The margins on the new service is also much higher which should help boost the firm-wide adjusted operating margin towards management's goal of 20% by 2016.Īcquisitions Model Has Been Sidelined In Favor of Organic Growth That would more than double their existing revenue across the entire firm. The market opportunity is tremendous (at $400,000,000 if they can get to the $100 per test and reach every US birth). Management thinks they can add 10 to 15 hospitals per quarter but have been adding nearly double that rate and stated that they have quotes out to many more hospitals. With over 3,000 hospitals in the US, and nearly 4,000,000 births last year, there is a significant opportunity for large ramp in revenue revenue which would be very sticky and recurring. Its win-win because the hospital can shift some cost out of their standard delivery fees while Natus sees better fee rates. While the incremental revenue to Natus this year from the new business model will be minimal, we think this could be a massive opportunity as hospitals see the win-win outcome from shifting the business to outside of the hospital. In addition to adding new hospitals to this service offering, they hope to convert their existing ALGO customers to this new service model as well as attracting new customers to Natus. This will be accomplished by taking out the hearing test costs but still billing insurance for the screen. Management at Natus believes the new outsourced service can increase the revenue per test from the current $10 to approximately $100 or more. This would include the hospital's costs for the disposable hearing device which their doctor would perform. Typically, hospitals would bill the patient (delivering mother) a set, combined amount for all services related to a standard birth. The new business model is different as the hospital is separated from the process and outsources the whole screen to Natus. Under that model, they received approximately $10 per test for the disposable product. The service is a change from the prior business model where they would simply supply the devices and products to the hospital to conduct the test. In the first quarter of its launch, they added their first hospitals and ended the second quarter with approximately 17 total hospitals, and the third quarter with 39. The new Peloton hearing testing service, was recently launched in the second quarter of this year. The product obviates the need for hospitals to buy Natus' devices but can still bill insurance companies for the actual service. The new business model will operate more as a hearing screening-as-a-service, actually performing the test for hospitals. This is done because many hearing anomalies can be fixed if discovered within the first couple of days after birth.Īt the start of the year, Natus launched a new business initiative for their hearing screening business. Every newborn is given a hearing test within the hour of being born. While the neurology segment gets most of the attention, partially due to its size at 65% of revenue in 2013, up from 43% two years prior, we think the newborn care segment, and specifically their hearing screening business, is a large potential grower for them over the next several years. Hearing Screening A Misunderstood and Massive Opportunity The second is newborn care, which includes hearing screening, jaundice management, brain injury, and thermoregulation. The business is divided among two product families: neurology, which includes diagnostic products like electroencephalography, electromyography, sleep analysis, and Doppler ultrasound technology. Natus Medical ( BABY) is a provider of medical devices and healthcare products that are used primary in newborn care, hearing screening, and neurology. We think, despite the run in the shares over the last year that they remain undervalued given the potential for margin expansion, organic growth from new product launches, and a new service that could boost revenue by 10x in one of their main divisions. Natus Medical is largely unfollowed, with just five sell side analysts, and we believe contains a massive opportunity within their newborn segment. The medical device space has seen severe disruption over the last several years due to regulatory and fiscal issues as well as large technological innovation in the industry.
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