Wearable Defibrillator Underpenetration Will Drive Long-Term Expansion In Cardiac Protection Adoption

Catalysts

About Kestra Medical Technologies

Kestra Medical Technologies develops and leases the ASSURE wearable cardioverter defibrillator system to protect high risk cardiac patients during recovery and treatment optimization.

What are the underlying business or industry changes driving this perspective?

• Category underpenetration in the U.S. with only 14% of eligible patients currently using a wearable defibrillator creates a long runway for adoption, supporting sustained double digit prescription growth and accelerating revenue expansion.
• Large scale real world evidence from ACE PAS and complementary studies on over 40,000 patients is shifting clinician perception of early cardiac arrest risk and could drive broader prescribing behavior and guideline upgrades, lifting volumes and revenue visibility.
• Ongoing payer contracting that has already moved in network fittings from about 70% to the low 80s is improving conversion rates, revenue per fit and collections, which should compound into higher revenue and structurally better net margins.
• Scalable lease based device fleet, where each system can protect roughly three patients per year and an expected 90% annual reuse rate, enables strong operating leverage as volumes rise and is intended to support progress toward management’s 70% gross margin target and narrower EBITDA losses.
• Planned expansion of sales territories and targeted deployment of clinical specialists in high volume, high coverage markets is increasing account penetration and share capture, which is expected to support continued top line growth and potential earnings improvement through better sales productivity.

Assumptions

How have these above catalysts been quantified?

• Analysts are assuming Kestra Medical Technologies's revenue will grow by 46.1% annually over the next 3 years.
• Analysts are not forecasting that Kestra Medical Technologies will become profitable in next 3 years. To represent the Analyst Price Target as a Future PE Valuation we will estimate Kestra Medical Technologies's profit margin will increase from -186.9% to the average US Medical Equipment industry of 12.9% in 3 years.
• If Kestra Medical Technologies's profit margin were to converge on the industry average, you could expect earnings to reach $29.9 million (and earnings per share of $0.42) by about December 2028, up from $-138.8 million today.
• In order for the above numbers to justify the price target of the analysts, the company would need to trade at a PE ratio of 87.2x on those 2028 earnings, up from -11.0x today. This future PE is greater than the current PE for the US Medical Equipment industry at 30.4x.
• Analysts expect the number of shares outstanding to grow by 7.0% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.73%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• Wearable cardioverter defibrillators remain materially underpenetrated at 14% of eligible U.S. patients and guideline updates are unscheduled and controlled by external committees. If clinical recommendations do not change or adoption stalls, category growth could slow and limit Kestra's long-term revenue expansion.
• The company is investing heavily in sales force expansion, clinical specialists and revenue cycle management while still operating at a GAAP net loss of $32.8 million and adjusted EBITDA loss of $19.7 million in the quarter. If operating expenses keep rising faster than gross profit, path to profitability and net margins could remain structurally weak.
• Kestra relies on steadily improving in-network payer coverage in a fragmented landscape of more than 3,000 U.S. payers. Delays in contracting or any deterioration in reimbursement terms could pressure conversion rates, revenue per fit and overall earnings.
• The rental model depends on scaling a capital intensive device fleet and achieving about 90% annual reuse. If device utilization, wear time or prescription growth fall short of expectations, depreciation leverage may not materialize and gross margins could stall below the 70% target.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The analysts have a consensus price target of $29.14 for Kestra Medical Technologies based on their expectations of its future earnings growth, profit margins and other risk factors.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $32.0, and the most bearish reporting a price target of just $25.0.
  
• In order for you to agree with the analysts, you'd need to believe that by 2028, revenues will be $231.5 million, earnings will come to $29.9 million, and it would be trading on a PE ratio of 87.2x, assuming you use a discount rate of 7.7%.
  
• Given the current share price of $26.17, the analyst price target of $29.14 is 10.2% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.