Inari Medical (NARI) is a name which has attracted my attention since the company went public. When the company went public in May, shares traded around the $40 mark, as I concluded that the public offering ticked all the boxes. After all, the company had two marketed medical products, showed strong growth and was profitable. One of the few drawbacks, was that shares have tripled from the preliminary offering price, raising expectations in the meantime.

The Business, Initial Thoughts

Inari is a medical device company which develops products to improve the life of people suffering from venous diseases, currently marketing two minimally invasive catheter-based thrombectomy devices in the marketplace.

Commercialization of these products started in the second half of 2018, with Inari currently supplying these products to some 600 hospitals already. This clot-removing therapy is more effective than drugs and other therapies, as the number of procedures performed with its products has risen sharply. Procedures totaled 4,600 in 2019, as the number of procedures rose to 2,400 in the first quarter of 2020 alone, and that it is even if we include the impact of Covid-19 on March sales.

Momentum has been very strong with sales having risen from $7 million in 2018 to $51 million in 2019, as in fact the company was profitable already last year. Moreover, revenues rose to $26.9 million in the first quarter of this year, at a run rate of more than $100 million. The 47 million shares represented a $900 million equity valuation at $19 per share (the IPO price), which after adjusting for a pro-forma net cash position of $150 million, translated into just a 7 times sales multiple! Moreover, operating earnings trended at $20 million on an annual basis in the first quarter, as this looks quite compelling.

This appeal was reduced a bit with shares jumping to $43 on the opening day, translating into an operating asset valuation of $1.8 billion, or about 17 times annualised sales. While this looked relatively compelling given the profitability and rapid growth, I feared the competitive threat and reliance on a few products, while recognizing this might become a multi-bagger over time as well. Unfortunately I have not initiated a position, as the world looked quite a bit different back in May, including the Covid-19 related situation of course.

The Trends

The company reported its second quarter results mid-August with sales up 152% to $25.4 million, although this marked a sequential decline for obvious reasons. Moreover, GAAP operating losses totaled $0.6 million in the second quarter, as the numbers did not really specify the cost impact related to the IPO on the bottom line results. At $65, operating asset valuations have risen to $3.0 billion, pushing up sales multiples to 30 times. One noteworthy item, the number of procedures performed rose 4% on a sequential basis to 2,500, suggesting less hospital stocking and perhaps lower pricing.

After a big decline in April, trends improved in May and June, with new records achieved in the final month of the quarter, and even than the penetration rate was just 2%. In fact, when reviewing the results I believed that third quarter sales might improve to $35 million, for a 20 times multiple. This was driven by the solid June momentum, and comment that July was even a better month.

With shares at $65, I thought the valuation was a bit steep and while kicking myself for not buying the IPO, I concluded to become a buyer around the $50 mark, as unfortunately we have not seen those levels anymore.

Very Strong Momentum

Since the second quarter results have been released, not much happened other than that some positive research results have been released. These show great efficacy in the FLASH Study for its FlowTriever system in combination with a dramatic decline in adverse patient outcomes, providing comfort to the ”strength” of the solution.

The third quarter results have more than met my expectations. Third quarter sales rose 172% on an annual basis to $38.7 million on the back of 3,700 procedures having been performed. Moreover, the company reported a GAAP operating profit of $7.2 million, on which net earnings of $6.5 million were reported.

A diluted share count of 55 million shares reveals an operating asset valuation of $3.85 billion at $73 per share, as net cash balances come in around $3 per share. That being said, the revenue run rate now already exceeds $150 million, for a 25 times sales multiple at a time when sales are still growing at more than 100% per year.

Looking To Enter

The third quarter results confirmed my thoughts, and I am impressed with the continued actual operating performance of the business. That said I am sticking to some discipline with no urge to buy shares unless they hit the $50s, recognizing that I am upping my entry target a bit as I am quite impressed with the third quarter revenue numbers reported.

Not only did revenues come in 10% above my guesstimates, outlined alongside the second quarter results, the margin profile is quite impressive as well. Moreover, the operational performance improved throughout the quarter, with October being stronger than the end of September.

This is all quite comforting as third quarter sales might have included a big pent-up demand component after the soft second quarter, as commentary suggests that is not the case. Hence, the continued growth story is intact as I look forward to initiate a position on substantial dips.

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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.





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