Is Stereotaxis the Next Intuitive Surgical?

Intuitive Surgical (ISRG) needs no introduction. The company's daVinci surgical robot is allowing the company to grow at a heady rate, and added to this, ISRG makes a gamut of disposable tools (which serve as the "working end" of the robotic arm used in surgery) which need to be "renewed" for every surgery. The tools provide ISRG a stream of revenue in a manner that is similar to Gillette's blades. ISRG's revenues are almost at a billion dollars a year run-rate, and it sports a market cap of over $10 Billion. The largest company that exclusively focuses on medical devices is Medtronic (MDT). MDT's market value was at $10 billion - back in 1995 - the same year that ISRG was founded.

There is still a lot of money to be made, and in ISRG, there always is room for newer disruptive technologies in the field of MIS (minimally invasive surgery). The two companies of today - which are often compared with ISRG - albeit with ISRG from about a half a dozen years ago, are: Hansen Medical (HNSN) and Stereotaxis (STXS). Hansen¹ develops, manufactures and sells a new generation of medical robots designed for accurate positioning, manipulation and stable control of catheters and catheter-based technologies. Stereotaxis² focuses on the cardiac surgery market, and enables physicians to complete more complex interventional procedures by providing image guided delivery of catheters and guidewires through the blood vessels and chambers of the heart to treatment sites.

STXS has an extensive array of patents covering its magnetically guided catheter systems. HNSN has an equally impressive array of patents protecting its Sensei system. After a review of both patent portfolios, I'm confident that STXS has an edge over HNSN. Plus, STXS's system has a huge operational advantage - its catheters are substantially slimmer than HNSN's comparable ones. This is due to the fact that STXS's catheters have a magnetic tip, and are guided by a magnetic field surrounding the patient - while HNSN's guidance wires are bundled with the catheters (and hence thicker).

STXS's system has one huge disadvantage - the room in which the system is located needs to be custom built with magnetic shielding. Also, operational procedures similar to those taken by MRI facilities (no ferrous/ferric/magnetic stuff anywhere close to the system or the room it is in) need to be taken into account. In short, once a STXS magnetic guidance system is in place, it is cost-prohibitive to even think of moving it.

HNSN's most recent quarterly numbers were hampered by "sales lumpiness", but the company fell short of its goal for quarterly system sales (system sales drive the sale of disposables). STXS has the edge in system sales for now - despite the fact that its systems are a lot more difficult to deploy. But, STXS had its own missteps, and had to go back and re-engineer its magnetic irrigated catheter (it needs to be re-approved by the FDA). Optimistically, this will contribute to revenues in calendar Q1-2009.

	STXS Q2, 2008	STXS Q2, 2007	HNSN Q2, 2008	HNSN Q2, 2007	ISRG Q2, 2001	ISRG Q2, 2000
Revenues	10.66M	7.84M	5.8M	2.4M	12.72M	5.13M
R&D	4.8M	7.1M	6.3M	4.4M	3.3M	2.8M
Gross profits	6.5M	3.5M	1.08M	0.781M	6.1M	1.6M
EPS	(0.35)	(0.42)	(0.60)	(0.37)	(0.12)	(0.23)
Shares	36.5M	36.1M	24.7M	21.5M	35.6M	19.8M

From the table, one can see similarities in the numbers. ISRG had a reverse 1 for 2 split in July 2003 - which means that there was 100% dilution from the point of time that I chose to pick in 2001 for ISRG. STXS has been smart with its money, and got a $18 million payment in royalty from Biosense Webster - its partner in the manufacture of ablation catheters. Looking at numbers from other 10Q's filed by ISRG, ISRG extracted much more in sales for the amount of expenditure on R&D - even in the early stages of the company.

The bottom-line:

1. There is no clear winner here in the battle for becoming the next ISRG. In fact, the next ISRG is ISRG - as it has another half a decade of growth left in it.
2. Between STXS and HNSN, my pick is STXS, because its technology has been through 10,000 cardiac procedures, some so complex that they were not attempted before STXS's Niobe entered the fray.
3. HNSN can use the fact that it is more easily deployable to get an edge over STXS, but at the end of the day, the thinner, more routable STXS catheters will be able to perform surgeries that HNSN's Sensei cannot touch.
4. Both companies are burning money now, and will probably continue to do so for another three years. So, there is no urgency to get into either stock.

Operating rooms are rarely re-located. Neither are MRI labs. So, STXS's biggest negative is probably not a big deal in most cases.

Notes:

1. I have no positions in either stock. May initiate in the near future.
2. From Hansen's latest 10Q.
3. From Stereotaxis' latest 10Q.
4. ISRG's 2001 10Q.

Comments

[GA:]

Interesting comment....but you failed to mention tha thte STXS unit cost three to four times more to purchase/build out and is not mobile. The HNSN unit is mobile. Also, the STXS growth is stagnant....while HNSN is growing. Finally....HNSN was founded by the same folks that founded ISRG....all very important points....and not sure how you as a private investor or analyst could say that because a catheter is thicker...it is worse than the STXS....quite interesting.

2008 Aug 20 08:32 AM

[hclunited:]

I agree with GA. Those points GA brought up are very important to adoption of either system. I also think you are putting too much importance on size of catheters. Just because it can do more complex surgeries does not mean it will make more money. As a matter of fact, complex surgeries usually make up a small percentage of catheter-required surgeries. It's more about capturing the surgery that occurs the most. The reason ISRG is so successful is because it does the basic prostatectomy really well, not because it can do really really complex surgeries well.

2008 Aug 20 09:39 AM

[Bapcha's St...:]

Read the paragraph on STXS's huge disadvantage - especially the last sentence that says "it is cost-prohibitive to even think of moving it".

2008 Aug 20 10:03 AM

[hclunited:]

Thanks for writing this article though, Bapcha. I have a position in HNSN, and have been thinking of adding an STXS position. I think robotic surgeries are going to revolutionize medicine in the next 20 years. There's definitely not enough articles about companies in this arena, except on ISRG.

2008 Aug 20 10:33 AM

[guliamo:]

Thanks for the interesting post.
Honestly? I think these days folks should stay away from these experimental technologies. Looking 6 months ahead, I think ISRG will out perform both of them.
I've owned ISRG for a while now (see my portfolio on my site) and done amazingly well with it.

2008 Aug 20 11:27 AM

[lagunabb_2008:]

HNSN is a great short. If David Tice still runs his bear challenge contest, it would be one of my top three picks.

2008 Aug 20 08:27 PM

[Stockmaven:]

On the same type of situation I like ARAY. Seems their Cyberknife system is computed guided pinpoint radiation. The equipment is $4.5 million a copy and there is a maintenance annually of about 10% of equipment cost. Backlog is growing at this point but earnings are there but not great at this point.
Seeing it gets results painlessly without surgery and far fewer treatments than is normally required I believe the company will reach critical mass and the stock will go from $7 to $100 swiftly.
My pick.

2008 Aug 21 09:25 AM

[borisb:]

dont count on it.

2008 Aug 21 10:44 AM

[User 247341:]

And don't forget it is in the execution. Lonnie Smith turned Moll's idea into reality and executed well. Kaminski worked for Smith at Hill-Rom. Execution could once again spell success. However, upside potential for STXS isn't nearly what it is for ISRG, which is more of an enabling technology.

2008 Aug 21 12:16 PM

[thedivot:]

Speaking of expensive operating room equipment..........
IMRIS (IM on the TSX) is a small Canadian company that has developed the world's most advanced MRI system. It is a "mobile" system that involves huge expense in setting up an operating room so revenues are very lumpy. This system allows the patient to remain in the operating room and the MRI system is moved to the patient during the operation rather than taking the patient out of the room to the usual MRI station. Then the MRI is moved back out of the way and the operation continues. They're getting sales around the world - don't know how successful they'll be as not much history but could be interesting. Just some more expensive equipment for hospitals to buy!!

2008 Aug 21 07:32 PM

[jacklabanator:]

It's amazing to me how ISRG is lumped together with companies like Hansen, Sterotaxis and Cyberknife. The reality is that Intuitive is a fundamentally sound business model, structured to reap 65% of its recurring revenue from disposables and enjoying quarter over quarter growth that consistently beats consensus estimates.

It is so very clear that what they produce is the becoming the future of surgical intervention. Until technologies evolve that supplant surgery effectively, this company will be the future of surgery. They have a broad based IP portfolio, excellent, conservative leadership and aggressive Sales and Marketing into multiple specialties. The other players mentioned are so narrow in scope and target markets that the comparison between them and ISRG is superficial at best. This company is so clearly a winner long-term that a fairer comparison would be with Ethicon or US Surgical in the early '90's. If you want to speculate on the future of minimally invasive intervention, contextualize ISRG against those pioneers. This company is the future of surgery and no one else is even close in terms of market opportunity.

2008 Sep 30 01:37 PM