Medical start (OM -34.05%) appeared to be at a significant inflection point in the home dialysis market. The company shipped a record number of its Tablo systems for home patients during the first quarter of 2022.
That momentum just hit a major roadblock, though. Outset announced after the market closed on Monday that it was suspending all shipments of its Tablo system for home use. The healthcare stock plunged more than 30% on Tuesday following the news. But is Outset a buy on the sell?
Why shipments are suspended
Outset Medical said in a press release that it has suspended shipments of its Tablo system for home use as it waits for the Food and Drug Administration (FDA) to review and authorize a 510(k) application. A 510(k) filing is necessary to demonstrate that a medical device is safe and effective before it is marketed.
The company originally received FDA clearance for its Tablo dialysis system for use by patients at home in March 2020. So what happened?
Outset has made changes to its previously submitted 510(k). The FDA requires that a new 510(k) be submitted whenever “there is a change or modification to a legally marketed device that could significantly affect its safety or effectiveness.”
The company stressed that it has not identified any security issues with Tablo. It continues to market the chronic and acute care system, where Tablo is used by healthcare professionals. Any Tablo devices that have already been shipped to patients at home can also be used.
An uncertain financial impact
Not surprisingly, shares of Outset Medical have fallen significantly. The company suspended its previous full-year 2022 revenue forecast of between $144 million and $150 million. The suspension of home patient deliveries will hurt Outset, but the negative financial impact is uncertain at this stage.
Outset said it now expects second-quarter revenue of at least $25 million. However, this amount is well below the $30.6 million in revenue reported in the first quarter. The company plans to update its guidance when it announces second-quarter results in early August.
It is important to note that Outset does not expect to be able to provide an update on the status of the FDA review process of its latest 510(k) filing until the third quarter. Generally, the FDA will make final decisions on 510(k) submissions within 90 days.
A purchase of bad news?
There’s no reason at this point to expect the company to have any issues getting FDA approval for its latest regulatory filing. Assuming all goes well, Outset’s revenue should only be disrupted for a few months. But delayed revenue isn’t as bad as lost revenue.
Investors should keep in mind that the company still makes most of its money from the chronic and acute care markets. These sales will not be affected at all by the pause in shipments.
In the long term, however, the domestic market presents a huge opportunity for Outset. The company estimates its addressable market for home dialysis to be $8.9 billion. Currently, only about 2% of US patients eligible for home dialysis actually receive treatment at home.
Outset has a long way to go to capture a significant share of the domestic market. Shipping hold doesn’t help. But Tablo offers several major improvements over older home dialysis machines. The company should be able to regain momentum in this large market soon.
Temporary setbacks often present great buying opportunities for investors with a long-term mindset. Is this the case with Outset Medical’s Shipping Hold? I think so.