InMode: Potential for doubling amid strong growth prospects and favorable market position

Executive Summary

InMode is a medical technology company that develops and sells innovative aesthetic and medical devices. The company has experienced impressive growth in recent years, driven by its expanding international presence and successful product launches. With a With a debt-free balance sheet, strong liquidity and a track record of generating ample cash flow, the company is well positioned for continued growth and offers significant upside potential.

Business overview

InMode (INMD) is a renowned worldwide provider of minimally invasive surgical aesthetic and medical treatment solutions utilizing energy-based technology. The company excels in energy-based aesthetic treatments for facial and body contouring, medical aesthetics and women’s wellness, using radio frequency (RF)-based technologies that overcome the shortcomings of traditional laser-based treatments and offer both fat reduction and skin tightening.

INMD has a unique history as a medical device manufacturer specializing in non-invasive body contouring products using their proprietary Radio Frequency Assisted Lipolysis (RFAL) technology. The company is fully integrated and handles the design, manufacturing and global marketing of its products. Their range of products and treatment options include outpatient procedures such as liposuction, skin tightening, body and face contouring and skin rejuvenation. These procedures offer several advantages, such as no scarring, no hospital stay and no need for general anesthesia, providing a practical alternative to plastic surgery.

What sets INMD apart is its impressive growth rate and financial performance. Between 2016 and 2021, the company’s revenue increased from $23 million to $358 million (Source: InMode Form 20-F Report). Despite the typical high R&D and sales costs of early-stage medical device companies, INMD managed to generate robust free cash flow with adjusted EBIT margins of nearly 50% while maintaining an ROIC in the +40% range.

InMode stands out for several positive characteristics that contribute to its growth potential in the aesthetic products market:

• Strong end markets: Prior to the COVID-19 pandemic, the professional aesthetic product market was expected to grow at a CAGR of over 10%, with double-digit growth in areas where INMD primarily competes, such as body contouring, skin tightening and women’s wellness. Despite pandemic-related headwinds, demand for aesthetic procedures increased rapidly in 2020 and remained strong through the first half of 2022.
• Technological Leadership: INMD’s minimally invasive RF-based products are particularly suitable for patients aged 35-50 seeking skin tightening as part of their body/facial contouring. INMD uses bipolar RF energy delivery, which enables a lower cost, higher quality solution for an increasing number of use cases. Bipolar delivery has an advantage over monopolar delivery in that the depth of penetration of the RF energy is not dependent on tissue impedance or probe size. INMD has successfully met rising demand and navigated supply chain issues with ample production to meet demand within weeks.
• Differentiated Sales Strategy: Despite generating most of its revenue from selling capital systems at ASPs in the $100,000+ range, INMD enjoys a strong gross margin profile in the mid-80% range, well above the peer group average. This margin advantage comes from lower manufacturing costs for RF compared to industry-standard laser-based technologies, along with pricing power that is on par with more expensive technologies.

InMode competes with several companies in the medical aesthetic device industry. Key competitors include Cutera, Hologic, Syneron Candela, Alma Lasers and Cynosure. These companies produce similar products that offer non-invasive and minimally invasive treatments for various cosmetic procedures, including body contouring, skin tightening and facial rejuvenation.

InMode’s competitive advantage in the market lies in its technology and product offering. InMode has developed proprietary technologies such as radio frequency (RF) energy which delivers controlled heat to the targeted area, leading to faster and more effective treatments. The company has also developed its patented 4D technology, which uses a combination of RF energy and pulsed electromagnetic fields to deliver longer-lasting results. This technology has been proven to be superior to traditional laser treatments as it provides better results with minimal downtime.

In addition to its technology, InMode’s diverse product offering also gives it a competitive edge. The company offers a wide range of products that address various medical aesthetic procedures, from body contouring to facial rejuvenation. Its flagship product, BodyTite, is a minimally invasive device that uses RF energy to tighten and contour the body. The FaceTite and NeckTite products offer similar treatments for face and neck rejuvenation. In addition, InMode’s new product line, EmpowerRF, offers non-invasive treatment options for women’s health and wellness.

Overall, InMode’s superior technology and diverse product offerings allow it to stand out in a crowded market. The company’s continued innovation and focus on customer satisfaction has allowed it to maintain its position as a leader in the medical aesthetic device industry.

Over the past few years, INMD has significantly increased its international revenues and outperformed its US market growth metrics. This is important as it reduces the company’s dependence on the US market and creates opportunities for sustainable growth. Despite having 6,600 units installed in the US compared to 14,000 units worldwide, the US still contributes 64% of INMD’s revenue, indicating the company’s success in expanding its international presence. INMD operates in 78 countries and shows considerable potential for future growth.

In addition, INMD has successfully launched new products this year, including Empower RF, which targets women’s health. The product has shown early signs of success, and the company aims to generate over $30 million in revenue by the end of the year, surpassing the initial forecast of $20 million.

ELITONE is the only non-vaginal stimulation device covered by prescription insurance that has been shown to be effective in the treatment of stress urinary incontinence in women. INMD’s EmpowerRF with VTone attachment follows a similar treatment method to rehabilitate pelvic floor muscles and reduce bladder leaks.

Patents

InMode holds a number of key patents that protect its intellectual property and provide a competitive edge in the market. One of its most important patents is US Patent No. 9,839,208, which covers its proprietary radio frequency (RF) technology used in many of its products. This technology is used to deliver safe and effective energy-based treatments for a variety of cosmetic and medical applications. The patent was issued in December 2017 and is set to expire in 2035 (Source: InMode Form 20-F Report).

Another important patent for InMode is US Patent No. 10,227,115, which covers its BodyTite technology. This patent protects InMode’s proprietary method of combining RF energy with liposuction, allowing for simultaneous fat removal and skin tightening. The patent was issued in March 2019 and expires in 2038.

Additionally, InMode holds patents for its Morpheus8 and Fractora technologies, both of which use RF energy to treat various skin conditions. The Morpheus8 patent (US Patent No. 10,303,132) was issued in June 2019 and expires in 2038, while the Fractora patent (US Patent No. 8,496,647) was issued in July 2013 and is set to expire in 2030.

It is worth noting that patents provide protection for a limited period of time, after which competitors are free to develop and sell similar products. The expiration dates of InMode’s patents suggest that the company has a significant opportunity to maintain its competitive edge and continue to innovate. However, it will be important for InMode to continue investing in research and development to stay ahead as the patents expire.

Assessment

Management has stated that the current growth algorithm is likely to result in annual top line growth of $60-70 million. This is due in part to the episodic nature of sales of capital systems, which usually have a sales cycle of 3 to 5 months. However, the company’s history of exceeding stated targets and top-down industry estimates suggests that these projections may be too conservative. In addition, the company has historically generated 11-13% of its total sales from its consumables and extended warranty segments, which provide recurring revenue.

Over the past 10 years, the MedTech industry’s trading multiples have ranged from approx. 12x to 20x on next year’s EV/EBITDA basis. More recently, this group’s trading multiples have aggregated in the mid-to-high teens on an EV/EBITDA basis.

The company is expected to generate ~$250M. of EBITDA this year and ~$215m. in free cash flow in the middle of the sales side. Assuming InMode is revalued at a multiple in line with its peer group (which is reasonable given the strong growth rate, high return on invested capital, and strong management team), shares will change to $50 – $70 per share. share or offer 66% to 133% upwards.

Importantly, the company currently has no debt and has healthy cash flow of $547m, along with generating strong cash flow, which should provide a solid margin of safety.

Conclusion

In conclusion, InMode has established itself as a leader in the minimally invasive medical aesthetics market, with a strong track record of growth and innovation. The company’s focus on R&D has allowed it to introduce new products and expand its reach in key international markets, reducing dependence on the US market. InMode’s portfolio of intellectual property rights, including its key patents, provides a significant competitive advantage in an industry poised for continued growth in the coming years. With a solid balance sheet and ample cash flow, the company has several opportunities to create shareholder value, including share buybacks, dividends and strategic acquisitions. Overall, InMode’s impressive growth trajectory, combined with its competitive advantages and strong financial position, make it a compelling investment opportunity for those looking to capitalize on the growing demand for minimally invasive medical aesthetic procedures.

Risks

Regulatory Risks: InMode operates in a highly regulated industry, which exposes it to potential regulatory risks. Any changes in regulations or adverse regulatory decisions could have a negative impact on the company’s operations and financial results.

Competition: The market for medical aesthetics is highly competitive, and InMode faces intense competition from established players as well as new players. The emergence of new technologies and products may erode InMode’s market share and pricing, adversely affecting its financial results.

Supply Chain Risks: InMode relies on a complex supply chain to manufacture its products, and any supply chain disruptions or delays could adversely affect its operations and financial results. This includes risks related to the availability and cost of raw materials, as well as risks associated with the Company’s dependence on third-party suppliers and manufacturers.