Nano-X Imaging (NNOX 4.65%) has caused quite the stir among the Robinhood crowd, as the company claims it can provide healthcare screening exams to the two-thirds of the world's population who have limited access to such medical imaging. Given that the 2020 world population was just short of 8 billion people, suffice it to say, that's a large total addressable market. How can Nano-X go from a concept to a company with lots of wealthier shareholders?
1. Start shipping
Management has stated they have several agreements in place worldwide, with the earliest set for Feb. 6 for 3,000 systems in the U.S. Likewise, on March 2, the company announced an agreement for the deployment of 1,000 systems across Australia, New Zealand, and Norway.
While management says they plan to ship in fourth-quarter 2021, I have to wonder what the holdup is. It has been over a year since the first agreements, and the lack of shipments so far casts some doubt on the company's estimates of 15,000 units in place by 2024. For comparison, Intuitive Surgical (ISRG 1.15%) went public in June 2000, having already placed seven systems worldwide in the previous six months. On July 11, 2000, Intuitive received FDA clearance to market the da Vinci Surgical System for robotic surgery, and on July 7 of that year, management announced in their first earnings report that they had placed an additional six systems in second quarter 2000. The timelines for Intuitive and Nano-X are, shall we say, slightly different. The company needs to start producing deliveries for investors to see their share price rise.
2. Where's the R&D?
Nano-X wants to charge $14 per imaging session. In order for that to happen, the company will need stellar artificial intelligence (AI) at a cheap price, as well as incredible computing power. Regarding AI, management has claimed partnerships with at least five AI companies, though they have not specified which ones. The goal appears to be to act as an intermediary to get facilities from imaging to AI reads. This limits overhead, but it means the company is in the awkward position of not truly offering anything innovative -- Nano-X even admits it is using 30-year-old technology. Likewise, it is hard for me to think that this is an innovative company when they are spending less than $10 million on research and development in 2020 -- and spent less than $3 million in 2019, according to the most recent earnings report.
For comparison, in 2020, medical device makers Shockwave Medical (SWAV 1.56%), Inari Medical (NARI -0.30%), and Outset Medical (OM 2.38%) spent $37 million, $18.4 million, and $28.9 million, respectively, on R&D -- and all of these companies already have products on the market. For Nano-X not to be investing in its own future is odd, and I struggle to see how a company can be transformative without significant R&D.
3. Show me the product
Admittedly, COVID has thrown some cold water on product showcases, but with vaccines becoming increasingly available, the company needs to start showing its product in person. Nano-X's product is a bit of a workflow redesign for the healthcare system, which means it needs to present very few -- and very manageable -- bumps in the road to be a success. I would want to see shipments starting out sooner than the fourth quarter and product reviews from actual healthcare facilities before considering investing my hard-earned money in Nano-X.
If the fourth-quarter timeline holds, a year and a half will have elapsed between the company's first agreements and its shipments, which seems like a long wait for an X-ray machine that only costs $10,000. And cost savings alone won't be enough; the quality of images, turnaround time for radiology reports, and the caliber of the AI all need to come close to today's standards in order for this to be successful. These concerns will only be alleviated once we see the product in action.
Nano-X is certainly walking to the beat of its own drum, and not necessarily following the blueprint of a handful of successful medical technology companies. All of that is OK -- but eventually, the three above points will need to be well addressed in order for the company to become, and stay, successful. Until then, cautious healthcare investors may want to stay on the sidelines.