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ZYXI: Zynex Medical – Disruption Creates Opportunity

12/30/2020

NASDAQ: ZYXI | NYSE:FMS

Two takeaways of the current pandemic are growth in the availability of home healthcare modalities and the need for real-time continuous monitoring of patient vitals. Zynex Medical is tackling both opportunities.

Zynex Medical (NASDAQ: ZYXI) sells electrotherapy devices for pain management. The devices are designed for at-home use, often in conjunction with rehabilitation therapy following injury or surgery. Zynex has grown revenues at an average annual rate over 50% in recent years, bolstered by its move to a direct salesforce, from the more traditional mix of distributors and indirect sales. In a segment marked by commodity and relatively low levels of innovation, Zynex seeks its competitive advantage by providing customer service and taking on the reimbursement challenges. In early 2020, Zynex received 510k clearance for its unique non-invasive blood volume monitoring device, opening the door to the $10-15 billion global patient monitoring market.

What’s the buzz? – Electrotherapy in rehabilitation medicine

Electrotherapy has long been used to manage acute and chronic pain. The global market for non-opioid pain relief device market was estimated to be $3.8 billion in 2019 and forecast to grow at 8-9% annually (Research and Markets, 2019). Extrapolating from this estimate suggests a current market of $1.5-2.0 billion in the US for electroanalgesia, which includes electrotherapy but also transcranial and deep brain stimulation, peripheral nerve stimulation and percutaneous (invasive) forms of electrotherapy.

Non-invasive forms of electrotherapy deliver a non-painful electrical current through electrodes place on the skin. According to the gate control theory of pain, current disrupts a pain signal before it reaches the brain, providing relief. Electrotherapy is popular and effective for many types of local or regional pain and is most often prescribed for short-term pain (30-90 days) following injury or surgery.

There are three primary forms of electrotherapy for pain management: TENS (transcutaneous electrical nerve stimulation), IFC (inferential current) and NMES (neuromuscular electrical stimulation). TENS delivers either high-frequency/low-intensity pulses (conventional TENS) or low-frequency/high-intensity pulses (AL-TENS). In addition to disrupting the pain signal, TENS increases endorphin release through heat transmission at the electrode site. IFC delivers current to more deep-seated structures and is believed to aid in tissue repair and muscle retraining in addition to reducing pain. NMES is used for muscle strengthening, maintenance of muscle mass and strength during prolonged periods of immobilization and muscle retraining.

A systematic analysis (Cochrane 2009) on the efficacy of TENS in managing pain found many studies showing efficacy with low risk of side-effects or complications. However, clinicians will say that some patients respond well to TENS, while others report no benefit. This variability in response for individual patients is consistent with clinical study findings.

TENS therapy is covered by most insurers although policies and coverage benefits vary. Many policies limit the conditions covered and require proof that analgesics alone are not effective. In general, insurers cover TENS treatment for acute pain after injury or surgery and reimburse for the TENS unit and for a stated number of reusable supplies monthly.

Zynex – a leader in at-home electrotherapy

Zynex focuses on the estimated $500 million prescription at-home electrotherapy market. Prescription electrotherapy devices deliver a wider range of therapies and significantly greater intensities compared to over-the-counter devices. The company’s ZMI’s primary product is the NexWave device, which offers TENS, IFC and NMES modalities in one small, portable, battery-operated device. The device uses consumables such as leads, electrodes and replacement batteries which are sent to patients on a recurring basis.

In addition to NexWave, Zynex sells InWave, an in-home electrical stimulation device used to treat female urinary incontinence, and NeuroMove, which is used in-clinic for rehabilitation in stroke, spinal cord and traumatic brain injury patients.

Growing documentation requirements have increased the administrative burden on clinicians and patients from difficult to onerous, and many companies in the durable medical equipment space rely on distributors or indirect salesforces as the primary interface with clinicians and their patients. While distributors and indirect sales are a low-cost, flexible way of building market awareness (particularly for small medical device companies), indirect agents often sell products from multiple companies, creating competition for share-of-mind. In addition, indirect agents may not be as up-to-date on complicated issues of documentation and reimbursement as a dedicated sales team.

For many years, Zynex relied on a group of 100 independent representatives for sales. The Company saw an opportunity to invest in a direct salesforce when two large competitors, EMPI (a subsidiary of DJO Global) and RS Medical, exited the at-home market following investigations into billing fraud. Zynex hired 63 direct sales representatives in 2018, and another 70 120 in 2019 and approximately 320 in 2020. This direct salesforce is supplemented by 42 10-15 indirect sales representatives.

The switch to direct sales has been impressive. From 2014-2016, Zynex’s sales grew at an average annual rate of 7%. In 2017, sales nearly doubled to $23.4 million, from $13.3 in 2016. By 2019, sales climbed to $45.7 million. Sales of $54.5 million through September 30, 2020 represented a 74% increase from the nine-months ended September 30, 2019.

The Company’s top representatives have annual sales of $1.6 million, while the overall average was $300,000 per representative. The long-term sales productivity target is $1 million per representative within 18 months of hire. We see this as a challenging, but not unreasonable goal, which with its current direct salesforce would drive over $500 million in annual sales.

Expanding into the patient monitoring market – A $5 billion+ global opportunity.

The COVID pandemic has made us familiar with pulse oximeters, which while reliable and inexpensive, have a delay of several minutes – a delay that can be clinically significant particularly in unstable patients. There is increased demand for the move to continuous, ideally non-invasive monitoring of patient vitals.

Grandview Research sets the global market for vital signs monitoring at $5 billion in 2019 growing to $9 billion by 2026. Other surveys suggest a value of $15 billion by 2026, driven by growth in the home-based market. The patient monitoring market is broad and includes pulse oximeters, blood pressure monitors and temperature monitors. The $6 billion blood gas testing/monitoring market is often tracked as a separate market (and occasionally includes pulse oximetry). In vital signs monitoring, pulse oximetry accounts for about 40% of the market, with hospitals being the primary customer base.

Circulative blood volume (CBV) is an important variable in many medical situations – trauma, surgery and hemodialysis. Blood volume is a measure of the fluids in the blood vessels and heart at any time and is crucial maintaining organ and tissue function. Under normal conditions, the body tightly regulates blood volume. Changes can result from illness or injury and both increase and decreased blood volume can have serious consequences. Abnormally low blood volumes (hypovolemia), from hemorrhage, may result in systemic shock, or if more localized, infarction. High blood volume (hypervolemia) can be a sign of heart failure, renal failure and other types of organ dysfunction. It may also occur in patients undergoing dialysis. Hypervolemia can lead to hypertension, shortness of breath and other conditions.

Blood volume changes can occur in patients undergoing major surgery, in intensive care, with sepsis or undergoing dialysis. In addition, blood volume can be affected by patient hydration, weight and individual vascularity, making it difficult to get consistent, accurate measurements. The gold standard for measuring absolute blood volume is measuring red cell and blood plasma volumes using dilution with radioactive elements. It is time-consuming and the exposure to radiation makes it unsuitable for general clinical use. In general, clinicians rely on algorithms applied to indirect and/or discrete measurements such as blood pressure, oxygen and carbon dioxide levels and other factors to monitor blood volume. For example, patients undergoing dialysis have fluids removed and infused in order to remove waste typically eliminated through the kidneys. The parameters used to determine the dialysis rate are based on indirect, discrete observations of a patient’s blood volume (fluid status) and these parameters change during dialysis treatment. According to one study up to 25% of dialysis patients suffer hypervolemia (too much hydration) leading to low blood pressure (Henderson et al, 1983).

During the past 30 years, researchers have suggested a number of non-invasive methods for tracking changes in blood volume including: optical density, optical reflection, mass density, viscosity, protein concentration and electrical conductivity. Continuous measurement devices are seen most frequently in hemodialysis. Fresenius (NYSE:FMS) uses an ultrasonic device on its dialysis machines to measure relative blood volume changes. However, these devices are subject to interdevice errors and are designed for a specific population. As a result, these devices have not been adapted for use in other applications.

In February 2020, Zynex received 510-k clearance for its CM-1500, Cardiac Monitor (the “CM-1500”). The CM-1500 is a non-invasive medical device for monitoring of the following parameters and their relative changes, indicative of relative changes in fluid volume in adult patients: bioelectric impedance, heart rate, ECG amplitude and PPG amplitude. The CM-1500 is designed to be used for monitoring central blood volume in operating and recovery rooms to detect blood loss during surgery and internal bleeding during recovery. This device has been subjected to multiple clinical studies and the company indicates that additional studies are expected before commercial launch.

If Zynex is successful in bringing the CM-1500 to market, the potential opportunity is significant, not only in terms of overall market size and growth, but also in terms of price point and margins. Switzerland-based Sentec Group, sells a range of transdermal sensors that provide continuous, real-time monitoring across of oxygenation, PCO2 and other vital measures. We understand that pricing for a Sentec system is approximately $20,000 plus the cost for the disposable sensors.

Summary:

We generally expect the medical technology companies to keep pace with the market over the next six-to-twelve months, with certain names outperforming through a combination of rising earnings and modest multiple expansion. However, there are two themes we suggest that investors keep under watch because of their potential ability to cause significant volatility.

First, the home therapy industry is characterized by both small single-product vendors and large diversified companies. Zynex has set itself apart with its commitment to direct sales and customer service, both of which provide a competitive advantage in building relationships with prescribers. At the same time, the physical therapy DME space has faced reimbursement challenges, and the industry has been a target of fraud investigations for over thirty years. If one company is found to be at fault, investors have tended to paint all companies with the same brush. Zynex implemented its direct sales strategy to capitalize market share left behind when Empi and RS Medical withdrew from the market and the investment has paid off for Zynex. However, if concerns about billing or significant changes in reimbursement for the industry arise in the future, it is possible that earnings and multiples will contract for the whole sector, at least for a period of time.

Second, the current business and potential business models are quite far apart. At this point, nearly 99% of Zynex’s revenues are coming from the more modest growing rehabilitation sector and its NexWave device in particular. While the Company has a solid plan to gain share in the rehabilitation sector and a meaningful opportunity to move into the vast and rapidly growing patient monitoring space, we believe several more milestones will need to be met before Zynex is more broadly recognized as an innovative medical device company in a rapidly growing market.

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