Outset Medical Update
My thoughts on the Monday announcement
I have spent far too much time speculating on Outset Medical (OM). In the grand scheme of things this is not really an important company. It was overhyped from the start and followed a well worn path, which is more or less:
Create a unique and interesting device that serves an unmet need
Hype the hell out of it and talk about the massive TAM/SAM you have in front of you
Hire a private equity type CEO and go public
Show some initial growth as you convert the low hanging fruit customers
Stock goes up and management sells their shares
CFO resigns, sales disappoint, layoffs, sales realignment
Issue high cost debt with a BDC
More disappointment, etc.
Dilute the hell out of equity holders
Start over
The thing I have come to realize is that capitalism is really not as ruthless as people think. A company that can show some sales (along with a little hype), can persist for a long time, living off high interest debt from BDCs and dilutive equity from investment firms. And with a company like OM where management doesn’t have much of an ownership stake, you can see the principle/agent problem in play. Why not dilute equity holders after all? Live to play another day. That’s another couple years of salary and board of director salaries. Just follow the incentives as they say…
When I saw the announcement, I decided to sell most of my shares. These are my high level takeaways:
My sense is OM management realized they could not grow/cut their way to profitability, so they probably saw a year or so of cash runway and then it would be game over. I can imagine a situation where the auditors might have been asking questions about going concern and management had to take action.
As an aside, I think it is important to mention what the company could have done. Did they approach their debtors, SLR Capital, to even try to restructure their debt? Remember when Carvana was able to restructure their debt and equity holders still made out well? Do you think SLR would want to run an unprofitable medical device company?
I think a part of it may have been that customers would have been hesitant to deal with a company like Outset Medical if bankruptcy could have been a possibility. I sort of get it. A customer is committing to buying the equipment and disposables over a number of years and they need some assurance the company will be around.
The blue sky scenario is probably off the table for investors. If you bought the stock anytime prior to August 2024 you are probably SOL. The share count is going to explode to about 270 million shares + $100 million in debt versus 50 million shares and about ($25 million) net debt (200 million in debt versus about $175 million cash give or take). So the leverage for equity holders is pretty much gone. For example, if OM goes to $10/share today, this is a $500 million company. After this deal goes through, it would be a $2.7 billion company. The valuation won’t make sense and you’ll always have the overhang of sellers.
So now management is buying into this new deal at an effective price of about $.64 a share. This is the tell. Equity holders are now bagholders.
Not much else to say. I do still have a position, but I will probably sell it over time.
Long OM.