Outset Medical (OM -8.43%) seemed to be at an important inflection point in the home dialysis market. The company shipped a record number of its Tablo systems for home patients in the first quarter of 2022.
That momentum just hit a major bump in the road, though. Outset announced after the market closed on Monday that it was placing a hold on all shipments of its Tablo system for home use. The healthcare stock plunged more than 30% on Tuesday following the news. But is Outset a buy on the sell-off?
Why shipments are being suspended
Outset Medical stated in a press release that it suspended shipments of its Tablo system for home use because it's waiting on the Food and Drug Administration (FDA) to review and clear a 510(k) application. A 510(k) application is required to demonstrate that a medical device is safe and effective prior to being marketed.
The company initially received FDA clearance for its Tablo dialysis system to be used by home patients in March 2020. So what happened?
Outset made changes to its previously submitted 510(k). The FDA requires that a new 510(k) be submitted anytime "there is a change or modification to a legally marketed device and that change could significantly affect its safety or effectiveness."
The company stressed that it hasn't identified any safety issues with Tablo. It's continuing to market the system for chronic and acute care, where Tablo is used by healthcare professionals. All Tablo devices that have already been shipped to home patients can also still be used.
An uncertain financial impact
It's not surprising that shares of Outset Medical declined significantly. The company suspended its previous full-year 2022 revenue guidance of between $144 million and $150 million. The hold on shipments to home patients will hurt Outset, but the negative financial impact is uncertain at this point.
Outset stated that it now expects second-quarter revenue of at least $25 million. However, that amount is well below the revenue of $30.6 million reported in the first quarter. The company plans to update its guidance when it announces Q2 results in early August.
Importantly, Outset doesn't think it will be able to provide an update on the status of the FDA's review process of its latest 510(k) filing until the third quarter. Typically, the FDA will make final decisions on 510(k) submissions within 90 days.
A bad-news buy?
There's no reason at this point to expect that the company will run into any problems winning a thumbs-up from the FDA for its latest regulatory filing. Assuming that all goes well, Outset's revenue should be disrupted for only a few months. But revenue delayed isn't nearly as bad as revenue lost altogether.
Investors should keep in mind that the company still makes most of its money from the chronic and acute care markets. Those sales won't be impacted at all by the shipment pause.
Over the long term, though, the home market presents a huge opportunity for Outset. The company estimates that its addressable market for home dialysis totals $8.9 billion. Currently, only around 2% of U.S. patients who are eligible for home dialysis actually receive treatment at home.
Outset has a long way to go to capture a significant slice of the home market. The shipment hold doesn't help. But Tablo offers several major improvements compared to older home dialysis devices. The company should be able to resume its momentum in this big market soon.
Temporary setbacks often present great buying opportunities for investors with long-term mindsets. Is that the case with Outset Medical's shipment hold? I think so.
