Medicare Access And Margin Pressures Will Dominate Before Long-Term Rehabilitation Demand Emerges

Catalysts

About Myomo

Myomo develops and commercializes myoelectric arm and hand orthoses that restore function for individuals with upper limb paralysis.

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

• Although expanding access to fee for service Medicare and growing Medicare Part D volume should support steadier device demand and higher revenue, persistent Medicare Advantage preauthorization denials and appeal related delays may cap overall unit growth and slow the path to higher earnings.
• While the emerging O&P channel and Germany’s broad insurer coverage could diversify beyond direct billing and raise international revenue, dependence on a relatively small number of large clinic groups and country specific reimbursement regimes leaves Myomo exposed to abrupt policy or contracting changes that pressure top line growth and margins.
• Although the MyoConnect referral program leverages therapists and physicians to lower customer acquisition costs over time, the need to continually train and support clinicians and convert referrals into completed fittings could limit the scale benefits and delay improvement in net margins.
• While investments in new products like MyoPro 3 and software such as the MyConfig mobile app are aimed at strengthening clinical outcomes and supporting modest ASP growth, extended development cycles and uncertain adoption rates risk prolonging elevated R&D spend and suppressing earnings.
• Although the expanded manufacturing footprint and process changes are intended to unlock better fixed cost absorption as volumes rise, current gross margin compression from higher labor, materials and overhead suggests that revenue must grow substantially before any operating leverage is visible in net income.

Assumptions

This narrative explores a more pessimistic perspective on Myomo compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts. How have these above catalysts been quantified?

• The bearish analysts are assuming Myomo's revenue will grow by 15.4% annually over the next 3 years.
• The bearish analysts are not forecasting that Myomo will become profitable in next 3 years. To represent the Analyst Price Target as a Future PE Valuation we will estimate Myomo's profit margin will increase from -28.9% to the average US Medical Equipment industry of 12.9% in 3 years.
• If Myomo's profit margin were to converge on the industry average, you could expect earnings to reach $8.3 million (and earnings per share of $0.18) by about December 2028, up from $-12.0 million today.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 14.5x on those 2028 earnings, up from -3.4x today. This future PE is lower than the current PE for the US Medical Equipment industry at 30.4x.
• The bearish 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 8.35%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• Persistent Medicare Advantage preauthorization denials and a structural industry shift toward tighter utilization management could continue to cap authorizations, slow device deliveries and keep a large portion of the stroke population from accessing MyoPro, limiting long term revenue growth and delaying a path to positive earnings.
• Gross margin has already compressed from 75.4% to 63.8% amid higher labor, overhead and material costs. If inflationary input costs and under absorption of the new manufacturing facility persist longer than anticipated, operating leverage may not materialize at the targeted $16 million to $17 million quarterly run rate, constraining net margins and cash generation.
• The strategy relies heavily on expanding O&P and international channels, yet only roughly 30 O&P units were shipped domestically and growth is highly concentrated in Germany. Any reimbursement policy changes by German statutory insurers or slower than expected O&P clinician adoption globally could stall diversification efforts and weaken revenue and earnings visibility.
• Advertising and R&D spending are rising, including funding randomized controlled trials and the MyConfig mobile app. If initiatives like MyoConnect and media mix optimization do not sustainably lower customer acquisition cost or improve conversion rates, operating expenses could continue to grow faster than revenue, widening operating losses and depressing net margins.
• The company has layered on a $17.5 million term loan while still burning cash. If revenue growth, margin recovery and expense discipline fall short of management’s expectations over the next 18 months, Myomo may face refinancing risk or be forced into dilutive equity raises or cost cuts that hinder growth, pressuring earnings and shareholder value.

Valuation

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

• The assumed bearish price target for Myomo is $2.0, which represents up to two standard deviations below the consensus price target of $5.0. This valuation is based on what can be assumed as the expectations of Myomo's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $10.0, and the most bearish reporting a price target of just $2.0.
  
• In order for you to agree with the more bearish analyst cohort, you'd need to believe that by 2028, revenues will be $64.0 million, earnings will come to $8.3 million, and it would be trading on a PE ratio of 14.5x, assuming you use a discount rate of 8.4%.
  
• Given the current share price of $1.05, the analyst price target of $2.0 is 47.5% 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.