TransEnterix Bullish Thesis + Earnings Preview

By The Wall Street Fox Tuesday, February 24, 2015
TransEnterix is a minimally invasive surgical company founded in 2006 that originally sought to revolutionize general surgery through the use of flexible catheter-based technology. Soon enough, the SPIDER surgical system was born. The SPIDER is a disposable, manual surgical device that utilizes a single incision about the size of a dime to introduce various tools and a camera into a patients abdomen in order to carry out specific operations. The SPIDER is the first device to introduce true left/right hand instrumentation, enhanced flexibility and articulation, and internal triangulation in a patient side surgical platform.

To date, surgeons have carried out more than 4,000 operations since the device received FDA approval in 2009.

After TransEnterix conducted a soft launch of the SPIDER, they began receiving feedback from surgeons which led them to question whether or not the company should continue with its original plan of ramping up commercialization efforts and expanding its sales force for a global roll out of the SPIDER. While feedback was positive from surgeons, they kept mentioning specific qualities of Intuitive Surgical's da Vinci system that would be beneficial to have included in a patient side surgical platform like the SPIDER. Basically, surgeons wanted the best of both worlds.

In 2012, TransEnterix was at a crossroads: either continue commercializing a product it's been developing for years (and spent roughly $76M on), or shift gears entirely and focus on developing a patient side surgical robotic platform for general surgery. The company ultimately decided to take what it learned from the SPIDER and include that core technology as the base of their new device, the SurgiBot.

It is important to note that there are key factors that differentiate the SurgiBot from ISRGs da Vinci System. These factors include price, mobility, tactile feedback, patient side operation and more. The SurgiBot will cost ~$500,000 compared to da Vinci's ~$2 Million price tag. TransEnterix's low price point allows the company to target the 3,000+ small-medium sized hospitals and 5,000+ private surgery centers that have not yet invested in robotic surgery because of its steep costs. The SurgiBot is mobile and can easily be wheeled into operating rooms while the da Vinci takes up a lot of real estate and usually remains installed in the same operating room. The SurgiBot has full tactile force feedback, which makes navigating around a patients abdomen much easier for a surgeon, the da Vinci does not have this crucial capability. The SurgiBot allows the surgeon to operate in the sterile field, scrubbed in right next to the patient, where as the da Vinci has the surgeon out of the sterile field, working on the patient from a remote console several feet away. This is just a bare minimum, basic summary...a lot more detail can go into how the SurgiBot differentiates itself from the competition.

Now, fast forward three years and TransEnterix is on the verge of submitting their 510(k) filings to the FDA. If all goes as planned, the company will receive FDA approval in late 2015/early 2016 and begin selling the device shortly after. The company originally planned to submit the SurgiBot to the FDA in December of 2014, but a 6 month delay announced during last quarters earnings pushed that filing back to mid 2015. This delay led to a more than 50% decline in share value, which is when we were pounding the table to add more. It should be noted that this delay was not caused by drastic changes that were necessary for the SurgiBot to gain FDA approval, but rather for last minute tweaks (in some instances the relocation of a few screws) that required rigorous testing/validation.

After accumulating such a massive position in TransEnterix (relative to our entire portfolio) over the past year, a reflection is needed. Below are just a few bullet points that led to such a high conviction long thesis.

  • TransEnterix is backed by "smart money." 5 different healthcare oriented venture capitalists funded the company while it was private. Dr. Phillip Frost and Dr. Jane Hsiao of Opko Health invested in 2013 when TRXC went public through a reverse merger with SafeStitch Medical.
  • BlackRock acquired a ~6% stake in the company. Other institutional names invested include Vanguard, Putnam, Fidelity and more. Roughly 65% of the company is owned by institutions and insiders.
  • TransEnterix has high quality management. CEO Todd Pope was former CEO of Cordis, a billion dollar unit within Johnson and Johnson. Mohan Nathan comes from Intutive Surgical. CFO Joseph Slattery played an instrumental role at Digene.
  • TransEnterix has worked together with the FDA for the SurgiBot submission. The company conducted a formal pre-submission filing with the FDA, received feedback, and incorporated that feedback into their final 510(k) filing. The FDA also signaled that TransEnterix would be able to utilize the human data from the 4,000 surgeries conducted with the SPIDER as data for the SurgiBot submission. These factors drastically de-risk the FDA approval process.
  • TransEnterix already has a customer base and is a known presence in the surgical business following its launch of the SPIDER system. The company has experience with FDA submissions/approvals and product launches. 
  • The surgical robotics market is growing, has barely been penetrated by competition, and the SurgiBot is a compelling product that solves many solutions hospitals/surgeons/patients are seeking. This supports a long term, rapid growth thesis for TransEnterix.

TransEnterix will report Q4 earnings tomorrow before markets open. Because the company ceased sales of its previous product to focus on developing the SurgiBot back in 2012, revenues hold little weight here. What does hold weight is the status of the current FDA submission/approval timeline for the SurgiBot, the current and projected cash burn rate, and commercialization plans.

TransEnterix has enough cash to make it through the end of the year, and a recently announced $25M at the market offering should help the company make it through the initial commercialization stage of the SurgiBot if they indeed are on schedule.

The risks that lie ahead include: TransEnterix delaying the FDA filing again due to some unforeseen hiccup (it's happened once, it can happen again), the FDA pulling an about face and informing TRXC that they actually need to conduct human trials for SurgiBot approval instead of utilizing data from the SPIDER operations, which would delay them by roughly 3 months. In short, the only real risk is that this gets delayed by a few more months, which would indeed destroy value in the short term, but in the long term the thesis would remain unchanged.

Here is my 100% speculative opinion on why I believe TransEnterix is on schedule with their mid 2015 FDA filing of the SurgiBot:

  • TransEnterix has a presentation at the RBC healthcare conference the day after earnings, and another the following week at the Raymond James healthcare conference. Typically, a company would shy away from announcing disappointing news at earnings, and then reiterate that disappointing news at two healthcare conferences directly after earnings. 
  • A brand new re-designed website may signal that the company is preparing for the initial stages of hiring a sales force. From the website on the career page, "Due to the volume of inquiries received, we regret that we cannot contact all applicants personally."
  • When TRXC announced its 6 month delay in November, it also announced the resignation of its COO, who was responsible for the R&D of the SurgiBot and its developmental timeline, among other duties. Following his departure, Todd Pope oversaw the R&D of the SurgiBot, as the company decided not to immediately hire a replacement COO. TransEnterix recently posted a new job position for a R&D director, which signals to me that Pope is ready to pass on the torch because the bulk of the work has been done and the SurgiBot is near ready for FDA submission. Introducing/training a new R&D director in the midst of a frenzied rush to speed up the development of the SurgiBot to reach its mid 2015 timeline does not make sense if they are indeed still falling behind schedule. This new R&D Director signals that the company is done with the bulk of the work associated with SurgiBot development/FDA filing and is ready to train a R&D director to lead the development of future products/tools/enhancements for the SurgiBot.

Technically speaking, TransEnterix has a fugly chart. The stock is in a clear downtrend, consistently getting rejected at that purple downtrend line. However, it has been putting up a sustained fight, and a decisive break above that trend line leaves for lots of ground to be recovered. The stock did hold its 50 day for a brief period of time, but recently broke below it. If a decisive sell off occurs, there is a lot of room to move lower. 

Other Surgical Robotic companies include MAKO, Mazor Robotics, Hansen Medical, Stereoaxis, and Imris.

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The Wall Street Fox

The Wall Street Fox utilizes fundamental and technical analysis to generate investment ideas. TWSF holds a MBA, and is currently preparing for the Chartered Market Technician (CMT) designation.

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