Dignitana was for a time the largest position in my portfolio. It is not anymore, despite the fact that I hold approximately the same number of shares as before. The share price at all-time low and the company is struggling to achieve the necessary turnover to be profitable. In this post, I sum up the development that Dignitana has been through the past three-four years to give an idea of where to go from here.
In short: Dignitana provides a scalp cooling systems that prevents hair loss during chemo-treatment for cancer. First listing was at Aktietorget in June 2009 and then on First North, Stockholm in November 2011. In November, the company moved from Lund, Sweden to Austin, Texas.
Above, I have copied Dignitanas share price from the NASDAQ webpage from the listing there in 2011 and until today. As it is visible, the overall trend is a downtrend. I was so lucky to get on board in spring 2015 and made most of the journey that lasted from January to July 2015 where the share rose from 4.5 SEK to 15.6 SEK in half a year. These were the happy days. On Thursday, the share closed at 2 SEK.
Dignitana is in the phase where a developing company goes from high hopes to cool business. This passing is difficult both in terms of achieving profitability and in terms of investor behaviour. Often companies lose a lot of their share value during this passing, either because of need for additional funds (issues) or because investors grow impatient. Or both.
In my portfolio, this goes for Recyctec, AroCell, BrainCool, Waystream, Phase Holographic, and Dignitana. Somehow, Heliospectra have managed to keep out of this after the latest issue – probably due to a steady rise in sales from quarter to quarter.
Today Dignitana has moved all of its operations to the US. During autumn last year one of the major customers terminated their contract with Dignitana forcing the company to ask investors for more money. This gave rise to a new direction. As result of this process, the company decided to move its operations. In terms of closeness to customers, the move makes sense. Dignitana remains listed in Stockholm.
Dignitanas growth strategy has been clear, but are changing. The main market is and was the US and the business model was a pay per treatment model, where Dignitana will receive a lease from the hospitals and clinics and a payment per treatment from the patients. Along this main growth driver, sales in the rest of the world would go through distributors. The first contracts in the US came in January 2016 – shortly after FDA approved scalp cooling in December 2015.
The first FDA approval in December 2015 were for treatment of women with breast cancer. In July 2017, FDA approved treatment for patients with solid tumours. This approval enlarged the market significantly. For a time Dignitana was the sole company approved by the FDA, but lately Paxman, a British company also listed in Stockholm, has received approval as well both for breast cancer and in June for solid tumors. Despite having a competitor on the US market, the presence of another supplier has the advantage that it is easier to get acceptance from medical staff and doctors for a new treatment as scalp cooling.
Looking 3-4 years back Dignitana has made a number of issues both preferential rights issues and private issues. In November 2014, June 2016 and November-December 2017 there were preferential rights issues of 79 MSEK and private issues in July 2015 and June 2016 adding 61 MSEK. The issues since 2014 then have provided around 140 MSEK. In comparison is the current company value 81 MSEK.
While we are looking back, it is worth mentioning than BrainCool is a spin-off from Dignitana and became a separate company in March 2014.
Dignitanas long road to profitability
In Q1, revenues were 6 MSEK and cash flow from operations 7 MSEK. By the end of Q1, there were 22 MSEK left from the issue in November-December. Calculated roughly, the current outflow of cash means that Dignitana will need more money by the end of the year. On the other hand, expected cost savings due to the move to US amounts to approximately 15 MSEK per year (taking effect after the move) and the one-time-costs of 3 MSEK for moving might be hidden in the burn rate of 7 MSEK. Give Dignitana achieves the cost saving of 3.5-4 MSEK per quarter, the burn rate will half from Q2 and onwards. If so, Dignitana can continue for 1½ year without changes in sales. In other words, we could avoid another issue during the next 12 months.
Along the moving to Texas, Dignitana ended the agreement with the European distributor, Sysmex, and took over sales and service of the 70 installed systems in Europe. This indicates a change in strategy as the rest of the world now is moving into focus as the CEO has visited distributors in both Asia and the Middle East lately.
Last week there was a temporary setback, which affects both Dignitana and Paxman. Since insurance companies pay most health costs in the US, it is important for a treatment to have a so-called CPT code offered by the American Medical Association. This code simplifies the reimbursement process for the patients and tells the insurance companies that the treatment is in line with medical practice. A CPT code will boost sales as it signals that preventing hair loss is an integral part of cancer treatment.
Rest of 2018?
The aim for Dignitana during 2018 is to keep growth high. In Q1, revenues only rose 5% in the US compared to Q4 last year. At that pace, the company will run out of cash before it gets profitable. There is no doubt that pay per treatment offers a significantly better and more predictable cash flow opportunity than direct sales to hospitals or clinics machine by machine. In order to avoid another issue, growth must remain on a high level. In this light it worries me that in the latest newsletter (June 2018) the number of installed machines are down to 133 from 146 in May and 147 in April. Better utilisation of each machine can still make revenues grow, but the trend does not look good. We will see when the Q2 report arrives on August 21th.
See my latest post on Dignitana here.