By Brian Marckx, CFA
Q4 / 2016 Financials: North American Sales +38%, Reflects Growing Demand in Aesthetics Market
Miramar Labs (OTC:MRLB) reported financial results for the fourth quarter and year ending December 31, 2016. Revenue in Q4 came in at $4.4M, down 18% from the $5.3M generated in the comparable year-earlier period but up almost 3% from Q3 2016 ($4.3M). On a yoy basis, miraDry console sales fell 24% ($2.4M Q4 ’16 vs. $3.1M Q4 ’15) while consumable sales fell 9% ($1.9M Q4 ’16 vs. $2.1M Q4 ’15). Miramar attributes most of the yoy revenue decline to timing of Asia console sales, which were received earlier in the year in 2016 as compared to 2015.
Perhaps interestingly, all of the sequential total revenue growth (i.e. Q3 ’16 to Q4 ’16) was related to a 10% increase in console sales while consumable sales fell 5% over the same period. In fact, on an aggregate basis, consumable sales fell for two consecutive quarters (i.e. from Q2 ’16 to Q4 ’16) despite the total installed base increasing from approximately 800 consoles at the close of Q2 ’16 to approximately 873 at the end of 2016. We think much of that may be due to a lag between when a capital sale is made and when meaningful utilization materializes and continue to expect consumable sales to outpace that of consoles over the longer term. Another (non-fundamental) recent factor relates to transition of one or more OUS distributors which negatively impacted consumable sales.
Despite the relatively soft sales in Q4, for the full year revenue grew 19% in 2016 to $20.5M (vs. $17.2M in 2015), which was mostly catalyzed by top-line yoy growth during the first half of the year. Sales in North America, which now accounts for approximately 50% of total revenue (up from 43% in 2015), were particularly strong and up 38% from 2015. We think sales in North America, where MRLB details with a direct sales force, are benefitting from greater awareness from the implementation of the company’s physician marketing strategy as well as social media efforts. Additionally, the recent label expansion (‘reduction of hair’ in June ’15 and ‘reduction of odor’ in Oct ’16) as well as the attractive economics for physicians may also benefitting uptake in the U.S.
We also note that there has recently been considerable M&A activity in the domestic aesthetics market which we think also speaks to the attractiveness and growth in interest of the space. In the same month of February 2017 Allergan (NYSE:AGN) announced it will acquire ZELTIQ Aesthetics (NASDAQ:ZLTQ) and Hologic (NASDAQ:HOLX) announced it will acquire Cynosure (NASDAQ:CYNO). Both ZELTIQ and Cynosure are medical device companies focused entirely on aesthetics including ‘body contouring’ (non-invasive fat reduction). While Allergan has had significant presence in aesthetics (Botox accounts for ~20% of total sales), Hologic has not as their focus is largely related to women’s health: diagnosis, imaging and treatment. Relative to CYNO, their PrecisionTX device received FDA clearance for an axillary hyperhidrosis indication in January 2015, making it a direct competitor to miraDRY (although as we discuss later in our report, we believe miraDRY has significant competitive advantages to CYNO’s device). So while we are not suggesting MRLB is necessarily a take-out candidate (although we are also not discounting that possibility), we do think these M&A deals of pure-play aesthetics companies do speak to the potential significant upside growth of the aesthetics segment in the U.S. and, by extension, continued significant growth in Miramar’s domestic revenue.
Meanwhile, sales in Asia, which account for approximately 30% of total revenue (compared to 34% in 2015) increased by 6% in 2016 but were softer than we had expected – some of which we think relates to the aforementioned distribution transition. In fact, console sales in Asia were very strong, up 45% yoy in 2016 – so had it not been for the relative weakness in Asia consumable sales, total revenue in 2016 would likely have been even much higher.
Sales in the Middle East and Europe, which account for 19% of total revenue (compared to 21% in 2015), grew 10% in 2016 - all of the growth in these territories was due to consumables sales, which increased 69% from 2015. Meanwhile, console sales fell – which was also attributed to the termination and transition of key distributors.
Total console and consumable sales grew 18% and 21%, respectively, in 2016 and accounted for 54% and 43% of total revenue, contributing essentially the same respective proportions of total revenue as in 2015.
Gross margin exhibited meaningful widening in both Q4 and the full year. Gross margin was 56.3% in Q4, plus 300 b.p. (vs. 53.3% Q4 ’15), and 55.3% in 2016, plus 330 b.p. (vs. 52.0% 2015). Gross margin is benefitting from a higher proportion of total sales coming from North America and Asia, where selling prices are relatively higher, as well as from economies of scale from higher production volumes. We continue to model incremental widening of gross margin as higher margin consumables grow to account for a larger percentage of total revenue.
Q4 operating expenses were $5.7M, up about 5% from Q4 ’15 but down 8% from Q3 ’16. For the full year, operating expenses were $22.9M, up only 3% from 2015. Management has done a good job of controlling operating expenses which, along with the 19% revenue growth and 330 b.p. widening in gross margin, trimmed operating loss from $13.3M in 2015 to $11.6M in 2016.
Cash used in operating activities was $3.7M and $12.0M in the three and 12 months ending 12/31/2016. Cash balance at year-end was $2.2M but subsequent to year-end the company issued $2.7M in convertible promissory notes. MRLB notes in the their 10-K that they believe current resources are sufficient to fund operations until the middle of May 2017 and also note that they are “considering strategic partnerships in addition to seeking funding from private and public sector investors.”
We are maintaining our $10/share price target on MRLB which is calculated via DCF and confirmed with price/sale comparable multiples based on the recent acquisition prices of ZLTQ and CYNO. See below for free access to our updated report on MRLB.
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