In this episode of Industry Focus: Wildcard, Jason Moser and Motley Fool contributor Brian Feroldi discuss a recent IPO in the healthcare space. Learn about the purpose-built medical devices offering minimally invasive, low-risk procedures. Learn about the addressable market, growth potential, and much more.
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This video was recorded on June 10, 2020.
Jason Moser: It's Wednesday, June 10th. I'm your host Jason Moser, and I'm joined today by Motley Fool analyst Brian Feroldi. Brian, how's everything going?
Brian Feroldi: Jason, it is the end, finally, the end of school for my children this week. Normally, the end of school year is something to fear and not like. Given that we've been homeschooling for three months, we couldn't be happier [laughs]. How about you?
Moser: Yeah, I can imagine. That's interesting, our timing, same timing. Our girls are finishing up their last week of school now. And yeah, it's been school-at-home for the past three months or so, which has been interesting, I think. You know, Fairfax County Public Schools have done, I think, an admirable job in a difficult situation. I do not envy having to be in that type of position where you just have to figure out how to flip this thing on its head and completely do everything differently. It wasn't perfect by any means. I'm sure they learned a lot from it, and I'm sure they will continue to employ those lessons and make it better and better.
But frankly, you know, we were just thrilled that our kids were able to finish school and actually complete the work and be able to move on to the next grade next year, because it does sound like they want to get these schools open back up in the fall, which I know that [laughs] parents are certainly looking forward to that, probably as much as the kids.
Feroldi: Yes, I can confirm that. As a parent of three elementary school children, I assure you I am so looking forward to them going back to school, already, but the real way -- none of this homeschooling nonsense. [laughs]
Moser: Yep. Well, you know, we get a few months of summer here and then hopefully we're right back into the swing of things. But today, folks, we wanted to talk a little bit more -- today is Wednesday, so it's Wildcard Wednesday, and as our listeners know that Wildcard Wednesday can take the show in virtually any given direction. Today, we're going to take it into the healthcare direction, as I'm sure some would be happy to hear.
Brian, you have been looking into a recent IPO in the healthcare space -- you've been researching a company called Inari Medical (NASDAQ:NARI). And tell our listeners about what Inari Medical does and what you've found out about it so far.
Feroldi: Sure. And hats off to Joey Solitro for bringing this one to my attention. I always lean on Joey to be super excited about IPOs and he's always so happy to share them with me. So otherwise, this one might have gone under my radar. But yeah, so this is Inari Medical, the ticker symbol is NARI, just came public in May of this year. So the IPO markets, Jason, are still open, believe it or not. They raised about $180 million.
And this is a medical-device company that is focused on minimally invasive treatments for venous thromboembolism -- I'm just going to call that VTE from now on -- and what that essentially means is a blood clot in a vein. So there's a blood clot in a vein, that's venous thromboembolism or VTE, and these are bad news. You know, cardiovascular disease is one of the leading causes of deaths. And clots can appear in veins for a huge number of reasons. They are typically associated with surgery -- like post-surgery, it's fairly common to have them. Certain medications can increase your likelihood of them if you have limited mobility for whatever reason. If you're under prolonged bed rest, if you're recovering from an injury -- even if you're on an airplane for a long period of time -- that can lead to a blood clot. And the risk of developing one of these skyrockets if you are obese, if you smoke, or if you are a little bit older. And these are a major, major problem.
Moser: Yeah. And you know, I'm glad you mentioned that, because it's one thing as we get older, I think this is something that certainly comes into play for more of us as we get older. And you mentioned flying. I know that travel can become a bit of a chore for folks with venous thrombosis issues, VTE issues, and you know, you can't be sitting around for extended periods of time -- you have to be up and moving.
And so, everybody I have ever spoken [to] with issues like this, I mean, it sounds like most are being prescribed some type of medicine, some type of drug that is helping to thin the blood. But this is not a drug company -- this is a device company, isn't it?
Feroldi: Yes, correct. So Inari has FDA [Food and Drug Administration] clearance to treat two types of VTEs. The first is called deep vein thrombosis, or just DVT. And that's when a blood clot is formed in the extremities of the body. The most common area for them to be formed is in the leg. And sometimes, those blood clots can detach and travel, and one of the places that they travel to is the heart and the lungs, and that is called a pulmonary embolism, or a PE. So Inari makes products that go into the veins and physically remove these blood clots from the body. Now, you mentioned before that a lot of people with PE or DVT are typically treated with blood thinners -- those are called anticoagulants. That's a very popular and common way to treat them and it does exactly what it says -- it thins the blood. So it makes it so even if there is a clot in there, the blood still has an easier time of getting around.
But there's downsides to being on anticoagulants. First off, you're on them for the rest of your life -- it's not something you take once. It's once you're prescribed them, you are on them for the rest of your life. That can be expensive. No. 2, when you have blood that is thinned, that creates a bleeding risk. What that means is if you get a cut or a scrape or you are bleeding for some reason, your blood has a much harder time stopping the bleeding, and that can lead to serious medical complications, especially if you're going in for surgery or something along those lines. So anticoagulants are a low-risk treatment.
But Inari was founded to basically say, to heck with the anticoagulants. How about we take the actual blood clot and get it out of the body?
Moser: [laughs] Well, that's certainly an attractive option for many, I can imagine. Particularly, you get caught with something like this earlier in life, the idea of having to take medication for decades, I don't think a lot of people want to do that, and it's obviously not inexpensive to do. So I guess one question I have in regard to Inari is this one device that they make, or do they have technology that is spanning the, sort of, catalog of treatments, or do they have a number of devices that can address certain conditions?
Feroldi: Yeah. So they have two devices that are on the market. One is called the FlowTriever and the other is called the ClotTriever. Both of them remove blood clots in the veins. And it's also worth pointing out that it's not like the idea of taking a blood clot out of the body is new. In fact, Inari points out that, since the year 2000, the FDA has cleared 170 devices for taking blood clots out of the body.
So you would think, so what is the potential here? How can Inari be any different? Well, they point out that while there are 170 devices that have cleared, all of them are actually designed for the arterial system. So they're designed to take blood clots out of arteries. Inari is the only one that is purely focused on veins. And what's the difference between the two? As a reminder, arteries carry oxygen-rich blood away from the heart, and veins carry a low-oxygen blood back to the heart and back to the lungs for reoxygenation.
So all the devices that exist already were basically designed to clear clogs in arteries and were repurposed for use in veins. It sounds like they'd be the same thing, but Inari points out that veins and arteries are different. Veins are low flow, low pressure. Arteries, because they are after the heart, are high flow and high pressure. And arteries also get smaller and smaller and smaller as they go through your body. You're going from a big tube back down to the cell level to get the blood; veins, exactly opposite -- it's going from smaller and smaller to larger and larger.
So, because Inari is hyper-focused on just the veins, they have purpose- built these products for just vein surgery. It's allowed them to stand out in what appears to be a crowded marketplace.
Moser: Okay. So, given the medical description there and understanding what the product does, how it differentiates itself from other competitors in the market, because that is really something worth noting with a market filled with devices that address a certain condition -- it does seem like with Inari taking a different tack here, that makes sense. I mean, you get FDA approval with something like that; that's got to be more encouraging there.
So ultimately, we're investors, of course. Brian, what's the business model with this company? Is this something where they're selling these devices to the physicians themselves? Exactly how does the money flow through this business?
Feroldi: Yeah, sure. So Inari is going after hospitals, and they're specifically targeting interventional cardiologists, interventional radiologists, and vascular surgeons. And just for a sense of scale, this company just achieved FDA approval for these products in 2018 and they're in the scaling-up phase, and so they have 72 reps that are on the market.
So the devices that they sell -- again, called the ClotTriever and the FlowTriever -- they're sold directly to the hospitals and they are used during the surgery. And Inari says that there's a couple of benefits to its model. First off, its products have been designed to minimize blood loss. There's also no upfront capital cost for the hospital. So, example: When we talk about companies like Intuitive Surgical that requires a massive $1 million investment upfront, in Inari's case, it's just the devices themselves which are disposable. It's each patient. And Inari has the clinical data to basically say, you use our device, when compared to others, and you reduce the amount of time that you stay in the hospital, you minimize the amount of blood loss, you safely and effectively remove the blood clot. And then after we're done, that patient is going to be anticoagulant drug free for the rest of their life. So those are some serious clinical benefits that they're promising.
Moser: Yeah, absolutely. Now, one thing I wanted to make sure I understood correctly -- is this a device that is ultimately inserted into the patient and the patient lives with for the rest of their life or is it something that comes out at some point? Did you know?
Feroldi: Yes, good question. So the device actually goes into the vein. It literally grabs onto the clot and it pulls it out of the body. So it's just used during the surgical procedure. After the blood clot is removed, they don't have anything in them ever again. It is only used during the surgical procedure.
And they have lots of completely gross photos on their website where you can go and check out blood clots that have been removed from actual patients' bodies to show that the technology is the real deal.
But the exciting thing here, Jason, is even though this company just got FDA approval in 2018, I mean, we're not even talking about two years -- the numbers that they're throwing up already are extremely exciting. I mean, extremely exciting. You would expect that this company would be a cash-burning machine; just an absolute furnace of that. Not true. This company was actually profitable last year, which is just unbelievable. It is so rare to see companies that, basically, a year after FDA approval, are already profitable.
So let me just review a couple of their numbers; see if any of these capture your attention. So this is for last year, 2019. Revenue was up 650% to $51 million. Again, first year after [being] on the market -- 650% to $51 million. Gross margin, 88% already. Gross margin, 88%. I take that back. The company did lose $1 million of net income last year. However, in the first quarter of 2020, their revenue growth slowed all the way down to 290%, so they only produced $27 million in revenue. But in the first quarter, they produced $4 million of net income. So they recently became profitable.
So when I see super-fast revenue growth and super-high margins, boy! -- does that get me excited.
Moser: Yeah, I can understand that and, you know, back to the point you were making about the way this device works. And I think that's important for people to know, because a lot of times, we talk about healthcare companies and device companies, in particular. You look at some companies -- now, I'll use Masimo as an example here of a company that produces devices and also the equipment that ultimately renders those devices usable. And so, they have that, sort of, razor-and-blade model where that consumable, where they always have to be, you know, hospitals and physicians have to be replenishing those consumables. I mean, that is a nice, sort of, recurring revenue model, and it does sound like with Inari here, because that's a device that's essentially used once and done, you know, when you start looking at some of these numbers here in your notes regarding the market opportunity there. I mean, 1 million people in the U.S. have VTE each year. You have almost 300,000 deaths just from VTE each year. And so, you see clearly there's a massive market for this product, and if it's a product where you know that it's going to be somewhat of a recurring revenue stream and that this is a device that's going to need to be continually used, I mean, as investors, that's another attractive quality, I'd say.
Feroldi: Yeah, completely. So to your point, 1 million people in the U.S. have VTE each year resulting in 300,000 deaths. So this is the third most common cause of vascular disease after heart attack and stroke. The management team estimates that in the U.S., its current addressable market opportunity is about 442,000 patients. So about a little less than half of the people that have VTE. And their total addressable market opportunity that they estimate is about $3.6 billion -- that is just, again, in the U.S.
They, obviously, also see potential for this technology to be used in international markets. So again, compared to $51 million in revenue last year and probably somewhere about $120 million or so in revenue this year, long way to go.
Moser: Yeah, that really does speak to the market opportunity there. We look for those large and growing market opportunities, you know. Large is, obviously, a subjective term to a degree, but with a company that is really just getting its feet on the ground, like Inari here, you can see there's plenty of share to capture there.
Now, you mentioned management, and I want to talk a little bit about management, because I think CEO Bill Hoffman, there's an interesting history there, you know, that he sold the company to Medtronic. And so, initially, when I see a company like Inari, there's clearly a lot of potential -- a very small company. Sometimes, I look at these companies and it's a little surprising that they even get public, because you figure maybe there would be an acquisition at some point or another. But it does strike me as the type of company that one of these bigger medical-device companies, like a Medtronic, for example, would ultimately look at one day and say, "You know what, that might be a nice little additional avenue for growth there." And they just continue to snap up these little device makers as they can.
But talk a little bit about management, about Bill Hoffman, and what you found out there?
Feroldi: Yeah, to your point. So the entire management team is littered with industry veterans, but we're just going to talk about the CEO, Bill Hoffman. So prior to joining Inari -- he is not the founder, but he did successfully sell a company to Medtronic. And CEO Bill Hoffman owns about 3.5% of the company, so that's a sizable amount of ownership position for somebody who is not the founder. And insiders as a group, which includes the board of directors, the other members of the management team, own about two-thirds of the company. So we are investing alongside people that are invested in making this company into a success.
And again, this is a brand-new IPO. As you'll probably guess, given all the things we've been saying about it, trades at a bit of a premium valuation. So the market cap here is about $2 billion. Again, revenue last year was about $50 million, but it's growing very quickly. So a very, very high price-to-sales ratio, but I understand why.
Moser: Yeah, I can definitely see why. And another thing that comes with a recent IPO, particularly with these smaller companies and one where there is a significant insider ownership, you look at the float -- the total shares outstanding versus the shares that are floating on the open market -- that float looks to be a relatively low number today. Now, that's pretty normal for most IPOs. I mean, as time goes on, that float starts coming back up. But my point there just being that, it can result in some volatility in the share price, if maybe the stock in its early days isn't quite as liquid as maybe some more mature companies. So certainly something worth keeping in mind.
But speaking to the market cap there and the valuation of the company, because I would say that's probably one of the bigger risks with a company like this, at least in the near term.
What about the competitive landscape for Inari? I understand they're doing something a little bit different versus the way other companies approach this problem. Are there companies out there trying to mimic what they're doing, or what does that competitive landscape look like?
Feroldi: Yeah, that's something that I want to get to understand a lot better about this company, but because they, in their S-1, they listed a couple of companies you may have heard of as competitors, such as, Roche, Boston Scientific, Penumbra, Teleflex, AngioDynamics. As we said before, 170 devices have been cleared for arteries that have been, you know, used again in veins.
So far, what we've seen suggests that that's not a problem. When we see explosive upside revenue growth in the company, that always tells me that the company is doing something special, because I know firsthand just how hard it can be to convince healthcare providers to try something different, so they clearly see this technology as differentiated and useful. Otherwise, the company's revenue would not be growing nearly this quickly.
So that's absolutely a risk that investors need to be aware of that those competitors will develop competing products or that the company may struggle to grow past the initial core group of users. That's always a risk to keep in mind. But so far, given the story here and given the growth we've seen so far, I'm inclined to say they're on to something.
Moser: Yeah, I'm glad you mentioned that in regard to revenue growth, because we get a lot of questions from investors all the time about metrics that we follow in regard to companies, and what are the metrics that matter in regard to either this company versus that company? And certainly, some industries are different than others, and there are metrics that can give you some insight that others won't.
But really, you know, looking at just good old-fashioned revenue growth can tell you a whole heck of a lot, can it? I mean, it is one sure indicator that they're on to something, like you said.
Feroldi: Yeah, exactly. That's what I always say, I mean, when I'm looking at medical companies, in particular. They can dazzle you with science and clinical studies, but the question that always comes down to is, great... what does the market think of it? What do actual insurance companies and doctors and patients think of it? And you can tell that by just looking at revenue. So what we've seen so far clearly tells me that Inari has developed something that the market appreciates.
Moser: Well, it does sound like you're interested. And I guess the ultimate question for listeners, they're going to want to know your perspective on this stock, if it's something where you feel like investors ought to be keeping an eye on this one or whether this is something that maybe they should just, kind of, throw into the too-difficult-to-understand pile? Where do you fall in the stock here? I'm not asking to make a commitment, right, but I mean, is this a stock that you think is worth keeping on the radar? Is this one that you think maybe you want to push to the side for now and give it a little bit more of a chance to try to prove itself?
Feroldi: This is firmly on my radar. I am not a shareholder yet, I could easily see myself becoming a shareholder in the not-too-distant future, going in full well to expect extreme volatility on both the upside and the downside because shares are currently, again, trading at -- checking live -- about $2.3 billion valuation on $50 million in revenue last year. Boy... is that a spicy price-to-sales ratio! So I would approach this the way I do any new high-growth company. I would buy a little bit in the beginning, and then give the company time to settle into its life as a public company. We don't know. Are they going to exceed Wall Street's expectations, is the culture here being race-type, is the management team committed for the long term? We haven't had a single conference call. There aren't even any Glassdoor ratings on this company, Jason. So it's a complete newbie for us.
This could have a place in the speculative portion of your portfolio, for sure, and this is one that I look forward to following for a long time to come.
Moser: Yeah, and you know what? If nothing else, Brian, it does sound like you may want to take just some time here in the next week or two, put together a pitch for the Rule Breakers team because this sounds like something they might be interested in over in David Gardner's Rule Breaker service, I think... don't you?
Feroldi: Sure. And if only it had an AR/VR angle to it, right, Jason? [laughs]
Moser: [laughs] Oh, man! That would just be the best of both worlds. Oh, man! Well, Brian, listen, I really appreciate you taking the time out today to jump into this company, Inari Medical, and telling our listeners more about what they're doing and why it's a stock that should be on their radar. Excellent rundown, excellent information. And as always, really appreciate you taking the time.
Feroldi: Hey, you know, I love nothing more than shining a light on awesome companies that I think people should get to know.
Moser: Yes, sir. And that's going to do it for us this week, folks. Remember, you can always reach out to us on Twitter @MFIndustryFocus or you can drop us an email at IndustryFocus@Fool.com. And hey... if you see some new companies out there IPO-ing or something you think we need to be looking at, make sure and let us know because we always love digging into new companies.
But as always, people on the program may have interests in the stocks they talk about, and The Motley Fool may have formal recommendations for or against, so don't buy or sell stocks based solely on what you hear.
Thanks, as always, to our man Austin Morgan behind the glass -- the Zoom glass -- for putting all of the pieces together for us. For Brian Feroldi, I'm Jason Moser. Thanks for listening, and we'll see you next week.