Apyx Medical (NASDAQ:APYX) is a cosmetic surgery medical device company that has gone on quite a run over the last six months with the stock up a whopping 70% (from when the company name was Bovie Medical BVX). The hype surrounding Apyx is predicated on the potential commercialization of its J-Plasma technology for dermal resurfacing, branded by the name of Renuvion. Renuvion is currently an off-label flop, and we believe it will continue to be a flop even if it gets FDA approval later this year.
Apyx is currently flush with cash after selling its core business of electrosurgical generators. Now its only product is J-Plasma, and we believe it's a cosmetic surgery dud. As sales fail to ramp, we believe the stock will fall to $3 per share within a year to a year and a half and fall even further as the company engages in cash burn and equity raises.
On its drastic business change, Apyx got a new CEO, Charlie Goodwin, on 12/18/17. Goodwin has thus far done a good job promoting the company on its new mission and helping to get the stock to go up. However, he has a checkered past. Unbeknownest to most shareholders, Goodwin was previously named in a Court Case for allegedly illegally boosting sales while he was a senior VP at Olympus/Gyrus by fraudulently submitting fake documents to Medicare and covering illegal payments to physicians and hospitals.
We believe investors do not have the full picture regarding the safety and application of J-Plasma, given that management didn't reveal the outcomes of their completed IDE clinical study which was recently submitted to the FDA for the approval of use for dermal resurfacing. We believe there's a good chance it failed to reach its primary endpoint and could result in an FDA rejection.
We went directly to the source and surveyed physicians about the J-Plasma technology, and most do not recommend it. We believe the failure of the J-Plasma will mirror an identical product called the Portrait PSR which also failed to gain traction even though the marketing push behind it was tremendous. The stock price alone is overvalued compared to competitors, at a 14x sales multiple versus peers at a below 2x multiple. We predict APYX sales multiple will move closer to its peers within 12-18 months, to a stock price of $3 per share.
Apyx was previously known as Bovie Medical and was trading on the NYSE. On 1/1/19, the company officially changed its name to Apyx and moved to the NASDAQ. For consistency, we're going to use the Apyx name in this report when referring to the company even though most of the links we refer to are when the company was known as Bovie.
Apyx used to have a solid and consistent business with a good product of electrosurgical generators and accessories for surgeries. With electrosurgical cautery equipment becoming a commodity, Apyx sold this business in August 2018 to Symmetry Surgical for $97M. While Apyx still derives a minor portion of its revenue as an OEM supplier to Symmetry, its main focus now is on the J-plasma cosmetic surgery technology, also known as Renuvion. Basically, the only product Apyx now has is J-Plasma, which isn't selling well now for two off-label cosmetic uses, and, as we show the reasons why in this article, we don't think it will sell well in the future.
The following is a picture of the J-Plasma device. It uses both cold helium plasma and RF energy to heat tissue. The product includes a generator and J-Plasma hand piece.
The J-Plasma technology was patented by a group of Russian and Korean inventors with a priority date of June 1995 and October 1996. Because both US and EP (European Patent) utility patents are granted for 20 years, J-plasma foundational patents have expired back in 2016. Apyx has filed patents after 2001 that protects specific features of Renuvion design, but these patents are narrower in scope than the original foundational patents. This means that other market players can design and market their own Helium Plasma devices, should they see a substantial market opportunity for this yet unproven technology.
Apyx learned about J-Plasma in 1998. In February 2000, Apyx entered into a Joint Venture Agreement with Jump Agentur Fur Elektrotechnik GMBH ("JUMP") to have a license to produce and market any surgical/medical devices using the J-Plasma technology. Apyx owned a 50% interest in this joint venture. On April 30, 2007, Apyx acquired the remaining 50% interest in the joint venture for total consideration of $500K, resulting in the Company having 100% ownership of the J-Plasma technology. For JUMP to sell its 50% interest of J-Plasma to Apyx for only $500K means JUMP valued it in 2007 to be worth only $1M.
Since 2007, 12 years ago, when the J-Plasma acquisition was made for $1M, Apyx' management:
As we will show in this report, the $184M valuation of J-Plasma today ($280M Market Cap - $96M Cash) is irrational and results from management's skillful promotion of a questionable technology to investors and physicians.
Before we start underlining why the J-Plasma technology will never gain traction, let's start by talking about who is at the helm of this company.
Apyx CEO Charlie Goodwin has a questionable track record at Olympus/Gyrus, which includes allegedly exploiting illegal medical device sales practices to boost his division sales. Most of Goodwin's career was at Olympic/Gyrus. From the Apyx website:
Prior to this position, Mr. Goodwin spent more than 11 years with Olympus/Gyrus ACMI in a variety of commercial and leadership roles of increasing responsibility. Mr. Goodwin began as a regional sales director for Gyrus in 2002 and was later promoted to Vice President of Sales, overseeing the Company's strong commercial ramp and assisting Gyrus' executive leadership team in the successful acquisition of American Cystoscope Makers, or "ACMI", for $500 million in 2005.
With such an outstanding track record at Olympus/Gyrus, what explains Goodwin's decision to leave in July 2013 with no job lined up?
Notice on Goodwin's Linkedin page, the date he started his next job after Olympus at MIS is conveniently left out:
Goodwin didn't start his job at MIS Implants until December 1, 2014, a year and a half after he left Olympus. Why such a long gap of time between jobs for this executive?
Source: Dental Products Report
The answer is in the details of the infamous $306M Olympus settlement followed by another $646M settlement over kickbacks and bribes to doctors and hospitals. Mr. Goodwin was directly named in the Court Case filings from 2/4/16 titled: United States of America vs Olympus America/Gyrus Acmi. Goodwin's name was included after the statement:
Current and former Olympus executives with knowledge of the fraudulent activities alleged herein include...
John Slowik, who got awarded a whopping $51M for disclosing Gyrus sales practices to US government, said in the Court Case filings:
Defendants knowingly submitted and/or caused to be submitted thousands of false or fraudulent statements, records, and claims… The schemes that have resulted in false claims submissions to Medicare and other government-funded healthcare programs which began in 2000 and which continue through the present, include but are not limited to the following:
Adopting and continuing Gyrus' practice of paying illegal remuneration to physicians and hospitals in the form of free medical equipment and/or providing discounted products with the intent to induce these physicians and hospitals to buy Gyrus' consumables following Olympus's acquisition of Gyrus in 2008.
Paying physicians tens of thousands of dollars and sometimes more than $100,000.00 per year ostensibly for consulting services. These payments were in reality a qui pro quo to increase purchases of Olympus products.
Offering and/or paying illegal remuneration to physicians and hospitals, in the form of millions of dollars worth of free medical equipment. Categorized as various euphemisms including without limitation, "permanent loans," "leases," "promotions," "demo units," "MLS - Medical Loaner Scopes," "samples" and "trade-ins" this equipment was given away and written off with the intent to induce purchases of Olympus America's equipment, devices and supplies.
Using "honorarium" or "speaker" fees for physician marketing. Approved by management, they were ostensibly compensation to physicians for agreeing to speak at a formal speaking engagement. In reality, the speaker fees and honoraria were kickbacks intended to induce purchases of Olympus America products and/or to influence such purchases by the physician-speakers' peers.
As stated above, Gyrus allegedly defrauded the US Healthcare System "from at least 2000 through the present." Goodwin was a direct beneficiary of this scheme, as he was responsible for Gyrus' sales at the time of the illegal activity. The 2005 Gyrus Annual Report confirms this proudly featuring Mr. Goodwin's 29% growth in global revenue "achievement".
Source: 2005 Gyrus Annual Report
When the whistle-blower, Slowik, got fired in 2010, and the government investigation became a reality, that's when Goodwin abandoned the sinking ship in mid-2013.
The materials from the Olympus/Gyrus Case are a warning sign to Apyx investors. Olympus/Gyrus was allegedly paying physicians consulting and speaker fees to purchase their products. Apyx is also engaging in tactics of paying Key Opinion Leaders (KOLs). Apyx made $530K in payments to physicians in 2017 that we believe are not for performing clinical studies or physician training. What are they for?
We asked Investor Relations for clarification on Goodwin's allegedly illegal activities, and Apyx's payments to physicians. We didn't receive an answer.
Goodwin's checkered past should give investors pause in believing what he says in regards to Apyx, particularly because the business is about the commercialization of an unproven technology with a history of failures.
Our research indicates that under Apyx management, J-Plasma has failed all medical applications, which it was originally developed and marketed for.
Before 2018, APYX put a lot of focus on developing medical surgical applications for J-plasma for open and laparoscopic procedures. According to a 2016 Q3 report, as of September 30, 2016, APYX had a J-plasma sales force of 42 people (14 field-based selling positions + independent manufacturer's representatives), which was focused on operating room procedures. 2016 revenue from its J-Plasma products, or Advanced Energy, was a meager $3.49M as shown in the 2017 annual report.
The latest version of APYX corporate presentation does not mention surgical applications of J-Plasma at all.
Failed gynecologic application: There was a lack of market adoption for the J-Plasma products which led to the loss of its giant sales channel partner, Hologic (NASDAQ: HOLX, 12.5bn mkt cap)
On 7/21/16, Apyx announced a sales channel partnership agreement with Hologic. Hologic added Apyx's J-Plasma product line to its portfolio of healthcare solutions in gynecological and gynecological/oncological surgery.
In Feb 2017, Hologic, disappointed by the lack of market adoption of J-Plasma by gynecologists, didn't renew the co-marketing program with APYX. The APYX stock fell from $3.80 to $2.98.
An analyst asked in the Q117 earnings call what was next for APYX after losing Hologic:
"Some months ago, when our agreement with Hologic ended, you had mentioned that we were going to have a replacement company fairly shortly, and all of that talk seems to have disappeared. Can you comment on what we're doing in that regard and any enhancement in OB/GYN and other areas?"
Robert L. Gershon:
"Absolutely, I'm happy to, Russell. So just to be clear, those conversations have not disappeared. In fact, they are certainly ongoing."
However, Apyx never found a partner to replace Hologic, and that medical indication for J-Plasma ended up being a failure.
An outdated J-plasma brochure mentions product applications in colorectal surgery, GI surgery, advanced laparoscopic surgery and ENT surgery. We found no clinical publications/data for these applications of J-Plasma, which Apyx has abandoned now. The closest thing to a clinical publication is from a PubMed search for J-Plasma we found one article that is a 2015 video poster abstract on using J-Plasma to treat endometrioma. The rest of the publications are not clinical.
The poor fit of J-Plasma to surgical application was also mirrored by the fate of an identical twin of J-Plasma technology from Soring, a German medical device manufacturer.
Prior to the formation of the joint venture with Apyx we mentioned earlier in this report, JUMP had licensed its J-Plasma technology to Soring. Soring (Soering) got FDA approval and marketed the Cold Plasma Coagulator through the AUS (American Urological Services), based on J-Plasma technology.
This J-Plasma Coagulator failed to sell in the surgery markets and is not any more mentioned on Soring's website.
J-Plasma has a history of failure for medical applications and in the following section, we show why we believe the cosmetic application will fail as well.
We contacted many cosmetic surgeons through the Physician Finder on Apyx's own website, renuvion.com. Below we show the email responses of 49 cosmetic surgeon offices. From the website, we only booked one consultation with a physician who performs the J-Plasma treatment and we asked about J-plasma for dermal resurfacing. This procedure is currently done off-label by physicians. Specifically, we asked about J-Plasma's use for facial skin tightening/ skin resurfacing, a target indication of Apyx' clinical trial for FDA submission ("improvement of facial appearance by reducing facial wrinkles and rhytides").
The physician was very upfront and open and said that he does not perform topical (directly over the skin) J-Plasma treatment, because of the risks associated with the technology's investigative nature and suspected adverse events. He elaborated that he belongs to a group of early adopters of J-Plasma technology and that he has heard from the other physicians in this group about safety issues after topical facial application of J-Plasma. The physician specified that these safety issues are:
The physician concluded that he is not comfortable to use J-Plasma for topical facial treatment until a safer protocol is established. This physician had heard that other physicians use J-Plasma with embryonic stem cells, so he believes further protocol improvement is needed. The physician then switched conversation to offering a CO2 laser which he said is a well-proven technology for facial wrinkle treatment.
When we asked why he was referred at the company's website for J-Plasma treatment, the surgeon admitted he is comfortable offering J-Plasma as an adjunct treatment to liposuction for treatment of bellies, necks, hands, legs and other parts of the body, but in these applications J-Plasma application is not topical but a subdermal (under the skin through liposuction incision). In his opinion, J-Plasma is tightening loose skin after liposuction. Sometimes, this treatment has to be repeated to improve on its effect. The cost of the liposuction combined with the J-Plasma subdermal treatment is around $4500 with local anesthesia and sedation and around $5500 with general anesthesia.
We also contacted many more cosmetic surgery offices from the Physician Finder on renuvion.com inquiring about whether they do Renuvion dermal resurfacing. You would think that since the physicians were from Apyx's website, then all of them would be positive about the procedure. But that wasn't the case - the responses were overwhelmingly negative or neutral about the procedure.
Although there were some positive responses, we believe many of them were just sharp acknowledgements with the goal of getting us in for a consultation. Or, they said they use the Renuvion for dermal resurfacing, but also mentioned many competing products they use as well. We rated those responses as neutral - not positive or negative. We believe very few physician responses were glowingly positive on the procedure. To protect the physicians' privacy, we have made all of their responses anonymous.
We rated the responses as either Positive, Neutral, and Negative.
The following are the numbers of each response
Positive = 8
Neutral = 14
Negative = 27
You can read all of the responses on our website here. The following are some of the more interesting responses:
Renuvion is a fantastic treatment for acne scars and deep wrinkles. However, we also have the Fraxel Restore (Non-ablative) and Repair (CO2), the Halo Pro, Clear & Brilliance, Nano Laser Peel for non-ablative and ablative skin rejuvenation, plus Thermage and BBL Skin Tyte to reduce skin laxity, fillers for volume restoration and skin laxity, surgery, etc.
Thanks for your reply! Yes, Dr. does offer plasma resurfacing and is seeing accelerated healing when he adds in stem cells serum - very exciting! I would be happy to schedule a consultation with him so you can learn more.
thank you for inquiring about our skin resurfacing procedures. You are correct in that Renuvion is not FDA approved for skin resurfacing, however it is being used very successfully off label for this purpose. We have been doing this procedure since it became available. The results are even better than the fully ablative CO2 laser resurfacing with significantly less risk of burns, scars or hyperpigmentation. You also have the option of doing a CO2 laser fractional resurfacing or Radio frequency microneedling procedure. You may review the information on our web site.
The long and the short is yes we do use it for resurfacing but only if your skin type is appropriate. Otherwise Dr. has a Co2 fractionated laser for other skin types. It is best that you come in for a consult to discuss.
Dr. was an early adopter of the Renuvion, or JPlasma, device. It is recommended for skin tightening following liposuction, however she does not use it for skin resurfacing. If skin quality is a real issue, laser resurfacing may be the perfect solution. Erbium and fractional lasers use an intense light beam to correct issues such as sun damage, crepey skin, wrinkles, or acne scars.
Yes we have the Renuvion but I do not use it for resurfacing. I mainly use it for skin tightening. I have a CO2 laser that I use mainly for resurfacing.
We actually purchased it initially to do resurfacing. But we found that the patient comfort level was difficult to maintain in the office. The protocols have changed since we initially purchased it. I am wondering what your ethnic background is. I would not recommend for darker skin types. I would be concerned about hyperpigmentation issues. I also wonder your age and how much resurfacing that you are wanting. We also have the Sciton Laser which can do microlaser peels with about 7-10 days of downtime depending on the depth. Have you ever had any laser or chemical peel treatments in the past?
The concerns you mentioned can be addressed by a few different procedures. We typically suggest Micro Needling, Micro Needling with Radio Frequency or ablative lasers. A consultation would be required for us to properly asses you and provide a treatment plan.
Thank you for your inquiry and interests in Renuvion. Renuvion can tighten your face. For dermal resurfacing, it is only a target for caucasian patients. We offer Procell microchanneling for facial skin rejuvenation.
The overall theme from these responses is a caution on the applicability of Renuvion for Dermal Resurfacing. The cosmetic surgeons are far from enthusiastic, which one would naturally expect from a selected group of physician supporters referred to at the Apyx website.
Here is a very negative review of J-Plasma dermal resurfacing from a Yelp user:
4/16/2017 The J Plasma laser has been the most horrible procedure. I'm seven months now healing. I did everything by the book and informed this DO of my eye surgeries from the past. Over looking all my information this procedure was done to me and several others on the highest setting by a doctor who was not even laser trained according to some of her staff. I'm praying eventually I'll have my face back. I also had to have eye surgery because of this laser. Way too deep way too high a setting. Don't do it. There are several of us that are still struggling to get out to our lives because of this and I'd hate to see it happen to anyone else. This laser has also had bad outcomes with a couple other doctors. J Plasma. Horrible.
7/9/2017 Ten months and counting there are at least seven of us who are severely damaged by this Dr. She did J Plasma laser. She was grossly negligent and all of us are undergoing painful procedures to try to fix our once pretty faces. Good luck with this doctor. Rolling the dice.
We found this detailed description of the recovery after J-Plasma dermal skin resurfacing on a realself.com:
2 days post Dr. suggested General Anesthesia for this procedure for optimal comfort - but I asked if I could have local and he agreed to it. Now here's the rub on that: It wasn't easy. Two Halcion tablets, topical numbing cream, and many injections of local anesthetic (ouch!) and I still felt it in places. (Not everywhere - but maybe 50% of my face.) Not at all pleasant, but doable. I will add that I have always had a high tolerance for pain - so I was surprised. They say it is virtually painless - perhaps that is true for some, but not for me for whatever reason. So, just keep in mind that if your Dr is offering General Anesthesia for this, you may want to consider it. Recovery: Ick.! Not painful - just very uncomfortable. Greasy, tight, swelling that semi-obscures vision. If you do it definitely have some sleeping medication or tranquilizers prescribed (as I did) or you will not be able to sleep for at least the first few nights. I am two days post now and look hideous. (No pain no gain as they say.)
4 days post I had this procedure on 3/20. Today is 3/24. Recovery has continued to be a gooey mess - still uncomfortable but not painful. Today, however, I feel as if I am turning a corner. Still oozing a bit, but swelling is starting to subside and skin does not feel quite as sunburn-y and annoying. The hideousness I saw in the mirror since day one (which was about a 10 on a scale of 1 - 10) is now about a 7. Progress!
5 days post Lots of dead skin and ick stuff (God knows what) is sloughing from my face. Waking up in the morning is the worst part. The protective face grease dries up overnight and everything feels tight (especially around the eyes) and I can barely open them until I grease up again. The Doc also did under my chin and my earlobes (which is nice!) but they are additional areas to grease up. So basically, I have been a walking grease-bomb.
31 days post Well, parts of me certainly look better -- but I must say parts of my face are still in recovery mode. Ears and under chin have had prolonged crusting and swelling. 80% resolved now, I'd say. Face still feels slightly sand-paper-y and tight in spots and dead skin still surfacing now and then. I am going to reserve judgment until the three month mark - at which point I will likely post some kind of picture.
40 days post The going is still slow....still peeling at times here and there and my eye area is a bit dark. As I said, I'm going to reserve final judgment for a few months - but I will add that all these people who look 15 years younger in the before and after pics after 6 weeks or so - that has not been my experience unfortunately.
45 days post Hi. It was my understanding that the procedure itself significantly tightens the skin.....and I think I do see some of that - however, my main reason for doing it was textural irregularities and to diminish some scarring, and I'm not seeing any major improvement there....but the worst part is the darkness around my eyes. I believe it is getting better. I may be a slow healer/late bloomer. As I said earlier, I'm going to reserve final judgment for at least another month and will report back!
No further comments have been posted after 45 days. To us this is a red flag - no happy ending to report?
J-Plasma is FDA approved but not for any particular indication. It is currently being used off-label for dermal resurfacing and skin tightening. As stated in the company's recent investor presentation, Apyx completed an IDE clinical study evaluating the use of Renuvion for dermal resurfacing. It was a multi-center, single arm study of 55 patients evaluating the safety and efficacy of Renuvion in the improvement of facial appearance by reducing facial wrinkles and rhytides.
Apyx announced on 12/21/18 that it submitted its 510(K) submission to the FDA for a new indication for J-Plasma for use in dermal resurfacing procedures. The company didn't reveal any details whatsoever about the results other than saying:
We were very pleased with the clinical results of this study and we are optimistic in receiving regulatory clearance for this differentiated technology in 2019."
This PR statement doesn't even specify whether this study has achieved its primary outcomes. So we suspect, it did not.
There are no clinical data out there whatsoever on the J-Plasma being used for dermal resurfacing. In our opinion, releasing this data would be very helpful to physicians who are currently using it off-label for this indication. We believe if the data was good, then the company would release it. Therefore, we have to assume the data was bad. We believe it's likely that the participants in the trial experienced similar side effects that the physician talked about in our interview and the patients' testimonials.
This lack of transparency is a switch from the earlier Apyx statement that they are showing the "full details" of the study.
From the Q317 earnings call:
And our strategy in general is to expand our specific indications, the first specific indication is dermal resurfacing, so our clinical study was accepted, and the full details of that study today reside on ClinicalTrials.gov.
As Apyx's former CEO Robert Gershon said above, is that the full details of the study were on ClinicalTrials.gov. But now after the study is finished, Apyx hasn't revealed any of the details. Was Apyx originally planning to reveal the details? We don't know. An analyst asked the current CEO Goodwin this question, and he had an interesting answer, as transcribed below from the Q118 earnings call:
Thanks. Just on the study front, could you just remind us a couple of quick things, sort of what's the follow-up time on that? Do you plan to share those results when they're compiled? And then I guess sort of your best guess as to when a 510(K) clearance should come?"
Well, I can't necessarily speak to you about a 510(K) clearance because I'm not the FDA. But what I can help you with is that our focus now shifts to being preparing for that submission. And really what the timeline for that is, is our last patient was enrolled in the study today there is a 90-day follow-up for that and then we will need at least a couple months to analyze the data and prepare that submission. And so we are estimating to prepare - to have that to be able to submit to the FDA in November of this year, in November of 2018."
Above the analyst asked whether Apyx plans to share the results of the trial. Goodwin says they'll submit the data to the FDA in November, but he ignores the question about whether they'll share the data with the public? Did Goodwin ignore it on purpose? We'll let the readers form their own opinion on that.
We asked Apyx Investor Relations why they didn't share the results of the IDE clinical study, given that there have been no published studies on J-Plasma. They responded:
The Company conducted an IDE clinical study using Renuvion for dermal resurfacing procedures. It was a multi-center, single-arm, evaluator blind prospective study designed to evaluate the safety and efficacy of Renuvion for the reduction of wrinkles and rhytides and was the basis of clinical evidence used to support a submission for 510k clearance from the FDA. Following clearance from the FDA, the Company will pursue the publication of the study results.
As we explain above, it's a bad sign that Apyx is not sharing the study data with the public. If the study endpoints were not met, then the FDA may reject J-Plasma for the Dermal Resurfacing indication. We think an FDA rejection of J-Plasma approval for Dermal Resurfacing is likely, given safety issues and long post-procedural recovery we discovered in our research. We've seen the overall negative results that it seems to have on patients from reading their reviews. Also, surgeons don't seem to like doing the J-Plasma procedure on patients' faces.
We found one site, which provides balanced information on J-plasma for dermal resurfacing and its recovery issues.
The Truth About J-Plasma: Learn About This Trendy Facelift Alternative
by Sydney Whalen; January 5, 2018. Reviewed by Dr. Neil Zemmel and Dr. Robert N. Young
To hear plastic surgeons tell it, this new technique will soon replace laser skin resurfacing as the gold standard in non-invasive facial rejuvenation. However, it may be wise to take some of this praise well-salted. Being such new technology, there is no readily available formal research assessing the long-term efficacy of the treatment.
Recovery time for the procedure can be quite long when compared to other non-invasive procedures. Recovery takes roughly two to three weeks. Skin may continue to look red and makeup should be avoided for the entirety of this time unless a physician says otherwise.
Proponents of J-Plasma claim that the results are instantaneous. In reality, it could take several months for the full effects of the treatment to become apparent and all the associated redness to completely disappear.
As stated above in the article clip: "recovery time can be quite long when compared to other non-invasive procedures." This is one of the big drawbacks to the J-Plasma procedure. Patients don't like to be healing and having to stay inside for long periods of time. If they have to stay home for two months without going to work, which can happen with the treatment, that's a big issue. Also, physicians don't want the risk of the patients coming back to the office for complimentary follow-up treatments, wasting time and complaining about how they aren't healing fast enough. This could also be a liability risk for the physician, who has many other non-invasive procedures they can choose where the patient will have a much quicker recovery time and not cause the problems from the J-Plasma procedure.
Although Apyx presents its J-Plasma as a novel technology in dermal resurfacing, many cosmetic surgeons still remember and are still using the first plasma technology, called Portrait Plasma Skin Regeneration ("PSR"), which is also used for dermal resurfacing. Portrait PSR is a commercial failure, and we expect J-Plasma to follow the same path.
Both technologies use radio-frequency generators for plasma generation and are overall very similar. The main difference between the two is that J-plasma utilizes Helium gas, and Portrait PSR utilizes nitrogen gas. We asked some physicians what the differences are between the two. One physician told us:
The difference is the gas that is used and also the size of the tip in the hand piece.
Here's what one physician who uses Portrait PSR on patients says about J-Plasma:
J-Plasma does nothing but damage tissue, is ineffective RF heating a metal spike and will not regenerate or nourish or change DNA - lawsuits have been rampant within one year of its use, very poor outcomes.
We asked Apyx IR what are the differences between the two, and they answered:
Our Renuvion technology combines the unique properties of helium plasma with the efficiency of RF energy to create a dual thermal effect, providing a dramatic yet gentle effect on tissue. We understand that Portrait uses Nitrogen gas, but how their technology compares to Renuvion has not been studied.
This is what Stephen Prendiville, MD, said on August 23, 2017, about plasma skin regeneration versus a fractionated CO2 laser:
J Plasma resurfacing is a newer form of skin rejuvenation utilizing radiofrequency and inert helium gas to create a plasma that causes a controlled injury to facial skin. It is along the same lines as the Rhytec nitrogen plasma skin regeneration (PSR) that was in use before the company went bankrupt in 2006-2007. Having used the Nitrogen plasma skin regeneration for several years, I found the results were good to moderate on most of the face, but relatively ineffective around the mouth. Since 2009, I have used a fractionated CO2 laser (Lutronic eCO2). In agreement with the statement in your question and contrary to other opinions you may hear, the Fractionated CO2 laser remains the gold standard for facial resurfacing.
Web articles, like this one, often lump both of these plasma technologies together, despite the difference in the gas used. Based on similarities of both plasma technologies, we believe the Portrait Plasma Skin Regeneration ("PSR") commercial failure is a red flag to Apyx investors.
In 2008, the FDA approved Portrait Plasma Skin Regeneration ("PSR") technology for skin rejuvenation and the treatment of wrinkles. Portrait PSR Technology was developed and marketed by Rhytec.
Before its commercial flop, Portrait PSR was marketed aggressively and had national media attention. It has been featured in Vogue, Time Magazine, W Magazine, Harper's Bazaar, New Beauty, Elle, The New York Post, Dermatology Times and was featured in O Magazine in the 2007 article, "Is this Any Way to Treat a Face?" by Jenny Bailly. Portrait Plasma was also featured in June 2007 on Fox TV's The Morning Show with Mike and Juliet. The show featured Dr. Doris Day and a Portrait patient who "revealed" her results 2 weeks post-treatment.
Apyx plans on heavily marketing the Renuvion dermal resurfacing procedure if it gets FDA approval. We don't think they'll be able to market it as intensely as the Portrait PSR has been, given that it was featured in all those magazines and TV shows listed above. We believe that nowadays, with an increased amount of medical scams in the media, celebrities and shows are more skeptical and hesitant about what they endorse than they were 10 years ago.
After the FDA approval and with broader adoption, severe adverse events after application of Portrait PSR were reported in the FDA MAUDE database.
From this adverse event report on 7/24/07:
I had a rhytec portrait psr3 plasma skin regeneration full face/full energy treatment to remove brown spots & soften fine lines, otherwise, my skin was in perfect condition. This treatment is advertised as predictable, heals like a tca peel & it usually takes 2 to 6 weeks for your skin to appear normal with or without makeup. My results bear no resemblance to the claims about this treatment. I was flaming, scarlet red & the redness persisted. Three months after my treatment, my doctor treated me with a v-beam laser to reduce the redness, then again at five months, then again at seven months. The redness persisted for over a year.
From this adverse event report on 8/8/08:
Permanent damage of the skin of the face resulted when the "portrait" plasma skin regeneration machine by rhytec was administered in a doctor's office to me, a woman. The skin became so swollen that the skin was permanently stretched resulting in deep skin folds between the nose and mouth and chin, eyelids sagged, bags formed under the eyes and other problems developed in the skin including redness. None of these existed before the procedure.
Without commercial success, Rhytec, the manufacturer of Portrait plasma-based skin resurfacing systems, filed for bankruptcy in late 2008. Energist Medical Group, a private UK medical device company, acquired Portrait PSR from Rhytec in 2009. It was rebranded as Neogen PSR. Energist states on its website:
Energist is the only company worldwide to offer Nitrogen Plasma Skin Regeneration with Neogen, a unique and ground-breaking technology within the industry.
Energist's annual revenue has been estimated to be $2.7M. And that includes three brands other than Portrait/Neogen. Energist is the only producer that sells the Portrait PSR device and parts worldwide, so this is a very miniscule international sales number. We gather from the lack of sales that Portrait PSR continues to be a commercial flop.
In the US there are much less liposuction procedures than facial dermal resurfacing. According to the 2017 American Society of Plastic Surgeons report, the number of minimally invasive procedures relevant to dermal resurfacings was 12.6 Million (7.2 M Botulinum Toxin injections, 1.4 M of Chemical Peels, 0.6M Laser Skin Resurfacings, 0.7M Microdermabrasions and 2.7M Soft Tissue Fillers), as compared to just 246K liposuctions performed in the US in 2017. The dermal resurfacing market is a whopping 50x larger than the liposuction market.
What this means, is for Apyx to live up to its hype and to even become profitable, liposuction subdermal procedures are not enough. The company needs to convince investors that it will take a significant market share of the 50x larger dermal resurfacing market. To survive in a volatile cosmetic surgeon practice, J-Plasma, an expensive capital equipment one-trick-pony product, must achieve a high utilization rate, not achievable in limited markets and broad physician base.
In its Investor Presentation, Apyx describes a rosy market size by suggesting it can sell J-Plasma generators for $85K to 15,000 of US cosmetic surgeons. If we distribute 246,000 US liposuction procedures for 15,000 US cosmetic surgeons, we end up with only 16 annual procedures per year per physician. This is a very low utilization rate to justify the purchase of an $85K generator. Indeed, assume a physician is selling the patient the J-Plasma add-on to his liposuction at $1500 (in addition to the price of standard liposuction). Reduce this revenue by $425 of the cost of Renuvion disposable, also the price mentioned in the presentation, and the physician ends up with just $1075 in revenue. J-Plasma adds at least 15 minutes to the surgery time, that is an additional operating expense of $250 or more if general anesthesia is required. The physician's take is then further reduced to $825. On 16 procedures per year, the physician would earn $13,200 annually. This would take more than 6 years to pay back the cost of capital equipment. Not a good value proposition to a cosmetic surgeon.
Assuming the typical cost of tummy liposuction without J-plasma is $2000 to $3500, we think that patient may pay around $1000-$2000 extra for J-Plasma. Does the benefit of skin tightening justify the additional costs of the procedure? If the part of the body on which liposuction is performed is visible, like a neck, then the value of skin tightening might be significant. However, a woman who wants to improve body contour by liposuction and plans to wear a formal suit to her office job may decide against spending an extra $2K for a slightly tighter tummy skin, especially if this treatment needs to be repeated.
There are plenty of products currently available on the market, which target skin tightening after liposuction. Neither of these technologies has yet proven themselves. All of them appear similar to J-Plasma with respect to skin tightening benefits.
For a review of technologies targeting on improving standard liposuction click here.
APYX reports its sales Quarter over Quarter, showing an impressive relative increase. It is, however, growing at a slower pace than 2017. Remember, Goodwin has a marketing background and a shady one at that.
Apyx has a very large sales force for the size of the company. Most of the reps from Apyx's legacy business are still with the company, despite selling the business. According to the January 2019 Investor Presentation, Apyx's sales force was 40 representatives as per 9/20/2018. With $13.2M 2018 revenue in J-Plasma, it is only $ 325,000 per rep.
J-Plasma revenue has a very small basis in Q1 2017 of $ 0.6M, so the 2017 growth to $ 3.1M in Q4 2017 is huge as a percentage but still small in absolute numbers. The growth is much less impressive in 2018. Q1, Q2, and Q3 of 2018 were less or equal to Q4 2017, as shown in the graph below, which we reconstructed from reported Advanced Energy (J-Plasma) quarterly sales.
Source: APYX Sec Filings
Q4 2018 sales saved 2018 in eyes of investors, but it likely came at the expense of the forthcoming Q1-Q3 of 2019.
Apyx Engages In Aggressive Physician Marketing Tactics
Apyx spent $530K in 2017 on payments to physicians, which is 6.5% of 2017 J-Plasma revenue (full data for 2018 are not available yet). Most of the payments were given to cosmetic surgeons. All payments were General Payments, not Research Payments which are required for clinical studies. With no clinical data to be presented and no surgical training allowed due to an off-label nature of J-Plasma technology, we are left to believe that Apyx paid the $500K to its Key Opinion Leaders (KOLs) in 2017 mainly in consulting payments. But with no new devices under development in 2017, these hardly were R&D related consulting. We are wondering if these payments would somehow encourage early adopters of J-Plasma technology to promote and use the Renuvion vs other alternatives.
Doctors who have publicly promoted J-Plasma technology have a history of lawsuits related to professional malpractice
After we came across these negative comments on facial restructuring we wondered, who are these doctors that are promoting this technology. First, we found that all three physicians received consulting fees from APYX in 2017 (2018 data are not yet available), as shown here, here and here. We decided to take a look at the backgrounds of these three plastic surgeons and see what kind of doctors they are.
The doctors we looked into were quoted in the Apyx January 2019 investor presentation:
Source: Apyx Investor Presentation
On a side note, notice the comments of the physicians above don't mention J-Plasma is a good procedure for dermal resurfacing.
We found that one of the three physicians listed above: Richard Gentile has a questionable background and lawsuits to his name.
Starting with Richard Gentile M.D. MBA, this person was sued before in relation to a failed plastic surgery process that resulted in serious injuries:
An Ohio law firm has obtained a $5.1 million verdict in a medical negligence lawsuit for a woman who allegedly suffered several injuries, including multiple recurrent infections, nerve damage, and permanent scarring, that resulted from a plastic surgery procedure in March 2010. The procedure was performed by Dr. Richard D. Gentile. The jury in this case found Gentile negligent due to his failure to obtain the patient, Kelly Turkoly's, informed consent and that medical battery was committed in connection with the surgery.
After the lawsuit, Gentile tried to sue the woman back for posting an online review about his poor performance and lost.
Apyx has a decent cash pile from selling its electrosurgical equipment business in August 2018 for $97M. Apyx reported $96M in cash for quarter ended 9/30/18.
In the Q318 earnings call, Goodwin said:
obviously, there would be a big push on cosmetic surgeons that are doing dermal resurfacing procedures and we would have a big capital push for that.
"A big capital push" is a foreboding that Apyx is going to spend a lot of its cash for a J-Plasma dermal resurfacing marketing push if it receives FDA approval for that indication. The company might even do an equity raise at the stock's current high levels. The company will spend a lot of shareholders cash on what we believe won't be a profitable endeavor. Also in the Q318 earnings call, Goodwin said that they are looking to grow their sales force to 50 people by year-end 2018, up from 40 on quarter ending Q318. More sales reps will increase Apyx's expenses and cash burn.
Apyx plans on heavily marketing the Renuvion dermal resurfacing procedure. Even if Apyx is able to market J-Plasma as intensely as the Portrait PSR has been, there is no guarantee of technology adoption (see Portrait PSR story above).
With the APYX share price of $8.40, its market valuation stands at around $ 280M. Ex-cash, this is about 14X of its 2018 J-Plasma sales of $ 13.2 M or 11X, if much less attractive OEM revenue is taken into account to total $16.8M in sales for the year. Such high valuation is not justifiable, in our opinion, if we compare Apyx to its comps. Plus, the cash is already earmarked for J-Plasma marketing campaign, so we can expect increased cash burn in the quarters ahead.
We have reviewed medtech companies which provide energy-based products for cosmetic procedures. Most of these companies are private or are very large corporations. We found only few that we can use as comps (see below).
On the basis of its comps, we believe APYX is worth 2X of J-Plasma sales at the most. Comps-rational valuation of Apyx would bring the enterprise value down to $32M, or 18% of its current enterprise value. Thus we conclude that APYX share price is due for a downward correction of 70% or more to levels below $3 within a 12 to 18 months' time period. The graph assumes that the cash gets spent in a marketing push with increased cash burn, and the company doesn't do an equity raise, although an equity raise is a possibility.
As we found in our report, most of the physicians from Apyx' own website don't like to use J-Plasma for dermal resurfacing. This would be the case with or without FDA approval for that indication. However, given that the CEO said the company will spend a lot of cash on a marketing push, we can assume that sales will go up this year. We don't know for sure whether the dermal resurfacing indication will get approved by the FDA or not. If it gets approved, we can expect more marketing spend, if it gets rejected, the marketing spend will be limited because J-Plasma will still be used off-label. For our price target model, we are predicting a 20% rise in sales in 2019 and an increase in cash burn to $5M per quarter.
Apyx reported $96M in cash for Q318. The company had an operating loss of $3M that quarter. Assuming $3M in cash burn for Q418, that leaves Apyx with $93M. At $5M would leave the company with $73M by the end of 2019.
Our calculation for our $3 price target in 12-18 months:
2019 predicted sales: $16M Valuing the company with a P/S of 2 = $16Mx2 = $32M Enterprise Value. Plus $73M cash at year end 2019 = $105M market cap. Assuming share count increases by 2M in 2019: $105M/35M shares = $3/share. This $3 price target and comps are illustrated in the graph below.
Data Source: Financial News
Cutera (CUTR) is a medical device company, a maker of laser and other energy-based aesthetic products. With a current Market Cap at $219 M and 2018 annual revenue of $ 165M, its P/S ratio is just 1.3X.
Solta Medical had a portfolio of six aesthetic energy-based devices to address skin resurfacing, body contouring and skin tightening. It was acquired for $ 250 M by Valeant at the end of 2013. The annual revenue of Solta in 2012 was 145M, which implies 1.7X multiple of Sales.
Now a private company, Syneron-Candela is another good comp for Apyx. It is a marketer of energy based devices for a variety of aesthetic applications including body contouring, hair removal, wrinkle reduction, tattoo removal, women's intimate health, improving the skin's appearance through the treatment of superficial benign vascular and pigmented lesions, and the treatment of acne, leg veins, and cellulite. Syneron-Candela was acquired for 397M on April 3, 2017, by Apax Partners. At the time of purchase, company annual 2016 revenue was 298M, which suggests a 1.3X multiple of Sales.
APYX Is An Easy To Borrow, Low Fee Stock
APYX has a very low borrow fee, only a 0.25% annual fee on Interactive Brokers right now and is easy to short with most brokers. We believe this is because Apyx only recently changed its business structure and now is a speculative investment. Before, it had a solid, predictable, boring business that didn't make it an attractive shorting opportunity. After that business was sold in August 2018, now Apyx has a controversial, speculative product and a new, salesman CEO with a shady history.
We expect more short selling firms will become involved in short selling APYX as long as its share price remains high. With the low borrow fee, we expect the short percentage of the float could increase to 20%-40% like other highly shorted stocks.
As we show in this report, J-Plasma is an OK procedure as an add-on to liposuction, but it's ineffective when it comes to dermal resurfacing. With multiple competing products for skin tightening after liposuction and the small opportunity, we don't believe there's enough revenue from that indication in order to justify Apyx to continue as a company its size. Apyx seemed to confirm the low value of a liposuction indication by not doing an IDE clinical study for it. The meager sales for that indication aren't worth the expense of a study. But they did, however, do a study for the use of J-Plasma for the dermal resurfacing indication. That would be worth the expense if it got FDA approval and if J-Plasma worked well for that procedure. But we found it doesn't work well for that procedure, and since the company didn't reveal the results of the study, we think the results submitted to the FDA might not have been good enough for approval.
We believe the best thing for long term shareholders, is to liquidate the company's assets, sell the J-Plasma technology to the highest bidder, and distribute all of the cash to shareholders. If Apyx did that today, we believe the liquidation value of the company would be about $3 per share.
However, just like with many single-device medtech companies today, the hype and potential in investors' eyes of what is really a mediocre medical device can make the company's stock rise to irrational levels. We've exposed these types of medtech companies in recent reports, such as Transenterix (TRXC), Viveve Medical (VIVE), and Helius Medical (HSDT). Those companies stock price is now far below where it was right before we exposed them.
We believe the APYX stock price will suffer the same fate as the other medtech companies we've been bearish on. As the reality of this report sinks into investors, and the truth is reflected in the company's future sales, we believe the share price will take a big tumble. Our $3 price target in 12-18 months is just the beginning. If the company continues on this path, we believe the cash burn and subsequent equity raises will push the stock far below $3 per share in the coming years.
This article was written by
Disclosure: I am/we are short APYX. 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.
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