Q3 2023 review

The sales for Q3 came in at EUR4.2m (EUR3.7m), 4% above our sales estimate of EUR4.0m. This corresponds to a Y/Y increase of 14%, where we learned from the report that both the software and devices segments performed well during the quarter. Moreover, the gross margin for the quarter was 67.5% (57.4%), which was in line with our estimate of 68%. Operating expenses amounted to EUR-2.9m (EUR-2.0m) compared to our OPEX estimate of SEK-3.0m, and EBIT came in at EUR-0.6m (EUR-1.4m), better than our EBIT estimate of EUR-0.9m. The difference between our estimates and the report is mainly the sales and some minor differences in OPEX.

The cash flow from operating activities was EUR0.8m (EUR-0.5m), and by the end of the quarter, the cash and cash equivalents amounted to EUR9.6m. We believe Optomed has no capital need, and we argue the current cash position will cover future business activities.

During the last quarter, the devices segment revenue increased by 7.5% to EUR1.8m (EUR1.7m). We learn from the report that the global distributor, China sales channels, and a continued growth on the US market drove the growth. Optomed provided a large device delivery to a Chinese customer during the quarter. We learn from the conference call that the customer is a private company and that Optomed expects additional orders in the future. We are positive about the Chinese customer; however, as the Chinese market has been turbulent for the company, we would like to see a new Chinese partner before increasing our future expectations.

Moreover, the devices segment’s gross margin was 61.9% (44.2% excluding the loan waiver) and EBITDA was EUR-0.05m (EUR0.55m). However, note that the comparison period included a loan waiver of EUR0.8m that affected EBITDA.

The software segment has had a solid performance during Q3 with quarterly sales of EUR2.4m (EUR2.0m), a 19.4% increase Y/Y. The reason for the growth continues to be the healthcare solutions business. EBITDA for the segment came in at EUR0.64m (EUR0.48m), and the gross margin was 71.8% (68.6%).

Overall, we are positive about the report as sales are rising and costs are kept at reasonable levels. We also highlight the cash flow from operating activities was positive, which we consider a significant milestone for the company. However, we note that the company has no further updates regarding the FDA process. We assume the additional data has not been sent in yet to the FDA, and we expect an FDA decision in early 2024 instead of late 2023, as we previously expected.

The news flow during the quarter has been limited. However, in September, Optomed announced it had completed a directed share issue with qualified and institutional investors, raising EUR4.3m before issue-related costs. The primary purposes of the share issue were to strengthen the company’s balance sheet and to ensure sufficient financing for the company’s growth strategy in the US.

The subscription price was set to EUR2.7 per share, representing a discount of around 8.8% to the closing price the day before. The number of shares increased from 16,541,355 to 18,130,397.

We did not anticipate any share issue as we argued the previous cash position (EUR5.7m at the end of Q2) would have been sufficient to cover future business activities and the company’s US strategy. However, we argue the terms of the directed issue were solid and believe the share issue should be seen as an opportunity to improve the balance sheet rather than a capital need.

Moreover, we highlight that Juho Himberg has started his role as the new CEO of Optomed. Mr. Himberg has previously served as the CEO of Aidian and has had several leadership positions globally in healthcare and medical technology companies.

As the report came in better than our expectations, we have only made minor changes to our 2023e-2024e estimates. Firstly, we increase our sales estimate for Q4 2023 from EUR4.4m to EUR4.5m, where we expect stronger software sales and device sales to be at similar levels as Q3. Furthermore, we made minor changes in our OPEX estimates, lowering our employee benefits costs (EUR-2.4m to EUR-2.0m) and increasing our other external costs estimate (EUR-0.9m to EUR-1.0m). Moreover, we previously expected an FDA decision during the late stage of this year. However, we assume the additional data has not yet been sent in and expect a positive decision in early 2024. Because of this, we lower our US sales for 2024, resulting in a new 2024e sales estimate of EUR19.4m from the previous EUR20.7m.

Regarding Optomed’s FDA process, we argue there is a high possibility of approval, and we expect the US strategy and launch will start directly after the potential approval. It is stated in the report that the company has no further updates on the process, and we therefore assume the additional data has not been sent in yet to the FDA. However, we believe the process is in a late stage and that a potential approval may come during early 2024. The FDA approval is highly important for the company and our investment case as there is a clear need for the AI camera in the US, in our view. Moreover, the US strategy will create recurring sales to a much higher degree than currently, which we believe reduces the risk in the case. Optomed´s share has had a negative trend during the year. The general stock market climate is, of course, a major reason. Additionally, the market has probably had higher expectations of the company’s growth, and the FDA process has been longer than anticipated. However, we argue the share is currently traded at attractive levels and highlight the potential FDA approval as a major trigger for the share.

We expect full-year 2023e sales of EUR16.0m and an EBIT of EUR-3.0m. Furthermore, we believe the launch of Aurora AEYE will start early in 2024e and that Optomed’s sales will increase to a higher degree from next year (2024e sales estimate of EUR19.4m). Moreover, we expect Optomed to become EBITDA positive next year and estimate sales of EUR33.5m in 2025e, which is highly affected by US subscriptions. As we leave our long-term outlook unchanged, the estimate changes have a limited impact on our valuation range. However, due to an internal policy, we increase our assumptions for the risk-free rate from 2.5% to 3.0%, changing our WACC from 10.5% to 11%. The changes we have made render in an updated fair value range, including a base case of EUR7.5 (8), a bull case of EUR16 (17), and a bear case of EUR1.5 (1.5).

Our valuation of Optomed is based on a discounted cash flow model. Our analysis suggests a base case of EUR7.5, representing a significant upside from the current share price levels.

At Redeye, we use three different scenarios to value a company's stock. These provide a more dynamic view of the case.

• Base case: EUR7.5 per share
• Bull case: EUR16 per share
• Bear case: EUR1.5 per share

In our base case of EUR7.5, we assume a European market value in the device segment of approximately EUR21m. We estimate Optomed will have 16% market penetration in 2023e and that the market will grow by 7% across the entire forecast period. Moreover, we assume Optomed's market penetration will increase during the forecast period, arriving at 20% penetration at the end of the period (2030e). Optomed's European software segment has been strong in the past, and we expect ongoing 10% annual growth. The Chinese market has been turbulent, and in our base case, we expect this to continue, resulting in low expectations. As Optomed is developing its business in other parts of the world, we believe its RoW sales may increase significantly in the future. However, as we do not expect this in the coming years and because of the uncertainty, we exclude a potential expansion and only apply minor sales numbers to this segment for our forecast period.

Moreover, we believe the US business model is exciting and vital for the case. In our base case scenario, we assume a 90% LoA by the FDA and estimate that Optomed will have 7,000 subscribers in the US by 2030e. Although we expect the number of subscribers can grow far larger, we would like to get a picture of the interest and demand before assuming higher numbers. We expect to get a better picture during 2024 as the first subscribers have tried and evaluated the offering.

In our bull case scenario of EUR16, we assume a faster ramp-up in sales in all segments. Our assumptions are summarized in the list below:

In this scenario of EUR1.5, we assume a slower sales ramp-up in all segments. Our assumptions are summarized in the list below:

In addition to our DCF valuation, we offer a peer group analysis that compares Optomed with other medtech companies in the Nordic region. These ten companies have a similar enterprise value to Optomed. We argue the best measurement is EV/Sales, as Optomed is not currently profitable on a yearly basis.

We argue it is challenging to find similar peers to Optomed, and we observe the company's EV/Sales multiples are 2.9x for 2023e and 2.4x for 2024e. However, the most similar company to Optomed is Revenio Group, which operates in the same area. Even if Revenio is larger than Optomed and is in a later stage, its EV/Sales multiples are more than twice as high. We believe such a difference is too massive and argue that the Optomed share is currently trading at low levels, especially due to the high potential in the US. However, we believe the share price development will be better during the next twelve months and view the upcoming FDA approval as a major trigger for the share.