Profound Medical has a 130 per cent upside, says Raymond James

A minor setback is not enough to sway Raymond James analyst Rahul Sarugaser from his bullish stance on Profound Medical (Profound Medical Stock Quote, Charts, News, Analysts, Financials NASDAQ:PROF). Sarugaser delivered a company update on Tuesday where he reiterated an “Outperform” rating on Profound Medical, saying the upcoming 2023 year will be catalyst-rich for the stock.

Profound Medical is commercializing a novel, non-invasive image-guided therapeutic technology called the TULSA-PRO for prostate cancer procedures. The company, which trades on both the NASDAQ and the TSX, has received 510(k) marketing authorization by the FDA for the TULSA-PRO and is currently ramping up its installed base across the United States. 

Profound Medical released an update on September 2 on the path to reimbursement under the Centers for Medicare and Medicaid Services (CMA) for the TULSA-PRO. Profound announced that it would be withdrawing its Current Procedural Terminology (CPT) Category 1 application from consideration at the American Medical Association (AMA) 2022 meeting in September, saying instead that the application will take place next year. 

The decision moves CMS reimbursement out to likely early 2025 instead of early 2024.

“As the pursuit of a CPT Category 1 code continues to be an important part of our efforts to secure longer-term reimbursement for TULSA from third-party payors, we believe that the proposed hospital payment under C9734 is sufficient to help further advance adoption of the technology in the near- to mid-term in the United States,” said Arun Menawat, CEO and Chairman of Profound, in a press release.

But Sarugaser said the company’s decision is not really a delay in PROF’s timeline. He explains that an underappreciated risk on PROF was that applying now could have resulted in the AMA opting to award the TULSA-PRO with a Category 3 CPT code for emerging technologies instead of the sought-after Category 1, the difference being that reimbursement under Cat-3 is at the full discretion of the payor and, importantly, that granting this status would delay PROF’s ability to reapply for a Cat-1 code for three years. 

“PROF is currently able to access a C-code that reimburses >$13k per TULSA procedure (up +5 per cent for 2023), and the award of a Cat.-3 code would have made PROF’s current C-code defunct: a risk the company was unwilling to take,” Sarugaser wrote.

“While [the new announcement] does push potential commencement of reimbursement under CMS to Jan. 2025 (was Jan. 2024), we see this event as only mildly net negative for PROF, given: (i) there is now a greater certainty of TULSA winning reimbursement at a future AMA meeting (~mid-2023), and (ii) PROF’s current C-code is now protected from being nullified by a potential Cat.-3 CPT code allocation (see below), which, in turn, insulates short-med-term Rev,” he said.

The TULSA-PRO uses real-time magnetic resonance imaging with transurethral robotically-driven therapeutic ultrasound and closed-loop thermal feedback control for the precise ablation of pathologic prostate tissue while protecting the critical surrounding anatomy. 

Sarugaser said he is reiterating his long-term conviction in Profound Medical, noting several near- and medium term catalysts, including: 2022 year-end data from a Focal prostate Ablation vs radical prostatectomy study; the year-end count of 35 TULSAs as its installed base; a CPT-reimbursement decision (expected mid-2023) and 2023 year end data on another comparison trial.

Profound’s share price had climbed a long way over the period of mid-2019 to early 2021, effectively going from $6 to as high as $28 at its peak. But the past year and a half have seen all of those gains now erased, as PROF is currently trading again in the $6 range.

But Sarugaser is expecting a lot more from the stock going forward, pairing his Outperform rating with a maintained 12-month target price of $15.00, which at press time represented a projected return of 130.1 per cent.

“[G]iven the continued sell-down in PROF, we see the present stock price as a value-level to build positions over the next six months in advance of the 2023 catalysts which lead to our long-term thesis,” he said.

By the numbers, Sarugaser thinks Profound will generate full 2022 revenue and EBITDA of $7 million and negative $25 million, respectively, which moves to 2023 revenue and EBITDA of $19 million and negative $24 million, respectively, and onto $117.8 million in revenue and positive $20.8 million by 2026. 

On valuation, Sarugaser has Profound’s EV/Revenue going from 12.2x in 2021 to 11.2x in 202 to 4.9x in 2023 and its EV/EBITDA multiple going from negative 3.9x in 2021 to negative 3.3x in 2022 to negative 3.5x in 2023.