Investor Impatience Presents High Conviction Opportunity: We Are Pounding The Table On TransEnterix

By The Wall Street Fox Sunday, November 30, 2014
Investors are impatient. It's human nature. Humans have a constant want for instant gratification and when they don't get it, they're disappointed. Investors have a constant want for instant gratification and when they don't get it, they freak out and hit the sell button.

TransEnterix (TRXC), a company we have been following/covering/investing in heavily over the past year, is having one of these moments. We believe a panic fire sale is going on right now and it won't last forever. Investor impatience has presented a high conviction buy opportunity and we are currently pounding the table on TransEnterix because of it. Below we will attempt to clear the mud.

It doesn't get much uglier than this. On a YTD basis (left), TRXC is down ~75%. On a monthly basis (right), TRXC is down ~50%. While our entry into the security ended up being, without a doubt, premature, we remain bullish and remain buying.

It takes real skin to be invested in a developmental stage medical device company, as shown by the two charts above, and I'm reminded of this everyday when I log into my brokerage accounts. But after conducting due diligence, I'm always reminded that TransEnterix is not your run of the mill medical device company. TransEnterix has the potential to experience exploding revenue and business growth thanks to its core, upcoming product offering: The Surgibot. The video below shows you exactly what you are investing in when you purchase a share of TransEnterix.

The SurgiBot utilizes a single incision about the size of a quarter (25mm) to insert the flexible snake like arms and camera, as illustrated in the video, and conduct surgery. This results in less post operative care for the patient, less blood loss, less scars, and a speedy recovery time.

The SurgiBot will be the first product to hit the market and directly compete with Intuitive Surgical's (ISRG) da Vinci product, and once the market picks up on that, nothing will be able to hold back this stock. Keep in mind, Intuitive Surgical is worth $18.8B, TransEnterix is worth $132.6M. We see an enormous amount of potential upside for TransEnterix.

To be as confident as we are in buying TransEnterix, you really need to understand the dynamics of robotic surgery, which, thanks to Intuitive Surgical, is a booming industry. If you'd like to  learn more about the basics, read our prior reports on TransEnterix, email us for professional analyst reports from the investment banks that cover TransEnterix, or listen to the company's latest presentation at the Stifel 2014 Health Care Conference, or listen to the company's upcoming presentation at the Piper Jaffray conference on December 3rd, both of which can be accessed from the company's investor relations page found here. 

The advantages of TransEnterix's SurgiBot over Intuitive Surgical's da Vinci and Titan Medical's (TITXF) SPORT platform (expected to be FDA approved mid 2017), and other highlights, are listed below:

  • Low $500,000 initial unit cost (small hospital beds/private surgery centers can afford it)
    • Intuitive's da Vinci costs anywhere from $1.2M-$2.5M, Titan Medical price is unknown
  • Surgeon is scrubbed in and patient side, the way surgery has always been done
    • Intutive's and Titan's offering is a console based system where the surgeon is 10+ feet away from the patient and out of the sterile field. Patients and surgeons both prefer patient side operations. 
    • Dr. Juan-Carlos Verdeja, a leading U.S. surgeon said after using the SurgiBot, "SurgiBot has the opportunity to revolutionize the robotic market. The platform automates what have been manual laparoscopic tasks in meaningful ways with added strength, precision and visualization. Plus, the platform allows me to scrub in and work at the patient’s side, and maintains a tactile feel that I want as a surgeon.”
  • Surgeons have 100% tactile feedback
    • Intuitive's and Titan's offering lack any form of feedback for the surgeon. Tactile feedback is also known as touch feedback, and in surgery, it's what the surgeon feels when operating on a patient. Tactile feedback allows surgeons to feel the difference between a vein, an artery, an organ and more through vibrations that travel directly from the surgery tool to the hand of the surgeon that is holding that tool. 
    • Because Intutive and Titan's offering is a console based system 10+ feet away from the patient, they receive touch/vibrational feedback. The lack of tactile feedback has led to accidental fatal artery cuts by surgeons, which has caused a mountain of civil lawsuits to be filed against Intutive. The SurgiBot is a game-changer because the surgeon remains that tactile feedback throughout the operation.  
  • TransEnterix is able to utilize data from its predecessor, the SPIDER, to gain FDA 510(k) approval for the SurgiBot
    • TransEnterix's previous product, the SPIDER, which is a non roboticized version of the SurgiBot, has been utilized in ~4,000 general surgery operations since it received FDA and European approval in 2009/2010. TransEnterix is able to utilize the data from those 4,000 surgeries to gain approval for a multitude of surgical indications rather than conducting human trials for each surgical indication. This greatly derisks the FDA approval process for the SurgiBot.
  • The SurgiBot has a small profile and is mobile, can be moved inbetween operating rooms
    • Intutive Surgical's da Vinci has a large profile and is not easy to move in between operating rooms. The SurgiBot's small profile is ideal for small hospitals/surgery centers. Titan Medical is developing a mobile surgical platform but has yet to reveal a prototype of its product.
  • TransEnterix has strong institutional backing, large insider ownership
    • Titan Medical has zero institutional backing
The list goes on (true triangulation, motion scaling, 3D visualization, high ergonomics, advanced energy device, attractive business model/recurring revenue model, etc.). Investor presentation slides below highlight the case for TransEnterix.


Why Did TransEnterix Drop 50% In A Month?

TransEnterix released its Q3 earnings report and revealed that they were pushing back the FDA submission filing of their SurgiBot product 6 months, to mid-2015 rather than December 2014. This delay, coupled with the COO resignation, sparked a multi week panic sell off. The COO was let go for failing to meet his deadlines. He did not leave voluntarily, he was let go. CEO Todd Pope explains at the Stifel conference, ex-COO Mueller was great at the developmental side of medical devices, not so much the manufacturing side, which is where TransEnterix is at now. The departure of the COO represents a non-issue, and a more capable COO candidate should fill the position closer to SurgiBot commercialization. Institutional ownership remains unchanged following the early November announcement, and it seems to be impatient retail investors who are selling their positions, causing the steep price drop.

Another worthy note: a week after TransEnterix's delay, Titan Medical announced that they would be delaying the commercialization of their SPORT surgical platform by 18-24 months, and won't be releasing the product until mid-2017, which caused their stock price to drop as low as 50% in a mere two days. This news development may have also played part in TransEnterix's sell off, creating a spook in developmental surgical robotics companies. 

We feel that a 6 month delay does not warrant a 50% sell off and therefor, we have been pounding the table. Our own share position has nearly doubled in the past month, and we are on the verge of divesting our beloved Plug Power holdings to buy more TransEnterix for the reasons listed above. No hate on PLUG, we are still bullish there, but we are compelled to add to TRXC at these firesale prices.

Keep in mind that the SurgiBot will be submitted to the FDA in mid-2015, and the approval process takes anywhere from 6-9 months, so we are not expecting SurgiBot sales to commence until Q1 2016. 

We don't like putting all of our marbles in one stock, but at these current prices, TransEnterix is seriously tempting us to do so. We continue to have a long-term, positive bias in TransEnterix, and expect the stock to be significantly higher come SurgiBot FDA submission/approval. 

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The Wall Street Fox

The Wall Street Fox utilizes fundamental and technical analysis to generate investment ideas. TWSF has experience as a buyside equity analyst, holds an MBA from Ithaca College, and is currently preparing for the Chartered Market Technician (CMT) designation. Please follow and share.

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