In his words, Raymond James analyst Rahul Sarugaser is expecting “massive recurring revenue” coming from Profound Medical (Profound Medical Stock Quote, Chart, News TSX:PRN) once the commercialization of its TULSA-PRO medical device really picks up steam.
In a review of the company’s latest quarter on Tuesday, Sarugaser reaffirmed his “Strong Buy 1” rating and $45.00 target price for PRN, which at press time represented a projected one-year return of 158 per cent.
Toronto-based Profound Medical released its fourth quarter and full year 2019 results on Tuesday, showing revenue up 64 per cent year-over-year to $2.8 million and a net loss for the three months ended December 31 of $5.2 million or $0.43 per common share, down from a loss of $4.9 million a year earlier.
“From the positive TACT clinical trial results, to receipt of both FDA and Health Canada approval for TULSA-PRO, 2019 was a momentous year for Profound,” said CEO Arun Menawat in a press release. “We are pleased that the increasing interest in TULSA-PRO in international markets, combined with our ongoing roll-out of Sonalleve in China, has resulted in a more than four-fold sequential increase in fourth quarter 2019 revenue.”
Sarugaser said the quarterly revenue was in-line with management’s guidance and a slight beat of his $2.7-million estimate. The analyst noted that in these early days of commercialization, revenues are bound to be lumpy, with the company focused on ramping up its TULSA-PRO install base.
Profound has opted for a recurring revenue model for the TULSA-PRO in the US, with the company charing a pay-per-use fee that rounds out to about US$6,500 per patient.
Management aims to have about 20 installation agreements signed by the end of 2020 and 15 of those in operation, but Sarugaser is taking a more conservative view, calling for ten installations in 2020 while nonetheless praising the company for its approach.
“Shifting toward a recurring revenue model is astute, and the expansion of PRN's install base appears to be proceeding smoothly. We note that companies with recurring revenues are historically valued at 10x to 20x sales (see Novadaq's sale to Stryker, and NeoTract's sale to Teleflex). Greater traction driven by imaging centre installations —where the device could be used by more than a single urologist, driving several procedures a week— bodes well for strong recurring revenue,” Sarugaser said.
Looking ahead, the analyst is forecasting 2020 revenue and EBITDA of $11 million and negative $23 million, respectively, and 2021 revenue and EBITDA of $27 million and negative $20 million, respectively.
Sarugaser is calling PRN his “Best Pick” for 2020 and Raymond James’ “Analyst Current Favourite,” saying,
“Light 2020 revenues we see as a function of PRN substituting short-term capital equipment revenue with massive, long-term recurring revenue. We view this as a deft strategy enacted by PRN's veteran management,” he said.
Sarugaser points out that sales could be greater by three to five times from 2021 onwards if PRN receives its C-Code in the United States, the temporary product code for new medical technology which is effectively a precursor for a CPT (Current Procedural Terminology) code. PRN applied for a C-Code in November, and Sarugaser gives the application a 50/50 chance of success and, if successful, says that PRN would get its C-Code around June or July 2020.
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