Description

InMode (INMD) is a leading global provider of energy-based, minimally invasive surgical aesthetic and medical treatment solutions. The company offers a differentiated approach to energy-based aesthetic treatments in the areas of face and body contouring, medical aesthetics, and women's wellness by offering RF-based technologies, a solution that overcomes many of the traditional shortcomings of laser-based treatments and achieves both fat reduction and skin tightening. 

Company History

INMD is a medical device maker that focuses on non-invasive body contouring products using proprietary technology. The company is fully integrated in that it designs, manufactures, and markets its wares globally. The technology utilized is radiofrequency assisted lipolysis, or RFAL. It uses RFAL to perform outpatient procedures such as liposuction, skin tightening, body and face contouring, skin rejuvenation, and more. The company's products can be used as an alternative to plastic surgery, offering sizable benefits such as no scars, no hospital stay, and no general anesthesia. INMD has built a deep portfolio of products and treatment options for a variety of applications and has grown at very rapid rates in recent years.

From 2016 to 2021, revenue grew from $23 million to $358 million.  Early-stage medical device companies typically grow quickly but at great cost from R&D and selling costs. What makes INMD unique is that in this time frame, the company was able to generate strong free cash flow with adjusted EBIT margins of near 50% while producing ROICs in the +40% range.

Positive Company Attributes

-       Robust end markets. Prior to the COVID-19 pandemic, the $12B+ professional aesthetic products market was expected to grow at a five-year CAGR of just over 10%, with growth expected to be driven by double-digit increases in several parts of the market where INMD primarily competes, including body shaping, skin tightening, and women’s wellness. That end-market growth was called into question as COVID-19 global pandemic headwinds flared into early 2020, but demand for aesthetic procedures rebounded quickly starting in mid/late-2020 and demand for such procedures remained strong even through the first half of 2022.

   Technology leadership. INMD's minimally invasive RF-based products are best appropriate for patients in the 35–50-year-old age range who opt for skin tightening procedures as part of their body/face re-contouring, but whose skin laxity isn’t at the stage in which more invasive excisional measures (facelift, tummy/eyelid-tucks, etc.) are required. Not only do these laser procedures exploit this area that has sorely lacked optimal solutions over the years, but this is also the single largest age range in the domestic cosmetic procedure market.  Current industry statistics suggests as much as 40-50% of all cosmetic procedures in the U.S. are typically performed on patients in this age range.

o   Most product offerings are based around the company’s use of bipolar RF energy delivery. Management believes it is the first company to utilize bipolar radio frequency in a minimally invasive manner. These attributes enable a lower cost and higher quality solution in a growing number of use cases. Additionally, the company has proven proficient in meeting growing demand and successfully sidestepped recent supply chain issues with ample production to meet demand within a few weeks’ time.

o   We have included a brief primer on the company’s technology from their 20F here: “RF energy can be delivered to the skin in a variety of ways, the most common being monopolar delivery, whereby RF energy is delivered through a single probe placed on the skin with a grounding pad distant to the probe site. Alternatively, in bipolar delivery, RF energy is delivered from a probe with two electrodes placed over the treatment area. Bipolar delivery has an important advantage over monopolar delivery: depth of penetration of the RF energy is not dependent on the tissue impedance, or electrical resistance, which varies from person to person, or the cross-sectional area of the probe. That is not the case with monopolar delivery. Instead, in bipolar delivery, depth of penetration of the RF energy depends on the distance between the two electrodes on the probe, with increasing distance resulting in increased depth of penetration. We believe we are the leader in the development, design and commercialization of bipolar RF energy devices for minimally invasive and subdermal ablative aesthetic purposes.”

-      Differentiated selling strategy. Despite generating 85-90% of company-wide revenue from the sale of capital systems at ASPs in the $100,000+ range, INMD enjoys a strong mid-80% gross margin profile that is well above aesthetic peer group GM% averages in the 55-70% range This margin advantage comes primarily from lower manufacturing costs for RF vs. industry-standard laser-based technologies alongside pricing power that's on par with other, costlier technologies.

-       New products/indications. Beyond the growth potential in its current applications, INMD has a full pipeline of products focused in other areas including women's healthcare (EmpowerRF), ophthalmology/dry eye (Envision), cellulite, and other procedures that could meaningfully expand INMD's market opportunities over coming years.

International Expansion and New Product Applications Provides Growth Opportunities

INMD has successfully been able to increase its international revenues significantly over the past few years, which has outpaced its U.S. market growth metrics. This is not only critical in reducing the company’s dependence on the U.S. market, but also provides a longer runway for sustainable growth.  Its U.S. installed base was 6,600 units against a worldwide installed base of 14,000.  This means the U.S. currently represents 47% of its install base, even though it currently contributes to 64% of its revenues. This is a clear indicator that INMD has been able to grow its international presence considerably and has plenty of runway to continue its growth worldwide. As of today, INMD has systems in place in a total of 78 countries.

INMD has also effectively introduced new products thus far this year. The firm’s entrance into women’s health through the launch of Empower RF, for example, is showing signs of early success and is on track to exceed it’s 2022 targets.  Recently on INMD’s latest earnings call, President of North America’s Shakil Lakhani stated “our expansion into the women's health and wellness space is becoming a vital part of InMode's business. Total sales were originally projected at $20 million for the year but with the current market along with Health Canada's approval, we are now aiming to reach over $30 million in revenue by the end of the year.” 

As of today, ELITONE is the only nonvaginal stimulation device covered by insurance through prescription, which has been proven to successfully treat stress urinary incontinence for females. The treatment method used by ELITONE has a similar outcome to INMD's EmpowerRF with VTone attachment. Both products rehabilitate pelvic floor muscles to decrease bladder leaks. Assuming that INMD's device is eventually approved for insurance reimbursement, INMD could see a more widespread demand ahead, given that the global urinary incontinence device market is expected to grow from $2.09B in 2020 to $6.17B by 2030, at a CAGR of 11.8%.

Strong Management Execution

Management originally provided 2022 guidance in January and restated that target in April on the company's first quarter call. With the company's second quarter pre-release in early July, however, management raised its top-line guidance to be in the range of $425M-$435M, up vs. $415M-$425M previously, essentially adding through the $10M of upside delivered in the second quarter. This updated guidance now calls for 19-22% y/y growth for the full-year (vs. +16-19% prior), and after accounting for the 31% and 30% y/y growth delivered in 1Q and 2Q, respectfully, this updated guidance implies 10-15% y/y growth in the back half of the year.

While shareholders may worry this slower implied growth for the second half of the year reflects concerns management might have about growing macro/consumer uncertainties, we believe this has to do more with historical management conservatism. Historically, the company has beat consensus revenue targets by at least 5% and by up to 15%+ over every quarter dating back to the company's mid-2019 IPO. However, we’d also like to mention that the 2022 second half comps are much tougher (two-year CAGR comp of +53% for 2H-22 vs. +48% for 1H-22) than the first half. 

Additionally, it is worth noting that INMD’s CEO, Moshe Mizrahy, has proven to be a skilled operator in prior endeavors as founder and CEO of both Home Skinovations Ltd. and Syneron Medical Ltd.

Continued Market Share Gains

Last quarter, INMD's global installed base of systems grew to 14,000 in 2Q, up from 12,700 last quarter (+53% y/y, +10% sequentially), including a U.S. installed base that now sits at 6,600 as of the end of 2Q vs. 6,100 last quarter (+42% y/y, +8% sequentially) and an international installed base of 7,400 vs. 6,600 last quarter (+64% y/y, +12% sequentially). For the U.S., the 500 system placements in 2Q were a step up from the 400 new systems added during 1Q-22, while outside the U.S., the ~800 placements in 2Q were also up relative to the 700 system placements INMD reported for each of the past four quarters. 

Balance Sheet

The company has no debt, $440m of cash on the balance sheet and is generating ample cashflow (while currently trading at a ~7% FCF yield). Management is evaluating shareholder friendly uses of cash, including a continued share buyback. The company did not repurchase any shares during the most recent quarter after having repurchased 1M shares last in the previous quarter, as management has intimated that it is also evaluating opportunistic tuck-in acquisitions and a potential dividend.

Recent Updates

Because INMD is registered as a foreign private issuer, INMD is exempt from filing beneficial ownership statements.  We only see insider transactions annually in INMD's proxy, but management suggested on the company’s previous earnings call that insiders have been making open market purchases following recent share price weakness. Listeners to the call were not provided any other additional details, but after last year's insider selling, we consider this to be an encouraging data point.

Financials and Valuation

-          Management has commented the current growth algorithm likely calls for topline growth of $60-70M on an annual basis.

o   This comes partly from the episodic nature of capital system sales that typically carry a 3 to 5 month selling cycle. However, top-down industry growth estimates as well as the company’s history in exceeding stated targets suggest these estimates may be light.

o   In addition to system sales, the company has historically generated 11-13% of its total sales from its consumable and extended warranties segments, which are reoccurring forms of revenue. 

-          For conservativism, we project gross margin to hold steady just under a recent low of 84% while the company digests some inflation in inputs and anticipate modest operating margin expansion from general fixed cost leverage.

-          Over the last 10 years, MedTech peers have traded around an average range of ~12x to ~20x on a next year EV/EBITDA basis. Recently, trading multiples of this group have clustered in the mid-to-high teens on an EV/EBITDA basis.

-          Bear: 2023 sales come in at $388mm and we arrive at a 2023 EBITDA estimate of $154mm. We assign a 10x multiple to arrive at a price target of $26.93.

-          Base: 2023 sales come in at $490mm and we arrive at a 2023 EBITDA estimate of $231mm. We assign a 15x multiple to arrive at a price target of $49.52.

-          Bull: 2023 sales come in at $534mm and we arrive at a 2023 EBITDA estimate of $255mm. We assign an 18x multiple to arrive at a price target of $62.72.

Risks

-       Competition. Competitive markets that include larger and potentially better-funded competitors such as BHC, AGN, CUTR, as well as smaller companies that have also recently entered the less-invasive skin tightening market such as APYX.

-       Changes in User Preferences. Ever-changing end-user preferences (both patient and practitioner) that require continued evolution of product capabilities.

-       Reliance on Capital Sales.  The majority of INMD’s revenue is derived in the form of capital sales, which can be lumpy and hard to predict.  

Catalyst

Improved Supply Chain.  Management recently moderated its expectations for its gross margins for the full year of 2022.  Should these issues moderate, this could help INMD expand its margins back to levels it had in 2020 and 2021.

Product Approvals in China.  Even though China currently makes up a small portion of INMD’s revenues, the company continues to wait for additional product approvals. The Chinese market could eventually represent a much larger part of its international revenue footprint. 

Insurance Reimbursement Approval.  There is the potential that some of INMD’s new product offerings could eventually be approved for insurance reimbursements in the future. 

Kim Kardashian. While not an explicit catalyst per se, we note Kim Kardashian recently commented about her preference for using Morpheus8, an INMD product, for her laser treatment to tighten her stomach. In our conversations with the company, management stated there is no direct financial incentive or relationship between her and the company for such sponsorship. Though the comment may not prove to be a needle mover, perhaps it could, so we felt it was noteworthy enough to mention.