Inari Medical, Inc. (NARI)

Investment Analysis Clubs Saul’s Investing Discussions
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New to this board, so please bear with my humble first company proposal of

Inari Medical, Inc. (NARI)

Annual revenues (in millions of USD):
2018 6.83
2019 51.13
2020 (TTM) 110.95

Quarterly revenues (in millions of USD):
Sep19 14.23
Dec19 19.89
Mar20 26.95
Jun20 25.39
Sep20 38.72

Cash flows look healthy with free cash flow turning positive in Sep20.

Accumulated losses peaked at USD -41.21M in Dec19 and are recovering since then.

These accumulated losses have generated a business that generated a quarterly gross profit of USD 35.49M in Sep20 (resulting in an annualized gross profit of around USD 140M in Sep2020).

Balance sheet is healthy with a strong cash position.

GP margins are between 80% and 90%.

Cash is mostly spent on SG&A and R&D.

Business model is asset light without much capex.

Total addressable market is huge with room for global expansion.

Company is currently valued at EV/Gross Profit of around 33, in line with similar companies in this sector (e.g. STAA or INSP).

NARI is a medical device company offering single use disposable catheter systems to treat deep vein thrombosis (DVT) and pulmonary embolism (PE). Simplified, these devices are used to remove blood clots from the body of the patients. No machine or durable equipment sales. R&D for additional venous treatments is work in progress.

Products are on the market and they have several patents.

Company had its IPO in May 2020.

Current investor presentation at

https://ir.inarimedical.com/static-files/230c7c63-aad9-464f-…

and SEC filings at

https://ir.inarimedical.com/financial-information/sec-filing…

From a pure financial perspective the company looks healthy. But the medical device business is risky. There is always the risk of channel stuffing, catastrophic device failure causing a sales pause, risk of one trick pony companies and competitors bringing better products to the market. And of course the question about the strenght of the patent family.

Therefore I am interested in getting feedback from other high growth investors about NARI, ideally someone here has a medical background ;-)?

I have initiated a first small position and continue to do DD.

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P.S.: Brian Feroldi did a high level review of the company in June 2020 at

https://www.fool.com/investing/2020/06/15/why-you-need-this-…

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March 2019 they had a net loss of $900,000 vs March 2020 a net income of $4.1 million. Is this a turn-a-around more so than a growth stock?

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A turnaround is a profitable company that fell on hard times and is now recovering or turning around. Inari Medical, Inc. is a company going from startup to profitable, that’s not a turnaround. Growth would be defined by how fast revenues are growing.

I searched for Inari competitors. Most have under one thousand workers, like Inari. Their target market seems very narrow and specialized. I don’t see how, investment-wise, it can compete with the much larger TAM companies discussed on this board. Also, healthcare stocks are subject to lots of hurdles like insurance willing to pay and political pressures to lower prices. Seems too specialized for my taste.

Denny Schlesinger

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March 2019 they had a net loss of $900,000 vs March 2020 a net income
of $4.1 million. Is this a turn-a-around more so than a growth stock?

Good morning, Dave.

I get it that turnarounds are off topic here. But, didn’t most growth companies start off losing money? So, how do you differentiate between so-called “turnaround” companies (off topic here) and growth companies that started off losing money (on-topic, right?).

Eric [hoping I’m not posting the wrong thing here…]

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I get it that turnarounds are off topic here. But, didn’t most growth companies start off losing money? So, how do you differentiate between so-called “turnaround” companies (off topic here) and growth companies that started off losing money (on-topic, right?).

True I do not disagree but these forum rules are tight so I wanted to get clarification.

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Hi Wakeboarder,

Please take into account that I am basing what I say entirely on what you have posted and that I have not researched Inari Medical at all, myself.

Annual revenues (in millions of USD):
2018 6.83
2019 51.13
2020 (TTM) 110.95

Okay, this is clearly a high-growth company. Whoever referred to it as a turnaround was in error. This is a high growth company!

GP margins are between 80% and 90%.

Excellent gross profit margins.

Cash is mostly spent on SG&A and R&D.

Business model is asset light without much capex.

That seems to say that they don’t have much need for S&M and that the devices seem to sell themselves by word of mouth.

Low capex is good of course.

I would think you could say that they also have recurring revenue of a sort, as the doctors who use it obviously like it and will use as many or more next year.

Total addressable market is huge.

Not sure how you know that. The number of people with deep vein thrombosis or pulmonary embolism is a truly tiny percentage of the population.

with room for global expansion

This poses a problem. I tiny company like this would have to work entirely with distributors in foreign markets. And foreign countries have very small medical payments and insurance reimbursements compared to the US. They would probably have to sell devices to distributors at most at 20% to 30% of the price that they sell at retail in the US to allow for the lower final price points, and also to allow the distributors to make at a 50% to 100% profit (which they would probably insist on). This would still bring in additional gross profit dollars to Inari, but at a 25% to 40% gross margin instead of 80% to 90%.

Another problem I see is that there is no moat except that it works, and if another company came out with either a better product, or with an equal product at a significant cheaper price, the doctors could change device companies tomorrow and not miss a beat.

I think that this is not at all a bad company, I’ve seen lots and lots worse. It could turn out to be very successful and keep growing like mad. But a deep pockets large competitor could come out with a strong competing product and wipe it out. It’s a tiny company. I would have to look very carefully at it before buying, and then only buy a very small speculative position.

Thanks for having the courage to bring a company to the board, and thanks also for enclosing a lot of information about it.

Best wishes,

Saul

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Okay, this is clearly a high-growth company. Whoever referred to it as a turnaround was in error. This is a high growth company!

I researched and found the company has losses through 2019. 2020 is the first year they reported a profit. If growth is top dollar sales and not profit sure they grew, however not profitably until recently.

  1. The company’s revenue was $6.8 million with a gross margin of 81.2%. Net loss for the year was $10.2 million.
  2. The company’s revenue increased to $51.1 million. That’s growth of 750%. And gross margin rose to 88.4%. Net loss decreased to $1.2 million.

https://investmentu.com/inari-medical-ipo/

"Because Inari was only able to provide first quarter 2020 data, we will compare it to that first quarter of 2019, rather than the whole year.

Ended March 31, 2019. At this point, company revenue was $6.9 million with a gross margin of 86.6%. Net loss was $900,000.

Ended March 31, 2020. The company reported revenue of $27 million for its first quarter. Its gross margin was up to 90%. And rather than a net loss, Inari had a net income of $4.1 million.

However, despite this improvement, Inari Medical still has substantial debt. At the end of 2019, outstanding debt was $41.2 million. At the end of the first quarter in 2020, debt decreased to $37.1 million. "

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Inari has no debt as of Q3 2020. Here’s a link to their latest 10-Q: https://www.sec.gov/Archives/edgar/data/1531048/000156459020…

Yes, they are newly profitable, but Q3 2019 was actually the first quarter they were profitable, not 2020. With the exception of Q2 '20, every quarter has been profitable since then. They are also cash flow positive as of Q3 '20.

CloudAtlas

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Yes, they are newly profitable, but Q3 2019 was actually the first quarter they were profitable, not 2020. With the exception of Q2 '20, every quarter has been profitable since then. They are also cash flow positive as of Q3 '20.

So for the purpose of this board a growth stock is one that did what and for how long? Seems to me that they just turned around and are on the right track but not enough time to be a proven “growth stock yet”?

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Seems to me that they just turned around and are on the right track but not enough time to be a proven “growth stock yet”?

If they are a growth stock may yet to be seen but they certainly do not look like they should be called a turn around story. It looks like they are young, having spun off a medical devise incubator in 2013. Likely they are recently getting product to market that is not starting to pick up growth at a fast pace but starting from a small base. They have came up with 2 products that are disposable in their use and cost around $9100 per procedure. According to their Investor Presentation, TAM looks to be around $2B

They have been growing every quarter expect Q2 2020 which is likely Covid related but bounced back in Q3 and looks to early grow over 100% from 2019 to 2020. It looks like they are executing well since getting FDA approval in 2018 (I believe) so no turn around to speak of.

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So for the purpose of this board a growth stock is one that did what and for how long? Seems to me that they just turned around and are on the right track but not enough time to be a proven “growth stock yet”?

Canonian,
Are you just arguing for the point of arguing? Of course a company whose revenues go from $7 million to $51 million to perhaps $136 million this year, in successive years, is a high-growth company. Are you arguing that growing revenue from $7 million to $136 million in two years isn’t enough to “prove” yourself as a high growth company. What are you arguing for against something so obvious? This isn’t a board where you come and argue nonsense. As Denny explained the definitions to you quite clearly:

A turnaround is a profitable [and growing] company that fell on hard times and is now recovering or turning around. Inari Medical, Inc. is a company going from startup to profitable, that’s NOT a turnaround.

Growth would be defined by how fast revenues are growing, [and thus Inari is high growth].

Saul

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Growth would be defined by how fast revenues are growing

You are ignoring me on profitability.

I said this a few posts ago

“I researched and found the company has losses through 2019. 2020 is the first year they reported a profit.If growth is top dollar sales and not profit sure they grew, however not profitably until recently.”

Not arguing. Is the above true or not?
How many quarters of growth with profit is considered a growth stock?
How many quarters of growth withOUT profit is considered a growth stock?

Looking for the boards definition.

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A turnaround suggests something has changed in the business. Just because it crosses through to break even does not make it a turnaround. Revenue growth in the early phase is most important, assuming some path to profitability. In no way is Inari a “turnaround”.

That said, there are a lot of competitors in this space. While they might show some advantages here or there and claim a better product than Penumbra or other competitors, the differences are marginal. Sometimes the choice is based on the sales rep or what the technologists are comfortable using.

For our smaller hospitals, Penumbra offers a single system that treats clots in multiple areas (arteries, veins, dialysis circuits). Inari is an added up front purchase for much more limited applications.

There’s room for multiple devices, but their proprietary technology does not have anywhere near the competitive advantage as ABMD let alone something like ISRG.

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Not arguing. Is the above true or not?
How many quarters of growth with profit is considered a growth stock?
How many quarters of growth withOUT profit is considered a growth stock?

Looking for the boards definition.

canonian -

“Growth” is indeed top line revenue growth, which both Denny and Saul have already answered for you. That is then weighed against gross margins, customer growth, expenses, profitability, etc. Many top growers are early stage companies and not yet profitable. In that case, holders want to see rapidly narrowing losses and a business plan that presents a real path to future profits. If that exists, losses aren’t as big of an immediate concern.

No one is ignoring you on profitability, and there is no “quarter count” to qualify as profitable or unprofitable. It’s neither that simple or formulaic. Everything you need to know can be found in the links down the right hand side of the page, or you can just hang out and follow along for a while. We are about a week away from a boatload of portfolio reviews which should help explain a lot of how this board functions.

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You are ignoring me on profitability.

I said this a few posts ago

“I researched and found the company has losses through 2019. 2020 is the first year they reported a profit.If growth is top dollar sales and not profit sure they grew, however not profitably until recently.”

Not arguing. Is the above true or not?
How many quarters of growth with profit is considered a growth stock?
How many quarters of growth withOUT profit is considered a growth stock?

Looking for the boards definition.

Going from unprofitable to profitable is not a “turnaround” in any way. It’s in the same direction.

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Thank you all for the valuable input!

@Denny, @Saul and @IRDoc: I agree about the TAM as an important factor. Reimbursement and pricing are important, too.

The company claims 3700 patients treated in Q3 2020 in the USA with the products (should roughly correlate to 3700 product units sold, so annualized 14800). They claim their TAM is around 442000 cases per year in the USA (source: current investor presentation). Time will tell if NARI can reach a good chunk here.

About reimbursement and pricing: although the products look expensive at first sight the USP of these catheter systems is to LOWER the total costs of treatment in the health system as they reduce ICU bed usage and total time of treatment. But of course you never know what regulators and clinics think at the end of the day.

About SG&M costs: doctors and clinics are the “gatekeepers” about which products are used in hospitals. No like from doctor no sale. The industry is therefore ripe to “kickbacks” and hidden discounts in the SG&M costs. Therefore I am monitoring how the cash flows of the company evolve as their sales costs might be higher than it looks at first sight.

About international expansion: if the products basically sell themselves it will be easy to find international distributors at good rates (SG&M for this should be similar to internal costs for sales in the USA). Distributors are always looking for easy sells and door opener products but they avoid tough sales at all costs. According to their Q3 2020 call they plan to have their own sales team on the ground in Europe as the products received a CE mark, but rollout is delayed because of the current virus situation. Will be monitoring this.

The company has a kind of subscription business model once a doctor likes the product. But it has to be seen if there is a good moat around the company or whether new competitors can eat their lunch within a second.

At the end of the day the competitive situation is probably the key. Other companies will enter this market as it seems to be too attractive.

And, of course, there should be no material adverse events as Penumbra can sing a song about.

TL;DR Will continue to hold a first position and follow the cash flows…

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About international expansion: if the products basically sell themselves it will be easy to find international distributors at good rates (SG&M for this should be similar to internal costs for sales in the USA). Distributors are always looking for easy sells and door opener products but they avoid tough sales at all costs. According to their Q3 2020 call they plan to have their own sales team on the ground in Europe as the products received a CE mark, but rollout is delayed because of the current virus situation. Will be monitoring this.

While you may lose Gross Margin going through a channel for foreign sales, you should also reduce SG&M expenses so the Net may not be too different, depending on what the Channel brings to you. For example, you can have 1 account manager meaning many Partners/Distributors but those Partners may have multiple sales people and are working at growing the pipeline as well as may have feet on the ground to provide training and services. So while you lose at the Gross Margin level you gain at the net margin level

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The company claims 3700 patients treated in Q3 2020 in the USA with the products (should roughly correlate to 3700 product units sold, so annualized 14800). They claim their TAM is around 442000 cases per year in the USA (source: current investor presentation). Time will tell if NARI can reach a good chunk here.

14,800 out of 442,000 translates into a current 3.35% market penetration. Doctors out there, what sort of market penetration do you think a good product can have and how long to get there?

30% in 10 years is a CAGR of 25%
50% in 10 years is a CAGR of 31%

The above, of course, ignores new products and procedures which would boost CAGR much higher.

Denny Schlesinger

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14,800 out of 442,000 translates into a current 3.35% market penetration. Doctors out there, what sort of market penetration do you think a good product can have and how long to get there?

30% in 10 years is a CAGR of 25%
50% in 10 years is a CAGR of 31%

This relies on 2 assumptions.

  1. The number of US patients remains unchanged.

  2. They do not expand services internationally.

Maybe someone knows how to assign probability distribution to each of those.

draj

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