Profound Medical gets target trimmed by Raymond James

Raymond James analyst Rahul Sarugaser has trimmed his target price on medical device company Profound Medical (Profound Medical Stock Quote, Charts, News, Analysts, Financials NASDAQ:PROF) but he still has a lot of faith in the company’s growth trajectory. Sarugaser updated clients on Profound in a Monday report where he reiterated his “Outperform 2” rating while lowering his target from $22.00 to $17.50, which at press time represented a projected one-year return of 133.0 per cent.

Profound Medical is currently commercializing in the United States its TULSA-PRO technology, which is a non-invasive, image-guided device combining real-time magnetic resonance imaging with therapeutic ultrasound and closed-loop thermal feedback control. Profound is marketing the TULSA-PRO for the ablation of prostate tissue including prostate cancer and BPH (benign prostatic hyperplasia), with the company having received 510(k) marketing authorization from the US FDA in 2019. Profound is now working on increasing its installed base of TULSA-PRO units across the United States.

Sarugaser’s update comes after the American Medical Association (AMA) published the agenda for its September 2022 CPT Editorial Panel Meeting where decisions are made on permanent public (CPT-1) reimbursement applications, in this case including one from Profound for the TULSA-PRO. Sarugaser said news of a positive AMA determination on the TULSA-PRO would be a material catalyst for widespread adoption of the tech as physicians country-wide would then be looking to install the TULSA-PRO in anticipation of its full, stable coverage. 

Sarugaser reviewed the data on past results from the AMA CPT meetings and found that the average rate of approval is 52 per cent. But the analyst has pegged PROF’s probability of approval at greater than 75 per cent, with outcomes to be published on or before October 14, 2022. 

As for why he’s giving a higher than average chance of approval, Sarugaser pointed to a number of factors: (1) Profound’s application includes two reimbursement codes, one for a radiologist and one for a urologist, so that both or either specialist can bill. This increases the flexibility of the application and likely overall higher reimbursement, according to Sarugaser; (2) Profound included multiple support letters from medical associations in its application; (3) the TULSA-PRO has already been awarded a C-code (C9734) which clearly identifies the tech as meeting a critical unmet healthcare need; and (4) Profound has stated a Level-1 clinical trial which Sarugaser thinks should demonstrate TULSA’s superiority over robotic surgery, which should give the tech even more credibility with the AMA panel.

“In our view, these compelling factors should drive a higher likelihood of approval than average; we estimate a >75 per cent probability PROF’s two codes will be approved when outcomes are published on or before Oct. 14, 2022. The codes would come into force Jan. 2024,” Sarugaser wrote.

As to how the current installations of TULSA units have been going, Sarugaser said he thinks Profound hit its low point over the first quarter of 2022 and is now on the up and up, with strong revenue growth expected into 2023. 

“We believe PROF’s installed base—which we expect to be 35 TULSAs up and running across the U.S. by the end of 2022—would benefit materially by the likely approval of CPT-1 reimbursement (see above); we expect CPT-1 approval would amplify demand for procedures, catalyzing rapid deployment of new devices for a total installed base of ~70 by the end of 2023,” he said.

Sarugaser has rejigged his numbers and now has PROF hitting 2022 revenue of $7 million (previously $8 million) with EBITDA of negative $26 million (previously negative $24 million). For 2023, the call is for $19 million in revenue (previously $22 million) and negative $23 million in EBITDA (previously negative $21 million). (All figures in US dollars.)

Those estimates now put Sarugaser’s EV/Revenue multiple at 13.4x for 2022 and 5.1x for 2023 and his EV/EBITDA multiple at negative 3.8x for 2022 and negative 4.4x for 2023.

On the target drop, Sarugaser wrote, “[T]his is simply a recalibration of [our] revenue estimate and should not be read as a fall in our confidence. On the contrary, given our conviction in likely CPT-1 reimbursement, combined with a ~35-site installed base by 2022YE, we anticipate strong revenue growth into 2023 (hence our reset to an 18-month time horizon that is now closer to ten months), so we reiterate our Outperform rating,” he said.

Profound’s share price hit a high of just over $28 in February, 2021, but has been sliding ever since, dropping to just over $11 by the end of 2021 and now down to the $7-$8 range.

Ahead of Profound’s second quarter 2022 financial results due on August 4, the company last reported earnings in May when its Q1 featured revenue of $1.4 million compared to $711,000 a year earlier and a loss per share of $0.40 compared to a loss of $0.37 per share a year earlier.