Description

Stereotaxis – STXS

Summary

Stereotaxis is a turnaround story that after a decade of decline is on the verge of 3 major inflection points in the next 12 months that could re-rate the stock materially, as it transitions from a decade of declining revenues to growing revenues this year – and accelerating to 50%+ revenue growth with a growing recurring revenue stream and expanding TAM.   

Market

Stereotaxis makes a robotic system for endovascular (and potentially other – endoluminal/neurovascular) procedures.  The current indication for the system is for the treatment of Arrhythmias (irregular or abnormal heart beats).  The standard of care in treating arrhythmias is to use ablation to disrupt the electrical impulses in the heart.  It is a very large and growing market – with over 1 million procedures globally, $5 billion market that grows over 10% a year and has several tailwinds.

·       Demographics- incidence increases with age – so as the population ages so will the incidence of arrhythmias

·       Diagnosis – we are diagnosing more arrhythmias with better technology- and now even wearable devices can diagnose it initially (including an Apple Watch)

·       Treatment – there is a movement to treating people earlier/sooner which is proving to have better outcomes

Untreated arrhythmias lead to a significant increase in the risk of stroke and heart failure – and is a significant risk of death.

Why Stereotaxis

Robotics have become a major technological trend in medical treatment over the last 20 years.  It has significantly accelerated as technologies have improved.  However, many of these technologies have not shown in large numbers of patients to be materially safer or more efficacious – yet the promise alone (and ability to market a robot to your patient population) – has driven significant adoption and investment in the field.  Stereotaxis, however, has been around for over a decade – has over 100 installations globally, over 100,000 procedures and shown to be (1) clearly safer (2) better outcomes (3) ability to do the most complex procedures (which often have the best reimbursement). 

This is well documented in peer-reviewed journals over an extended period of time.  For patients, it is clearly the best procedure out there – the robot has much more accuracy in guiding the catheter, avoiding perforations and delivering better outcomes.  For physicians, it is also a material benefit not to have to sit in the room with a live x-ray.  It is well documented that electrophysiologists unfortunately suffer from cataracts (50% of them get them) and increased risk of brain tumors.  Additionally – to do the more complex procedures they often wear lead aprons to protect from stray radiation causing about 50% of them to have orthopedic injuries (spine etc).  With the robot – you are guiding the catheter from a separate room outside of the radiation – allowing EPs to extend their careers.  Finally, hospitals can take on the most complex patients (with good reimbursement, and often other co-morbidities they can treat)

What happened?

Stereotaxis started successfully getting over 160 units out into the field over 10 years ago, unfortunately the previous management was only good at getting placements, but never drove utilization or developed important ancillary products to support usage.  This ended up mothballing units and generally viewing this as old technology.  The stock peaked at over $120/share and over $50 mill in revs.  Since then they almost went bankrupt and revenues steadily declined until bottoming last year at $27 mill.  Back in 2017 the new CEO came in and started the turnaround that is finally coming to fruition.  He was able to fix the capital structure, right-size the organization and focus on new product development.   The company now has $44 million in cash (they only burned $4 mill last year even though they only sold 2 systems, and utilization was down from COVID leading to the lowest revenue in over a decade).  He also introduced a fellowship program to train new MDs in robotics.  This has been very successful growing from 11 in 2019, 12 in 2020, 15 in 2021 and 30 currently enrolled.  This should help build a pipeline for sales as these graduates join hospital systems.

3 Legs of growth – shifting business model

The company is now poised to benefit from 3 major legs of growth all starting now:

·       The next generation robot (Genesis) was finally launched last year (in the middle of COVID!) – and has many material improvements over the Niobe system – including an integrated X-ray system, real-time responsiveness etc.  There are 100+ active units out in the field – that are all late in their lifecycle (10+ years) – and a replacement cycle alone should drive 10-12 units/yr if not more (with an ASP of $1.7 mill – this leads to $17-20 million alone.  However we believe the market is much bigger – we have already seen 3 new greenfields sold – and our channel checks the market is easily double – but could be 3-400 units globally.  Additionally they have just partnered in China with a major medical device company – due to inbound demand from the largest EP practice in the country.  They found the outcomes were materially better than manual and now want to adopt more units (they currently have 5 units in China – that could easily be an order of magnitude larger if they get even minimal penetration).  So we believe on going system revenue should get to $20-30 mill/yr and go higher from there (up from $3.5 last yr).  They will do $11 mill this yr and have guided to $22 million next year – so we are starting to see the traction already

·       Consummable/Service revenue shift – the company also gets (1) service contracts worth about 10% the value of the sale – so this will increase to $150-170k/unit vs. the previous $100k/unit as the new systems roll out (2) they continue to get about $1k/procedure from ancillary product used (3) most importantly – they currently get $300/procedure royalty for their catheter – this is about to change.  They will be getting approval for/launching their own catheter in EU (2022) and US (2023/4) – this will allow them to sell the catheter for $3,000 and get an 80% GM – so effectively and 8x on Gross profit per procedure.  That will shift the story from a pure capital placement to a disposable story (and will allow more creative financing tied to volume commitments etc.  We feel this is undermodeled by the street – both in terms of revenue and the value of the revenue which will clearly be recurring

·       New Markets – Robotics is generally a competitive arena – with orthopedics saturated by the major players – SYK (MAKO), ZBH (ROSA), Smith and Nephew etc.   The Laparoscopic arena dominated by ISRG – but hotly contested by many companies (JNJ, MDT, DEH, Memic, etc).  Yet in endovascular/neurovascular it is essentially just STXS and Corindus (acq’d by Siemens Healthineers in Aug, 2019 for $1.1 bill with virtually no data, placements or revenue).  STXS has said they are looking into both new products that are non-Arrhythmia related EP opportunities, and more importantly totally new indications.  On their last call they said they would discuss these in detail likely by end of year and launch new products next year.  This is most likely going to be neurovascular procedures – due to the ability of the magnetically pulled catheter to drive into very small areas with incredible precision and safety.  Introducing these products and discussing new applications should materially increase (double?) the TAM – and importantly these areas have virtually no competition.  We will see these products soon.

Recent performance/news

The company announced in Q4 call (in Feb) that they had sold 5 systems – which was particularly impressive since it included 3 greenfields, 1 in China and all occurred during the constraints of COVID.  Since then they announced only 2 more sales – which disappointed the street.  The q/q trajectory of units sold will be lumpy – especially early in the launch, however, they did guide to doubling of system revenue – which implies 12-14 units in the next 9 months essentially. 

CEO compensation

In February, the company also announced a new contract with the CEO.  He now will receive a salary of $60k (from having no salary) – and a long term incentive plan tied to shareholder value creation – essentially getting 1% of the company for every $500 mill in market cap added – capped at 10% of the company at a $5.5 bill valuation.  Needless to say he is aligned with shareholders, motivated and focused on creating shareholder value.

Valuation – M&A and comps

Currently we use 122 FD shares implying a market cap of just over $700 mill with $44 mill in cash or an EV of $665 mill.  Assuming just under $ 60 mill in revs next yr (growing >50% from this yr) and almost $100 mill in 2023 – that implies 11x sales – as they execute – we believe that this will grow 50% with revs at the same multiple but should garner a higher one – since it is rare to find medtech companies growing this rapidly.  In addition we believe the technology has inherent value –

·       M&A in robotics over the last several years for even new technologies has been at least $1.1 bill and as high as over $5 bill with earnouts.  Importantly that is for companies that were often unproven, de minimis revenues, limited data and almost no installed base

o   Siemens Healthineers acquired Corindus for $1.1 bill in Aug 2019 (<$20 mill in revs, limited data/installed base)

o   SYK acq’d Mako for $1.65 bill – not profitable – 15x revs Dec. 2013 (has been a big strategic winner for SYK as they can bundle their implants with he robot)

o   JNJ acquired Auris Health for $3.4 bill and $2.35 bill in contingent payments April, 2019

o   MDT acq’d Mazor robotics for $1.7 billion in Dec. 2018

·       Current valuations

o   Memic – public through a SPAC worth $1 bill

o   DEH – Vicarious Surgical $1.1 bill valuation

o   PRCT – IPO now worth almost $2 bill – yet has only one application – and rev trajectory almost identical to what we have for STXS

Risks

·       The single biggest risk near term is lumpiness of new system sales.  Any quarter can be lumpy – but that should diminish over time as consumable sales increase and the base of units being sold go up so the volatility goes down

·       Execution on pipeline technology

·       Competing technologies (e.g., new energy sources for ablation)

Catalyst

Catalysts

·       Hitting numbers – and revenue estimates for 2022 going up

·       New units sold

·       Catheter launch in EU

·       New indications/products being announced and launched starting in December