Vapotherm (VAPO) has not seen great deal of coverage on this platform. With exception to a few articles written around the time the company went public in the autumn of 2018, it has been quiet on the stock. This is surprising as the recent events have been quite eventful, to say the least.
While the story unfolded and has been a challenge, it is actually Covid-19 which has come to the rescue for the company, not just providing a boom to current sales, yet allowing for a capital raise as well, as the situation remains very interesting to watch.
In November 2018 I concluded that while Vapotherm brings air for patients, it was the question if the same applied for its shareholders as well. The company described itself as a medical technology company which has developed Hi-VNI technology products to treat patients which suffer from respiratory diseases.
This is a non-invasive ventilator, providing heated, humidified and oxygenated air through nasal interface. Together with its Precision Flow System, this provides better care than the standard, as in fact there were 13,000 installed systems already, having treated over 1.5 million patients at the time.
Originally the key target patient groups are those with pneumonia, COPD, asthma and heart failure which requires supplemental oxygen. While Vapotherm already marked its Precision Flow System at the time of the IPO, it was looking to become the sole alternative compared to non-invasive positive pressure ventilation, yet that requires some FDA action. This could be a major market pegged at $1.5 billion in the US alone as current oxygen masks are not just uncomfortable, patients suffer from claustrophobia and the current solutions do not allow for simultaneous eating and drinking as well. Furthermore, it seems that Vapotherm’s solutions might be more effective as well. In comparison to traditional velocity therapy, the product sees lower intubation rates after usage with consistent higher blood carbon dioxide levels as well.
As shares were sold at $14 per share in November, the enterprise valuation of the firm stood at just $250 million. This looked reasonable given that the company saw sales rise from $30 million in 2016 to more than $35 million in 2017, and the company was on track to generate a little over $40 million in sales in 2018. The problem is that while the sale multiples and 20% growth looked rather compelling, is that the company lost a great deal of money. Vapotherm reported an operating loss of $22 million in 2016, nearly $29 million in 2017, and at the time of the IPO were seen around $35 million in 2018.
While the solution and growth, certainly in combination with modest sales multiples, looked compelling in my book, I had a few reservations. This includes the impact of competition, but moreover the steep losses which would result in a complete cash burn in 18 months following the IPO at that pace, quite a worrying sign. The wildcard in my eyes could be an M&A move or FDA granting the company a new classification, which allows for R&D and filing costs to come down while sales could see a boost.
Since the company went public shares initially traded around the $20 mark following a welcomed debut, yet a year after the IPO shares were trading around $10 late in 2019. At the start of 2019, the company reported its 2018 results with revenues of $42 million, an 19% increase compared to the year before, as the company guided for similar percentage increases in sales to $49-$51 million. The trouble was that of huge losses, with the company reporting an operating loss of nearly $11 million in the final quarter of the year, roughly equal to the reported revenue base.
Growth was a bit underwhelming in the first two quarters of 2019 as alongside the release of the second quarter results, Vapotherm announced a public offering of 3.1 million shares at $14.50 per share. Softness in the growth prompted the company into cutting the full year guidance when the third quarter results were reported, as shares fell to just $8 and change in February 2020. A month later, amidst the outbreak of Covid-19, the company reported its 2019 results. While full year sales rose 13.5% to $48.1 million, this was quite a bit weaker than anticipated at the start of the year.
Despite the growth, expectations were very low. With just 20.8 million shares outstanding by the end of the year, and shares trading at $8, equity of the company was valued at $166 million. Despite the issuance of new shares last summer, net cash was down to just $27 million again. This revealed that operating assets were valued at just $140 million, less than 3 times sales.
The reason for that is simple, and that is the huge operating losses of $12.7 million in the fourth quarter and losses for the year at nearly $50 million! There was no quick solution in sight with 2020 sales seen up just 10-13% to $53-$54.5 million as the company at this pace continues to lose roughly a dollar for every dollar in revenues.
The Breakthrough – Covid-19
In April, when the Covid-19 outbreak was in full swing, the company obtained good news from the FDA as this agency granted the company Breakthrough Device Designation for the Oxygen Assist Module.
First quarter results were spectacular with sales up 55% to $19.1 million. Nonetheless, operating losses were stable at a run rate of $50 million. The good news was that April revenues were seen at $19.0-$19.3 million, essentially the same as the entire first quarter! Strong results made that shares basically overnight jumped from their teens to $30 upon these strong results, as management hit the capital raise button, this time selling 3.5 million shares at $26, thereby making sure that capital burn is not a big issue in the near term, certainly not as losses would come down given the spectacular revenue growth.
Second quarter results, as released in the first week of August, were both encouraging and triggered a big selloff from a high of $55 to $30 again. A 193% increase in second quarter sales to $35.2 million was somewhat disappointing after April sales came in around $19 million.
This suggests combined revenues of $18 million in May and June, or about $9 million per month. Amidst the booming sales the company managed to reduce operating losses to $6.8 million, for a run rate of $27 million a year. This burn is no major concern as net cash now stands at $102 million following the offering during the quarter. A diluted share count of 23 million shares valued equity at $690 million, or operating assets at $590 million. The absolute value has gone up a great deal, yet based on the third quarter guidance the revenue run rate is still double that of the revenue rate at the start of the year.
Given the big sequential decline in May and June sales (averaging at $9 million a month) it is comforting to see sales stabilize at those levels with third quarter sales seen at $24-$28 million. The real question is how much of the increase in sales can be sustainable thanks to the FDA action and how much is Covid-19 related (most likely the majority).
A Final Thought
The crazy price momentum can be summarized as shares are now up twice from the IPO levels, up 4 times from the lows just a few months ago, and actually down nearly half compared to the highs in recent weeks.
The Covid-19 impact has provided a big revenue boost yet the FDA decision has been crucial as well. There is much to like in my opinion, although I am taking note that the company has seen modest operating profit leverage in the booming second quarter. While April has been a standout month, I am pleased that the third quarter outlook calls for flattish sales compared to the combined May/June period, suggesting run rate of a hundred million a year.
This is very encouraging at twice the pre-Covid-19 run rate as the company took advantage of the momentum to issue some shares, with cash now sufficient to finance the current cash burn for another 2-3 years. Trading at around 6 times annualised sales here, I think valuations can be defended here and while I remain very compelled to the business and its solution, I look forward to continued volatility in the stock to potentially enter it in the twenties, as well as keep close track of operational developments.
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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.