Surgeon Concentration And Reimbursement Risks Will Persist Yet Eventually Support A Stronger Business

Catalysts

About Carlsmed

Carlsmed provides an AI driven digital surgery platform with patient specific 3D printed spine implants and single use instrument kits.

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

• Although surgeon enthusiasm and procedure volumes are increasing, the company still relies on a relatively concentrated base of spine fusion specialists, so any slowdown in surgeon onboarding or use could limit revenue growth and delay the path toward earnings at scale.
• While reimbursement support such as the CMS NTAP and anticipated outpatient pass through payment expands economic acceptance of aprevo, future changes in coverage criteria or hospital budget pressure could cap pricing power and keep net margins under pressure.
• Although the COMPASS registry data and published studies show lower revision rates for aprevo, wider clinical adoption often takes time in spine surgery, which could slow the conversion from traditional implants and temper the pace of revenue growth.
• While the launch of cervical fusion broadens the addressable market and can increase revenue per surgeon, execution risk around sales training, case support and hospital approvals may raise selling costs and weigh on operating expenses and net earnings in the near term.
• Although the digital first, make on demand model is designed to support high gross margins, the current need for continued investment in AI, manufacturing capacity and education programs may keep overall operating leverage below investor expectations and extend the period of GAAP net losses.

Assumptions

This narrative explores a more pessimistic perspective on Carlsmed 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 Carlsmed's revenue will grow by 45.2% annually over the next 3 years.
• The bearish analysts are not forecasting that Carlsmed will become profitable in next 3 years. To represent the Analyst Price Target as a Future PE Valuation we will estimate Carlsmed's profit margin will increase from -58.8% to the average US Medical Equipment industry of 12.9% in 3 years.
• If Carlsmed's profit margin were to converge on the industry average, you could expect earnings to reach $17.7 million (and earnings per share of $0.54) by about January 2029, up from $-26.3 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 39.3x on those 2029 earnings, up from -12.9x today. This future PE is greater than the current PE for the US Medical Equipment industry at 30.8x.
• 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 7.8%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• Carlsmed is still recording GAAP net losses and negative EBITDA, and cash used in operating activities of $23.7 million in the first 9 months of 2025 points to ongoing funding needs, so a slower path to operating leverage than management expects could weigh on earnings and put pressure on future capital raises.
• The business model depends heavily on continued growth in surgeon onboarding and procedure volumes in a relatively concentrated spine fusion segment, so any cooling in surgeon enthusiasm or slower adoption of aprevo and cervical procedures could limit procedure volumes and revenue.
• The current economics rely on high gross margins of about 76% supported by contract manufacturing efficiencies and reimbursement support like CMS NTAP and anticipated outpatient pass through payments, so any shift in reimbursement policy, hospital budget constraints or manufacturing costs could compress gross margins and delay the move toward positive earnings.
• Expanding cervical fusion and education programs requires higher sales, marketing and clinical spending, and if these investments do not translate into sustained procedure growth and wider adoption, operating expenses could remain elevated relative to revenue and keep net margins under pressure.
• The long term thesis leans heavily on clinical data such as the COMPASS registry and published reductions in revision rates, so if larger or longer term studies fail to replicate these results or competing technologies show similar outcomes, the differentiation of aprevo could narrow and reduce pricing power, which would affect revenue and earnings growth potential.

Valuation

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

• The assumed bearish price target for Carlsmed is $17.0, which represents up to two standard deviations below the consensus price target of $19.6. This valuation is based on what can be assumed as the expectations of Carlsmed'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 $24.0, and the most bearish reporting a price target of just $17.0.
  
• In order for you to agree with the more bearish analyst cohort, you'd need to believe that by 2029, revenues will be $136.9 million, earnings will come to $17.7 million, and it would be trading on a PE ratio of 39.3x, assuming you use a discount rate of 7.8%.
  
• Given the current share price of $12.8, the analyst price target of $17.0 is 24.7% 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.