Inari Medical, Inc.

Moat: 2.5/5

Understandability: 2/5

Balance Sheet Health: 3.5/5

Inari Medical, Inc. is a medical device company focused on developing, manufacturing, and commercializing minimally-invasive, catheter-based technologies for treating venous thromboembolism (VTE), a category of blood clot disorders including deep vein thrombosis (DVT) and pulmonary embolism (PE).

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Inari Medical is a rapidly evolving medical device company focused on the treatment of VTE disorders, including DVT and PE. The company’s value proposition lies in its proprietary, minimally-invasive catheter-based technologies aimed at removing large clots from large veins.

Business Overview:

  • Revenue Model: The company primarily generates revenue through direct sales in the United States, with a small portion of international sales. Revenue is recognized when control of the goods is transferred to customers, primarily through sales force representatives targeting hospitals and medical centers, The price of the product includes the delivery and other required documentation. Revenue from thrombectomy devices represented over 90% of their total revenues, with the other revenue arising from the sale of disposable components.
  • Industry Trends: The medical device industry, particularly in the VTE treatment space, is marked by rapid technological innovation and increasing adoption of minimally invasive procedures. The focus on improving treatment outcomes while reducing costs and patient risks continues to drive innovation. Global VTE device market was approximately $3.2 billion and is estimated to reach $4.1 billion in 2024, suggesting rapid growth.
  • Margins: Historically, Inari’s gross margin has been relatively high. In their latest filings, their gross margins were around 88%. The company is not shy from stating that it will protect that figure while looking to improve it in the coming years.
  • Competitive Landscape: The medical device industry is competitive, with other, more established companies, working to create new offerings for their products. The company cites that there are no directly competing therapies. However, some hospitals still prefer medical treatment to thrombectomy options. A growing demand for minimally invasive devices as well as higher reimbursement for VTE treatment may draw new entrants into the market or create greater competition for Inari.

While management claims that Inari has no direct competitors, some companies like Penumbra and Boston Scientific also offer similar thrombectomy solutions. There are various differences in the way their devices work, and the markets that they tackle, and their size and capabilities are way different than Inari.

* **What Makes Inari Different:** The company aims to address the limitations of current treatment by developing purpose-built devices that provide fast, precise and effective clot removal in a minimally invasive manner, reducing bleeding time and patient recovery time. The products address the unmet need of treating patients through thrombectomy options for large clots, not only through medicines and blood thinners.
    *  **ClotTriever System**: Used for clot capture and removal of large clots. It utilizes a self-expanding nitinol mesh to trap and remove clots, avoiding the need for thrombolytic drugs.
    * **FlowTriever System**: It is used for aspiration and mechanical thrombectomy with a focus on efficiency and high clot removal rates. It uses a large bore aspiration catheter, minimizing the need to push the thrombus in small vessels, as some thrombolytic drugs might.    * **Geographic Expansion:** While the majority of the revenue is generated in the United States, Inari is starting to expand its business to other countries. They have received licenses in over 20 countries and are now planning to hire dedicated sales team, and continue the expansion efforts.

Financials:

  • Revenue: Inari has shown impressive revenue growth. Revenue was $111 million in 2019, $197 million in 2020, $290 million in 2021, and $493 million in 2022, demonstrating significant growth year-over-year. They expect this trend to continue in future years.

Year-over-year growth is a consistent trend with Inari, demonstrating that the adoption of the devices is increasing, along with the awareness.

  • Profitability: While their gross margins have been strong, the company is not profitable yet. They are aggressively investing in research and development, and commercialization, which are essential in growing the business. The operating margins are negative due to heavy sales, marketing, and development expenses. The company reported a net loss of $113.6 million in 2022, despite the revenue growth. But the losses are narrowing each year, which means a path to profitibilty is not very far away.
    • They seem to have good control over their operating expenses, as it has been growing at a slower rate than the increase in revenue.
    • Gross profits are on the rise.
  • Cash and Debt: They have no outstanding debt and a good cash position. The company’s cash and cash equivalents was at $353 million as of Sep. 2023. The company also has a good balance sheet showing strong liquidity.
    • Recent filings suggest a strong balance sheet, with cash, cash equivalents, and short term investments at over $370 million. The company has no debt, which indicates a strong financial cushion.
  • Share Dilution: There have been a slight increase in outstanding shares in the past years, due to stock-based compensation for its management and employees. If a company is in the growth phase, stock dilution is not as big of a risk, as long as the company is utilizing the capital for expansion which should lead to greater shareholder value in the longer term.

Moat Analysis:

Rating: 2.5 / 5

Justification:

  • Proprietary Technology: Inari’s primary moat stems from its proprietary, catheter-based technologies, specifically designed for large clot removal. However, there are other competitors, which means that the “moat” is not fully protected from other similar technologies.

  • Patents: Inari has numerous patents and patent applications related to its core technologies. However, the pharmaceutical and biotechnology sectors often see legal challenges and patent battles and the medical device sector is just like the pharmaceutical sector in this regard, but with the advantage of having faster times to market. The success of a company is tied to their ability to continually innovate and come up with new improvements, else the competition will likely overtake them in terms of technology and features and could lead to reduction in market share. Thus, it is difficult to say that the patents are a very strong moat.
  • First-Mover Advantage: Inari has a first-mover advantage in a niche market as its solutions provide the only FDA-cleared devices specifically designed for removing large clots. For example, the ClotTriever system is specifically designed for removing large blood clots in a minimally invasive fashion. However, the company needs to continually innovate and get its solutions used as the gold standard in the medical community to defend against new entrants into the market, which might be easy to replicate with small changes to design.
    • There are switching costs involved as hospital systems will have to invest capital and time in training and purchasing new equipment.
    • While there are no direct competitors, if the company’s device becomes easily replicable in future, competitors might easily enter the market, even with existing technology and minor improvements.
  • Customer Relationships: The company’s strategy depends highly on cultivating relations with hospitals and doctors and their ability to get these entities use and become loyal to their offering. The better Inari becomes in the industry, the higher the switching costs become for hospital systems and therefore a stronger moat.

Risks to the Moat and Business Resilience:

  • Regulatory Risks: Inari is subject to stringent FDA and international regulations for medical devices. Changes in regulatory pathways, the need for new approvals, or potential delays in approvals could hinder the company’s operations or expansion plans.
  • Competition: Although Inari seems to be a leader in the field, there’s the risk of new competitors, with new and innovative technologies. The field of medical devices is constantly evolving and any improvements in competitors’ devices might give them an edge.
  • Technological Obsolescence: The pace of innovation in the medical technology space is rapid, and any revolutionary new product might render the technology offered by Inari obsolete. To maintain a moat, the company needs to keep investing in R&D.
  • The company currently has been spending a good chunk of money into research and development and the company has stated its commitment to maintain this rate to keep innovating.
  • Reliance on a Limited Customer Base: Currently, the majority of Inari’s revenue comes from a few major customers in the US, and a loss or decrease in business from a customer may impact their revenue and profitability. If the company expands internationally and its client base gets large, the risk would be lowered.
  • Pricing Pressure: As hospitals and insurance providers seek to limit healthcare spending, there could be downward pressure on the prices Inari can charge for their products, affecting profit margins.
  • Supply Chain Disruptions: Since the company relies on a single third-party contract manufacturer in Costa Rica, the company is susceptible to supply chain risks that may impact production or raise production costs.

In terms of business resilience, Inari’s focus on a single treatment category makes them vulnerable to issues in the specific industry or changes in their treatment protocols. Their operations are also concentrated in California, which exposes them to risks associated with natural and economic disasters.

Understandability Rating:

Rating: 2 / 5

Justification:

  • The core business of Inari Medical is relatively simple: create medical devices that help remove blood clots more effectively and efficiently. However, the technicalities of the device and the regulatory pathways required to get the device to the hospitals and the market can be difficult to understand for a layman.
  • There is complexity in the understanding of the different clinical aspects of VTE, different approaches to its treatments, and how Inari’s products are better alternatives.
  • Understanding the valuation of the company through complex financial instruments is beyond the scope of a non-financial personnel.

Balance Sheet Health:

Rating: 3.5 / 5

Justification:

  • Inari’s cash position and negligible debt suggest a strong position on the surface, but their lack of profit generation for the near future makes it important to assess the stability of the financials. For now, they have enough cash and little debt.
  • There are concerns around stock dilution due to stock based compensation, which seems to be high.
  • Due to high R&D spend and lack of profits, they are not a completely safe haven. However, they seem to be on the right path, as long as they maintain control of their spending, and are able to move to profitability with the sales of their products, the company will have a very bright future.

Recent Concerns/Controversies and Management Response:

  • The company reported their fourth quarter and full year earnings on Feb 22nd, 2024. The stock dropped more than 15% after the earning call. Though the earnings per share and net revenue were both higher than the consensus estimates, the market seemed to punish the company based on a higher guidance of the R&D expenses.
    • The management however, on the earnings call have stated their commitment to maintaining their profitability and revenue growth by maintaining their product pipeline, controlling the expenses, and expanding into new markets.
  • There were no major legal or other controversies highlighted in their recent earnings calls or filings. All controversies and risks are well described in the risk factors, and management continues to work to reduce and eliminate those risks.
  • The company is primarily affected by medical device regulatory changes which are quite prevalent in this industry and they seem to acknowledge that and are ready to take all measures to mitigate any such risks.