By Brian Marckx, CFA
READ THE FULL MYOS RESEARCH REPORT
Q3 2018 Update: MYOS Canine Initial Sales and Add’l Distribution. Yolked Feedback Positive. Medical Nutrition Could Be Compelling Growth Opportunity…
MYOS RENS Technology Inc (MYOS) reported Q3’18 financial results and provided a business update. Relative to the financials, while revenue remains insignificant and has trended somewhat more moderate than our estimates, we continue to like near- and long-term growth fundamentals. We see several catalysts that we expect to come online, or as it relates to certain ongoing efforts, building more substantive momentum that we think have the potential to steepen the revenue growth rate over the next two to three quarters.
Near-term catalysts include expanded availability of both MYOS Canine, including through Miller Veterinary Supply East, Amazon.com (where it is designated an “Amazon’s Choice product) and MYOS’ own dedicated website, as well as Yolked, which is expected to soon be available to the general public (in addition to a growing list of universities). Recently secured CMS reimbursement for MYOS Enteral Nutrition Formula represents another potential immediate-to-near term revenue tailwind.
Meanwhile, data from ongoing and expected future pre-clinical and clinical studies continues to be what we think could catalyze sales over the long-term. While anticipated read-out of certain of the ongoing studies has been pushed back a bit, with management now guiding for availability of three study data sets before mid-2019, the wait should not be much longer. Leading with an evidence-based approach is clearly a focus for the company and, assuming positive results, we would expect MYOS will leverage the data to further enhance their marketing message. This would also further delineate their products from the nutritional supplement space – a general category of which they may be (unfairly) characterized under today.
Product line expansion and diversification into other end-markets could provide even more opportunities for growth. While MYOS Canine Muscle Formula is their first foray into the pet health market, additional products could follow – the ongoing Kansas State study should be informative as to product development related decision-making in pet health. MYOS’ Enteral Nutrition Formula is also a first-in-category product for the company – while this represents their initial entry into the medical nutrition space, it may not be their last. In fact, management noted on the Q3 call that they expect to explore additional opportunities in this market – which is one that we think could be particularly attractive given potential for insurance reimbursement.
Q3 revenue of $66k was down 59% yoy and 25% lower than Q2 of this year. While nothing to get too excited about and nearly 50% less than our $130k estimate, it did include somewhat of a milestone of sorts – that is, initial sales of MYOS Canine Muscle Formula, which generated $8k in the quarter. This follows initial sales of MYOS’ NSF-certified Yolked product, which made its initial revenue contribution ($15k) in Q2 and generated another $13k in Q3.
Meanwhile, revenue from Qurr, MYOS' consumer-focused Fortetropin-based products (puddings, powders and shakes) which launched in April 2017, was $40k and $153k in the three and nine months ending June 30, 2018. While Qurr continues to be the majority contributor to the company's top-line, accounting for more than 70% of total revenue through the first nine months of the year, its proportional contribution will likely moderate as MYOS' new products gain traction.
Yolked continues to be well-received with management again noting on the earnings call that the product is receiving positive feedback from both IMG and the universities themselves. As a reminder, Yolked was launched in April of this year and has been detailed to collegiate athletic programs through their strategic partnership with IMG College. Initially, the IMG agreement covers nine Division I colleges (in the NE). Many of the initial schools that they have worked with began a four-month program in July – while others started in the Fall. While MYOS has not reported on repeat-order flow, we may know more after these other schools have had a chance to provide feedback. Nonetheless, the anecdotal response has apparently been as-hoped. And a consumer-oriented launch could be imminent with management indicating that they expect to introduce Yolked to the general public before current year-end.
MYOS Canine Muscle Formula, their first Fortetropin-based supplement for dogs launched in June. MYOS has wasted no time in generating early awareness of the product and in expanding their sales reach. MYOS Canine was featured at the Atlantic Coast Veterinary Conference in Atlantic City, NJ in October. In terms of distribution-reach, upon launch the product had its own website and became available on Amazon.com. Then, in November MYOS announced that Miller Veterinary Supply East, which (per their website) provides “licensed veterinarians the equipment, instruments, pet food, pharmaceuticals and supplies needed to run their practices”, will carry MYOS Canine and afford it access to more than 6,000 veterinary hospitals in the eastern U.S.
MYOS Canine is believed to be the first and only evidence-based supplement for supporting muscle health in dogs. MYOS has noted that initial observational studies (including two done at veterinarian hospitals) indicated that their Fortetropin-based supplement may improve mobility. While anecdotal, coupled with positive results of prior studies and potentially positive results of the ongoing KSU study (which is assessing the impact of Fortetropin on reducing muscle loss in dogs that have undergone surgery after ligament tear), the database of evidence could eventually prove compelling.
There is no denying the attractiveness of the domestic pet market. The U.S. pet supplements market is worth approximately $600M and growing rapidly. MYOS has indicated that they expect to leverage the massive growth of the pet-health market. While MYOS Canine Muscle Formula is their first commercial foray into the market, it is not expected to be their last as their intention is to bring additional Fortetropin-based pet products to market. Current customer call-points include veterinarian hospitals, vet practices and direct-to-consumer. The product generated initial revenue of $8k in Q3. Revenue could gain additional traction from the new distribution via Miller East, which came online in Q4, as well as from increased awareness as a result of exhibiting at Atlantic Coast Vet conference.
Management previously mentioned that they had begun to add some personnel as they refine and build out their commercialization strategy. Recent additions include a brand manager and three sales/marketing-focused hires. Importantly, management's message as it relates to sales, messaging and product development is that they are firm believers in leading with an evidence-based approach - and that commitment is apparent given the number of studies that are ongoing and more that are expected to come online.
Relative to their quest to build on the evidence of Fortetropin’s benefits in a variety of conditions (in both humans and pets), MYOS continues to make headway in their various ongoing studies. As a reminder, over the last ~two years MYOS contracted with four universities to conduct as many studies of Fortetropin in different indications. Three of the four research agreements were entered into since December 2017, including a randomized, controlled clinical study with University of Berkeley. While timelines of some of the programs have slipped a little from prior expectations, importantly all remain active and progressing.
- The study at the University of Berkeley aims to understand the impact of Fortetropin on the rate at which new muscle is synthesized in men and women between 60 and 75 years of age. Positive results from the study could help bolster sales of MYOS’ product in the future. MYOS anticipates the study completing in Q2 of next year.
- The most recent research collaboration came in May when MYOS contracted with Weill Cornell Medical College for a preclinical study that will evaluate Fortetropin in preventing weight and muscle loss associated with lung cancer. Current expectations are that the study will conclude and results will be announced in late Q2 2019.
- In March 2018 MYOS entered into a research agreement with Rutgers University to develop product candidates for preventing muscle loss (resulting from sarcopenia and cachexia) and improving muscle health. The program is led by Joseph W. Freeman, Ph.D., an Associate Professor in the Department of Biomedical Engineering at Rutgers. Dr. Freeman is also part of the University's Musculoskeletal Tissue Regeneration (MoTR) laboratory which focuses on developing engineering techniques to repair and regenerate musculoskeletal tissue. As of the Q2 call (August 2018) management’s guidance was for patient screening to begin shortly and, assuming all went well, for initial data to be available sometime in 2019. Updated guidance was not offered on the Q3 call.
- In April 2017, MYOS initiated a study at Kansas State University, College of Veterinary Medicine, to assess the impact of Fortetropin on reducing muscle loss in dogs that have undergone surgery after ligament tear. Management noted on the Q2 call that enrollment had completed and mentioned on the Q3 call that initial could be available late in Q1’19. Positive results should not only help to confirm the efficacy of Fortetropin on muscle health in dogs (and enhance myospet’s current marketing message), but also support additional testing in both animals (for pet-related commercial applications) and humans – including potentially a human study in subjects recovering from musculoskeletal surgeries.
MYOS continues successfully raise operating funds on favorable terms, including $1.2M in Q2 from the sale of common stock (~$180k via the ATM program and $1M through the sale of 806k shares (@$1.24/share) through a private placement in April – two MYOS Directors participated). Most recently, Joe Mannello (MYOS’ CEO) agreed to lend up to $1M in exchange for a 5%, one-year (matures 8/31/19) unsecured promissory note ($750k funded as of Sept 26th, with the remaining $250k expected to be drawn in November).
The fact that management continues to provide significant funding (including unsecured debt at a lending rate that is undoubtedly well-below relative risk fixed-income market rates), is certainly a vote of confidence of the growth opportunity for their products. MYOS exited Q3 with $459k in cash.
Maintaining $3.50/Share Price Target…
We have made adjustments to our model following Q3 results. We continue to look for gradual revenue growth over the near term but for that to accelerate as awareness builds of the clinical and real-life benefits of Fortetropin on muscle health (in both humans and pets). MYOS Canine Muscle Formula provides an additional revenue source, which we think similarly will take some time to generate awareness around. The Enteral Nutrition Formula product is a potentially compelling entry into the medical nutrition market. With reimbursement in place we will be particularly interested to see how this product performs – as ‘success’ could be a harbinger for a greater development focus on this space.
We continue to be highly encouraged by management’s evidence-based approach towards messaging and product development and, assuming positive results from ongoing (and future) studies, would expect this strategy to result in long-term growth in both revenue and shareholder value.
We incorporate a discount rate of 15% and 2% terminal growth rate. We value MYOS at approximately $3.50/share.
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