(Editors' Note: This article covers a micro-cap stock. Please be aware of the risks associated with these stocks.)
There have been a lot of positive comments lately about Bovie Medical Corporation's (BVX) J-Plasma technology. Physicians have praised J-Plasma's efficacy across a wide range of surgical applications. At Bovie's Annual Shareholder Meeting held on July 16th, Dr. Royce T. (Terry) Adkins gave a talk on his experiences with J-Plasma, describing it in glowing terms. The company's largest shareholder has been increasing the size of his position and expects Bovie to become an acquisition candidate. Bovie management has consistently spoken of J-Plasma's future in rosy terms; for example, Bovie President Robert Saron has said "it has the potential to change our company."
Bovie announced beta testing in July 2012 and initial orders for J-Plasma in October 2012. However, a review of Bovie's most recent quarterly results (Q1 2013) results shows the actual value of J-Plasma sales has been minimal.
This seems very incongruous. What gives?
A review of the evidence suggests J-Plasma has not yet been truly launched as a commercial product. Although J-Plasma commercialization has nominally begun and some units sold, it appears that Bovie Medical's current J-Plasma focus is on marketing -- including building a solid track record of clinical results -- in preparation for the de facto product launch.
A common market entry strategy among medical product companies is to accumulate a strong set of performance data and present it at a major medical conference with the intent of gaining the attention of many target customers all at once and hopefully generating a lot of buzz among them. Available evidence suggests that this is indeed Bovie Medical's strategy for J-Plasma.
This article presents evidence that J-Plasma's de facto product launch is yet to come, looks at what current events tell us about the product launch, identifies a candidate launch event, reviews the progress of J-Plasma, and examines the implications of all of the preceding on the timing and magnitude of J-Plasma sales, along with commenting on how this may affect the share price.
J-Plasma Commercially Launched (But Not Really)
The May 15, 2013 Bovie press release on Q1 earnings made the statement that "increased costs associated with the development and marketing of the Company's J-Plasma® technology" were an important contributing factor in the drop in quarterly earnings. Conspicuously absent is any reference to sales. In business, marketing usually refers to the process of promoting a company's product to would-be customers. This can include, for example, customer and market research, product development, creating commercialization plans, selecting and implementing distribution channels, and product promotion. Sales is the actual selling of products to the customer and is typically a separate (but related) business function. The wording of Bovie's press release suggests the company is currently focused on marketing and the major sales effort has not yet begun.
The same press release also includes the following statement:
Additionally, we are receiving valuable input from surgeons resulting in ergonomic design modifications to the J-Plasma® hand piece, while incorporating system improvements which will benefit manufacturing processes and profit margins.
"Ergonomic design modifications" and "system improvements" are suggestive of late-stage product development and optimization that could be -- at a minimum -- at least partly classified under marketing. This kind of product design optimization is consistent with the idea that most existing J-Plasma users are beta testers, intended to provide feedback for device improvement and generate a body of clinical data in preparation for the true product launch.
The Bovie Medical/Aaron Product Catalog (as downloaded on 7/20/2013) includes Electrosurgery, Cauteries, Lights, Opthalmic Products, and Nerve Locators -- in other words, very nearly the entire Bovie/Aaron product range EXCEPT for J-Plasma. (Bovie sells a small number of generators that aren't included in the product catalog.) The Bovie website includes a list of manufacturers' reps for customers to contact if they wish to purchase products listed in the catalog (the webpage specifically identifies them as representatives for the Bovie Aaron product line, i.e., not J-Plasma). Alternatively, customers can purchase products through distributors such as AOSS Medical Supply.
In a previous Seeking Alpha article, this author documented how Bovie has made it clear that it intends to use a second, parallel sales force for J-Plasma separate from its existing sales force. So if one wanted to purchase J-Plasma products, whom should one contact? As of right now (the morning of 7/22/2013) there is no list of J-Plasma sales reps on the Bovie Medical website. Neither is there such a list on the J-Plasma site. The J-Plasma site includes a link to a registration page. Will registering on the site provide access to a list of sales representatives? No such luck (see picture below). How about a distributor that carries J-Plasma products? This author has yet to find one.
In a February 1, 2013 Tampa Bay Business Journal article -- published almost four months to the day after Bovie announced initial orders for J-Plasma -- we are informed that "Rob Saron… will not talk in any detail about Bovie Medical Corp.'s electro-surgical technology because of keen competition." The reporter was forced to write mostly about Intezyne due to the tight-lipped approach of Bovie management. Although it's understandable that the company wouldn't want to say much about new products under development, wouldn't management want to take the opportunity to talk about products they've recently introduced into the marketplace?
This hardly looks like a company that is trying hard to sell its new product, especially when management has said the product could literally change the face of the company. What, then, is going on?
Current Efforts and the Real Launch Strategy
Rather than being focused on sales, current J-Plasma efforts are directed towards true J-Plasma launch. Evidently the plan is to quietly prepare for the launch, make a big splash at launch time, and then quickly ramp sales in the aftermath.
In the most recent Bovie Annual Report (10K), it is mentioned several times that "we maintain close working relationships with physicians and medical personnel in hospitals and universities who assist in product research and areas of development." The May 15, 2013 press release included the following:
As previously reported, teaching courses for surgeons and sales representatives continue to generate strong surgeon interest from participants. Courses have been scheduled monthly in both Las Vegas and Nashville through September of this year. The location of these courses allows for surgeons in the eastern U.S. and western U.S. to have access to a teaching facility where they can increase their skills and knowledge of J-Plasma®. Interest in J-Plasma® remains high and clinical outcomes have been impressive enough for surgeons to document their findings in papers…
We were recently informed that a video and paper on J-Plasma® has been submitted by a prominent surgeon to one of the most prestigious GYN conferences in the world. If accepted, J-Plasma® will be presented which should give J-Plasma® worldwide credibility. In addition, several other papers are being developed by a GYN oncologist, a plastic surgeon and infertility surgeons including GYN surgeons.
This language is entirely consistent with an approach of focusing on physicians involved in medical research who will use J-Plasma in different procedures and then document the results in submissions to medical journals and conferences. Holding monthly courses on J-Plasma in multiple locations throughout the US is one way to quickly bring a number of research-oriented physicians up to speed on how to use the J-Plasma, over time leading to a number of journal articles and presentations at conferences, helping to bring J-Plasma to the attention of the broader medical community. The disclosure that "a video and paper on J-Plasma® has been submitted by a prominent surgeon to one of the most prestigious GYN conferences in the world" may be a hint that this specific event will signal the both the start of a flow of J-Plasma clinical data and the true product launch date of J-Plasma.
Statements from the 10K and May 15, 2013 press release could also explain how and why reported J-Plasma sales figures don't seem to correspond very well to the actual number of J-Plasma users (as judged from Bovie press releases). One simple (and likely) answer is that since the physicians doing research in applying J-Plasma to different medical procedures are working cooperatively with Bovie (per the 10K, "we maintain close working relationships with physicians and medical personnel in hospitals and universities who assist in product research and areas of development"), it would be entirely natural for Bovie to lend (rather than sell) J-Plasma systems to them when such systems are to be used for research that is expected to be beneficial to future Bovie J-Plasma sales. Bovie is also "receiving valuable input from surgeons resulting in ergonomic design modifications to the J-Plasma® hand piece, while incorporating system improvements which will benefit manufacturing processes and profit margins," further strengthening its incentive to lend J-Plasma systems to cooperating research physicians.
A possible objection is that J-Plasma sales have reportedly come in below expectations, with Bovie's May 15, 2013 press release stating:
There is a difficult process, however, to receiving hospital purchasing committee approval, in order to affect [sic] a sale, since hospitals require a two committee approach, of first giving consent to use the product on patients, followed by further approval from a purchasing committee. This has contributed to delays in accomplishing our initial sales goals. The delays are more extensive than in prior years and have impacted other companies as well. The success of J-Plasma® surgeon evaluations portend that committee approvals should be forthcoming, resulting in future sales.
One possible explanation is as follows. Bovie could have been expecting to sell loaned J-Plasma systems to hospitals following a certain amount of initial use or additional systems beyond a loaned one. It would not be especially surprising for hospital committees to want to wait until the redesigned J-Plasma system is released or to see results from other research physicians in addition to their own internal research before approving a purchase. This would easily account for delays in initial sales goals. Note that the press release does not provide any guidance as to the sales levels that had been expected, so there is no reason sales goals could not have been very modest and yet have actual sales numbers fall short of the goal.
Two other items related to the May 15 press release are worth mentioning at this time. First, the statement that "teaching courses for surgeons and sales representatives continue to generate strong surgeon interest from participants" suggests J-Plasma sales reps are attending the same courses as physicians. An advantage is that seeing "strong surgeon interest from participants" will help excite and encourage the sales reps, presumably increasing their effectiveness at selling J-Plasma in the aftermath of its true launch. Second, with the apparent focus on generating J-Plasma results across a range of surgical procedures and reporting these results in the medical literature, we can expect to see a wave of papers and presentations appear in journals and at conferences. The arrival of this wave -- rather than a long dribbling out of information over time -- will help generate awareness of, and interest in, J-Plasma among the medical community. With the average lag time between the conclusion of research and its actual publication in a scientific or medical journal being measured in months, a reasonable estimate is that this wave will begin to arrive late this year and stretch into next year.
In the Seeking Alpha article referenced earlier ("Bovie Medical And The Point of Value Recognition," written by this author), Mr. Jeff Rencher, Bovie's Vice President of Sales and Marketing, is quoted as stating the planned J-Plasma sales force of 120 independent sales reps selling to hospitals and surgery centers (and presumably also the 50 selling to distributors) will be in place in six months' time; in other words, November of this year. (Of course, this doesn't preclude the sales force being in place earlier than this.) If Bovie's plan is to have all the sales reps in place when the true J-Plasma launch comes, then this gives us a general idea of the timing of the launch, with the second half of this fall and this winter being the time of highest probability. (Since the sales reps are independent and already selling other products, they are self-supporting and do not need to begin selling J-Plasma as soon as they are brought on board, thus giving flexibility to the product launch time. The caveat is that waiting too long after assembling the sales force may cause disenchantment and personnel attrition, placing a practical limit on the time between completing this and launching the product.)
A summary of Bovie's apparent J-Plasma launch strategy is as follows:
- Recruit well-known, respected physicians and medical personnel as J-Plasma beta testers.
- Work with the above persons to generate impressive clinical data for publication and presentation to physicians and key purchasing decision makers.
- Make final engineering improvements to the J-Plasma system based on feedback from the initial users.
- Complete the assembly of the J-Plasma sales force.
- Undertake the true product launch in conjunction with reporting of impressive J-Plasma clinical data at a major medical conference, helping generate buzz among attendees.
- Have the J-Plasma sales force make a big push in the immediate aftermath of the product launch.
- Promptly follow up with more J-Plasma clinical data spanning a range of surgical procedures.
A Candidate Launch Event
The American Association of Gynecologic Laparoscopists (AAGL) will hold its 42nd Global Congress on Minimally Invasive Gynecology on November 10-14, 2013 in Washington, D.C. The number of attendees will likely be around 3,000, with many coming from other countries. This conference meets the criteria the Bovie press release referred to: "one of the most prestigious GYN conferences in the world… If accepted, J-Plasma® will be presented which should give J-Plasma® worldwide credibility." Coming in mid-fall, the conference is also within the highest probability time window for a J-Plasma launch.
While the AAGL 42nd Global Congress may meet the probable criteria we have laid out for a J-Plasma launch event, are there specific reasons to believe this conference is a strong candidate for the launch event? As a matter of fact, yes there are.
The Preliminary Program for the AAGL 42nd Global Congress is now available online. On page 44 we find a full-page ad for the J-Plasma system (see the first picture below). Bovie appears in the list of industry sponsors on page 54 (see the second picture below -- note that the red oval was added by this author to aid the reader). It seems rather unlikely that Bovie would be spending money on full page advertisements and conference sponsorship if the company did not expect the true J-Plasma launch event to happen during or before the conference.
Bovie's strategy of putting J-Plasma units in the hands of research-oriented surgeons across a variety of disciplines is beginning to bear fruit. The May 15 press release stated that "several other papers are being developed by a GYN oncologist, a plastic surgeon and infertility surgeons including GYN surgeons." A plastic surgeon was reported as describing J-Plasma as a possible "game changer" in plastic surgery.
Dr. Royce T. (Terry) Adkins, addressing the recent ASM, had this to say:
In 25 years as a surgeon, I have not previously had the ability to use such a safe product that not only gives me precise tissue dissection with the ability to coagulate safely near delicate tissues and other vital structures. Multiple colleagues have duplicated my experience and often say, 'Why didn't I think of this?' Often in surgery, surgeons may have the opportunity to utilize new and revolutionary tools. Unfortunately, the majority of these innovations frequently come with the significant disadvantage of adding cost to an already overwhelmed healthcare system. Compared to many of the tools surgeons previously have utilized, J-Plasma® outperforms many while providing an actual cost savings of several magnitudes to healthcare delivery systems who increasingly have either fixed or lower reimbursement for the majority of the care they provide our patients.
The unique physical qualities of a helium based gas plasma, used in J-Plasma®, may now possibly give us even better results in multiple applications due to the 'cooling effect' specifically on the tissue itself when compared to the heat produced by conventional electrosurgery and laser technology. In other words, a cool drink of water will basically not lead to the same degree of potential thermal tissue damage as compared to a boiling cup of coffee!
Dr. Adkins is a strong candidate for being the "prominent surgeon" who submitted "a video and paper" to "one of the most prestigious GYN conferences in the world." His praise of both the performance and price of J-Plasma should come as an encouragement to Bovie shareholders.
Bovie's May 15 press release reported:
J. Robert Saron, Bovie's President stated, "With increased surgeon sentiment supporting the application of J-Plasma® in multiple surgical specialties, the Company is reviewing a program to enter new markets; thus, taking further advantage of J-Plasma's® revenue potential."
The most recent of this author's previous articles on Bovie stated that J-Plasma would likely be useful in a wide range of medical applications, quite possibly including treating cancer and preventing MRSA infections during surgery. Bovie's original target market for J-Plasma was in the OBYGN area, to be followed in time by other areas. Mr. Saron's comment strongly implies that results in other areas have been so positive that the company is considering moving into other markets much more promptly than originally planned. Again, this is encouraging news for shareholders.
Implications for Sales and Share Price
As the de facto J-Plasma product launch and large-scale sales effort most likely won't happen until November, sales of J-Plasma surgical devices should stay subdued until then. The good news is that J-Plasma is very cost-competitive; surgeons who have used it report excellent results; once product launch does occur, a flurry of very positive clinical data should start appearing in medical journals and conferences, contributing to product awareness and acceptance on the part of the target market; and results to date are sufficiently encouraging that Bovie is considering expanding into other surgical markets besides OBGYN rather more quickly than originally planned.
In a previous article by this author, an analysis of the planned near-term (six months out) size of Bovie's J-Plasma sales force and estimated average sales per rep suggested the company anticipates J-Plasma sales reaching an annualized run rate of approximately $150M per year at some point during 2014, for a total annualized company revenue of $175M per year. This author also made the case that these figures should easily support a $22 share price, with $30/share being very justifiable based on the company's growth rate. (Note that Bovie Medical is developing additional technologies and products and these figures do not include any value these other items may bring. Also, they do not include any allowance for possible prevention of MRSA infections or other advanced capabilities, some of which are discussed in this author's most recent article on Bovie.)
If Bovie does enter other markets besides OBGYN faster than the company originally planned and is successful in gaining significant market share, revenue and share price should both perform substantially better than the figures quoted above. The very positive surgeon response to J-Plasma reported in Bovie press releases and the apparently substantial forthcoming wave of publications in medical journals and presentations at medical conferences should do be very beneficial in raising awareness and acceptance of J-Plasma among the medical community. This is important because industry self-education is effectively a form of marketing and will act to reduce the marketing burden on Bovie, increasing the number of surgical markets the company can enter given a limited marketing budget.
One effect of the "Great Recession" has been to slow down hospital capital equipment purchasing cycles, with greater scrutiny given to purchases. Over the long run this shouldn't have much of an impact on J-Plasma sales. What it will do is to initially slow the rate of J-Plasma sales growth by expanding the average length of the sales cycle, effectively smearing out sales over time that otherwise would have been more condensed. However, this smearing effect should be on the order of a few months.
From what we can deduce about Bovie's J-Plasma medical device launch strategy, the company's plan continues to be to have a dramatic product launch (e.g., multiple publications and conference talks detailing very positive clinical results coming out within a short time period, except now expanded to include a wider range of surgical applications) concurrently with the start of a concentrated sales effort by a comparatively large sales force (120 independent sales reps targeting hospitals and surgical centers and 50 targeting distributors). If this strategy proves successful, J-Plasma sales should ramp up quite quickly. An example of a rapid shift in market share due to a significant advance in medical technology is Boston Scientific's (BSX) introduction of the Taxus stent in 2004 (also discussed in a previous article by this author); BSX's jump in year-over-year stent sales in 2004 is very evident in the picture below. One important difference between J-Plasma and the Taxus stent is that J-Plasma has many possible applications and thus much potential for continued sales growth over many years.
Although it is difficult to make detailed projections of sales revenue and share price in light of the recent Bovie news releases without examining considerably more data and making a number of assumptions about market penetration, a rough estimate could be made as follows. If we assume J-Plasma quickly makes inroads into other surgical markets besides Bovie's planned initial target of OBGYN and reaches a sales level in 2014 double that initial expected, this would correspond to annualized J-Plasma sales of $300M, or total company sales of $325M. A price-to-sales ratio of 2.5 (industry average) and 19.7M shares when fully diluted gives a predicted price of $41/share. A price-to-sales ratio of 3.5 (premium due to company growth rate) predicts a price of almost $58/share. With its most recent (7/22) close at $3.35/share, this gives Bovie tremendous potential upside if J-Plasma proves to be a market success.