08 May Paragon 28: “Walking” the Road to Profitability
Paragon 28, Inc. (NYSE: FNA) is a leading medical device company exclusively focused on the foot and ankle orthopedic market. The Company designs products with the patient and surgeon in mind to improve outcomes, reduce ailment recurrence and complication rates, and make the procedures simpler, consistent, and reproducible.
Paragon 28, Inc. (NYSE: FNA)
Market Cap: $873.00M; Current Share Price: 10.53 USD
Data by YCharts
The Company and its Products
Paragon has developed a comprehensive portfolio of foot and ankle surgical systems and procedural techniques designed to address many of the conditions requiring surgery in the foot and ankle, including fracture fixation; forefoot; ankle; PCFD or flatfoot; charcot foot; and orthobiologics.
Each system typically includes numerous plates, screws, staples, nails, advanced joint and bone replacements, orthobiologics, and other implantation instruments and disposables. Except for Paragon’s total talus spacer, which is authorized for marketing under a Humanitarian Device Exemption (HDE), its marketed products are Class II medical devices cleared by the U.S. Food and Drug Administration (FDA) for specific indications, or they are Class I exempt for general orthopedic use. The Company has no products that are Class III medical devices.
Below, we will discuss the critical rationale for covering this Company.
- Large Growing Market with Unmet Needs
The global market for implants and devices used in foot and ankle procedures is projected to grow at approximately 7% annually to reach $6.9 billion by 2028, representing the fastest-growing market within orthopedics. The United States remains the largest market for foot and ankle procedures and is Paragon’s largest market for product sales.
Image Source: Company
The foot and ankle market could accelerate with technological advancements and an increased focus on and specialization in foot and ankle ailments. The Company also expects the foot and ankle market to benefit from general trends, including an aging population, increased incidence of obesity and diabetes, and the broader patient population’s desire to pursue a more active lifestyle.
Overall, the global foot and ankle market is a fast-growing market with several key differentiators, including highly complex anatomy, generally active and younger populations, significant opportunity for innovation to drive improved outcomes, and well over 100 indications with a wide variety of causes (activity-based, trauma, genetic predisposition, etc.).
Paragon’s market consists of medical devices and implants used across approximately six core sub-categories and conditions, including fracture fixation, forefoot, ankle, PCFD or flatfoot, charcot foot, and orthobiologics, with varying levels of penetration across multiple providers. Additionally, the market comprises soft tissue, sports medicine, orthobiologics, and analytical solutions across each sub-category.
There is significant opportunity for further expansion and penetration across a broad subset of indications within the foot and ankle due to current products delivering suboptimal patient outcomes, partly driven by a lack of anatomically specific technology and defined techniques. Also, there has been a lack of innovation required to drive better clinical outcomes and surgeon experiences. New technologies driven by meaningful research, data analytics, and AI will result in higher procedural success rates, which may prompt increased procedure volume.
Paragon is well positioned to benefit from the ongoing market dynamics for several reasons, including its well-balanced portfolio effectively spanning each sub-segment, year-to-date growth across all sub-segments, the substantial opportunity to expand its footprint in U.S. and International markets, and a long runway for growth in existing and new international markets.
- Strong Product Launch Cadence and Pipeline
Paragon has a dedicated team of design and development engineers who have embodied its research philosophy to drive continual innovation. Its system of collaboration allows it to harness and rapidly respond to customer feedback to develop new concepts and product iterations.
The foregoing has helped Paragon expand its portfolio quickly and consistently, having launched nearly 80 product lines since 2011, including four product lines launched in 2023. The Company currently has more than 30 product and system offerings in its development pipeline and expects the majority to launch commercially in the next 24 months.
Image Source: Company
Specifically, Paragon expects around 5-10 launches in the next three years, while the 1st Smart28 Module is planned for mid-2024.
Paragon has also enhanced its offerings through licensing agreements and tuck-in acquisitions, such as its recent Additive Orthopaedics and Disior Oy acquisitions.
- Recent Financial Performance
For Q4 FY23, consolidated net revenue was $60.6 million, representing 17.6% and 17.3% reported and constant currency growth, respectively, compared to Q4 FY22. Consolidated net revenue for FY23 was $216.4 million, representing 19.3% and 19.7% reported and constant currency growth, respectively, compared to FY22.
Gross profit margin was 74.5% for Q4 FY23 compared to 81.5% in Q4 FY22. Gross profit margin was 79.9% for FY23, compared to 82.1% for FY22.
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Adjusted EBITDA for Q4 FY23, negatively impacted by the $4.0 million of inventory write-downs, was a $4.4 million loss compared to a $1.5 million loss in Q4 FY22. Adjusted EBITDA for FY23, negatively impacted by the $4.0 million of inventory write-downs during Q4 FY23, was a $9.7 million loss compared to a $10.7 million loss for FY22.
The net loss was $19.6 million in Q4 FY23, compared to $38.8 million in Q4 FY22. The net loss was $47.8 million in FY23, compared to $67.3 million in FY22.
Going ahead, Q1 FY24 is expected to be the lowest quarterly year-over-year growth percentage as Q1 FY23 was the highest growth quarter of FY23 (27% constant currency), and Q1 FY24 has one fewer billing day. The Company expects quarterly growth rates for the rest of the year to be higher than Q1 FY24, given the dynamics of year-over-year growth rate comparisons and the timing of 2024 new product launches.
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Overall, Paragon expects FY24 net revenue to be $249 million to $259 million, representing 15.1% and 19.7% reported growth compared to FY23.
Risks
Paragon is exposed to certain risks despite all the positive indications discussed above. First, Paragon’s success is dependent on the broad adoption of its products by hospitals, physicians, and patients. Any failure of the Company’s products to satisfy demand or to achieve meaningful market acceptance and penetration will harm its future prospects and have a material adverse effect on its business, financial condition, and results of operations.
Secondly, Paragon operates in a very competitive business environment, and if it cannot successfully compete against existing or potential competitors, its business, financial condition, and results of operations may be adversely affected.
Thirdly, industry trends have increased downward pricing pressure on medical services and products, which may affect Paragon’s ability to sell its products at prices necessary to support its current business strategy.
Conclusion
Paragon seems to have a promising future. It operates in a large market with unmet medical needs and has a strong product pipeline that may help grow revenues exponentially. Nevertheless, the Company’s success is dependent on factors such as the broad adoption of its products by the industry and its ability to outperform competitors. Hence, investors must proceed with caution.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
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Reference:
https://www.sec.gov/ix?doc=/Archives/edgar/data/1531978/000095017023061109/fna-20230930.htm
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