The Next Nano-X, but With Less Risk?

Hyperfine is looking to head to public markets with the lofty goal of disrupting the magnetic resonance imaging (MRI) market with the first portable MRI machine approved by the Food and Drug Administration. In this episode of Industry Focus: Wildcard, join Brian Feroldi and Emily Flippen as they break down Hyperfine's road show and unpack this recent target for a special purpose acquisition company (SPAC).

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This video was recorded on July 14, 2021.

Emily Flippen: Welcome to Industry Focus. Today is Wednesday, July 14, and I'm the host of this Wildcard episode, Emily Flippen. Today, I'm joined by The Motley Fool superior superstar sultan of specialty SPAC situations, Brian Feroldi. We're going to be talking about another interesting healthcare business that is SPAC-ing itself to public markets: That's Hyperfine. Hey, Brian.

Brian Feroldi: Hey, Emily, thanks for having me. I think this is going to be a really fun company to talk about. I learned about this company just a few weeks ago, pitched it to you, and I think you think it's interesting too.

Flippen: I definitely think it's interesting. And the name, Hyperfine, I feel like it does set the bar high. Is this really a hyper-fine business? I guess we'll find out. I think it is. It's an interesting business. It plays off of a lot of the conversations that not only you've been having, but we've been having on Industry Focus about small-cap disruptive healthcare businesses. Hyperfine and its combination, which I believe is HealthCor Catalio Acquisition Corp., which is the SPAC that's bringing it public, will be a really interesting business to talk about.

Feroldi: Yeah, the ticker symbol for this SPAC right now is HCAQ. Because it's a SPAC, we don't have all the information that we usually get about a company that hasn't been filed yet with the SEC. So basically, we're working off of a presentation at this point, but they did give us enough to pique our interest.

Flippen: Yes, definitely. I love that disclaimer because again, we don't have all the information. In fact, I jokingly said to you, Brian, when prepping for the show, I felt like I was just spewing out everything they said during their road show, which is really all the information we have. You will notice with SPACs or any company, even ones that file S-1s, so even ones that IPO a traditional route, if you just read what management releases, it often makes you really excited. It paints a really pretty picture, and it doesn't necessarily highlight the challenges of the industry. When we talk about the business today, it is always worth acknowledging that, hey, we don't have all the information here and there are probably unseen risks, challenges, or aspects of this business that we just don't know right now.

Feroldi: Yes, we don't have the full financial picture of the company, but the headline for me, which you rightfully pointed out, is this is a business that was co-founded by Dr. Jonathan Rothberg. If that name sounds familiar, he recently took another company that went through the SPAC process earlier this year, called Butterfly Network, that's BFLY. Butterfly, we highlighted on the show, and they were bringing a portable ultrasound to market. This company is very much in that vein.

Flippen: Yes, it's interesting. Rothberg, I went down this rabbit hole with him. I had spent very little time thinking about his involvement in other businesses until scrolling through this presentation, seeing that name, thinking to myself, man, that looks familiar. Why does that name look familiar? He's actually the founder of a start-up accelerator named 4Catalyzer who has a really big broad mission of helping disrupt the medical industry. They want to bring medical disruptors given the resources that they need to succeed and this is one of those businesses that has come through that start-up accelerator. I'm curious, Brian, you spend a lot of time thinking about the missions of businesses. I guess, let's start off with the mission of Hyperfine. It's also combining with another company called Liminal. We'll get to that in a minute. But what does this business do and what's its mission?

Feroldi: Well, to be honest, I found two different mission statements for the company and believe it or not, that is not all that uncommon. I've seen many, many cases where a company has one mission in its S-1, another mission on Glassdoor, and another mission on its About Us page. It always irks me, but I'll say the one that was in the documents that we found. "The mission is to provide affordable and accessible imaging, sensing, and guided robotic intervention to revolutionize healthcare for people around the world." My first thought is, that's a lot of words, just too many words. Cut that down. I really like what they're doing and they say what they're doing in the mission. They're a company that's focusing on imaging technology, sensing technology, and robotic technology to bring this technology to the rest of the world. It gives them plenty of opportunity if they can execute.

Flippen: I had the same reaction when seeing this mission statement. I'm going to give the business a pass on this one because I think what they are trying to do with that mission, I believe that was the one that was used in the road show to investors, is they are trying to split up their business into those three aspects: imaging, sensing, robotic intervention. It does paint a nice picture for what the business sees as its three core, I guess, aspects, where they're going to be investing their money. I will say the mission that they have, I believe you found this on their Investor Relations site, or website, if I remember correctly. I believe that mission, which is "To make MRIs accessible to every patient regardless of income or resources anytime, anywhere," sounds more like a successful mission to me.

Feroldi: Yeah, and to be fair, that is on the Hyperfine page and the SPAC we're talking about is going to be combining really three technologies so that could be the difference between the two, but yeah, I really like that. That's the business that exists today and excites me today. Yeah, it's to make MRIs accessible to every patient regardless of income or resources anytime, anywhere. It seems that they actually have a chance of doing just that. This is a company that has created the world's first FDA approved portable MRI machine. Portable is the key word here. If you go to this company's website, you can see a picture of the device. A really simple way of visualizing this is this basically is R2D2 fatter [laughs] in that kind of vein, it has wheels at the bottom and a clear chamber at the top. What this machine does is it can be wheeled around a healthcare facility, and if somebody needs an MRI, the MRI machine can come to them and a little latch opens up, the patient can be slid into the MRI machine and then you get the MRI reading right from the machine itself, that is then uploaded to the Cloud. Doing so really makes it easy and speeds up the time that a patient can get an MRI, because that is actually a big barrier right now. 

On the company's Investor Relations website, it says that the average time to get an MRI to go through the entire process is over 24 hours on average. By using this technology in the facility, they can get that down to 90 minutes and getting that information sooner especially since they're going after the initial use case for this, to check out patients that have had strokes. Time is really of the essence. That could lead to some big-time cost-savings down the road and potentially lives being saved.

Flippen: It's funny you mentioned portable being the keyword there in the description of Hyperfine, and I definitely agree that it is. But where my mind went initially was FDA approved. That's something that we don't see a lot, especially with really small disruptive healthcare companies. Hyperfine's portable MRI machine. That's the imaging part of their business, that mission statement. It was FDA approved in 2020. The approval itself was for things like non-contrast brain MRIs. That again, to your point, being used for things like strokes, brain injury, among a handful of other uses. The machine itself is really focused on the head. Management does have plans to come out with the second version of their imaging machine, which is going to be less R2D2 shaped, or more like a horizontal R2D2. That's going to seek to expand the use cases to things like spines and extremities, post-op care. Right now, they are really focused on strokes, head area, but long-term opportunity here for the entire body.

Feroldi: I think that you just pointed that out. Not only is this device FDA approved and it was FDA approved in 2020, but there are already 46 of these devices that are operational in the United States. For that reason, that gives me confidence as an investor that one, it's already been de-risked because it has some stuff from the FDA; two, see the demand is already there from the bleeding edge of the medical facilities. Importantly, they say that the MRI process is fully reimbursable using the existing codes. That's really important because getting new technologies reimbursed can be a heck of a headache. If you can slide in under the codes that are already in place, that can really speed up commercialization.

Flippen: Yeah, as a consumer, having something that is easily built I think is so important, but even more important is just the cost savings for the hospital. We talk a lot about how disruptive technology needs to make a use case for itself. That compels people to, I'll say leave, I'll caveat that statement in the future, but leave traditional machines to go with the disruptor. But there has to be an economic use case and right now, a typical MRI machine costs more than $2 million, which limits their accessibility. The vast majority of patients -- or vast majority, 22 to 46% of patients -- experienced adverse events just trying to get transport to where the MRI machines are. The idea of the portability and the cheaper costs for the hospitals is a critical aspect in getting those use cases, getting more hospitals to install them. I love how you said there are already 46 of them in use in the United States. That feels small to me, but for something that only got FDA approval in 2020, give credit where credit is due.

Feroldi: Not only that, but when you're going from the product not being on the market to product being up in the market, especially one of this size, manufacturing is a challenge. The fact that they have 46 might not sound like that, but these are, again, fat R2-D2s. When you're just learning how to manage these factories at scale, I'm actually impressed that they've got 46 on the market to say nothing of the fact that selling in the last 18 months has been incredibly challenging for every company that does anything in the hospitals. I guess I'm more impressed by that 46 than you are.

Flippen: I do want to talk about Liminal, because Liminal while not being a big revenue driver for the business, not being any revenue [laughs] for the business right now is interesting. Before I get onto Liminal, I just want to highlight the workflow that exists with a portable MRI machine. I mentioned how many patients experienced those adverse events. Just getting from the point where they decide that they need an MRI to the actual MRI machine. In addition to that, it's also faster. The portable MRI machine reduces workflow time for the hospital itself by over 90%. That takes 26 hours of medical imaging needs to just 90 minutes again. This is going to increase the number of use cases for MRIs and it's not to displace existing MRIs but to add on top of the existing demand.

Feroldi: I think that's a really key point. While this is a disruptive technology, the company has said that we're not out there to displace MRI machines as they exist today. This is meant to augment them, just like you said, speed up that time and really give hospitals the ability to increase the number of patients that can get their MRIs and the speed at which they can do so. Traditional MRI machines will still exist, they'll still be there, but this is really going to help reduce the backlog over time. I could see newer hospital systems transitioning over to this if this technology can work and grow as we expect it to. But that's a really key point: that they won't necessarily be butting heads with the existing MRI machines, they're going to be augmenting it.

Flippen: Hyperfine, as part of this acquisition, is the only one that's coming in with an active FDA improved machine. Liminal is attempting to do some work in non-invasive brain monitoring. But while we talk about the business there, just full awareness that management does not project Liminal from contributing anything in the top line for the foreseeable future. They're much earlier stage than Hyperfine is right now. But with that being said, the Liminal brain-sensing system is a concept. It wants to be the heart monitor of the brain. I love hearing that because heart monitors are just so ubiquitous. The idea of using that for your brain, it sounds odd, but when you think about the fact that right now the only way to get things like pressure sensing in the brain is to drill a literal hole and somebody's head, and insure a pressure sensor bolt. If they succeed, that surely is a big market.

Feroldi: To your point, this is a little device that will be worn on the patient when they're in the hospital to monitor the way that the brain, the pressure inside the brain. Currently, there is no way to do that and it sounds crazy that in 2021 that the state of care is to drill a hole into the head or more likely, probably just not be able to monitor at all. This technology could come to market and it could be disruptive. To your point, while this is an interesting technology, management believes that this won't be generating any revenue for the company until 2023, and that's obviously a best-case scenario, assuming that FDA approval goes through. For me, as a potential investor in this company, I'm basically going to assume that that business goes to zero and doesn't happen at all and I'm just going to focus on the MRI business that exists today.

Flippen: Well, let's do that then. Let's talk about the MRI business, because the market opportunity here is massive. The MRI imaging market today is currently a $23 billion opportunity. I know Hyperfine doesn't see itself limited by that current market opportunity though, because as I mentioned, having a portable, cheaper, more accessible MRI machine expands the use cases beyond what exists today.

Feroldi: But even still, just the market for their imaging machine alone could be potentially worth $23 billion. They hope to get to about $250 million or so in revenue within the next five years. That's their optimistic forecast that they are putting out there. But even if they can do that and at that rate, the company thinks that will be self-funding. If it can get there, what's that? 1% of its current market opportunity. Even if it grows hyper-fast over the next five years, it still won't have kept its existing opportunity. Again, that's just in MRI. If the Liminal system does work out, the company believes that will add another $23 billion into its market potential and it also has a third business that it's developing: a guided robotic intervention to actually take essentially the imaging that is found from its first two products and use that to operate on the patient. The company believes that that is another $23 billion market opportunity. If this company does not work out for investors, it's not because the opportunity isn't huge. It's huge.

Flippen: When you think about how Hyperfine and this combined entity is thinking about monetization, I mentioned at the start of the show that it requires very little up-front investment from the hospital. It's cheaper than the millions of dollars that a typical MRI machine needs. How do they monetize this strategy?

Feroldi: I think that that's one of the most interesting things about this technology. They didn't give us any details about what this is going to cost them to create, so we don't know that yet. However, they did say that they're going to be selling this essentially using a software-as-a-service business model. They are going to charge the hospital just over $7,000 a month, about $7,250 per month, and that will put this device into the hospital. It turns a huge one-time upfront cost to install the MRI machine into a predictable recurring revenue charge for the hospital. But at that price point, given the potential usefulness of the technology, I could see a lot of hospitals saying, "Yes, we will add this to our current workflow, because it's not disrupting what we already have." I really like that. If I was a hospital I could say, "Hey, I can offer this technology, portable MRIs, and just pay about $7,000 per month." That sounds like a score.

Flippen: The downside of not charging this big up-front cost to hospitals is that it takes a while though, for Hyperfine's business to really become cash-flow positive. Management, even at their projections, which are aggressive, I won't say they're wrong. But management's projections will always be aggressive when they're trying to raise equity capital. Management believes that recurring revenue from Hyperfine's portable MRI machine could be around $250 million in 2025 and only then will they be cash-flow breakeven on that level of revenue. Even with management's projections, we're not looking at a business that will generate any free cash flow for the next four to five years.

Feroldi: That makes this a high-risk company for sure. The bet here is that the early adoption that we've seen so far is going to continue and accelerate from here. That's the bet you're making if you're buying this company today. However, on the flip side, while revenue growth is slower, given the nature of the business model, that is some very attractive revenue that they are projecting. They believe that long term, by 2025, if they can reach the scale that they're hoping to get to, they believe that they can produce a gross margin over 70%. Again, that is recurring revenue because the model again is a software-as-a-service company. If that's anywhere close to accurate, I could see this really working out for investors.

Flippen: Although that is basing off, I believe, an image install base of over 2,800 machines, a far cry from the 45 that they have today. But I do love a business that is seeking to do great things in the world. I don't mean that just in the sense of disrupting technology, but this is a product that if it succeeds, genuinely helps patients save money from lower stays, links in their hospital, less risk from transport, while also helping hospitals save money from existing MRI costs, increasing accessibility for MRIs for those who need it the most, and potentially driving shareholder returns. I genuinely think it's rare that we find businesses that look to do great things in the world, helping every stakeholder involved, while also doing that on a profitable basis. Again, to get to that profitability, we are talking about a huge number of machines. But I love seeing that mixture of disruption and conscious thought in my investments.

Feroldi: Yes, I'm still getting used to the whole SPAC thing where management teams could come out and say, "Here's our projections for the next five years." Because of course, they have a huge incentive to make these eye-popping numbers that just look fantastic. To your point, yeah, they think that they're going to have 2,848. How they came up with that precise number, I don't know. You would think that they would just say, "About 2,500." But no, 2,848 is what they are projecting, and that is a compound annual growth rate that's in the hundreds of percent from here. So yeah, to get from 45 today to that number would require a really strong execution, but they believe that they can do it. On another note, they do think that by 2023, that sensing business, that Liminal business, will be operational on the market and producing revenue. They believe that they will have 1,661 of those systems installed too. They believe that that business will start to take off. The revenue from that business, we don't know what the profile is going to look like, but it does seem that the revenue per unit is going to be much lower than it is for the MRI machine. That makes sense, given that the MRI machine is going to be generating $8,000 in product ramp, but make no mistake, this company believes that the next few years are going to see hypergrowth on the top line.

Flippen: I think it's worth mentioning that last aspect of the business, which is we talked about their mission statement being imaging, sensing, and guided robotic intervention. The MRI machine is the imaging; Liminal, with their brain monitoring, is the sensing. The last part of that piece is the guided robotic intervention, and for investors that might remind them of businesses like Globus Medical, Intuitive Surgical, these businesses that are focusing on minimally invasive surgery. When I listened to the business roadshow, and read through their presentation, I found very little information about what intervention could look like for this business. Probably because obviously they're focusing on imaging and sensing right now, they just know that long term, post probably 2025, this is an area of expansion for them. They could see themselves getting into guided robotic intervention, which could help treat the issues that are discovered through imaging and sensing. All management said about this, that I heard, was that they don't like the esoteric designs that work around magnets right now. It went a little above my head, but I like the fact that that is on their sites, because the way that the liminal system works with Hyperfine's MRI machines right now is that they can exchange information. The theory is that once Liminal is up and running, they'll be able to exchange information to make the process of treatment seamless. Intervention is the logical next step.

Feroldi: It really is, and the chart that they did put out there for that business, the robotics business, will start to produce revenue by 2025. But that means that investors essentially have four years of waiting to do before they realize if that business will amount to anything at all. I like that the company has three different business units that it's developing right now. That to me is clear signs of optionality, and they also mentioned that they're planning on developing software that allows all these products to work seamlessly together. So that could really make them even stickier and even stronger if they can develop it over time. But four years from now, the sensing business is at least two years away and the robotic business is at least four years away. But make no mistake, if this company succeeds, it's going to be based on the MRI business.

Flippen: Definitely. Before I move on to summarize our thoughts here, what do you think about the president and CEO of Hyperfine or this combined entity?

Feroldi: His name is Dave Scott. He seems to be exactly the kind of leader that you want in place. He's worked for a number of medical companies, including Verb Surgical, Abbott, Intuitive Surgical. He spent time at Apple and he's been in the business for 25 years. That is the kind of resume that you want to see for somebody that's going to have to take an innovative company and really grow it. I didn't get a lot of more information other than basically his resume. We don't know the inside ownership of this company yet. We don't really have much on Glassdoor, there were basically three reviews, that means that the data is essentially useless. All the things that I used to look at, we don't really have other than to say his resume seems good.

Flippen: Well, let's summarize our thoughts here because again, when I read through a road show, when I get such little information about a business, I have to say, after going through all of this, I'm excited. I'm really pumped.

Feroldi: That's great. Emily, you're not someone that gets pumped  much when it comes to businesses like this. I'd expect you to be much more skeptical.

Flippen: I will get there.

Feroldi: Fair enough. When I see this business, I think that there's a lot to like. Again, we don't know everything about the valuation, but it seems like the company is going to be sub $1 billion. I like that. I like that the company is already through the FDA and that we have early signs that the technology is being accepted by the medical community. I really like the business model. That's counter-positioning. That's when you take an existing business model and you flip it on its head. Because if you can do that successfully, that really changes the dynamic of the industry, and that makes it hard for competing MRI companies to copy you because if they were to switch to this model too, they'd have to give up millions of dollars in up-front revenue and that's really hard for established companies to do. I like that reimbursement is in place. The management team seems to be perfectly fine. And post the SPAC process, they are expected to have $375 million in cash and zero debt. We don't know what their burn rate is, but they did hint that they think that is going to be enough to get them to cash-flow breakeven. We'll see, because launching a medical device company from scratch is really expensive. I also really liked that Dr. Jonathan Rothberg is involved with this company. That does give me some confidence. 

On the other side, the other two businesses are still years away from FDA approval and it's really hard to know what the chances of this happening is definitely be unprofitable for many, many years, that's not all that common, and we don't know things like insider ownership, and I wouldn't invest in a company unless I knew that kind of thing. There's a lot to like here, there's a lot to be excited about, but I'm still a little bit skeptical at this point. What do you think, Emily? 

Flippen: Well, the same way I wouldn't marry someone based on their Tinder profile. I'm not going to invest in a business based on their roadshow or their SPAC investor presentation, because I know they're presenting the best side of themselves and I think maybe there's potential there. Maybe that turns into a long-term relationship. Maybe I will end up buying shares of Hyperfine. But right now, I think I want to understand how management acts as a public company. I want more information. How does this team work when times are tough as opposed to easy right now? What happens if they don't make headway with the FDA, especially on the Liminal brand of products? These are all things that I want to consider more deeply before investing in any company. It just goes to show, I never really care how great a company's initial presentation is. I think what really shows tenacity in investments is how they perform over the long term. Good thing is that this business is so early in its life, that I can afford to wait quarters, years even, before I buy shares if I ever do buy shares. I'm excited by it. I love the fact that we got the opportunity to cover it. It's now on my radar and will continue to be on my radar, but I'm by no means looking to go out and get married to this business before I even understand the inside ownership structure, the financial picture, the costs, all of these details that are missing.

Feroldi: That's fair enough. But on the flip side, if you were the type of investor who likes to swing for the fences, I could see that there is enough here to say, "Hey, it's worth taking a flyer on." For me, right now, I'm going to be in the wait-and-see mode. Personally, I'm still not completely comfortable with investing in SPACs before the entire process has gone through. I like to see at least one quarterly earnings report for the company before I would get in. But like you, I think this company is definitely going to be on my radar.

Flippen: Yeah. Maybe if you're the type of person who got married in Vegas with Elvis and that worked out for you, this is your investment.

Feroldi: There you go. I love the dating analogies you bring to Industry Focus, Emily.

Flippen: It's the only analogy I have. It's becoming really annoying and outdated at this point, so I hear you, listeners, I'll do better in the future. Well, Brian, thank you so much as always to come on and share your valuable insights. I really appreciate it.

Feroldi: Thanks for having me.

Flippen: Listeners, that does it for this episode of Industry Focus. If you have any questions or want to reach out just to say "Hi," you can always shoot us an email at [email protected] or tweet us @MFIndustryFocus. As always, people on the program may own companies discussed on the show, and The Motley Fool may have formal recommendations for or against any stocks mentioned, so don't buy or sell anything based solely on what you hear. Thanks to Tim Sparks for his work behind the screen today. For Brian Feroldi, I'm Emily Flippen, thanks for listening and Fool on.