Embla Medical: Positive Medicare coverage expansion - ABG

- Medicare expands lower-limb prosthetics coverage from 1 Sep
- Good news for patients and Embla Medical
- P&L implications unclear, but looks to be meaningful growth contributor

Final CMS rule very similar to the draft proposal
The CMS (Center for Medicare & Medicaid Services) has announced the final outcome of the previously proposed expansion of coverage of microprocessor controlled lower limb prostheses. The final outcome looks to only have smaller changes versus the draft proposal and has been announced to be active already from 1 September 2024.

Proposed LCD - Lower Limb Prostheses (DL33787) (cms.gov)

Background and implications
Today there are some 180k lower-limb amputations annually in the US, with the Medicare covering ~30% of these amputations. The amputees are segmented into activity levels 1 through 4, with K1's having very lmited mobility and therefor in little need of very advanced prosthetics. In contrast are K4's highly active and are e.g. athletes, active adults or children. The CMS ruling sees K2 patients also be covered for microprocessore controlled prosthetics. We believe the market is currently split 50/50 in terms of K1/2 vs K3/4 patients but with upwards of 90% of the total value being captured by K3/4's, showing of the positive value uplift implications of the expanded coverage. A cautious assesment could see the coverage expansion at least double the market. Embla garnered USD 398m in Prosthetics revenues in 2023, with ~25% of this being Bionics and half generated in the US.

Yet unclear implications, but this is positive news
There remains yet many questions to be answered including what type of products may be favoured, the speed at which this is adapted, and whether this will be rolled out to only the most active of the K2 patients. However, we notice that this decision alone may double the current US bionics business, and adding $50m over 5 years could add +1%-point to group annual organic revenue growth. In addition do we believe this extra business should carry positive margin leverage and make Embla an even more attractive partner for US clinics as it is one of very few credible bionics manufacturers. We make no changes to estimates owing to the yet low visibility on estimates.

Embla reports Q2 on Tuesday 23 July where we expect to learn more about how this decision may impact Embla.

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