Dignitana’s Q3 report came this week. It is a fine report and Dignitana is on the right track judged by the fast growing turnover. Share price lifted 6 % after the report.
The company focuses heavily on the US market after the FDA-approval in December 2015. The main turnover therefor is generated by the American subsidiary. The business model differs from the rest of the world, as Dignitana has chosen a pay per treatment approach. In terms of cash flow this model generates cash on a regular basis. If the Dignitana sells a systems, it only generates turnover once (and maybe a little on service and spare parts). In US systems are rented out to hospitals and either the hospital or the individual patient pays a fee for each treatment. At present there are 76 systems at 53 hospitals in 17 states in use.
Increase in turnover
The effect of the rapidly growing number of systems in use was not yet visible in the half-year report. In Q1 and Q2 turnover was app. 1 MSEK per quarter. In Q3 this has increased to 2.8 MSEK, +193 % compared to Q2. The total number of systems rented out in itself generates a certain turnover. On the other hand, also the number of treatments on each machine is crucial. More daily treatments generate more turnover. The company does not reveal how much of the current capacity is used, but there is probably idle capacity so future growth both can come both from new hospitals and clinics offering the treatment and a growing number of users on existing systems.
According to press releases in October the number of active systems were 47. Of these 47 a some were installed during the quarter and have only marginally contributed to Q3 turnover. In November another press release announced orders of 22 new systems, which is almost 50 % more than previous installed. Based on this I expect at least a doubling of turnover again in Q4.
The burn rate at this point is high – app. 10 MSEK per quarter. After the issue earlier this year there are sufficient cash available (42 MSEK) for the continued expansion. In Q3 the loss was 7 MSEK and with a turnover of 2.8 MSEK we still need a couple of quarters with a steep increase in turnover before breakeven. I assume that we will see the first quarter with profits in the first half of 2018 (conservative) or Q4-17 (optimistic).
Arrival of a competitor?
Until now Dignitana is the only FDA-approved system for cooling scalps to prevent hair loss after cancer treatment. In other words: the only product on market. On one hand it is an enormous advantage to be first mover, but on the other it is a disadvantage since Dignitana is the sole voice to persuade the market that this kind of treatment is beneficial for patients. The British company Paxman Ltd. has filed for an FDA-approval and will probably enter the market during 2017. It is exciting to see if the arrival of a competitor will open the market – or if competition will slow down growth.
Another positive aspect of the report was that Sysmex, the European distributor, has placed an order for delivery during the last part of 2016 and the first months of 2017. There is no doubt that market penetration has been slow in both Europe and Asia. To some extent it is understandable as Dignitanas efforts have been directed towards the more profitable American market. Hopefully success on the American market can act as reference for Asia and Europe. Judged by their web-page Paxman are more successful penetrating the European market.
The share price went up after the report. Since the issue in June, the price has moved up and down, mostly down. Shortly after the issue the Dignitana share fell to 16.40 SEK, then jumped over a few days to 21.40 SEK in the weeks after. From there on the price slowly went down during July, August, September, October and by November 2th it even went under the issue price of 15 SEK and closed at 14.95 SEK. This seems to have been the turning point, though. Since first week of November the share has regained its momentum and closed on Friday 25th at 18 SEK fuelled by the announcement of the 22 systems on November 7th and the report on the 24th.
It does not seem to have affected the price that the Dignitana has made a very discreet and quiet change of CEO by the beginning of November. The release is a study how to make a press release that under- emphasises the fact that the company have changed CEO. It does not appear before the third paragraph and is told in a ‘by-the-way-we-sacked-the boss’ manner. Elegant! But why?
During the past months approximately once a month the Dignitana have announced orders or groups of orders. I look forward to see what December will bring – knowing that the full effect of orders this late in 2016 only will have effect from 2017.