iCAD: Downside Seems Limited

Summary

• Shares of medical technology concern iCAD are down two-thirds from 14-year highs set at the end of March 2021, as top line results from the past two quarters disappointed.
• Management expresses confidence in the superiority of its breast cancer detection and radio therapy offerings, blaming longer enterprise sales cycles for (at least one of) the misses.
• With Street analysts extremely bullish on its prospects and recent insider buying – the first since 2017 – iCAD merited a deeper dive.
• A full investment analysis follows in the paragraphs below.
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FURKAN TELLIOGLU/iStock via Getty Images

"By faithfully working eight hours a day you may eventually get to be boss and work twelve hours a day." ― Robert Frost

Today, we take an in-depth look at a small medical concern with an interesting and evolving product portfolio as well as some recent insider buying. The stock has seen a substantial decline lately and the company recently appointed a new CEO as well. A full analysis follows below.

ICAD Stock Chart

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Company Overview:

iCAD, Inc. (NASDAQ:ICAD) is a Nashua, New Hampshire based medical technology concern providing early detection and radio therapy solutions for patients afflicted with cancer. The company markets multiple products for the discovery of breast cancer and one product (Xoft Axxent Electronic Brachytherapy System) for the treatment of cancers. iCAD was formed in 1984 as printer and copier manufacturer Howtek, pivoting full bore to the medical imaging market in 2001. It went public in the same year it was founded, raising gross proceeds of $36 million at $25 a share, after giving effect to a 1-for-5 reverse stock split. Shares of ICAD trade around the $6.00 level, translating to a market cap of approximately $155 million.

The Marketplaces and iCAD's Respective Products

Approximately 39 million mammograms were performed in the U.S. in 2020. Although the most accurate form of detection, ~20% of breast cancers are not detected through this process - about half the time due to observational error. Also, full-field digital mammography (FFDM) generates a significant number of false positives, which generates unnecessary recalls and patient anxiety. Digital breast tomosynthesis (DBT) has demonstrated the ability to improve on these metrics, and as such, is replacing FFDM as the go to screening method. Furthermore, artificial intelligence [AI] and computer-aided detection [CAD] systems have help negate observational errors. However, owing to the hundreds of images produced by DBT versus only four for FFDM, radiologists are challenged by additional workload, which makes them less efficient.

To address this issue, iCAD has developed a suite of detection solutions for 2D and 3D mammography, which include AI and image analysis, CAD systems, and workflow solutions for DBT, FFDM, MRI, and computerized tomography. These are marketed to the ~8,677 mammography screening facilities throughout the U.S., which house ~22,553 FFDM and DBT machines. Its premiere detection system is ProFound AI with an install base of ~1,350 in the U.S., marketed by a sales force of only 13. In cancer detection and breast density assessment, the company competes with Hologic (HOLX), Volpara (OTCPK:VPAHF), Norway's ScreenPoint Medical, Canada-based Densitas, and French concern Therapixel.

The other market in which iCAD participates is radio therapy. There are three types of radio therapy: external beam radiation therapy, which involves a radiation source positioned outside the body with the treatment typically requiring up to 40 sessions; systemic radioisotopes, which are administered by infusion or oral ingestion; and brachytherapy, which employs sealed radioactive sources placed precisely inside the body. Electronic brachytherapy (eBx) - sold by iCAD - uses a miniaturized high dose rate X-ray source to apply radiation directly to the tumor.

Specifically, the company developed Xoft System, an eBx platform that delivers isotope-free (non-radioactive) radiation therapy in a dose consistent with the size and shape of the tumor while sparing healthy tissue and organs. The source is placed inside a disposable applicator (balloon) and energized to deliver a precise, prescribed dose of radiation in a single procedure. Owing to its relatively small size, Xoft System can be transported to the operating room where intraoperative radiation therapy (IORT) can be delivered.

The initial and primary employment of the Xoft System has been for early-stage breast cancer, gynecological cancers, and non-melanoma skin cancer. Owing to its approval for treatment anywhere in the body, emerging applications include brain, prostate, and rectal cancers; although studies proving its effectiveness in the treatment of specific cancers are usually a precondition of adoption by the medical community. The platform and disposable balloons - modified for the cancer they are treating - comprise a razor-razorblade model with each platform costing the purchaser (hospitals, veterinary clinics, dermatology offices, cancer care clinics, etc.) ~$165,000 - based on available data. Through the first nine months of this year (YTD21), iCAD has installed 28 Xoft Systems, which compete with Carl Zeiss Meditec's (OTCPK:CZMWY) and Sensus Healthcare's (SRTS) IORT offerings.

Reporting Segments

Not surprisingly, the company disaggregated its operations into two reporting segments: Detection and Therapy.

Through YTD21, Detection accounted for revenue of $16.5 million, representing a 19% increase over the prior year period and 64% of iCAD's total. With an install base of ~1,350, supply and service revenues accounted for $4.7 million in YTD21, or 29% of the segment's total.

Therapy was responsible for revenue of $9.3 million in YTD21, growing 74% over the prior year period. This growth was aided by the fact that platform sales were severely hindered by the pandemic in YTD20, providing an easy comp. It has also been bolstered by strong demand from dermatologists.

3Q'21 Results:

Despite what appears to be cutting-edge technology, shares of ICAD have fallen 68% from its 14-year high of $21.44 achieved on March 31, 2021. The responsibility for part of that downdraft falls on the company's poor 2Q21 results, which featured a $0.04 per share (non-GAAP) earnings miss (-$0.11 vs -$0.07 expectation) and a $1.3 million top line miss ($7.82 million vs $9.15 million consensus). Longer than expected enterprise sales cycles for its detection offerings were blamed. Its stock fell 24% from $15.40 to $11.77 in the subsequent (August 6, 2021) trading session.

The reaction to 3Q21 earnings was not as swift, but just as severe. On November 9, 2021, iCAD reported Adj. EPS of negative $0.09 on revenue of $9.4 million as compared to negative $0.07 on revenue of $7.1 million in 3Q20. Gross margins remain steady YTD21 versus the prior year period at 72%. Even though the top line represented 31% year-over-year growth and a 20% sequential gain, it fell $0.5 million short of Street expectations. This time no reason for the miss was assigned and management said that it was unaware "of a singular case where we lost [business]… because of the competitive dynamics [owing to] the clear differential between [its] offering and others that are out there." And even though the company's stock fell only 6% in the following trading session, its current price reflects an approximate 30% decline since the announcement, also possibly aided by tax loss selling.

On December 6, 2021, the company announced that Chairman & CEO Michael Klein would be stepping down as CEO, replaced by current President Stacey Stevens effective March 1, 2022.

Balance Sheet & Analyst Commentary:

On a positive note, the current cash burn is such that iCAD should not have to return to the capital markets anytime soon, having raised net proceeds of $23.2 million at $18 per share in March 2021. It held cash and equivalents of $35.8 million versus a cash outflow from operations of $7.9 million YTD2021.

Despite iCAD's lackluster performance over the past six months, analysts are extremely bullish on the company's prospects with one outperform and seven buy ratings and a median twelve-month price target of approximately $20, representing nearly 250% upside from its current trading levels. Only JMP Securities lowered its price objective ($22 to $18) subsequent to the company's 3Q21 earnings report. On average, the Street expects iCAD to lose $0.38 a share on revenue of $34.3 million in FY21 (more than 20% over a pandemic-impacted FY20), followed by a loss of $0.22 a share of sales of $43 million in FY22, reflecting 30% top-line growth.

Also bullish were the company's outgoing CEO Klein - he will remain on as chairman - and board member Susan Wood, who collectively purchased 14,975 shares of ICAD below $7.40 on December 8th, marking the first insider buying in the stock since 2017. It should be noted a week ago, another director disposed approximately $120,000 worth of shares, which was a very tiny part of his overall holdings.

Verdict:

A rumor circulated in August 2021 that iCAD was exploring a potential sale. Obviously, nothing has come of it to date, but it does provide a potential bridge between management's and analysts' assessment of its detection and therapy product suite vis a vie the market. Trading at approximately 3.6x FY22 sales that reflects 30% growth with 72% gross margins can be regarded undervalued, contingent upon the eye of the beholder. That beholder may come in the form of Siemens (OTCPK:SIEGY) or Becton Dickinson (BDX) - either of which could employ their significantly more robust sales efforts to propel quicker adoption - as shares of ICAD are down over 40% since that rumor was disseminated.

Trading near its 52-week low, it's never easy to catch a falling knife. And two quarterly misses in a row excludes this name for consideration of a large holding, especially with the pandemic still with us. However, with a well-regarded portfolio, iCAD's downside from current levels seems limited and with a takeout at least investigated, the risk/reward appears asymmetrical. As such, iCAD merits a small 'watch item' position at this time. Options are available against this equity, but right now they have poor liquidity. Therefore, a covered call strategy is non-viable currently.

"A dream is not what you see when you sleep. It is what keeps you from falling asleep."― Abdul Kalam

Bret Jensen is the Founder of and authors articles for the Biotech Forum, Busted IPO Forum, and Insiders Forum

Disclosure: I/we have a beneficial long position in the shares of ICAD either through stock ownership, options, or other derivatives. 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.