Stereotaxis' (STXS -2.27%) poor financial management certainly disappointed investors during its first attempt at a public listing, even after a much-hyped initial public offering (IPO) in 2004. The IPO priced at $8 per share and surged to an all-time high in 2007, reaching nearly $150 per share, which represented an increase of nearly 2,000%. A freefall based on dismal earnings and concerns about backlog reporting later culminated in a delisting. But that disaster led the company into the seemingly more capable hands of an investor-turned-CEO who has brought the company back to the public markets. It's time to take another look at the company's proprietary technology, management, and prospects to see if the company is a buy.
Stereotaxis in nutshell
St. Louis-based company Stereotaxis' was founded in 1990. The company's greatest strength lies in its proprietary surgery technology for the treatment of cardiac arrhythmias. Its surgery systems are used in more than 100 hospitals and have received regulatory clearance in the US, European Union, Japan, Canada, and China. The company's key offering is the Epoch Solution, a remote robotic navigation system. The system includes the Niobe, a tool that navigates magnetically enabled tools inside the body by controlling a magnetic field. One of its uses is the steering of catheters for atrial fibrillation ablation procedures, which work by scarring or destroying tissue in the heart to disrupt faulty signals causing the abnormal rhythm.
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What's improved about the company?
In 2016 Stereotaxis landed a $24 million equity investment co-led by DAFNA Capital, an investment advisor with a focus on biotechnology and medical devices. DAFNA principal David Fischel said at the time that the company stood out "in terms of the discrepancy between the value of its technically complex products with proven clinical benefit and its valuation."
The investment's purpose was to strengthen the company's financial position and help accelerate and enhance its growth initiatives. Fischel joined the Stereotaxis board at the time of the investment and became CEO later that year. Since that time he has worked to re-engage with the capital markets and reintroduce Stereotaxis as a high-technology company. It is worth noting that Fischel takes no salary as CEO of Stereotaxis. On the company's most recent earnings conference call Fischel said he was pleased the company was able to uplist onto the NYSE without needing to execute a reverse split, a move he said had raised some skepticism among investors.
Some degree of returning investor confidence in Stereotaxis was demonstrated in August as the company tapped institutional investors for a $25 million private placement, selling more than 12 million shares to healthcare-focused and growth-oriented investors. Fischel pointed out that financing was not necessary for the company to accomplish its goals but will enhance its commercial growth initiatives and a second wave of innovation.
"At September 30, we had cash and cash equivalents of $31.7 million and no debt," Sterotaxis CFO Kimberly R. Peery said on the company's most recent conference call. "This strong balance sheet allows for increased investment in growth initiatives and the ability to reach profitability without additional financings."
The company may have hit a turning point in its most recent quarter, posting a revenue increase and no loss per share. For Q3, the company brought in $8.2 million, up from $7.6 million in the same period a year ago and up sequentially from $6.7 million. The revenue increase was only slight but represented a departure from a revenue decline in two of the past three quarters and throughout 2018.
The case for investing now
Under Fischel's leadership Stereotaxis has increased its research and development spending in the past two years, from $4.8 million in 2017 to $8 million in 2018 and $10 million this year. Fischel said this translates to about 30% of sales and the amount is "far above" the company's weight class when compared to its peers. The company has invested extensive time and effort into development of its next-generation robotic surgery system, Genesis, which it says will improve magnetic navigation with increased efficiency and reduced size.
The system is cleared for launch in Europe and is in the final stages of the regulatory process in the US. Fischel characterizes the launch, along with the rollout of a proprietary fluoroscope product, as "the first significant wave in our commercial growth strategy." According to a presentation made by Fischel at the Heart Rhythm Society convention earlier this year, the system is 2000 pounds lighter than its predecessor, is one-fifth smaller from a patient perspective, is faster and instantaneously responsive, and benefits from simplified installation and maintenance. The company has high hopes for Genesis, but uncertainty remains on how much its launch will boost revenue, and when.
The company is also working on a proprietary magnetic ablation catheter it expects to serve as an even more substantial driver of revenue growth and it recently entered partnerships that may yield growth in the area of preoperative mapping technology.
The verdict
Annual revenues for robotic surgery systems are expected around $3 billion for 2019 and growth of 15% per year is expected, according to market research firm IBISWorld, and the number of potential patients for Stereotaxis' products is huge, with approximately one in 18 people, or 5% of the US population, estimated to be living with an arrhythmia. However, Stereotaxis has not shown investors it can successfully capture the market yet, and the company has been around for 15 years. Technology-wise the company is frequently compared to Intuitive Surgical (ISRG -1.16%), which has seen its market cap grow to nearly $67 billion, and has even been mentioned as an acquisition target for Intuitive.
But while management consistently cites its efforts to return to stable financial footing, its work has not yet materialized in the company's financials. Stereotaxis is worth keeping an eye on to see if its new products like Genesis can take hold in numbers that lead to a true turnaround, but investors would be wise to look for more signs management is executing on plans before making an investment.
