to rebuild. It's also hard to get too excited by the prospects of telehealth just yet, but I can see the appeal to patients who might be reluctant to visit a centre.
I've updated my valuation to account for a slower pace of growth this year, as well as the additional share count. This has always been a 3-5 year play, and nothing has changed on that front with COVID 19.
With this now approved for Medicare, we can expect many previous fence-sitting sleep clinics to now view Oventus technology in a more positive light, therefore accelerating roll-outs.
We've already seen distribution agreements signed with a new large vendor since the Medicare approval was granted.
Getting Medicare rebates for Resmed's topline product is currently a long process, so we may see Oventus' product treated favourably by Medicare as a cost saving measure.
Valuation is still very difficult without any real sales available for analysis at this stage. However I'm increasing my price target by 50% due to the shortening of expected timeframes and expanding of total addressable market size as a result of Medicare coverage. Detailed valuations will have to wait at this point.
Good update, 3 more sites live taking launched sites to 14 within the space of one month since 4C release so they are getting close towards the stated one site a week implementation. They are prioritising sites where revenue will likely come through faster which makes complete sense, whilst the rest of the commentary around cash burn forecast for 3Q20 being lower, jump in unit sales & consults, 50% early conversion rates etc. are all positive that supports price move today. Having said all that there are simply too many minute variables in the short term that it's honeslty not worth updating my valuation particularly when I'm trying to take a more LT view, for which key is that Chris remains confident that further new site/agreements will be signed. I have no idea how they've arrived at the deal pipeline figure of $33m (probabilty adjusted, annualised min unit orders?) but for now it sounds like overall execution remains on track. Still early stage but fair to say I take comfort from the announcement.
I reached out to Chris last week to feel him out about the next few months. A bit about his response below, but first some general thoughts on the business in the current climate.
There's no question that the next 6-12 months will be challenging for health tech businesses who operate primarily in the US and that are elective. OSA sufferers would arguably consider their problem – diagnosed or not – to be elective. Patients will therefore more than likely be focusing their attention and money elsewhere.
As cash reciepts pour in from the already booked pateints from previous quarters (see pateint flow chart from a previous straw) things should remain fairly stable at the end of Q3, but beyond that is hard to say. The key metric moving forward are the patient flow numbers, which I was pleased to see formed part of the investor presention last week, and which was growing rapidly.
Chris's primary concern is making sure that cash burn remains at a minimum, without affecting the rollout of lab-in-lab as planned. The new mantra permeating the company right now is thus (in his words): "...if what you are doing does not drive revenue through the lab in lab program in North America it should not be done..."
Travel costs have been slashed, and some reduction in staff numbers will likely occur, but not at the expense of the lab-in-lab rollout. In all, he expects a minimum of 20% reduction in outflows to counter the headwinds coming up in this Qtr's cash flows.
Perhaps the most pleasing thing about his response was that he expects "significant growth into the June quarter and the rest of the calendar year".
With 20-30% cost savings and a relatively OK net cash postition at the moment, it should see them through to the end of the FY and perhaps into Q2FY21 at which point we'll have a better idea of how Oventus is travelling. Nothing to suggest things are off track that I can see.
Oventus released an investor presentation today, which provided some more clues as to the next couple of quarter's potential revenue, through a graph of patient flow, and commentary that about 50% of patients convert to sales within 90 days.
Difficult to say how much will translate as cash, however by extrapolating the data provided for Oct–Dec19 (which implies a 90 day lag), it looks like it will be somewhere in the region of an additional $50k for the current quarter – totalling somewhere between $100-200k – depending on how well other streams perform.
Q4 looks set to book about $200k revenue, which although lower than my initial estimates, is still a significant uplift, and might be the catalyst for a re-rate.
Two things are of interest. Although only half of the patients are converted to sales, it could be a 'lever' that gets better over time with a refinement of the sales process. It's off a low base of patients, but I can easily see this number improving over time with greater confidence in the product and more abundant and favourable reviews from patients.
If that drop off rate can be reduced by 15-20% or so, and on much higher volumes in coming years, it would translate to a lot of additional sales.
Secondly is that the minimum quotas (20 sales per site, per month) are not being met yet. This was anticipated as the sites come online with a grace period so it's not really any surprise, but I overestimated the lag.
Overall it's pleasing to see some patient flow numbers and actual evidence of revenue, although disapointing it's less rapid than anticipated. Thesis still on track, as the number of patients can only climb higher at this early stage.
Final observation is that I'm surprised it wasn't marked as price sensitive, and that investor presentations are usually followed by a cap. raise – with $6m in the bank as at Dec 19, there's enough to cover the next couple of months – but no more – so this will happen within the month IMO.
Decent update today with 3 more sites launched, however no new sites contracted since the release of the last quarterly, which suggests the pipeline is still very lumpy. Probably due to large sleep groups dragging their heels a bit.
Cash burn is still morbidly high, so it's good to hear that management are forecasting a reduction in Q3 burn due to a streamlining of the rollout to sites that book revenue faster.
An uptick of A$13m in deal pipeline to A$33m is welcome news, but as I've said before, this will need to translate into tangible recipets.
I still think the probability of significant revenue growth is high this CY, but I'm catious about the rate: Chris put the cart before the horse in July 2019 by citing lofty numbers that whilst probably true long term, did make it seem like things were happening faster than they actually were in terms of contracted sites and implementation.
Having cited that concern however, much like my thesis for Polynovo (ASX:PNV) was and still is through surgeon praise for the product, that is largely what my thesis relies on here: the praise heaped on the airway system of the O2Vent by sleep pysicians is very interesting.
Looking at the numbers again, I think we need to see at least $200-$250k in the next quarerlty reciepts for any of this to look plauisble. I had pegged this at $500k in my last straw, but that seems optimistic given the lead times to booked revenue.
Ordinary set of numbers out this morning, although revenue was slightly up 24% off a small base to $188k. Huge expsenses incurred after a year of unfettered expansion in the US was the elephant in the room, though I would expect this to come down as a percentage of revenue over the next couple of years as the sales push reaches saturation. Most of it was attributable to increased staff costs and sales and marketing.
None of this should have come as a surprise to anyone watching closely however, and sights should be set on the next half, which *should* see a much improved outcome.
Not a great deal of commentary offered on how this next quarter is tracking, other than an expectation that the manufacturing process needs to be expanded to meet demand, and an encouraging clarification in a later announcement on the Aeroflow agreement, which looks set to add 7 contracted sites to the tally, bringing it to 43 by my count.
Further commentary that they will look to 'sub lease' the 'lab-in-lab' rights through the Aeroflow distribution network could be very lucrative, though it's hard to pin down any facility numbers or details of the fee Oventus will recieve. For example, it could be less than the $800 USD total per device for other sites, since it's a larger agreement. I'm also going to ignore any e-commerce direct sales as part of this deal, since that seems completely unknowable.
Not much else to do but see what the next quarterly numbers bring. Expect a cap. raise in this second half too, most likely after a positive market reaction to the Q3 results.
OSA being a highly lucrative and growing market continues to attract new players. One of the more interesting ones is Nyxoah's Genio which from my understanding is an improved version of Inspire Medical's neurostimulator offering with the one key advantage being that no surgical operation is required. They just did another successful round of fund raising and interestingly not only did Cochlear increase their investment but Resmed also participated so this is one worth following as a strong comp.
Also saw the CMS reimbursement announcement today which is yet another positive development for OVN. In the absence of existing contract demonstrating clear ability to ramp up above minimum orders again I won't bother updating my valuation, that said I have confidence that many will in due course.
Recent 20 min presentation from CEO
The impact of the virus is definitely going to be a negative for OVN. The recent SP drop hasn't been excessive in light of this.
Whilst the minimum contracted sales should stem the cash burn a little over the next 6 months, those same minimum contracted sales clauses will see a slowing in bringing new labs online and therefore a delay in reaching positive cash flow. The reason for this is that with uncertainty over US shutdowns and reduced demand for non-essential medical visits, sleep clinicians will be holding off on the signing of new contracts until the uncertainty passes.
The damage to OVN its pre virus position is more than a roughly 6 month delay, however. The delay will need to be paid for with additional CR that now needs to be spent on keeping the co afloat, as opposed to paying for rapid deployment and growth. This means further equity dilution - at a point in time where money markets are probably going to be tighter. As such, with the same positive long term outlook for the business model, the valuation today has justifiably fallen considerably due to the need for new equity funding.
In the past year or so, Oventus has shifted its operational expenditure from primarily R&D spend to sales and marketing, as it rolls out it's product in the US, Canada and ANZ. The US is by far the most attractive of those markets, with approximately 3 million CPAP abandonment patients who could benefit from O2Vent.
However, unlike Australia where pescribing the device is relatively simple, in the US FDA laws mean that both a sleep specialist and a dentist need get involved to persribe a medical device such as the O2Vent, and there's a lot of annoying back and forth for patients. Oventus have overcome this pain point by introducing a 'lab-in-lab' approach.
In simple terms, the lab-in-lab approach places a mini 'lab' within both the sleep specialst's and dentist's consulting rooms and optimises the worklow of each. Ogranising the perscription and subsequent fitting of the device is much more straightforward that it otherwise would be.
The lab-in-lab approach is advantageous for Oventus, because it quite often simply backs on to existing scanners and computer infrastructure. Oventus are only responsible for interpreting the scan data into a 3D model for an approved printer in Oregon to produce and ship, so there is very little capital outlay.
Profit margins for both the dentist and the sleep specialist are very high, and crucially much more than for CPAP. The alignment of everyone's monetary interest, coupled with a an easier-to-use device, has meant that Oventus are seeing clear evidence of O2Vent perscriptions being given first before going down the more frustrating path of CPAP.
Once the remaining add-ons are in market, the idea of perscibing a CPAP machine become even more remote.
The interesting thing moving forward will be how well sales of the ExVent grow, given they are sold on a subscription based serice with incredibly high margins. This arm of the business acts on a razor and blade model, and could generate millions in additional revenue every year.
Wholesale costs of the O2Vent are approx. USD $600, with an additional USD $200 in related services. Gross margins are very high, becauase the manufacturing is handled by a third party who provide the finished product to the clinician.
It's an attractive and very capital light arrangment that has huge operating leverage potential.
Oventus is a Brisbane-based medical device company that produces an innovative Obstructive Sleep Apnoea (OSA) treatment platform called O2Vent. In September 2019, it secured FDA clearance for its Optima device and has on-boarded a number of sites is the US and Canada to start treating patients.
The company has a captivating origin story, beginning life when Dentist, founder and now CEO Dr Chris Hart, concocted a homemade version of the device to treat his own OSA in the early 2010's. After "getting the best night's sleep of his life", he began to trial it in his own clinic on willing patients with encouraging results. In 2012, he took the leap of faith and sold his multi-site dentistry practise to form Oventus, and in 2016 the company listed on the ASX. After a number of years in R&D, the company has now pivoted to full commercialisation of the platform and is restructuring it’s capex to focus on rolling out their 'lab-in-lab' model.
In appearance the device looks like any other mouthguard on the market, but a crucial – and patented – airway system is wahat sets it apart. This airway acts as a kind of 'nose extension' via a gap over and around the teeth, essentially becoming a miniturised CPAP system. For a more detailed explanation on how the device works, here's a brief video explaining the technology.
The device is custom 3D printed to fit each patient, making it cheap and quick to produce. The lightweight design and simplicity of the idea gives Oventus an advantage over the more traditional CPAP solution sold by larger companies such as Resmed. While CPAP is 100% effective, it’s regularly abandoned by patients due to it's clumsy and uncomfortable nature. With a CPAP abandonment rate of nearly 50% in the US, the lasting effectiveness is widely acknowledged to be much less than touted. Early studies of O2Vent however, are showing that though the standard configuration of the platform is only ~63% effective, its lasting effectiveness is much higher than CPAP, partly because it’s not being abandoned at the same rate and partly because of its comfort and portability.
To add to this success, future add-ons to the system have been clinically proven to show incremental signs of efficacy up to 100%. The most interesting of these is perhaps the ExVent valve, designed for more serious cases of OSA, where the O2Vent alone is less effective. The ExVent will sell as a subscription-based product once FDA approved, due later this year. It’s attractive, because it will act as the ‘blade’ to the O2Vent Optima’s ‘razor’, and has the potential to generate millions of recurring revenue every year.
Oventus sells the O2Vent Optima wholesale for approx. USD $600, + $200 for services related to each sale, with a ~3-year expiration. There are an estimated ~6m patients who have been prescribed CPAP in the US with ~50% who have abandonned it, giving Oventus a market opportunity of about 3 million patients who may need an alternative. An optimistic view of the potentiual of the product therefore puts the TAM at nearly $2.5 Billion in the US alone.
A total of about 50 agreements have been signed so far with minimum orders of 20 devices for each site. About 20 sites have launched, with patient flow numbers starting to look decent after the first few months before COVID-19 hit. Their response to COVID-19 has so far been admirable, and though it's hard to say how things will end up I've been impressed with how Chris has handled the changing landscape. Some new home/remote implementation scemes, as well as good patient communication and booking rescheduling should help keep patient flow tracking well on an annulised basis. They've also slahed travel costs, slightly reduced headcount in the states, and helped local communities in the US with free Optima devices. Chris has also been extremely responsive to shareholder enquiries and seems to genuinely care about his business and staff.
The cherry on top is that the company has extremely strong insider ownership. CEO Chris owns a ~20% stake, whilst co-founder and Chief Technical Officer Dr Neil Anderson owns ~5%. The rest of the board make up another ~6%. Plenty – but not too much – of skin in the game.
There is some execution risk here, but whilst quarterly numbers will look dire in the coming months, they will be masking what could be a truly good business in the years to come.
There are some delays going from a contracted site to a fully up and running site selling the minimum sales quota (all in all about 150 days). So perhaps the best way to understand OVN's Intrinsic value is to calculate the minimum sales from all these sites and treat it as annual 'recurring' revenue (ARR).
Right now there are 43 sites on contract, each with a minimum quota of 20 units per month. Units sell wholesale to these sites for US $600 + a US $200 service fee for a total of $800.
So the equation is as follows:
ARR = 43 sites * 20 units * 12 months * $800
= US ~$8.26m
Apply an appropriate AUD conversion, together with a price to sales ratio that makes sense, and you should have a reasonably good idea of IV.