Recently, I wrote an article on Stereotaxis Inc. (STXS). However, based on questions from my readers, I arranged an interview with David Fischel, Principal at DAFNA Capital Management, LLC, an investment management firm that has focused on public Life Science companies for over 14 years and is a current shareholder in Stereotaxis. The interview took place on Sunday, August 18, 2013. David Fischel gave his take on why Stereotaxis remains an exciting company, market size of the company's technology, growth drivers and cash situation.
The conversation reaffirmed my belief that Stereotaxis is a company with huge long-term potential and that investors have much to gain, both in the short and long-term. Below are excerpts from the interview:
Naomi: Mr. Fischel, could you please tell us what makes Stereotaxis an exciting company.
David: What excites me most about Stereotaxis is that it is the leading robotics company in the endovascular space. Stepping back and taking a broader view of the company, it has the ability to become the Intuitive Surgical, Inc. (ISRG) of catheter procedures. Intuitive Surgical revolutionized laparoscopic surgery and became a multibillion dollar company in the process. The benefit provided to physician and patients by Stereotaxis in the catheter space is no less than the benefit ISRG provides in the surgical space. The market for endovascular procedures is at least the same size as laparoscopic procedures.
Naomi: Could you please shed more light on the market size and application of the robotic navigation system technology.
David: Stereotaxis has remained very focused on the Cardiac Electrophysiology lab but the technologies have applications far beyond that space. The Niobe Epoch Robotic Navigation System is a platform system that could be used in many procedures (for example neurology, peripheral vascular, graft placements). The focus on the cardiac space is prudent though - there are over 500 thousand global EP ablation procedures per year which by itself can be a $1 billion market of only catheter sales of which Stereotaxis still has very low single digit share. Several of the applications beyond the cardiac space could each also be >$1 billion in revenue. These numbers do not include system sales and service contracts. STXS is blessed with a very large and growing market and so this is not a factor that worries me.
Naomi: What can you tell us about the recently approved V-drive?
David: I wouldn't understate the value of V-drive, both in the short/intermediate term and in the longer term. Over the coming several quarters the primary benefit of V-drive is in enhancing the value-proposition of Stereotaxis' robotic platform by making procedures more convenient and cutting procedure times meaningfully. This can help accelerate revenue growth in two ways: First, many existing users of the Niobe system are likely to adopt V-drive and integrate it into their existing robotic systems, and second, V-drive helps lower the barriers that had existed for potential customers to adopt robotics as a whole, and so hopefully it will accelerate the growth in new accounts.
If existing US hospitals that use Stereotaxis' robotic system integrates V-drive, I would expect around $30 million in new system revenue as well as a large boost in recurring revenue. Looking at V-drive with a longer term perspective, it has provided Stereotaxis with a second complimentary mechanism of action for controlling catheters. There are two mechanism of action for robotically controlling catheters: 'pulling' the catheter from the tip and 'pushing' the catheter from the base. Each mechanism has benefits and drawbacks in terms of the size, maneuverability, safety and capabilities of catheters that can work with that mechanism. Stereotaxis has always offered the 'pull' mechanism with its existing system and V-drive provides the 'push' mechanism allowing both to be used in the same procedure.
Naomi: What would be your valuation of Stereotaxis?
David: Though they no longer directly compete, the most relevant comparable for Stereotaxis is Hansen Medical, Inc (HNSN) has about double the valuation of Stereotaxis but only a third of the revenue, a third the utilization, much lower margins, a much higher burn rate, and from my analysis, a much less exciting technology (has a system with only one mechanism of action similar to V-drive).
At a comparable valuation with Hansen, Stereotaxis should probably be in the $20s stock prices. This would also be at a sales multiple much more similar to other public high-technology medical device companies. From an acquisition point of view, all the large players like St. Jude Medical, Inc. (STJ), Johnson & Johnson, and Boston Scientific Corporations (BSX) have been active in the general space and specifically have paid very large amounts of money for early stage localization/navigation technologies - St. Jude acquired MediGuide for $300 million and Boston Scientific acquired Rhythmia Medical last year for up to $265 million - and these were several years away from commercialization.
Stereotaxis has maintained an attractive corporate structure - it has not sold or licensed away its IP (it has over 100 issued US patents), it has full ownership of its products globally, and it has tax loss benefits to an acquirer which by themselves are probably worth ~$100 million. Stereotaxis comes across in my mind as a very attractive acquisition candidate in providing both short term financial benefits (strong existing business with high margins) as well as the platform technologies which allows for long term significant growth." This confirms my thesis that Stereotaxis could make a good acquisition candidate.
Naomi: What are the company's growth drivers as we enter 2014?
David: The main growth drivers for Stereotaxis as we enter 2014 are:
- The effect of V-drive as the system is placed, and then more importantly as the recurring revenue from V-drive starts to build.
- Geographic expansion into Japan (Niobe system approved there just last quarter) and final regulatory approvals so the company can begin sales should be by year end.
- Potential geographic expansion in China if the right partner is found.
- A rebound in its base business growth as the belt tightening of the last several quarters slows down and the company can prudently re-grow its sales force.
Naomi: What can you tell investors about the company's cash situation?
David: Every company needs to balance between investing in growth and generating profits. I think the current management team has done a great job of cutting the company's burn rate significantly. But for a young company with such significant growth opportunities open to it, I think a push for profitability at this time is probably not the most prudent decision to generate long term value.
From my calculations, Stereotaxis should have enough cash for over a year and a half after it raises capital in the upcoming shareholder rights offering. And if any of the shorter term growth drivers does particularly well then the burn should be reduced naturally even further extending that runway. I feel comfortable with that. Longer term, this is a business which can have extremely high profit margins - ISRG has amongst the highest operating margins in the medical device industry and is an extremely profitable company. When Stereotaxis reaches the appropriate scale to start focusing on profit I think shareholders will be very handsomely rewarded.
Naomi: Thank you for your time.
David: You are welcome Naomi.
This concludes the interview and from the excerpts, I'm hopeful that the many 'unanswered' questions about Stereotaxis have finally been answered, all thanks to David Fischel.