Myomo Thesis(MYO)

Since substack is all the rage now, the I post all of my DDs on there as well. I like the ease of use of the platform as well. 

Myomo is a medical device company that sells an assistive device for those with reduced strength in their arms. The device uses the impulses generated by a persons brain and amplifies them to strengthen movements. The target population are a specific set of patients with chronic arm paralysis (basically you have trouble using your arm) such as stroke survivors, spinal cord injuries, Brachial plexus injuries and other various conditions.

Market: Management sizes the total market opportunity at 3M people with chronic arm paralysis in the USA and 1% of the global population growing at 250k each year. Not all of these patients will get a Myomo device, but there is still a large and growing unmet medical need

Industry: Myomo has no direct competitors, but there are two other companies focused on augmenting human movement: Ekso Bionics (EKSO) and Rewalk Robotics (RWLK). Myomo is focused on upper limb mobility while the other two competitors are focused on lower body mobility. Myomo's technology is patented until 2039. The patents are, at a simple level, for a device that measured muscle signals and 'amplifies' them using the forces from the brace.

Sales Rollout: The device is very expensive at > 30,000$, but growth has been impressive the past few years due to an increase in insurance reimbursement.

Source: company presentation

Revenue growth was 80%+ in the last year and has accelerated. This can partially explained by an increase in the ASP. The company is pushing towards increasing the direct billing revenue portion of their pipeline. This means the company directly bills an insurance provider rather than having to circuitously go through a medical provider. This has had a material impact on revenues as management noted on the Q3 earnings call. One year ago, the ASP was 27,000$, but in Q3, the ASP was 38,000$. (source: company 3Q earnings call). Another factor affecting their outstanding pre announced 4Q revenue results is a change in the revenue recognition. Certain billers started recognizing revenue on delivery thus pushing revenue ahead. The revenue recognition methods are variable for the direct billing, O&P/VA, and international sales (see the image below for details).

Their revenue growth is buoyed by the dual tailwinds of increases in ASP and an increase in authorization number which led to the robust growth seen in the past year.

For a more detailed look at future growth, we can look at the back log and pipeline numbers. He backlog represents units that have been authorized, but haven't been delivered. The churn on the backlog recently decreased from a historical 20% down to 5% (3Q CC). The pipeline represents the people that are engaged with Myomo to get a new MyoPro.

The current process Myomo goes through is fairly difficult to get authorization as a lot of leads have to get insurance authorization through the appeal process.

The conversion from the pipeline is fairly low, but this can provide a lever for growth. However, as the pipeline grows, revenue growth should accelerate. COVID dampened the pipeline since they couldn't add as many customers that were locked down and reluctant to get a new device. However, management has repurposed their advertising strategy and expect the pipeline new adds to return to Q1 number.

Their goal is to get to cash flow breakeven in 4Q21 and set the goal of 300 new pipeline units per quarter and 7 million in revenue in a quarter to get there. The sales cycle can take a fairly long time(6-12 months), thus they want to expand their pipeline now. The long sales cycle means growth could slow in the middle of 2021 but accelerate in the latter half of the year due to the shutdown effects and subsequent decrease in pipeline adds followed by a return to normal.

Future growth:

International expansion - Currently, they have a CE mark and are working towards insurance coverage in Germany. In addition, they recently entered a Joint venture in China to sell the MyoPro device. (Source). Myomo is partnering with a Ryzur Medical, a local medical device company, and plan to take a 20% stake in the JV with a commitment from Ryzur Medical to invest $8-20 million over 5 years. In addition, Myomo will receive an upfront license fee of $2.5 million and have a minimum purchase commitment of $10.75 million over 10 years. The initial minimum numbers aren't large, but the market opportunity is huge in china, providing them another avenue for growth.

Medicare coverage - Myomo was recently certified as a provider by medicare, but CMS codes for coverage/fees are TBD. The upshot of becoming a provider means reduced friction for Myomo devices being reimbursed. While they were previously reimbursed via other device designations, Myomo can now directly enter into contract with insurances, thus reducing friction in the process. In addition, once a fee for Myomo is determined, it can be used by those covered by Medicare.

Downsides: From the information laid out so far, the company looks like it has a proprietary device playing into a large market with catalysts on the horizon in the form of international expansion and increased coverage. However, there are some downsides and red flags with the company

No recurring Revenue - In a world where every type of company has some recurring revenue or a device upgrade cycle, Myomo devices are expected to last for long periods of time like a car, thus there are only a finite number of sales that can be made. In addition, more units have to be sold each year to sustain growth. While this may lead to medium term gains, the long term opportunity is limited. The warranty on the battery and device is 1 and 3 years respectively and the patient has to resubmit to insurance if they would like a new device. A form of recurring revenue could be introduced through newer models and renewals, but as of right now, there is no recurring revenue.

Low insider Ownership - According to a company filing in April, insider ownership stands at <10%, which is very low for a fast growing microcap company. For a company as small as Myomo, I would expect and like to see more insider ownership.

Reliance on insurance - The price point for Myomo devices are extremely high and any sales are reliant on insurance reimbursement. In fact, Myomo had previously guided for Medicare coverage to be established by the end of 2020, but due to COIVD, this failed to materialize.

Low Conversion rate of Pipeline - Currently only 15% of all patients referred to Myomo in the pipeline are approved and sold a device.

Delays in Business - In addition to the aforementioned delays in Medicare coverage, Myomo had also delayed the release of a pediatric MyoPro that was intended for a 2020 launch. However, the delays could be a function of COVID as recent financial performance has been excellent.

Valuation: Myomo has a net cash of 13 million indicating a runway past 2021 based on previous cash burn estimates. The EV/Sales based on FY20 results is ~6.8 indicating the company is undervalued if it can sustain growth. However, the risks outlined above make me apprehensive about taking a large stake (10%). The company highlights a large TAM, but only a select few of those who get chronic arm paralysis are eligible for a Myomo device thus capping their future potential. This is a 'Prove it" story and if revenue growth continues to accelerate with an increase in the conversion rate from the pipeline and international growth, I would buy more for the next 1-3 years.

Predicting revenue based on the pipeline:

Disclosure: I bought a speculative 1% position two weeks ago at 12$ and I plan to add more as I have done more research and the stock price is breaking out/relatively cheap.

Company website: https://myomo.com/