According to research carried out by Espicom, the Medical Equipment and Supplies industry accrues estimated global revenue of $273 billion. The research goes further to show that by 2016, the revenue will increase up to $349 billion. When we talk about medical equipment and supplies, it applies to a vast range of products like glucose meters, catheters, syringes, monitoring systems, thermometers, wound care etc. This is the industry Stereotaxis Inc. (NASDAQ:STXS) operates in.
One thing about Stereotaxis is that as a small-cap company, it did what small-cap companies usually do in order to survive in a competitive industry - specializing in a few segments instead of multiple. In this case, Stereotaxis focused its attention on development of robotic instrument navigation systems which falls under the surgical-related supplies and medical instruments that make up 45% of the industry. It also diversified a little into the disposable products segment. With catheters making up a significant secondary part of the industry, it puts Stereotaxis in a position to benefit from the projected 12%+ annual growth of the market with its worth in 2014 put at $32 billion.
This article gives a brief history of Stereotaxis. Recently, the company's stock took a plunge after Stereotaxis released its second quarter fiscal 2013 earnings report and also announced some of its current financing transactions. The quarterly report shows second quarter EPS of -$0.37, beating analyst estimates by $0.22. The company reported revenue of $9.7 million, missing the estimate by $1.1 million. The company reported that it entered into financing transactions with the company's existing convertible note holders. This is geared toward improving Stereotaxis' current liquidity position by providing cash infusion to the tune of $8.475 million.
Now, if you are still wondering why the company's stock took a plunge with the release of its second quarter earnings, it means you know little or nothing about Stereotaxis. Over the years, the company has not been profitable in the least sense of it to investors, especially with some of the products it looked to bringing in minimal sales. This especially applies to the company's NIOBE and Odyssey. However, with the recent approval of its Vdrive with V-Sono for commercialization in the U.S., hopes were raised. It should be noted that this approval did not happen in the second quarter but early part of the current quarter. As such, much is not to be expected so soon from the company in terms of revenues and earnings.
Cash and Liquidity
Truth be told, Stereotaxis' liquidity has been in bad shape. As at the end of first quarter 2013, the company had cash and cash equivalents of $9.6 million and by the end of the second quarter, its cash and cash equivalents has decreased to $4.1 million with a total debt of $29.9 million which includes HealthCare Royalty Partners debt of $18.5 million. It even received a covenant waiver on its revolving credit facility at the end of July 2013.
This is one of the major reasons why the management decided to initiate the "dust raising" transactions with convertible debt holders in a bid to improve the company's cash position. It should be noted that this is just a short term solution and will in no way help in improving the company's cash flow from operations as it is expected to remain negative all through 2013.
The company's liquidity issue is such that the company no longer meets the requirement to be listed on NASDAQ Global Market and as such, has filed for a transfer to NASDAQ Capital Market. In order to be listed on the NASDAQ Capital Market, Stereotaxis needs to achieve compliance with the laid out criteria and has up until December 16, 2013, to do so.
Abiomed Inc. (NASDAQ:ABMD) is Stereotaxis' peer in the industry with a focus on a different market. It provides heart support technologies through its Impella platform. Most of its products are minimally invasive with varying flow levels and size determined by each individual patient's hemodynamic support needs.
Abiomed's stock has also been under pressure after the release of its first quarter fiscal 2014 earnings report that showed a loss of $0.04 per share. The company's reported revenue of $42.7 million indicates a 10% increase when compared to the same quarter of the previous fiscal year. The increase was mostly impacted by the solid sales and patient utilization of Impella heart pumps in the reported quarter. The stock price declined by more than 1%. One of the products currently in the pipeline is the Impella pediatric device which is being designed for the treatment of infants and children with heart conditions. The stock is currently trading at 90% above its 52-week low price of $11.80.
Another industry peer is Cyberonics, Inc. (NASDAQ:CYBX). This company also has its focus on a different segment from Stereotaxis and Abiomed. It develops and markets devices geared toward the treatment of epilepsy and other severe neurological disorders.
Cyberonics' stock is also under pressure as its price has declined by over 1%. As a company that has huge potential upside, investors are looking forward to its first quarter fiscal 2014 earnings release slated for August 22, 2013. The company's stock is currently trading at 24% above its 52-week low price of $42.31
Top reasons why I'm still bullish on Stereotaxis
Now the most pressing issue for the company is its liquidity position. With its current financial transaction that will bring in cash to the tune of $8.475 million, the company will be able to temporarily hold the fort while it evaluates other strategic and long-term financing alternatives. To this end, Stereotaxis has engaged the services of a renowned financial advisory firm to help it through its weak liquidity condition by proffering better and permanent financing alternatives.
It should also be noted that the company did not provide any revenue and earnings guidance but reiterated its goals for full year 2013. This includes global market expansion which to a large extent will help in facilitating sales and net income for the company if successfully carried out. The company not providing guidance seems to be the right thing to do for now as the company has to focus on investing in its business for the remaining half of the year. That is if investors still wish to see the company remain on NASDAQ.
It is important that Stereotaxis maintains a strong balance sheet because it carries out complex operations based on the type of devices it develops. Adequate cash flow is vital to the company's survival as much as extensive capital spending. This stems from the fact that the company's products are high-tech and as such entails excessive capital expenditure on research and subsequent development if the company wishes to stay ahead of the competition with continuous rollout of new products or offerings.
With a long-term solution to its liquidity issues, the company will be able to achieve the above and also maintain pace with ever developing technologies which will immensely contribute to its success in the highly competitive industry it operates in. With positive cash flow, proper allocation of cash among Research and Development, appropriate maintenance of ongoing-operations and successful marketing of its already approved products like Vdrive with V-Sono ICE catheter manipulator and subsequent approval of others in the pipeline like V-Loop, Stereotaxis will be able to achieve maximum long-term sales and positive earnings results in the future.
With the pessimism surrounding the company's current short-term financing initiatives and search for long-term financing strategies, Stereotaxis seems like a value trap, but with the spirited efforts being made by the company's management in terms of managing the company's current operating expenses, expansion of its footprint globally and strengthening of the balance sheet, I would say it is not. Add all these to the projected earnings prospects of the segments it is focused on, then you might just agree with me that there is still hope for this St. Louis, Missouri,-based robotic instrument navigation systems developer.
I also want to point out the fact that the company's shares declined is not a reflection of what lies ahead for the company. It should rather serve as an entry point for investors, especially the venturesome and risk-tolerant ones who are on the lookout for companies with above-average potential growth, which Stereotaxis most likely fits. With the recovery of the company and its growth prospects as it dips its foot into emerging markets, it could even be an acquisition target from larger corporations. Should this happen, it would further increase the company's growth potential and as such, those investors who held onto their shares and those who initiated positions will surely reap the fruits of their loyalty.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.