Background
Butterfly (BFLY) is the former SPAC Longview Acquisition Corp (LGVW), founded by Glenview Capital's Larry Robbins. The company has developed a new ultrasound platform that uses a semiconductor rather than crystal-based sound waves which dramatically lowers the cost of the device and allows for greater flexibility with a single console. The merger vote was held February 12, 2021 and shares of BFLY began trading February 16, 2021, promptly reaching an intraday high of $29.13 on February 18, 2021. By May 13, 2021 when the company reported 1Q21 earnings, the stock had hit $11 with the earnings release and call driving the shares below $10.00. This was all in the absence of consensus estimates.
Thesis
We've come to appreciate the opportunity in front of Butterfly after speaking with several clinicians who use the device. The market is likely as large as BFLY claims, although adoption will take a considerable effort on their part to penetrate. While one clinician said every doctor could use a Butterfly "except for a psychiatrist" the learning curve is steep according to others, and requires an investment of clinician time to master. There are multiple competitors in the hand held ultrasound category, but according to conversations with clinicians, Butterfly is consistently the preferred device for its ease of use and portability.
Hand held ultrasound has been in the market for 25 years and remains a large an under-penetrated market. Key to our thesis is the high level of productivity the small Butterfly sales team, and the increase in revenue from its expansion. Butterfly doubled their sales team to 26 to start 2021, and based on their commentary, we're assuming they had 12 reps for much of 2020. In 1Q21 the company sold 5,013 units, or an average of 32 units per rep per week. When we run this new cohort of reps through a productivity curve, and continue to add small numbers of sales reps on a quarterly basis the ramp in revenue is substantial. 2021 guidance of $76-$80M appears reasonable with a path to $143M and $221M in 2022 and 2023 respectively, but the bigger opportunity is penetrating cart- based use cases and penetrating the pool of patients not using handheld ultrasound in their practice at all.
Valuation
Following the substantial price erosion, management announced on the earnings call that BFLY would double their current salesforce, while placing a larger emphasis on large healthcare system-wide implementations. Including the targeting health system enterprise sales. We're assuming an EV/Sales multiple range of 7.5x-20.0x, which at the midpoint, supports a forward price of $26 based on 2024 revenue of $321MM.
Catalysts
- App Downloads | We will be regularly updating app download data which offers some visibility into intra-quarter sales trends.
- Deal Announcements | We expect BFLY to close some sales to health systems or other large provider groups.
- Filed Notes | Continued checks with clinicians about adoption of Butterfly and competitive positioning.
Risks
- Reimbursement cuts for ultrasound | Cuts to reimbursement would be negative, although likely more so for higher end equipment.
- Longer than expected sales and adoption cycle | Butterfly has done a lot with a very small team and from the clinicians we've spoken to the adoption curve will take some effort.
- US Medical Economy downside | We believe in the near term that the medical utilization will go through a sustained period of elevated spending. We think this elevated spending will support increased capital spending as well. It is possible, however, that we are over-estimating the return of pent up demand and whatever post-COVID recovery has already peaked.
All data available upon request. Please reach out to with any inquiries.
Thomas Tobin
Managing Director
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