New Bunion Treatments Will Open Broader Market Opportunities

Key Takeaways

• Innovative products and expanded portfolio aim to penetrate the U.S. bunion market and enhance revenue through increased surgeon adoption and market appeal.
  
• Operational leverage and new reimbursement policies are expected to boost earnings and promote adjusted EBITDA break-even by 2025.
  
• Increasing competition, slow new product adoption, and declining margins pose challenges to revenue growth and profitability despite a strong balance sheet and innovation strategy.

Catalysts

A medical technology company, designs, manufactures, and markets medical devices in the United States.

• Treace's strategy to penetrate a larger portion of the 450,000 annual U.S. bunion cases with innovative, less invasive products suggests potential revenue growth. Additional revenues could stem from increased surgeon adoption and broader market appeal.
  
• Expanding its product portfolio with specialized solutions for all 4 classes of bunions can enhance revenue and potentially improve net margins if economies of scale are achieved in product innovation and production.
  
• The expected increase in reimbursement for CPT code 28297, effective January 2025, could positively impact revenue and potentially net margins by encouraging higher adoption of their Lapiplasty procedures.
  
• The launch of new 3D osteotomy systems and the introduction of the SpeedMTP system, catering to surgeon preferences and potentially expanding Treace's market size, supports anticipated revenue growth and could improve earnings as these products ramp-up.
  
• Operational leverage from a more experienced and stable sales force, alongside a broader product offering that doesn't require proportional sales team expansion, is expected to improve earnings and promote adjusted EBITDA break-even in 2025.

Treace Medical Concepts Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Treace Medical Concepts's revenue will grow by 9.1% annually over the next 3 years.
• Analysts are not forecasting that Treace Medical Concepts will become profitable in next 3 years. To represent the Analyst Price Target as a Future PE Valuation we will estimate Treace Medical Concepts's profit margin will increase from -26.6% to the average US Medical Equipment industry of 12.9% in 3 years.
• If Treace Medical Concepts's profit margin were to converge on the industry average, you could expect earnings to reach $35.1 million (and earnings per share of $0.55) by about May 2028, up from $-55.7 million today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 24.9x on those 2028 earnings, up from -8.0x today. This future PE is lower than the current PE for the US Medical Equipment industry at 31.6x.
• Analysts expect the number of shares outstanding to grow by 0.98% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.24%, as per the Simply Wall St company report.

Treace Medical Concepts Future Earnings Per Share Growth

Risks

• The company is facing increasing competitive dynamics, particularly in the minimally invasive osteotomy segment, which may impact their ability to capture market share and thus affect revenue growth.
  
• Although the company has a strong balance sheet, there is a risk related to the pace of surgeon adoption of new products, as slower uptake could delay expected revenue increases.
  
• The company's product innovation strategy involves significant investments that may not yield immediate returns, potentially affecting short-term earnings and net margins.
  
• Declining gross margins, as seen with a decrease from 81.2% to 80.4% year-over-year due to product mix shifts, could continue if newer products do not command premium pricing or require higher costs to produce.
  
• The financial guidance for 2025 suggests slower growth in revenue (7% to 10% compared to 12% in 2024) and a breakeven adjusted EBITDA, reflecting potential challenges in improving net profitability.

Valuation

• The analysts have a consensus price target of $11.071 for Treace Medical Concepts 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 $16.0, and the most bearish reporting a price target of just $8.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $272.1 million, earnings will come to $35.1 million, and it would be trading on a PE ratio of 24.9x, assuming you use a discount rate of 7.2%.
• Given the current share price of $7.05, the analyst price target of $11.07 is 36.3% 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.