$Zomedica (ZOM.US)$ Zomedica Could Be A Buy As They Look To ...

$Zomedica(ZOM.US)$
Zomedica Could Be A Buy As They Look To Disrupt The Veterinary Diagnostics Field

Apr. 13, 2021 4:34 PM ETZomedica Corp. (ZOM)33 Comments6 Likes

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Individual investor with more than 10 years experience in the market, including five years in biotechs, looking for well-managed companies with potential for large growth. High risk tolerance.

Summary

Zomedica recently launched its first commercial product.

Veterinary diagnostics is a competitive but growing field.

The company's platform has a chance to be a disruptor.

After a recent selloff, shares are attractively priced.

Photo by LightFieldStudios/iStock via Getty Images

Zomedica Corp. (ZOM) just launched its first commercial product, a veterinary diagnostic tool called TRUFORMA. On March 16, the company announced their first sale of the device, which is capable of performing five different diagnostic tests for adrenal and thyroid conditions in cats and dogs. The company is undergoing a crucial transition from the developmental stage to the commercial stage of its life cycle. With shares trading around $1 after a recent selloff, this is one healthcare stock that warrants at least a small investment.

Company Snapshot

Seeking Alpha contributor Mossy Harbor Analytics shared a neutral view of Zomedica back in February when the stock was priced near recent highs near $3 per share. With shares having dropped over 60% since the February peak, the company’s market cap sits at $1.1 billion with 947 million shares outstanding.

The company firmed up its cash position with a recently closed $200 million bought deal, in addition to having $62 million in cash at the end of 2020 thanks to two equity offerings during the year. Zomedica also has $69 million in accumulated debt, but now possesses a substantial cash runway. Zomedica lost $16.9 million last year, an improvement of 15% from 2019.

To Market We Go

Now comes the hard part, which is selling their new product. In order to justify the current market cap, investors should look for the company to be - at a minimum - revenue neutral by 2022, with significantly positive earnings in 2023 and beyond. Their costs were reasonable at $16 million in 2020, so even a modest annual sales total of $20 million begins to add cash to their bottom line.

Because the product launched in mid-March, their upcoming first quarter report won't provide the market with any substantial sales insight, but it should offer a glimpse of early revenues for TRUFORMA. Toward the end of this year, market adoption of the device will begin to come into clearer focus.

With approximately 30,000 veterinary offices and 120,000 veterinarians nationwide, there is the potential to sell tens of thousands of devices. The company could expand sales into Canada, Europe, and other parts of the world as well, which would open significant new revenue streams.

Although the company has not specified pricing on TRUFORMA, their distributor, Miller Veterinary Supply, is listing it at $13,000. That equates to $130 million in revenue for every 10,000 units sold.

Building Around a Platform

In their January shareholder letter, Zomedica explained to investors that they intend to develop an “expanding family of assays” in the coming years. That means more devices sold and more sales from the individual tests their units can perform. At launch, they have three assays available, with two more in line for distribution later this year.

TRUFORMA is a shoebox-sized kit that allows vets to process assays on-site rather than having to send them to a reference laboratory. This saves money and provides much quicker results that can forego the need for a follow-up visit. Having such point-of-care diagnostic information available could be a game-changer in veterinary treatment.

The device uses Bulk Acoustic Wave (BAW) technology that is also found in cell phones and advanced radar systems, making it precise and reliable. It is quite conceivable that this platform becomes an industry-standard in the coming decade.

Meanwhile, they are also looking to develop an additional device, one that utilizes “miniaturized laser-based Raman spectroscopy technology and is designed to detect pathogens in companion animals,” according to the company’s 2020 10-K filing. Thus far, only initial developmental work has been completed, but having a pipeline provides a critical value add to the company’s shares.

What Stands in the Way?

Commercial launches are fraught with challenges. The company will be building a sales team and determining the best way to work with their distributor and partners to spread the word about TRUFORMA. During the next year or more, Zomedica will likely continue to lose money while they attempt to ramp up sales. As noted in their latest 10-K filing, Zomedica is in the process of expanding its sales representative team, which will lead to some cost increases.

While their equity offerings have secured capital, they have also created a large share structure nearing an outstanding share count of one billion, which could hold back the stock price. It wouldn't surprise me to see Zomedica eventually offer a reverse split, which would raise the price and limit the number of shares. It would also eliminate some of the concerns surrounding the exchange listing requirement, an issue the company struggled with last year as shares languished under .20 for several months.

With a competitive landscape ahead, this will be a challenging period for the company. Zomedica's success depends on its ability to carve out a niche and take a bite of an industry featuring such established players as Thermo Fisher, Idexx, and Zoetis.

Dipping Into a Big Pond

In total, the American Pet Products Association reported nearly $100 billion in spending in 2019, with veterinary services topping $29 billion. This marks a record high, and the market is expected to continue expanding, as approximately 85 million U.S. households report owning at least one pet.

The veterinary diagnostics field alone is a $4.4 billion global industry that is expected to grow by over 10% annually through 2026.

In November 2018, ProShares launched a pet-themed ETF called PAWZ, which invests in companies providing goods and services to the growing pet industry. Holdings include such names as Petfresh, Chewy, and Idexx - another diagnostic company. Because Zomedica has not established itself in the industry, they are not yet a candidate for such a fund. However, as their sales increase and their presence grows, ZOM could make an outstanding addition to the list, which would further support the stock.

Valuation Measures

Getting to their cash position of approximately 25 cents per share was highly dilutive but gives them all-important time to execute their sales plan and build more products to grow revenue.

The real key for investors is determining how much revenue Zomedica can sustain over time and how soon additional products might come to market. This year will be a transformational one, as they enter the commercial market while trying to establish their product and add to their pipeline. I like the opportunity based on a current share price just above $1.

By comparison, let's look at one of the leading diagnostic companies in the market, Idexx. They are currently trading at a trailing price to earnings ratio of 75, with a market cap of $43 billion dollars. They also had 2020 revenue of $2.7 billion, for a P/S ratio of 16.

Zomedica will have difficulty garnering that same P/S number, but at $50 million in sales (a reasonable estimate for 2022) and a multiple of 10-12, their market cap would be $500-600 million, which is lower than today’s valuation.

However, if we look further out to 2023-2025, these should be years of noteworthy sales growth, possibly surpassing $100 million per annum as they roll out further tests and possibly a second platform. For a growth company with a burgeoning product line, a valuation north of $2 billion based on that sales estimate is perfectly in line.

Until Zomedica can provide specific revenue and earnings guidance, their share price will be subject to volatile swings. Profit talking is recommended in these situations because spikes are often followed by steep declines until the company becomes more established.

A recent bottom was made at .90 in late January, just before the stock made its ascent to $3. This level could be tested again in the near future and would represent an important pivot point if it can hold.

Conclusion

Zomedica shares look highly attractive at their current valuation, as the company embarks on their new phase of evolution as a commercial company. The TRUFORMA device looks to be a powerful tool for veterinarians, one that should begin to gain substantial traction in the coming year. With shares trading at 1.10 as of this writing, there is a potential for gains in the range of 50% or more for patient investors.

For my own portfolio, I am looking to ease into a long position in three tranches, hoping for an overall cost basis of $1 or less. For now, I am cautiously optimistic and looking forward to hearing their growth plan and actual sales figures over the coming year.

This article was written by

221 Followers

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Individual investor with more than 10 years experience in the market, including five years in biotechs, loo... more

Long/Short Equity, Value, Biotech, Healthcare

Contributor Since 2015

Individual investor with more than 10 years experience in the market, including five years in biotechs, looking for well-managed companies with potential for large growth. High risk tolerance.

Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in ZOM over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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Comments (33)

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17 Apr. 2021

Looks like their distribution agreement with Miller Veterinary, signed 80 days ago, went south... Now they have a product in need of a sales force.

They should just pay Qorvo to sell it for them since Qorvo invented it, holds the patents and manufactures it. ZOM only had one job in this. Not a confidence builder for investors.

ReplyLike(4)



16 Apr. 2021

It’s over 2 pounds stock I don’t know why it’s going down
Any idea

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16 Apr. 2021

@Addy1992 Needs buyers to step in here at support. Also announced a shift in sales strategy that caught some investors off guard.

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16 Apr. 2021

@Pale Horse Trading yes your right
Nearly 80% of stocks going down and I expect 20% more down until end of May then stocks might start picking up slowly until end of the year otherwise if rescission came then everything will drop more

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16 Apr. 2021

Compre con entusiasmo, muy caro, ahora a esperar....
Me gusta la innovación y los resultados inmediatos para mascotas de Truforma.
Hay algún sistema similar de diagnostico? no lo se.

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16 Apr. 2021

@Emilia57 There's not a system that uses the same technology and covers the same kinds of tests. There are getting to be more point-of-care options, though.

ReplyLike(1)



14 Apr. 2021

The Street's underbelly P & D is on full display here these past 24-48 hours.

Gosh Bless America's Capitalism.

The best of fortune to us all

ReplyLike(1)



14 Apr. 2021

"TRUFORMA is a shoebox-sized kit that allows vets to process assays on-site rather than having to send them to a reference laboratory. This saves money and provides much quicker results that can forego the need for a follow-up visit. Having such point-of-care diagnostic information available could be a game-changer in veterinary treatment.

The device uses Bulk Acoustic Wave (BAW) technology that is also found in cell phones and advanced radar systems, making it precise and reliable. It is quite conceivable that this platform becomes an industry-standard in the coming decade."

This appears to be a new technology play, which is interesting but as "user1416" noted, the technology appears to have a very narrow focus.

I wonder how vets would view its cost-to-benefit?

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