Stereotaxis Inc. (STXS)

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Stereotaxis Should Soon Attract Investors Or A Buyer (SA)

January 19, 6:22 PM ET | Zvi Bar

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Though still a highly speculative equity, Stereotaxis (STXS) appears to be in a sweet spot for potential revenue growth and for becoming an acquisition target by larger companies that are in the fields of medical devices and/or robotics. Shares of STXS have had a volatile last several months, but have recently performed well and appear poised to continue doing so throughout 2014. See a recent performance chart (click to enlarge):


Stereotaxis is the market leader in robotic navigation solutions for the treatment of arrhythmias and coronary disease, with a portfolio of over 100 patents for use in hospital surgical suites. The company's key device uses magnets to generate a Tesla field in a patient's heart, and then uses that magnetic field to guide devices. This magnetic guidance system allows for more control than traditional methods, which use a pull-wire to guide a device.

The system is considered safer due to its greater precision and a reduced use of x-rays. The reduced x-ray use should not only be seen as a benefit to patients, but also to using physicians, whose continuous occupational exposure to radiation should substantially diminish as a result of the technology.

The company received two key approvals in 2013, which should help drive forward adoption of the cutting edge technology. In March, Stereotaxis received Japanese regulatory clearance of its Niobe magnetic navigation system. In the Fall, Japan gave Niobe temporary classification as a C2 medical device, which is the nation's highest reimbursement category. The better the reimbursement rate, the more likely a hospital is to acquire the system. Japan is expected to set a permanent fee structure and reimbursement classification in April of this year.

The company also received U.S. FDA clearance for its Vdrive with V-Sono ultrasound robotic catheter navigation system in July of 2013. Earlier this month, Stereotaxis announced that it completed the clinical trial required for FDA clearance of the Company's Vdrive with V-Loop, which would be the second Vdrive product to receive FDA clearance, if its gets it.

The company did have some serious financial issues going into 2013, and its CFO left the company in but it did a decent job addressing them in the second half of the year. In August, and shortly after receiving its first Vdrive FDA clearance, STXS received $11.7 million as a result of exercised warrants from convertible note holders and institutional investors. The process helped extinguish $8.5 million in debt. Subsequently, the company issued a rights offering to shareholders, through which STXS raised $10.2 million in cash.

The exercising of these warrants and rights leaves STXS in a much healthier financial position, and the ability to ramp up both production and marketing initiatives to coincide with the recent and likely continuing device clearances. The company does still have an $18.5 million term loan that pays a whopping 16% interest rate. Future financing should be far less costly, in accordance with the reduced speculative nature of the technology and its probable industry adoption.

The technology also has minimal competition in the marketplace in terms of comparable advancements to traditional catheter manipulation methods. Further, the company has an already defensible and widening moat in the form of patents and regulatory clearances that are expensive to obtain. This moat should help Stereotaxis maintain high gross margins on its products for several years.

If widespread system adoption occurds, an increased installation base should set up a nice recurring revenue stream in the form of disposable parts used in advancing catheters and routine servicing of the system. This would be similar to the reveue setup for already adopted robotic surgery systems, such as Intuitive Surgical's (ISRG) da Vinci system and Mako Surgical's RIO system. In late 2013, Stryker Corporation (SYK) announced its intention to acquire Mako, which it completed in late December.

It would not be entirely surprising if a company like Stryker or ISRG, or perhaps a large conglomerate with a substantial medical device business, like General Electric (GE), moves to acquire STXS in advance of widespread adoption of its products. Similarly, Google (GOOG) has recently made some robotic technology acquisitions and also recently announced the early stage development of a medical device in the form of a contact lens that would act as a blood-glucose monitor for diabetics. At current valuations, these substantially larger companies could easily absorb STXS without much of an effect upon quarterly reporting, but the future revenue from magnetic catheter navigation systems could become significant if the technology does become the standard of care.

The company's technologies received clearance in multiple European markets prior to 2013, and in the highly advanced Nordic markets, they have already become the standard of care for electrophysiology ablation, or are or are rapidly approaching becoming so. By comparison, Stereotaxis has little to no market share in the U.S. and Japan. If the company were to obtain even ten percent of the ablation market in the U.S. and Japan, that would be over twice as large as the entire Nordic Market.

The global EP ablation market is now valued at around $8 billion annually, with substantial expected growth in the coming decade. Widespread adoption of this technology should mean that a significant portion of that revenue could find its way to Stereotaxis. Further, other uses exist. Though still speculative, STXS' potential is significant, and the possibility of near term catalysts in the form of the setting of permanent Japanese fee structures in April and a possible further FDA clearance later this year should help move valuations higher.

Disclosure: I am long GE, STXS. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Source: http://seekingalpha.com/article/1953551