Seeking Alpha
Special situations, micro-cap, biotech, healthcare
Profile| Send Message|
( followers)  

Investors who have been holding on to shares of Stereotaxis (NASDAQ:STXS) this year have seen nothing but misery. Shares are down around 80% since the start of the year and down around 98% since the company's IPO in 2004. As bad as things have gotten for Stereotaxis investors, a recent counter-rally that started on Oct. 22 on heavy volume could help erase some of the losses. The optimism is associated with the arrival of Dr. Euan Thomson to the board of directors. Dr. Thomson was previously the president and CEO of the medical device company Accuray, and is perceived by the market to be a big potential asset to the struggling company.

Stereotaxis' management issues go a long way back, but recent bearishness can be largely attributed to the company's former CFO Dan Johnston, who left the company on Aug. 15, 2011, "to pursue other professional interests." CEO Michael Kaminski, who's still leading the company, didn't really make any specific comments but discussed the company's intention to raise more cash with minimal share dilution. It's also worth noting that Stereotaxis was, and is not, a profitable company. CEO Kaminski has addressed the issue with a promise to continually reduce operating losses, but the stock's price action in the last year makes it apparent that investors worry about the company's ability to ever become profitable. Although investors in the healthcare sector are notorious for their patience, companies that cannot profit from their already marketed products are doomed. Does that imply that Stereotaxis is headed toward eventual bankruptcy? Not necessarily.

Stereotaxis markets something known as the EPOCH platform, which is the latest version of their remote-controlled system for catheter management during cardiac ablation surgery. Cardiac ablation is a procedure used to fix heart rhythm problems, more formally known as cardiac arrhythmia (also referred to as "irregular heartbeat"). Heart disease still remains the No. 1 cause of death in the United States (at roughly 600,000 fatalities per year according to the CDC), and an enormous 850,000 or so patients are hospitalized for cardiac arrythmia each year. Cardiac ablation, being one of the major recommended therapies for overly fast heartbeats (defined as a heartbeat above 100 or so beats per minute), is a very popular surgery and offers enormous market potential.

Stereotaxis markets three products that have seen very different performance in the market. Niobe ES is its high-tech catheter, which offers real-time control and computer-assisted movements that traditional soft catheters don't have. Then there is the Odyssey, which is a computer screen interface that allows physicians to "manage clinical information." Lastly, there are disposable soft magnetic catheters that are less likely to damage heart tissue during the surgery itself according to the company's statements. It seems that the disposable catheters have been the most popular this year. Disposable catheter sales have compensated for the financial shortfalls of Niobe and Odyssey.

Company management was extremely optimistic after the launch of EPOCH in December 2011, which introduced some new features, but sales have been lacking. According to Q2 2012 results from August, the company earned $10.5 million in revenue compared to $11.6 million in Q2 2012. Even if the company continued to generate new Niobe ES system sales this year, it is actually losing customers at an even faster rate. Note that in Q2 2012, the company had one less Niobe ES system sold than it did in Q2 2011. This also deteriorates the company's service revenue, which makes up much of its $6.6 million in quarterly recurring revenue --- a big problem to its future earning power.

The fact that the EPOCH system struggles to retain customers (or bring the company profits) should be alarming to any STXS shareholder, but there seems to be some hope regarding Stereotaxis' upcoming Vdrive device. The Vdrive makes surgery even more sterile and enables surgeons to manipulate catheters better, which reduces the length of the surgery. More importantly, it seems to be quite popular in Europe, where it has been cleared for commercialization (along with Canada).

Vdrive is still under FDA review, but Stereotaxis hopes to hit European markets before the end of this year. If we see further reductions in the company's expenses, this 13.6 million dollar company should probably be able to achieve profitability in 2013 -- assuming that Vdrive does generate revenue in Europe. Right now that "profitability gap" is about $4.6 million per quarter.

Ultimately, anyone considering shares of STXS for a long-term investment should be very confident in the future potential for Vdrive. The company's current product line has demonstrated a disappointing lack of market potential, and the company is about $13.5 million in debt. If Vdrive doesn't perform well, it's hard to argue that Stereotaxis stock will survive the fallout.

Source: Remaining Stereotaxis Investors Still Optimistic On Vdrive