TransEnterix TRXC S
October 27, 2016 - 2:42pm EST by
RubixCube
2016 2017
Price: 1.52 EPS -.41 -.35
Shares Out. (in M): 115 P/E NM NM
Market Cap (in $M): 175 P/FCF NM NM
Net Debt (in $M): -48 EBIT -50 -50
TEV ($): 127 TEV/EBIT NM NM
Borrow Cost: Tight 15-50% cost

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Description

TransEnterix

Short Thesis

TransEnterix is a small cap surgical robotics company with a market cap of $192mm and a TEV of $144mm ($65mm of cash and $17mm of total debt). The company is currently marketing its Senhance surgical robotics system (fka as the ALF-X Surgical Robotic System) in the EU and is seeking FDA 510(k) clearance of the Senhance. Though the company touts that the Senhance has unique features such as haptic feedback, the system has not been very well received. Since launch in the EU in 2012, the company has only sold a single unit. This is not surprising given the system has very little clinical data supporting its utilization and the system is just as expensive as those from the industry stalwart, Intuitive Surgical.

The US prospects for Senhance are even bleaker than in the EU since, in addition to the aforementioned reasons, the US market is well-penetrated by Intuitive Surgical, which has placed over 2,300 surgical robots. The primary market for surgical robots is in larger hospitals (i.e. hospitals with +100 beds). Of the 5,700 hospitals in the US, only 2,400 have +100 beds thus the addressable US market is approaching saturation. This is evidenced by the slowing US growth of Intuitive Surgical in the US in recent years.

With a system that doesn’t sell in the EU and is unlikely to sell in the US, TransEnterix is likely to run out of cash in 2H17 (2Q16 operating burn of $11mm). My price target for the company is $0.42, which values the company at cash on the books (company has minimal hard assets). This is 75% below the closing price on 10/21/16 of $1.67.

The company has 115mm shares outstanding and on average, 1mm shares change hands every day. Short interest stands at 5.9mm shares and it takes less than 10 days to cover. There aren’t many shares available to borrow, but a short position can be expressed through the option chain.

As time progresses and the company fails to generate sales of the Senhance surgical system, the market will eventually recognize the true value of the company and the stock should decline.

Company History and Background

The history of TransEnterix is a story of repeated failures. Over the course of the company’s 10 year history, it has tried to develop three separate surgical technologies, all of which are commercial failures.

The SPIDER Surgical System – The First Failure

The company was formed in 2006 to develop the SPIDER Surgical System, a handheld, single-port, multi-channel laparoscopic surgery system that allows surgeons to perform minimally invasive surgery in the abdomen entirely through the umbilicus, leaving no visible scar. Traditional laparoscopic surgery involves up to four separate instruments (typically an endoscopic camera and other surgical tools) being inserted into a patient’s abdomen through separate entry ports. The SPIDER allowed all four separate instruments to be inserted through a single port through the umbilicus, leaving no visible scar on the abdomen. The device was cleared by the FDA in 2009 and subsequently launched in the US in 2010. Though there was a cosmetic argument to be made, it never gained traction. Per a clinical study in involving 20 surgeons, it was noted that the SPIDER was “more challenging than conventional laparoscopy” (Giannotti et al. BMC Surg, May 2015). The company generated peak sales of $2.1mm in 2012, which declined to $1.4mm in 2013 and $0.4mm in 2014. The SPIDER product was phased out in 2014.

SurgiBot – Another Swing and a Miss

The company began development on its first surgical robotic system, the SurgiBot, in 2012. The premise of the SurgiBot was that it would be single-port, lower cost alternative to Intuitive Surgical’s da Vinci robot. The da Vinci robot costs ~$1.5mm and the disposable instruments per procedure cost ~$1,500-$2,000. The SurgiBot in contrast was expected to be priced at ~$800k per system with similar per procedure disposable costs. The robotic system was geared towards smaller hospitals that may not have the budget for a da Vinci system. Management believed the SurgiBot was applicable for ~2mm surgical procedures in the US and initially targeted the ~1mm laparoscopic cholecystectomies that are performed annually.

After submission of a 510(k) filing in June 2015, TransEnterix announced on April 20, 2016 that the FDA rejected its application, causing the stock to drop over 50% in the subsequent trading sessions from $4.77 to under $2.00. The company has since put the SurgiBot on the backburner and is now focused on commercializing the Senhance system, which it acquired from SOFAR SpA in September 2015.

Though the SurgiBot was not cleared by the FDA, its commercial prospects were never good, especially in its core cholecystectomy market. There are a high number of laparoscopic cholecystectomies performed in the US (95% of cholecystectomies are performed laparoscopically) because it is a procedure that is easily performed using manual laparoscopic methods; there are relatively few situations where robotic techniques can add meaningful value. Intuitive Surgical has also tried to penetrate the cholecystectomy market but hit a plateau at about 100,000 procedures per year, illustrating the challenges of the cholecystectomy market.

Additionally, because TransEnterix targeted smaller community hospitals, SurgiBot faced a difficult path to market. The typical adoption pattern of hospital technologies usually begins with technologies being tried and championed at leading hospitals and academic centers. Community hospitals subsequently look towards these leading institutions when deciding which technologies to adopt. With TransEnterix initially focused on smaller community hospitals, it never would have enjoyed this trickle-down effect and would have had to expend enormous resources on sales, marketing, and education to penetrate the community hospital market.

Senhance – Third Time and Still Not a Charm

In September 2015, TransEnterix acquired the ALF-X (nka Senhance) surgical robotics system from SOFAR SpA, a private Italian healthcare company for $100mm ($25mm in cash, $75mm in stock) with an additional $31mm in cash consideration due upon achievement of certain milestones. The Senhance has been on the EU market since 2012 and to date, only a single system has been sold. The first sale was made in August of 2016 to Humanitas Hospital in Milan (note that this hospital was one of the centers Senhance was developed / tested in clinical trials).

There are relatively few advantages to the Senhance system. The company primarily advertises that the Senhance features haptic feedback and eye-tracking camera control. Though haptic feedback is a useful feature, Intuitive Surgical’s da Vinci robot has succeeded without this capability (surgeons are quickly able to use visual cues to intuit the amount of force being applied). In recent Intuitive Surgical conference calls, management has mentioned that haptic feedback is not a top R&D priority.

More importantly, the Senhance is not expected to be compelling from a pricing perspective and there is very little clinical data supporting the use of this robot in any setting. The Senhance robot is expected to be priced at +$1.5mm while the disposable instruments are marginally cheaper at ~$1,200 per procedure. More importantly, the company has a very thin body of evidence supporting the use of its system. No large-scale, multi-center, prospective study has been performed on the Senhance and the studies advertised on TransEnterix’s website are all small, single-center, retrospective studies.

In every single clinical study that is advertised on TransEnterix’s website, it is noted that additional studies are required to confirm the clinical utility of the surgical robot. The papers are all authored primarily by two physicians, Salvatore Guieli Alletti and Francesco Fanfani, speaking to the limited utilization and study of the system. These authors find that “further studies are mandatory to define the benefits, advantages, and costs of this new robotic approach with respect to other minimally invasive approaches”. This is hardly high praise and squarely outlines the fact that the utility of the system is largely unknown. Compare this to Intuitive Surgical’s da Vinci, which has appeared in over 10,000 peer-reviewed publications.

Given the Senhance system has a similar cost to the da Vinci system, but does not have any of the supporting clinical evidence, it is unlikely that hospitals either in the US or the EU will choose to purchase the system. To date, only one system has been sold.

Competition

Intuitive Surgical is the 800lb gorilla in the robotic laparoscopy market. Intuitive Surgical originally received FDA clearance for the da Vinci surgical robot in 2000. However, the da Vinci never really took off until it began getting utilization and clinical data around da Vinci prostatectomy in 2004 timeframe. In multiple large-scale, multi-center studies, it was demonstrated that da Vinci prostatectomy led to lower rates of incontinence and impotence. These were clinical outcomes that significantly influenced patient flows and in order to have a competitive urology practice, hospitals had to buy da Vinci robots in order to offer this procedure. Over the years, Intuitive Surgical has since branched into hysterectomy and general surgery.

Intuitive Surgical now has over 2,300 systems in the US and performs over 500,000 procedures annually. Notably, Intuitive Surgical is offering its more value-conscious customers an array of economically attractive offerings. It offers refurbished da Vincis at lower prices and also offers leasing options on its da Vinci systems.

TransEnterix noted that Intuitive Surgical is very competitive with regards to pricing. In a May 2016 conference call, management mentioned that “We have, however been somewhat surprised by the competitive response, which has included withdrawing their high-end platform and substituting refurbished older technology at highly discounted prices”. Intuitive Surgical is a +$25bn market cap company with $2.2bn in cash and no debt. It has the financial wherewithal to sell discounted systems in order to out-compete new entrants such as TransEnterix. Such a competitive dynamic does not bode well for TransEnterix, which has only sold a single Senhance, despite being on the EU market for four years.

Valuation

The company has a $192mm market cap and a TEV of $144mm ($65mm of cash and $17mm of debt). Consensus estimates that TransEnterix will generate approximately $4.8mm in 2016 sales growing to $16.2mm in 2017 representing a TEV / Sales multiple of 29.8x / 8.9x in 2016 and 2017 respectively. To achieve $16.2mm in 2017 sales, the company will have to sell at least 10 systems in the EU in 2017, a tall order given there is no pricing advantage compared to the da Vinci and no clinical data supporting its adoption.

Risks

  •          510(k) clearance of the Senhance System: Management may be able to build hype around the potential 510(k) clearance. However, the commercial prospects for Senhance in the US are bleaker than in the EU.
  •        Increasing sales: though highly unlikely for the reasons outlined in the write-up, if management is able to revive sales in the Senhance, that would reignite enthusiasm in the company and cause the share price to increase. 
I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise hold a material investment in the issuer's securities.

Catalyst

Catalysts

  •          Continued weak commercial performance: Since acquiring the Senhance in September 2015, management has only sold one system. Without the ability to profitably sell the Senhance and encourage its utilization, TransEnterix will likely run out of cash
  •        Declining cash balance and an increasing going-concern risk
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