After many dark years (down about 95% over the last 5-7 years), USCOM had a stellar day this week - up 33% - to a paltry SP $0.016, on the back of its latest report. Strong FY24 sales growth (+40%) has produced a significant SP spike (+33%) upon release of results, although the firm is still loss-generating and does not appear to have committed to growth projections. So who are these one-day wonders, and what is USCOM all about?
The Company & Management
Universal Systems Corporation (USCOM) is an Australian-based medical technology firm specialising in advanced non-invasive heart and lung monitoring systems for use in hospitals and clinics. USCOM has invested substantially in European and Chinese production and distribution networks, with a sales presence in China, Europe, the US and Singapore as a hub for SE Asian markets.
The firm is based strongly around founder A/Prof Robert Phillips, the Chairman, CEO, Chief Scientist and majority shareholder (33.5%). The remainder of the board consists of three non-executive directors. In my view there is substantial key-person risk; in particular the potential of this key person and major shareholder to lack the governance structure to support best-in-class commercial decision making.
As the firm outsources device development and manufacturing to regional partners, USCOM’s main value-add is in the skilled personnel and experts in device design and development, as well as marketing links to the healthcare industry. There are key personnel risks. Regulatory risk has been somewhat diminished by the partnership with Foxconn, which improves manufacturing efficiencies and regulatory specialists for the China market.
The Products
The 1A
USCOM's flagship product is the 1A, an ultrasound device which measures the speed of blood cells through the aorta as they exit the heart and thus derive cardiac output, or the volume of blood pumped by the heart per minute. Clinicians use this data in critical care wards, emergency departments, operating theatres, paediatrics (child health) or obstetrics (pregnancy) to make decisions about critically-unwell patients. Unlike alternatives, the 1A is portable, completely non-invasive and uses a probe placed on the front of a patient's throat/neck to take measurements. Using ultrasound, it does not use any radiation which makes it particularly attractive in pregnancy and children. The disadvantages of the 1A are that it needs some degree of operator skill to place the probe correctly, and that it is probably unreliable if there is significant heart valve disease.
The gold standard devices are either invasive, with potential risks and harms attached to their use (pulmonary artery catheters, lithium- or thermodilution techniques), or require skilled technicians with years of experience and are time-consuming to perform an examination (echocardiography). There are less-invasive alternatives ('pulse contour analysis'), which use a probe placed inside an artery to measure the pressure characteristics of each heart beat to derive similar information as the 1A. These are probably slightly more accurate than the 1A, but do require some invasive probes into the patient's body (painful, uncomfortable, potential for injury). However, these devices are pretty well accepted in the Australian healthcare space, to a greater degree than the 1A.
The 1A may have greater application in developing markets (China, Eastern Europe, South America and Asia), where the non-invasive design, safety and short training time (2 days) could be compelling. In developed economies, the more compelling use cases may be in pregnancy and children than routine critical care.
The BP+
Uses ultrasound technology to measure central blood pressure (i.e. blood pressure at the heart / aorta, rather than at the arm), and arterial stiffness. Gives extra information to cardiologists managing high blood pressure and heart / blood vessel disease. Can be used at home or in the clinic.
Spirosonic
Uses ultrasound technology to measure lung functions, avoiding the need for breathing devices which use disposable flow sensors to detect the pattern of breathing at home or in the clinic. High precision ultrasound, non-invasive with minimal disposables.
Technology & Commercialisation Prospects
USCOM had several dark years, with COVID-related challenges followed by commercial difficulties in China, their largest individual market and growth prospect. To overcome Chinese medical device regulation and "Made-in-China" regulations, USCOM has partnered with FOXCONN to produce USCOM devices for distribution in the Chinese market. This investment in time and resources appears complete, with device sales in China continuing to grow. USCOM has this year increased sales presence into 24 (from 12) Chinese provinces.
FY24 Financial Results
Revenue $3.726m with a gross margin of 84%
Expenses $5.629m, of which:
- Employee Exp: $3.126m
- Marketing: $1.068m
- Administration: $0.541m
- Financing: $0.131m
- R&D: $0.021
FY24 Loss: $2.130m
Cash & Equivalents: $2.519m (approx 24-month runway)
Cash Used in Operations: $1,163m
Net Assets / Equity: $3.061m
NTA/Share: $0.015
FY24 Interntional Sales Growth & Outlook
Australia: 65.5% growth (33% total sales)
Asia: 45.3% growth (35% total sales)
Europe: -5.4% growth (25% total sales)
Americans: 519% (7% total sales)
Clearly the Americas has shown impressive growth, albeit from a low base and a small share of overall sales. Australia and Asia are growing well. It is not clear from the financial report where the profitability inflection lies - at these sales, the business is still loss-generating. The recent jump in SP appropriately reflects the current NTA backing of the share. USCOM has not provided a clear growth projection or pathway. The R&D expense was surprisingly (disappointingly) small, although probably reflects the post-restructure focus on sales & marketing of existing products rather than development of the patent pipeline. At a gross margin of 84%, and assuming employee, sales & marketing expenses are relatively fixed, then UCM needs to increase sales by 77% before breakeven (about 21 months at current growth rates, and slightly less than current cash runway). This year's sales growth of 40% may be a floor - if the Foxconn partnership has truly addressed the regulatory and supply chain problems into China, then growth may very well accelerate.
UCM is an established device designer/distributor, which has had major headwinds over last few years. There is a realistic prospect that the firm can achieve profitability within the next 18-24 months, if these headwinds truly have been overcome. With some generous assumptions of 8% discount rate, annual sales growth of 50% and costs growth of 20%, I get a valuation of $0.10 over a 5 year horizon.
