Medical device companies can’t market or ship their products unless the U.S. Food and Drug Administration (FDA) says they can. So when Outset Medical (OM 26.93%) suspended shipments of its Tablo hemodialysis system for home use in June pending FDA clearance, it was a big blow.
The healthcare stock plunged 34% in the immediate aftermath of the news. Outset’s shares were already down more than 50% year to date with the company reporting disappointing first-quarter results and the S&P 500 briefly entering bear market territory. But investors reacted especially negatively to the shipment hold for the home market.
That hold, though, is no longer a problem. On Monday, Outset announced that the FDA had cleared Tablo for home use.The stock soared 27% on Monday with the FDA’s decision. But here’s why even bigger gains could be ahead.
Home dialysis market
So far, the majority of Outset Medical’s Tablo sales have been to U.S. acute and sub-acute care providers, primarily hospitals and physicians’ offices. This remains a significant market for the company, with roughly 4.5 million treatments per year amounting to an estimated $2.5 billion annual opportunity.
However, the home market is where Outset especially has high hopes. There are around 570,000 patients in the U.S. with chronic kidney disease who require regular dialysis. Close to 30% of these patients are eligible for home dialysis. But only 2% of them are currently receiving dialysis at home. This presents an $8.9 billion annual market opportunity for Outset Medical. And the company should have a good chance of winning a significant share of this market.
Previous home dialysis systems were clunky and complicated. Tablo, which looks kind of like a small refrigerator on wheels, is easy to use. It requires only tap water and an electrical outlet instead of expensive infrastructure.
It won’t be an overnight success story
Don’t expect Outset Medical to have an overnight success story in the home market. Even though the company shipped a record number of Tablo systems for home use in Q1 prior to the shipment hold, there’s still a long way to go.
In its Q2 update, Outset provided full-year revenue guidance of $105 million to $110 million. That’s well below the company’s previous outlook for 2022 revenue between $144 million and $150 million.
Some of this lower guidance is due to the Tablo shipment hold. However, Outset also faces other headwinds, notably including customers experiencing staffing challenges and higher costs due to inflation.
Bright prospects for Outset stock
Outset’s prospects appear to be quite bright now that it again has FDA clearance for Tablo to be used in homes. Several reimbursement changes should boost home use of the device.
For example, in 2022 and 2023, Medicare will pay around $23 to $25 more per treatment for each Tablo home treatment. Importantly, the Centers for Medicare and Medicaid Services determined that Tablo offers a “substantial clinical improvement” over older devices.
The picture gets even better for Outset going forward. Between 2024 and 2027, the ESRD (end-stage renal disease) Treatment Choices Model will use a carrot-and-stick approach to encourage home dialysis. Providers will receive additional payments of up to 8% or reductions in payments of as much as 10% based on their ability to increase home dialysis adoption.
It will take time for Outset Medical to expand its home dialysis market share. But with the company’s market cap still below $1 billion even after the stock’s rebound, much larger gains truly could be in store.