ISRG - Vicarious Surgical: Huge Potential But Low Margin Of Safety To Commercialization

2023-08-24 17:42:23 ET

Summary

• Vicarious Surgical is a surgical robotics company developing a next-generation surgical robot with human-like dexterity.
• The company has a large addressable market of over 45 million abdominal procedures worth $150 billion, but its survival is uncertain due to low cash reserves and high burn.
• I am personally staying on the sidelines as I believe the risk / reward is better if/when RBOT reaches commercialization with a superior product than currently awaiting regulatory approval.

While screening for companies that have declined a lot over the past year, I came across Vicarious Surgical ( RBOT ). Vicarious is a surgical robotics company looking to develop and commercialize a next generation surgical robot that has human-like dexterity.

Although RBOT's marketing pitch sounds promising, I am concerned that the company has a very low margin of safety with its balance sheet. Even with a recent equity raise, the company will barely have enough projected resources to reach the FDA submission date in 2025. While the addressable market is huge, I have doubts about RBOT surviving in its current form.

Company Overview

Vicarious Surgical is a robotics company that has developed a next generation surgical robot that can be deployed through a minimally invasive 1.8 cm incision port (Figure 1). RBOT's robot has enhanced human-like dexterity with 13 degrees of freedom per arm and near 360 degree visualization capability.

Vicarious Surgical's proprietary decoupled actuators technology gives its surgical robot far more degrees of freedom compared to legacy robots. This is because the isolation of cable pathways reduces the tension between joints, dramatically reducing the build-up of unwanted forces that limits the degrees of freedom for the surgical robotic arm (Figure 2).

The additional degrees of movement of RBOT's surgical arm gives surgeons nearly unrestricted workspace in the abdomen compared to legacy robots (Figure 3).

Finally, RBOT's advanced engineering design also reduces the capital equipment cost, as the robot's movement is generated within the abdomen and not from expensive and clunky robotic arms outside the body. Vicarious Surgical's design also incorporates the latest in 3D printing and injection moulding technology, allowing for fully disposable sterile tips and tools to enhance economies of scale (Figure 4).

However, with limited details on the performance and pricing of Vicarious Surgical's robot, many of these claims are hard to prove / disprove at the moment. This video on YouTube shows the Vicarious Surgical robot in action outside the body.

Attractive Market Dynamics

According to the company's estimates, Vicarious Surgical's robot can address more than 45 million abdominal procedures that are performed annually, representing a $150 billion addressable market (Figure 5).

Within this market, robotic adoption is currently less than 5% due to high costs and limited access and capability of the existing robots. Furthermore, 1 in 3 surgical procedures end up with complications that may be reduced with RBOT's minimally invasive incision port.

Therefore, the market potential is huge if Vicarious Surgical is successful in bringing its next generation surgical robot to market.

RBOT Has A-List Backers...

With the high potential of its technology, Vicarious has garnered an A-list of backers, including Khosla Ventures, one of the pre-eminent venture capitalists in the industry; Founders Fund, a venture capital firm known for investing in cutting-edge technology companies; Eric Schmidt’s (former Google CEO) Innovation Endeavors; and the family office of Bill Gates (Figure 6).

...But Typical 2021-Era SPAC Performance

Like many pre-revenue, emerging growth companies, Vicarious Surgical was in need of capital to fund its research and development until its surgical robots reach commercialization. Therefore, the company decided to merge with a special purpose acquisition company ("SPAC"), D8 Holdings ("DEHU"), in April 2021.

The D8 transaction injected $220 million in gross proceeds into Vicarious Surgical and the deal was initially well received by the market, with the stock rallying over 50% in the early days after the closing of the transaction (Figure 7).

However, like many 2021-circa SPACs, Vicarious Surgical's shares have since fallen on hard times as equity markets entered a bear market and investors' risk appetites were suppressed.

Vicarious Surgical did not help matters with a string of earnings misses , which, given the pre-revenue nature of its business, meant that cash burn was higher than first estimated. This led to ROBT's share price steadily declining, from a post-SPAC high of $15.79 to a recent low of $0.82, or a stunning 95% loss.

Slipping Timelines A Reason For Decline

Another major reason for the decline in RBOT's share price has been the slow progress towards commercialization of RBOT's 'revolutionary' surgical robots. When RBOT first came public, the company provided a timeline of gaining FDA approval and shipping its robots to customers by the end of 2024 (Figure 8).

However, in a recent investor presentation, that timeline has been pushed out / downgraded, with a clinical trial to be expected in mid-2024 and an FDA De Novo application expected in early 2025 (Figure 9).

Since a clinical trial is time-consuming and an FDA approval could take months or years, this effectively pushes out commercial shipment by at least a year (end-2025), if not more.

RBOT Is Running Out Of Cash

Against the slippage in timeline, Vicarious Surgical is quickly running out of cash. In the first 6 months of 2023, RBOT burned through $34 million in operating cash flow against $83 million in cash and short-term investments as at June 30, 202 (Figure 10).

At management's estimated cash burn of $55 - 65 million for 2023, Vicarious probably has enough cash to last until the end of 2024, but not until commercialization with the new timeline.

Raises $45 Million To Bridge The Time To Commercialization

That is why on August 3rd, Vicarious priced a public offering of shares at a steep discount of $1.00 versus the stock price, which was trading at ~$1.60. Vicarious raised $45 million in gross proceeds that hopefully could take Vicarious to mid/end of 2025, when the company will be closer to commercialization.

Valuation Hard To Pin Down

Without earnings and revenue, it is difficult to put a pin in Vicarious Surgical's valuation. Investors are basically throwing darts at the company's potential market share, revenues, margins, and earnings.

However, at just $96 million in enterprise value, some investors may be tempted to roll the dice and live 'vicariously' through RBOT (Figure 11).

However, investors need to be mindful that the cash on the balance sheet is not really idle cash, as it will have to be spent over the next 2 years to fund ongoing research and development and a clinical trial in 2024.

If RBOT survives and is able to commercialize its technology, investors should be able to reap many multiples of the current stock price of $0.95 / share. On the downside, with a $55-65 million / year cash burn rate, the margin of safety is very low with respect to RBOT's balance sheet.

Will RBOT Be A Takeout Candidate?

However, even if Vicarious Surgical is ultimately not successful in bringing its robot to market, investors may still do okay if the company indeed has revolutionary technology that can appeal to other robotic companies like Intuitive Surgical ( ISRG ).

Intuitive's Da Vinci robot is the current gold standard in surgical robots and has helped fuel ISRG to a $100 billion market cap. If Vicarious Surgical's technology is anywhere close to being as revolutionary as the company claims, I have no doubt ISRG may look to acquire RBOT.

Risks To RBOT

At the same time, having Intuitive Surgical as a competitor is also a key risk to Vicarious Surgical. As a new entrant in the robotic surgery market, it is hard enough for Vicarious to deliver on its commercialization promise within the next 2 years. However, Vicarious will also have to attract and train top surgeons to use its robots instead of robots from ISRG and other competitors.

Once a surgeon becomes trained on a certain robot/procedure, it is often very difficult for them to switch, since they have 'sunk' a lot of their time and effort to learn the system.

Conclusion

In summary, Vicarious Surgical is an interesting robotics startup aiming to introduce a next-generation surgical robot with better dexterity compared to existing surgical robots. However, the company may not survive to see its technology reach commercialization given its high cash burn and rapidly depleting cash reserves. For contrarian investors, RBOT may be attractive given the large addressable market and low valuation.

However, for me personally, I would rather buy RBOT at 10x its current valuation when the company has a commercial product and is playing a market share adoption game instead of the current research and regulation game.

If RBOT's surgical robot is indeed revolutionary, it should be a quick ramp from $1 billion to $10 billion in market cap, assuming it can survive the next 2 years and gain FDA approval.

I rate RBOT a hold for now.

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