Before you read on, please be aware that the analysis below are my opinion only and may include flawed assumptions and inaccuracy of logic; therefore, caveat emptor applies here.
Why do you think bounce is coming?
Thanks to the shorts and doubters, $TRXC is trading at price lower than before FDA approval. The justification for this lower price is the “assumption” that laparoscopic surgeons do not want to adopt Senhance robotic surgical system which is, in my opinion, a propaganda promoted by the shorts.. However, the fact of the matter is that Senhance received FDA clearance only a little more than four months ago and it is going to take some time for laparoscopic surgeons and hospital managements to become familiar with the Senhance robotic assistance system.
Since I already discussed the benefits of Senhance robotic system in my past posts, I’m not going to repeat them here again; but I’m going to provide some common sense logic to refute the shorts’ propaganda:
- There are only a finite number of laparoscopic surgeons in the whole wide world
- Meanwhile, our aging population is living longer which will naturally increase the number of patients exponentially in the coming years who needed laparoscopic surgeries
- This imbalance (more patients than available surgeons) will create an unhealthy backlog which may burn out existing laparoscopic surgeons
- as a result, more surgical errors may happen due to exhausted surgeons with shoulder pains and sore neck from holding the lap tools in awkward positions for far too long in a back-to-back scheduled surgical procedures
- A new efficient method must be adopted now to prepare for the coming onslaught of more patients
Before I go on, let’s check out this article below:
Below is excerpt from above article:
The United States could face a shortage of between 46,000 and 90,000 physicians by 2025, according to a new report from the Association of American Medical Colleges (AAMC).
Overall, the report found that while the number of physicians is expected to increase, it will not grow quickly enough to meet demand.
The researchers said that one-third or more of the physicians currently practicing could retire within 10 years. Further, they noted that the younger physicians replacing the older ones tend to work fewer hours. Meanwhile, the number of people over age 65 is expected to increase by 46% by 2025, according to AAMC Chief Health Care Officer Janis Orlowski.
One option to combat this shortage is by using robotic surgical assistance designed for laparoscopy to create efficiency and reduce stress for the surgeons. General surgeons are already remedying this shortage by adopting the Intuitive’s Da Vinci system. It is my opinion (aka my 2 cents) that the laparoscopy market is now going through the “orientation” period with Senhance robotic system. Surely, you can’t expect volume buying of the Senhance system immediately after FDA approval. Even Intuitive Surgical Inc had their own “orientation” period after their introduction of the Da Vinci system.
So far, the shorts’ main thesis is centered on their expectation that not many will buy the Senhance surgical robotic assistance DESPITE receiving an FDA clearance. And they based their thesis on the fact that there were not many sales made in Europe BEFORE Senhance received U.S. FDA clearance.
Below is the formula I used for the Shorts’ thesis:
Senhance (with no FDA clearance) didn’t sell in Europe = therefore, they won’t sell in U.S. either (even with FDA clearance)
As you can see the above formula, I bracketed the FDA clearance status ’cause the shorts apparently either ignored it or disregarded it.
The shorts are already making an assumption that it won’t sell in the U.S. That, to me, is the huge gaping hole in their logic. To jump the gun so early in the game when the laparoscopy market is still going through the “orientation period” with the Senhance robotic system, the shorts are taking a huge gamble with their assumption and may end up having their foot shot to witherland.
Why do you say that?
First, FDA did not just rubber stamp the approval of the Senhance robotic assistance. They did their due diligence based on clinical data supplied by surgeons who actually used the Senhance robotic assistance to perform surgeries in Europe. There were 23 indications that are already approved and more are coming in 2018 as explained by CEO Pope in the recent 3rd QTR earnings conference call. Ask yourself this, if Senhance is as useless as the shorts think that it is, how in the world did TRXC get to have surgeons performed enough surgeries to provide clinical data to the FDA for a whopping 23 indications?
I think the shorts neglected to look into the possibility that these clinical data the FDA received and reviewed will be the very same data that will also convince the European hospitals to lower their resistance in buying the Senhance. With the FDA clearance from the U.S., this may eliminate majority of the resistance from the European buyers. Therefore, there is still a high probability that we may hear more about adoption in the coming months from both the U.S. and foreign countries.
The problem with the shorts are that they selected only the data that fitted their bias and ignored the data that did not support their thesis. WDR write-up of $STRP was a perfect example. If you accepted WDR words per their research, you would think that STRP massive bandwidths were useless and nobody would want it. Their “selected” experts happened to support their biased thesis. Some investors even sold their position because of their so-called expert research and lo and behold, $STRP is now trading at $18x.xx (about 5x the prices of $35.xx before the take over news).
The question of dilution is a popular “negative” factor the shorts and the doubters like to emphasize so I’m going to deal with this head on.
Instead of focusing on “net income/loss” to determine potential for dilution, I’m using actual cash used in operating activities to make that determination and avoid the net income/loss numbers entirely. After all, the whole point of dilution talk is making sure there are sufficient fund to cover the cash used in operating activities.
I will start with the Consolidated Statements of Cash Flows from the 2016 10K:
As you can see, I only concerned myself with the top section of Consolidated Statements of Cash Flows because it told the story of cash used in operating activities.
From the above figures:
Net cash and cash equivalents used in operating activities for a full 12-months period (in thousands)
So, from the above annual net cash used for operating activities, only $52 millions were used in 2016. That’s about half of TRXC current $100 million in cash.
Below is from the recent 3rd QTR 2017 10Q:
From the above figures:
Net cash and cash equivalents used in operating activities for a 9-months period (in thousands)
Notice that both years are practically identical in nine months cash used for operating activities, so I think it is safe for me to assume that the annual cash spent for 2017 will be close to $53 millions cash used using 2016 as a reference.
- That mean 4th QTR 2017 cash used will most likely be $15.5 million (expected annual $53M minus 3rd QTR cash used $37.5M).
- With a $100 millions in cash @ October, TRXC should have at least $90 million cash to begin 2018. Below is my calculation:
- $15.5M for 3 months so 2 months would be about $10M ($15.5M divided by 3 and multiply by 2 = $10.3M)
- $100M – $10M = $90M = assumption of 2018 estimated beginning cash balance
So, how many units of Senhance do TRXC needed to sell to avoid a dilution?
Here is what we know as assumptions:
- average annual cash used would be about $53 millions give or take
- assume a gross margin is 40%; thus each unit sold will net TRXC $600K ($1,500K x 40% = $600K) before cash used in operating activities.
- Cash balance going into 2019 using worst case scenario (assume no Senhance sales in 2018) would be about $37M ($90M – $53M). This worst case scenario is to establish a baseline for 2018 which I will explain further below.
- $16M would be needed in 2019 to cover the shortfall of cash ($53M – $37M = $16M)
So, a minimum quantity of units needed to be sold for 2018 must be 27 units to make up for $16M shortfall ($600K x 27 units = $16.2M)
What we want to see is that TRXC sell more than 27 units in 2018 to avoid any talk of dilution in 2019.
Let’s go through the numbers (assumptions only) in logical order below:
- $90M >estimated beginning cash balance in 2018
- $53M >subtracted estimated cash to be used for operating activities in 2018
- $37M >cash balance before cash from sales of Senhance
- $16.2M >added cash from selling 27 units in 2018 ($600K x 27 units)
- $53.2M >estimated ending cash balance in 2018
Yeah, I know. $53M is kind of low to start 2019. But think on this, if TRXC can sell at least 27 units in 2018, do you think they will sell nothing in 2019? Of course not, they will most likely sell a lot more than 27 units. By then, those four to six quarters cycle to close the sales will be in the hundreds in 2019 assuming that the strong interest from the laparoscopy surgeons and hospitals’ executives mentioned by CEO Pope materialized into actual sales. From there on, my 2 cents is there should not be anymore dilution talk ever again.
At this point, it’s all about the acceptance of Senhance as a valid surgical robotic assistance by the laparoscopy community. I believe getting an FDA clearance is a game changer that the shorts and the doubters refused to acknowledge. I believe the FDA clearance can open doors to acceptance by the U.S. market as well as many foreign markets. The advantages of using Senhance are as clear as day and interests are strong based on attendance from surgeons and hospitals’ executives at both Senhance facilities per CEO Pope. All the shorts and the doubters have are information about sales BEFORE the FDA clearance. To me, their refusal to acknowledge the power of FDA clearance may be there own peril.
My 2 cents is that once the company sold more than 27 units in sales for 2018, the company will be in good shape to weather 2019 without dilution.
Remember, caveat emptor applied when reviewing the above analysis due to potential incorrect assumptions.
Let’s talk about technology…
Regarding the subject of technology designed in 2008 being obsolete as suggested by the shorts and doubters, I like to know exactly what is being obsolete that rendered the Senhance to become an ineffective robotic assistance. Wait, ISRG has no haptic feedback, so it’s definitely not obsolete. Wait, somebody mentioned 3D laparoscopy will negate the need for robotic assistance in the laparoscopy market. Really? I bet to differ. I think 3D laparoscopy can be incorporated into the Senhance as a complementary tool. It’s a tool to enhance efficiency and accuracy by offering 3D viewing; but the surgeons can still benefit by using the Senhance as an extension of their lap tools which also offers more stability and accuracy. Don’t forget that Senhance is also designed to be used for hybrid surgery; therefore, Senhance may be used for majority of the work while the traditional lap tools can be used for more delicate procedures per the surgeon’s preference. And when it comes to 3mm reusable tools that offered the best minimally invasive surgery, below is an excerpt from $TRXC 2nd QTR earnings conference call:
Earlier this week, we announced that we have enabled the expansion of micro-laparoscopic into robotic surgery with the Senhance, utilizing 3 millimeter instruments. These instruments allow surgeons to operate through incisions that are deemed virtually scarless for patients and in most cases do not require sutures to close. Patients continued to demand the least invasive approach to their surgery and this expansion into robotic 3 millimeter instruments provides patient benefits that up to now have not been available robotically.
We believe this will contribute meaningfully to the conversion of laparoscopic procedures to robotically-assisted their procedures potentially boosting the adoption of the Senhance globally. We expect to fully launch the 3 millimeter instruments in the fourth quarter in CE Mark countries. We believe that the Senhance’s combination of haptics, eye-tracking 3 millimeter instruments and cutting-edge fluorescence imaging combined with our ability to offer low procedures costs has set a new benchmark in the robotics industry.
Technically speaking, $TRXC has reached a major support at the $1.30 support level.Because of the FDA approval, I just don’t see price dropping below the major support area. Notice price is now near the magical weekly 79 MA support area and the Fib 78.6% retracement as well. To me, the probability a bounce from here is better than 50/50.
This is a bet that reminded me of how:
- $CARA had dropped from $21.92 in 2015 to a bit below $5 in early 2016 and then bounced all the way to high of $28.50 in 2017
- $GWPH had dropped from $133.98 in 2015 to a bit below $36 in 2016 and then bounced all the way to high of $136.95 in 2017
I could go on and on but my point is that $TRXC is now at the point where going any lower will defy logic because there is still a real possibility of accelerated adoption of the Senhance robotic assistance system in the coming quarters. The past two weeks of extreme broad market correction created a rare incident which allowed price to drop to current level. Thus current low price is actually a blessing for both the bulls and the bears. Positive for bulls because it is a steal to buy a company with an FDA approved robotic system at current price and positive for bears because they could cover at such low price. The shorts had their days. They should pat themselves on the back for the unrealized gain they’ve (if they haven’t covered yet) but they also need to start thinking about taking profits by buying back shares before fellow shorts and bargain hunters drive the stock back up. Nobody wants to be the last man standing whether you are a bull or a bear.
Good Luck and may fortune blesses all TRXC investors.
Yes, I’m long $TRXC. In fact, I added more on Friday.
My 2 cents.
From my camera: