Vapothem: Revenue Growth Of 18.16% Y/Y, But Upside Is Limited

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About: Vapotherm (VAPO), Includes: FSPKF
by: Wilsonville Capital

Summary

Vapotherm, Inc. develops and commercizales proprietary Hi-VNI Technology solutions intended to treat patients with respiratory distress.

The estimated initial public offering price is expected to be between $14.00 and $16.00 per share.

The total amount of assets increased by 62% from 2016, amounting to $50.153 million as of September 30, 2018.

Revenue growth is impressive. In 2017, the company showed a revenue increase of 18.16% y/y, equal to $35.597 million.

The only serious risk of VAPO is its debt. The company may need to raise further capital in one to three years to pay it.

Growth investors should appreciate Vapotherm, Inc. (NYSE:VAPO). The company is growing revenues at 18.16% y/y, and its gross profit margin is large. VAPO does not seem undervalued at 5.11x sales, but it seems a name to be followed. Many institutional investors bought stock before the IPO.

With that, investors should review the debt closely. The company does not seem to have money to pay its debt in one to three years. Further sale of equity could lead to share price depreciation.

Source: Prospectus

Source: Prospectus

Business Overview

Founded in 1999 and headquartered in Exeter, New Hampshire, Vapotherm, Inc. develops and commercializes proprietary Hi-VNI Technology solutions intended to treat patients with respiratory distress.

Source: Company's Website

The company's technology offers noninvasive ventilatory support by providing oxygenated air at a high velocity through a comfortable small-bore nasal interface. The solutions should be helping clients as there is large amount of patients that have been treated with the company's Precision Flow systems. The prospectus reads that as of September 30, 2018, over 1.5 million patients have been treated, and large number of hospitals trust Vapotherm, Inc. The image below provides further details on this matter:

Source: Company's Website

The company sells Precision Flow systems to hospitals through a direct sales organization and distributors outside the United States. VAPO has educators, who help and teach new patients about using the company's solutions. In addition, as noted before, the relationship with hospitals and doctors is quite satisfactory. Recent revenue growth shows that hospitals in the United States and internationally appreciate the company's systems.

Market Opportunity: $1.5 billion per year

Taking into account that VAPO is a medical device company, the market opportunity seems large. The company believes that its total addressable market equals $1.5 billion per year. The lines below provide further details:

Source: Prospectus

Additionally, it is expected to grow at a high pace. The population is aging. As a result, the prevalence of illnesses affecting seniors should grow in the future. For instance, the amount of heart failures is expected to increase by 46% from 2012 to 2013. VAPO should benefit from this growth. With that, the company did not seem to mention the CAGR at which the target market should increase. It is not that beneficial. The lines below provide further details on this matter:

Source: Prospectus

The Advantages Of The Company's Solution

Hi-VNI Technology offers several advantages as compared to other solution available, NIPPV. First of all, the Hi-VNI Technology does not use a mask, but a small-bore nasal interface. It is shown in the image below:

Source: Prospectus

The company notes that its mechanism facilitates ventilation, normal breathing pattern and is more comfortable than NIPPV. Patients can eat, drink, and talk. Read the following lines:

"Instead of a mask, Hi-VNI Technology delivers temperature-controlled humidified gas to the patient at a high velocity through a small-bore nasal interface. High velocity nasal insufflation is typically a de-escalation therapy, which means it is appropriate to start at higher flows. Breathing while on Hi-VNI Technology helps patients ventilate and return to their normal breathing pattern." Source: Prospectus

In addition, patients seem to tolerate more the systems of VAPO as compared to that of other competitors. Patients treated with NIPPV are often admitted to an ICU. On the contrary, the company showed in a study involving 128 patients that 54% of the patients using VAPO's Precision Flow systems could be transferred to general care floors. With this in mind, the expenses for hospitals seem less significant while using the systems of VAPO.

Assets

The total amount of assets increased by 62% from 2016, amounting to $50.153 million as of September 30, 2018. The amount of cash also increased from $5.84 million in 2016 to $13.19 million as of September 30, 2018. The amount of inventory also increased, but not so much. As of December 31, 2017, the company had inventory of $8.2 million, and in September 2018, inventory was equal to $12.54 million. This means that the company is able to sell its solutions. It does not accumulate large amount of inventory. With that, investors should study the amount of inventory in the future. If it continues growing, it may show that VAPO cannot sell what it manufactures and also cannot predict expected demand.

Source: Prospectus

Financial Debt May Be An Issue

The liability side of the balance sheet does not look that beneficial. The amount of liabilities as of September 30, 2018 is equal to $43.3 million, which is below the total amount of assets. The issue is that the company has $31.17 million in long term debt and a short term line of credit of $1.68 million. VAPO does not seem to have sufficient cash as of today to pay this debt:

Source: Prospectus

The most relevant table that investors need to review is that of the contractual obligations of VAPO. It shows that VAPO will have to pay $19 million in one to three years. With cash in hand of $13.19 million, the company should not be able to make these payments. The image below provides further details:

Source: Prospectus

18.16% y/y Revenue Growth

Revenue growth is impressive. In 2017, the company showed a revenue increase of 18.16% y/y, equal to $35.597 million. The gross profit is also beneficial, equal to $13.24 million in 2017. With that, the company does not seem beneficial at the net income level. With $26.22 million in sales expenditure, total operating expenses seem too large. VAPO reported operating losses of -$28.87 million and net losses of -$31 million in 2017. The image below provides further details:

Source: Prospectus

If the company continues to show large revenue growth and large gross profit growth, net losses should not be a problem, and investors should appreciate VAPO. With that, value investors should not buy VAPO mainly because of the debt. In addition, the CFO is also negative, equal to -$25.37 million and -$29.46 million in 2016 and 2017 respectively. The image below provides the cash flow statement:

Source: Prospectus

Use Of Proceeds

VAPO is expected to use the proceeds from the IPO to hire personnel and fund additional research and development activities. It is beneficial that the company will not use the proceeds to repay debt. Investors should appreciate it. The lines below provide further details:

Source: Prospectus

With that, the company may soon need money to pay its debts. If VAPO needs additional financing, it may rise capital, which may lead to share price depreciation. It seems to be the only large risk on this name.

Capitalization

The expected cash after the IPO is $65.95 million, and the expected debt is $31.17 million. After the offering, the company expects to have 16.646 million shares. At $15 per share, the expected market capitalization should be $249 million. Adding debt and deducting cash, the expected enterprise value is $215 million. The image below provides further details on the expected market capitalization:

Source: Prospectus

Assuming revenue growth of 18.16%, the forward revenue equals $42 million. With this figure, the company is selling shares at 5.11x forward sales.

The prospectus reads that Philips Respironics and Fisher & Paykel Healthcare (OTCPK:FSPKF) are competitors of VAPO. The lines below provide further details on this matter:

Source: Prospectus

FSPKF has an enterprise value of $5 billion, gross profit margin of 65.74%, and 10.39% revenue growth. It trades at 7.89x sales, which is larger than that of VAPO. VAPO grows at a larger pace, but its gross profit margin is below that of FSPKF. Additionally, the company is not profitable. FSPKF reports positive EBITDA. With this in mind, 5.11x forward sales seems reasonable. The company could perhaps trade at 6x sales, but investors should know that the upside potential is very limited.

A lot Of Institutional Investors Bought Shares

The assessment of shareholders shows that many institutions decided to invest in the company. It is very beneficial and also very meaningful. Keep in mind that small companies like VAPO usually don't receive a lot of attention from funds and investors. The image below provides further details:

Source: Prospectus

Conclusion

With 18.16% y/y revenue growth and a large gross profit margin, VAPO seems interesting for growth investors. With that, the company does not seem undervalued as compared to peers. It trades at 5.11x forward sales, which seems reasonable. Other peers are trading at 7.89x sales with much better gross profit margin and positive EBITDA. The only serious risk of VAPO is its debt. The company may need to raise further capital in one to three years to pay it.

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.

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