ISRG - Catalysts Are Coming Soon For Stereotaxis

Summary

• Stereotaxis, Inc. stock fell in 2022 because of new product delays and weak new orders. These delays and disappointing new orders were caused by macro headwinds that are abating.
• There are many catalysts in 2023. The Magic catheter getting the CE Mark should turn investor sentiment in favor of Stereotaxis.
• I believe Stereotaxis, Inc.'s 2023 sales will be at least $49.5 million, which is above the consensus of $41.78 million.

Thesis

Stereotaxis, Inc. ( STXS ) is undervalued due temporary macro headwinds that are abating. The two most prominent ones are the extreme tightness in hospital budgets and supply chain issues. Once Stereotaxis starts getting its new products approved, sentiment will switch towards optimism. Investors will focus on future growth instead of past delays. I think the firm will beat the current 2023 sales consensus estimate.

Macro Headwinds Catalyzed Delays

The pandemic delayed the initial surge in orders expected for the Genesis RMN (robotic magnetic navigation) device Stereotaxis came out with in 2020. While the firm offers a calculator on its website which shows how the machine can pay for itself after a certain number of procedures, this didn’t matter much when hospital budgets were in dire straits. Over 50% of U.S. hospitals were losing money in 1H 2022.

The pandemic seems like it's long over if you look at the rise and fall of most Covid beneficiaries like software stocks. However, surgeries still haven’t fully recovered. Surgeries are the profit center for hospitals. It made sense for hospitals to delay ordering and installing a Genesis since it’s a multi-million dollar project ($1.7 million for the device + $1-$2 million for construction). Furthermore, labor inflation increased costs for hospitals just as their revenues were declining. The labor shortage will probably last longer than the decline in surgeries, but it might not be a major future detriment to Stereotaxis because its device provides efficiency gains for the Electrophysiology ((EP)) lab.

The supply chain caused 2 separate delays for the Magic Catheter which was supposed to be submitted for CE Mark in 2H 2021. It ended up being submitted to EU regulators in July 2022. The IDE submission to the FDA, which will start an almost 2-year-long process before final approval, was supposed to occur soon after the CE Mark submission. Because the firm needed to do an additional 2 month animal test at its facilities, which it needed to get approval to do, the IDE submission is now expected to occur in Q1 2023.

The Magic catheter is the most important product in the firm’s history because it expands its disposable portfolio which is a high margin (+80%) recurring sales base. Instead of getting $300 per procedure from the 10% catheter royalty from Biosense/J&J, Stereotaxis will earn the whole $3,000. Plus, it improves the usability and effectiveness of its magnetic robots; the Biosense/J&J catheter design is more than a decade old. Stereotaxis described its Magic catheter as adding power steering for electrophysiologists (easier control during procedures). Furthermore, the firm’s next generation semi-mobile robot, which should launch in Q3 2023, relies on this catheter.

The ((NEAR)) Future Is Bright: Magic

Minor execution issues and moderate delays due to macro concerns explain why the stock sold off in 2022. Now, let’s shift gears to the exciting part of the story: the coming positive catalysts. The most important catalysts revolve around the Magic catheter. Once we get good news on this device, investor sentiment on the firm’s ability to hit targets will improve. Leading up to the FDA approval of Genesis in early 2020, the firm had a lot of credibility with investors. This went away mostly due to pandemic related delays.

Specifically, the firm should be filing the Magic catheter’s IDE to the FDA in Q1 following the completion of its 1-month animal trial and the 1 month follow up period. On the November call , the firm mentioned its animal care facility in St. Louis had just been deemed GLP level quality. If you assume the 2 month test and review started in early December, the IDE submission should occur in February. The firm will either announce it when it happens or announce it on its quarterly call on March 3 ^rd .

As an investor, I prefer intra-quarter updates instead of waiting for the call. I’m 90% sure it will be announced when it happens. This means if it’s not done by the call, they will say it’s not done on it and give further details. The IDE submission starts the approximate 2 year clock for FDA approval, putting it somewhere between Q4 2024 and Q1 2025.

Stereotaxis should get the CE Mark for the Magic catheter in Europe sometime in Q1 if everything goes smoothly. Some shareholders on social media seem to be a little confused on the timeline. They are worried it has been delayed. Management said the best case scenario would be an approval at the end of 2022 based on Osypka’s experience. Osypka is the manufacturer producing them. Osypka has experience with MDR which is the new EU regulatory framework. The regulatory agency gave the Magic submission a completeness check in October. It subsequently started looking at the details of the tests done.

There is an overflow of devices being submitted to this agency because MDR requires previously approved devices to get re-approved. It’s a bit of a mess right now which means a delay of a few months wouldn’t be a negative signal for Magic. Of course, this doesn’t mean there won’t be a negative result. The reasonable worst case scenario would be for Stereotaxis to be forced to redo all its tests because they were done incorrectly. This could take another 6-12 months. I don’t expect that to occur because Stereotaxis has leaned on Osypka’s knowledge. There could be a smaller revision needed, or it can get approved right away. The MDR regulations are new and complex, but I still expect an approval in Q1 since Stereotaxis has largely been MDR compliant since last summer.

Before I move on to other new products and a discussion of Genesis orders, I must emphasize how important the next piece of good news will be for the stock. Investors have dealt with a bunch of delays on most new products. It’s human psychology to see the first positive product announcement as a sign of good news to come. I actually think that’s a reasonable perspective because most of the delays were due to the same thing: the supply chain crisis caused by the pandemic.

Guidewire

The guidewire has also been delayed by about a year due to manufacturing issues caused by the supply chain. Stereotaxis’ current projection for the start of guidewire sales is 1H 2023. This device only needs a 510(k) approval which is much less stringent than what the Magic catheter is going through with the FDA. If the time horizon is reaffirmed on the March call, we should see the device submitted to regulators this spring.

The guidewire is another high margin disposable product. It is pivotal to the firm’s neuro-interventional aspirations. The goal is to apply the preciseness of magnetic technology to tortuous nature of the brain’s blood vessels. This device will also be used with the semi-mobile robot I will discuss in the next section. Since the semi-mobile robot could be approved in America about 1 year before the Magic catheter, neurosurgery with the guidewire will be the only initial go-to-market strategy for the semi-mobile robot in the states. That’s why it’s important for the guidewire to be approved.

The semi-mobile robot only works with new interventional devices. The Magic catheter, the guidewire, and guide catheter are all backwards compatible with the Genesis and the Niobe. I’m not sure if neurosurgery will occur in existing EP Labs. The semi-mobile will make it easier to grow the install base, which I will get into later.

The CEO shared a comment on the call from one of the leading neurosurgeons he showed the new technology to. The neurosurgeon stated:

"I've done thousands of similar procedures and what we were just able to do with your robot is unbelievable. This provided an unprecedented ability to rapidly reach areas that are otherwise impossible to get to. This would have real value right now in my daily practice. In some of these procedures, I have been forced to spend an hour exchanging handfuls of devices to finally reach the target. And with this catheter, it was effortless. The clinical and financial benefits is huge."

This comment is exciting because the guidewire and the semi-mobile robot can make these procedures feasible for all neurosurgeons who want to adopt the technology later this year. Stereotaxis will be hosting a neuro centered event later this year to expand upon this comment.

Semi-Mobile Genesis

The semi-mobile robot has two major advantages over the current generation Genesis which make it much more accessible to hospitals. The first is related to construction. There doesn’t need to be electromagnetic fields installed in the walls like with Genesis. Plus, the semi-mobile doesn’t weigh as much as Genesis which means it doesn’t require construction so the floor can handle the weight. There are 6 month lead times to install Genesis which shut down the EP Lab. The semi-mobile can be installed in 1 day; it comes pre-assembled. These advantages lower costs and make it an easier sell.

Secondly, because it can be quickly installed and isn’t a fixed device, the semi-mobile device can be leased to hospitals which significantly lowers upfront costs and makes it easier to test out. The company can potentially further lower the cost of the semi-mobile by cutting lease payments if a certain threshold of disposables is purchased.

These two advantages expand the market for Stereotaxis’ devices, instantly making them more accessible. This leads to more collaboration among EPs and more studies using the device. This creates a snowball effect making robotic magnetic navigation a standard of care for treating complex arrhythmias. Stereotaxis is working on an app called Synx which connects EPs around the world, helping them improve patient outcomes. A similar snowball effect can start in the future indications Stereotaxis will go after such as ischemic & hemorrhagic stroke, tumor embolization, peripheral artery disease, coronary angioplasty, and abdominal aortic aneurysm. These are in the firm’s long term plans once its portfolio of disposable catheters, guidewires, and guide catheters are released and approved.

The semi-mobile device has been slightly delayed from filing for the 510(k). It was initially expected in late 2022; current guidance is late this summer. I barely count it as a delay because prior to the initial unveil of the device at the investor presentation in December 2021, I didn’t expect a new robot to come out for a few years. This presentation caused me to increase my position in the stock significantly due to the semi-mobile advantages I just mentioned. I expect the device to be approved in Europe first since that’s where the Magic catheter will be approved first. America will follow soon after. The regulatory process isn’t as stringent as it is for the catheter. It’ll also be easier since it uses similar technology to Genesis and Stereotaxis just went through that approval process.

The CEO of Stereotaxis used confident language when discussing the timeline for the semi-mobile robot on the November call which I can subjectively measure based on my history of talking to him and listening to the calls. I expect to hear news on the regulatory filings late in the summer. The firm should start accepting orders in Q4. The device will be easier to install and manufacture (each side is identical instead of mirrored), but there might be a gradual production ramp. If there is a lot of initial demand, manufacturing progress won’t matter much to investors.

Synchrony

Odyssey is Stereotaxis’ current display system that allows EPs to perform surgeries outside of the operating room using a mouse and keyboard. There are over 100 in use since the displays are installed with each robot. Similar to the current Genesis, it gets the job done, but suffers installation bottlenecks preventing it from reaching mainstream adoption. It requires a 350 pound 5 foot tall cabinet housed in a separate room. Plus, it requires thick cable wires routed in ceilings and floors. Installation takes over a week which shuts down the EP lab. It’s a premium priced product due to high costs. It needs to be manually installed on a PC. It also requires manual administration of accounts with significant maintenance.

Unlike the Genesis robot which will be sold alongside the semi-mobile robot as a more powerful machine, I think the Odyssey system will be phased out for the next generation system which Stereotaxis dubbed Synchrony. This display uses a cabinet that sits under a desk similar to a tower for a PC. It doesn’t require underground cables like Odyssey. It is automatically configurable as video sources are changed. It can be put in any operating room which expands the addressable market outside of Stereotaxis labs. I expect Synchrony to be launched in Q4 soon after the semi-mobile robot. This is a significant leap forward for Stereotaxis. This undertaking occurring at the same time as the semi-mobile robot is another reason why I’m very understandable of modest delays for these product launches.

China Expansion

China has so much interest in robotic magnetic navigation that they are buying Niobe devices which is the generation prior to the Genesis. In collaboration with MicroPort EP, Stereotaxis will be launching the Genesis in China along with its Magic catheter in the 2 ^nd half of next year. This will boost demand significantly.

MicroPort already hired 6 dedicated salespeople for its robotic capital sales team which will be selling the Genesis. The image above is an exclusive picture of the Shanghai showroom I received from the CEO. It was completed in Q3 2022, but Covid lockdowns prevented access. I expect it to soon be bustling with people now that the lockdowns are over.

New Genesis Orders & Installs

Up until Q3 2022, most quarterly reports showed disappointing new Genesis orders due to stringent hospital budgets caused by the pandemic. I predicted Q3 would be the beginning of a new era with improved hospital budgets and more Genesis orders. That was correct since the firm announced 4 new orders. Stereotaxis reports orders a little weirdly. Every order in between reports is a new order regardless of which quarter it was in. Obviously, firms report results from the prior quarter during the next quarter. This could be 2 months of added orders.

It helps that Stereotaxis also streamlined the process of closing orders. The firm utilized its data to better understand where each hospital is in the ordering process. This helps them understand which part of the sales funnel is most effective to press, whether its EPs or various lines in the chain of command at hospitals. Plus, the firm made 2 new key hires last August. They hired Frank Van Hyfte, who spent over 15 years at Intuitive Surgical ( ISRG ), and Tim Glynn who served as Vice President of Business and Market Development at Acutus Medical ( AFIB ).

To be clear, orders require a large down payment and a significant planning process, so they almost always close eventually. Stereotaxis is now getting strong new orders, but installations have still been delayed due to construction issues related to supply chain problems and labor shortages. As long as the firm shows there is demand for its products, investors will reward it. That being said, I want to see installations because real world usage shows the return on investment hospitals receive; that’s better than looking at a hypothetical financial model.

This is why I was encouraged by Bryan Vincent’s recent LinkedIn post . He is a capital sales manager at Stereotaxis. He stated:

“2020-2022 - 11 US Genesis Robotic Navigation Systems sold in 9 states. 2023 - 7 US Genesis installations scheduled, in progress and/or completed.”

The backlog is being worked through finally. This firm shouldn’t have a massive backlog of $16 million. That’s a unique issue caused by construction delays.

My Opinion On 2023 Sales Estimates

I don’t want to complicate investing in Stereotaxis. It’s simple. If 2023 sales estimates rise after the next reports, the stock will likely increase. I think the firm will beat current estimates. Management won’t give specific 2023 guidance on the March 3 ^rd call, but new orders and broad forward looking statements will determine the direction of estimates. Prior to the Q4 report, 2023 sales are expected to be $41.78 million which is up from the expected $29.47 million in 2022. That’s not much of an increase when you consider just the backlog being worked through and a normalization in procedure volumes in 2023 outside of China (China procedures should normalize starting in Q2).

Disposable, services, and accessory sales fell about $1 million in the first 3 quarters of 2022 year over year. It’s impossible to exactly tease out where this category of sales will land because disposable sales stop when the EP lab is shut down due to installation-related construction. Plus, there is a 1-year initial warranty period where hospitals don’t pay for servicing the Genesis/Niobe. I’m mostly focusing on the installation base being up and procedure volumes normalizing when I project growth in this category. I believe the vast majority of the $16 million backlog will be worked through since the construction issues are going away. The firm has 13 months to get the most recent orders installed before fiscal year 2023 ends (more time for older orders). Orders in 1H 2023 will also generate some sales in 2023.

If the firm gets the CE Mark for the Magic catheter in Q1, there should be a 10 fold increase in recurring catheter revenue to $3,000 per procedure as I mentioned earlier. If you assume that impacts about 35 Niobe/Genesis users in Europe who use the device twice per week, that’s about $9.8 million in incremental sales. If you assume the blended average usage in 2023 is 18 devices for 35 weeks, that’s $3.4 million in extra sales. Some countries in Europe have an extra regulatory step after the CE Mark that will take another 6 months. The CE Mark should be received in March, but some EPs won’t adopt it right away. I think power users will adopt it first, which is a big positive. EPs who use RMN for all their procedures use it much more than the ones who use it only for the most complex cases.

Therefore, I think Stereotaxis’ 2023 sales can be $20 million higher than 2022. That is about $49.5 million in sales which is above the consensus of $41.78 million. If you think any of my estimates are high, consider that I didn’t include any sales from the guidewire, Genesis orders in 1H 2023, or the semi-mobile robot. I think there will be sales from the guidewire after it’s approved in Q2 2023. I think there will be mid-single digit (5-7) new Genesis orders in 1H 2023. I don’t expect any sales from the semi-mobile robot in 2023, but it’s possible.

I Have A Position

I have a +40% position in Stereotaxis (average cost of $2.76). However, I tried to be unbiased in this article because it actually hurts me to be overly optimistic. I’m well aware delays have plagued Stereotaxis, Inc. in the past 2-3 years.

The biggest medium term negative that has occurred since I started my position in April 2021 is the failed replacement cycle. Management believed the X-Ray systems sold with the Niobe would need to be replaced after 10 years. That’s why it bundled X-Ray systems with the Genesis. In my opinion, the declining use of fluoroscopy in EP ruined the thesis that EP labs would need to replace all Niobes after the X-Ray machines aged out. That’s not a huge deal because many are still being replaced and there have been a decent number of greenfield sales. Genesis is smaller than Niobe and reacts quicker to controls (less than 1 second compared to 3 seconds).

The biggest medium-term positive for Stereotaxis, Inc. since I started my position is the semi-mobile robot, because it is much easier to install than Genesis. Genesis’ costly install was why I started out with a small position in Stereotaxis. It’s now a large position because of this new device and the decline in the stock price.

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