So TransEnterix (TRXC) has managed the easy part … getting FDA approval to market its Senhance surgical robot for abdominal uses.
That’s great except here comes the tough part. The company now has to build a business. And it has to build a business based on a product suffering a woeful lack of demand within a robot-eat-robot field dominated by a giant named da Vinci.
TransEnterix bought what it hoped would be the anti-da Vinci back in 2015 in a $25 million cash and 15.5 million stock deal after Italian developer Sofar cast aside the robot that no hospital wanted to buy.
TransEnterix had previously notched two commercial failures: a Food and Drug Administration-approved, non-existent-sales-generating AMID hernia repair stapler was discontinued in 2013; an FDA-approved, virtually non-existent-sales-generating Spider laparoscopic system was discontinued the following year.
TransEnterix desperately needed the Senhance bot as a backup for an earlier surgical robotic system that hit FDA road bumps and was finally outright rejected and shelved last year.
So the CEO’s reaction to the FDA approval was quite a shock…
*Chief Executive Yells “Sell!’
Five days after announcing the much-anticipated FDA approval, the president/CEO Todd Pope dumped a whopping 600,000 shares of the company stock. So the man who best understands the pluses and minuses of the TransEnterix robot is unloading stock at a time when the product has just attained the marketing approval that’s supposed to turn the company around? If the CEO’s selling now, we’re selling.
(Source: Company SEC filings, TheStreetSweeper)
He’s not the only recent inside seller. The chief financial officer, Joseph Slattery, reports he just dumped 23,391 shares in order to pay for 150,000 shares through his cashless warrant exercise. Mr. Slattery’s warrants are part of a raft of cheap, expiring warrants that ultimately threaten to dilute current shareholders, as explained below under “More Dilution Looms.”
(Source: Company SEC filings, TheStreetSweeper)
Just before joining TransEnterix, Mr. Slattery held roles from April 2010 through September 2013 as vice president and chief financial officer of Trans1, a minimally invasive spine surgery maker that was renamed Baxano Surgical. During his reign, Trans1 settled allegations related to Medicare fraud for $6 million.
Baxano filed for Chapter 11 bankruptcy in 2014. Documents state: “for some time, the Debtor has been experiencing a fundamental weakness in its business and an acute shortage of liquidity and that, ultimately, those factors have combined to cause the Debtor to conclude that it cannot survive as a going concern.”… and Mr. Slattery began working for TransEnterix, formerly SafeStitch, in October 2013… as the executive vice president and chief financial officer.
Regardless, these TransEnterix officers who recently unloaded over a half-million shares sure aren’t hurting for cash…
The three top officers’ compensation rose 36% last year to a whopping $4.9 million.
CEO Pope alone knocked down $2.2 million in compensation last year. Both the chief financial officer and chief technology officer received $1.3 million apiece.
(Source: Company SEC filing)
The gentlemen were undeniably well-compensated for overseeing a company so financially strapped that it recently reported it’s doubtful it will continue as a going concern.
Meanwhile, let’s consider the poor reception given the company’s product overseas…
Though the Senhance bot couldn’t be sold in America until FDA approval came through this month, the system won European marketing approval way back in 2011.
Yet despite having approval overseas for six years and spending over $25 million in direct expenses, the company’s bot suffered through years of zero sales. Finally, TransEnterix managed to sell three Senhance systems.
That’s right. Three sales over six years.
We’re calling these sales what they really are … a failure to penetrate the market.
The first sold to Italy in August 2016, five long years after European approval. One went to Germany last February. Another sold last June via a physician import license to Japan.
Indeed, TransEnterix’s paltry sales continue to keep the company wallowing in the red:
(Sources: Company SEC filings, TheStreetSweeper)
So TransEnterix has generated only about $5 million from the device. And it spent 5 times that amount to get there.
Now investors are paying over 100 times sales. But even if sales somehow doubled, investors would still be paying 50 times sales. Unjustifiable.
Now TransEnterix is preparing to take its European commercial failure to America and face the big boys, primarily Intuitive Surgical (ISRG), developer of the da Vinci system.
More than 4,100 da Vincis have been installed in hospitals worldwide as of late June, including 2,703 in the U.S., 698 in Europe, 538 in Asia, and 210 in the rest of the world.
(Source: Intuitive Surgical)
Following FDA approval in 2000, da Vinci has been used in more than 3 million procedures including urology, gynecology, general surgery, thoracic surgery and heart surgery in adults and children.
TransEnterix’ European approval covers use of Senhance in abdominal, pelvic and limited thoracic surgery, excluding heart surgery. The US approval is limited to minimally invasive gynecological and colorectal procedures in adults.
Meanwhile, TransEnterix’ name and studies are too weak to entice hospitals to buy the Senhance when they can buy or lease the faithful standard, da Vinci.
A recent study suggested use of Senhance in colorectal surgeries may be feasible and safe as compared with standard laparoscopy. But researchers concluded: “More clinical data are needed to determine whether this approach can offer any other benefits over other minimally invasive surgical techniques.”
Intuitive financials, of course, also outclass TransEnterix. Intuitive locked up 2,700 times more revenue last year, plus actual earnings and features a reasonable price/sales ratio compared with poor overpriced TransEnterix:
(Sources: Yahoo, TheStreetSweeper)
And the field also rumbles with large and small players that have introduced similar products or have stated interest in building new offerings, including:
*Applied Medical; *Titan Medical; *Medtronic; *MedRobotics;
*Auris Surgical Robotics; *Avatera Medical GmbH; *Samsung;
*Cambridge Medical Robotics; *Medicaroid;
*meerecompany; *Olympus; *Smart Robot Technology Group.
The medical world is also buzzing right now about powerhouses Google and Johnson and Johnson teaming up to create a 3.0 surgical robotics platform under a company called Verb Surgical. The plan is to introduce a safer, less expensive and … importantly … smarter surgical robot.
(Source: YouTube) (Source: YouTube) (Source: YouTube)
Now, let’s consider how TransEnterix is funding the costly task of taking its robotic weakling to the US market …
*TRXC History: Dilute and Destroy
TransEnterix has funded its three previous failures by taking on debt and issuing stock that dilutes stock owned by retail investors.
The company still has a $50 million ATM updated Aug. 31, 2017…
(Source: Company SEC filing)
And the company recently filed a Form 506 (b) to raise $950,000 from stock sales.
The dilutive activity is a necessary evil for the company that burned cash at the rate of $25.5 million over the past two quarters of basically sitting idle. Despite the company’s claims that its recent equity deals will fund operations into next year, that seems highly unlikely since TransEnterix will face vastly greater costs that likely will lead to even more dilution for average investors.
The company says so in regulatory filings:
“Sales and marketing expenses for the year ended December 31, 2016 increased 217% to $9.2 million.”
“We expect sales and marketing expenses to increase significantly in 2017 in support of our Senhance System product launch…
Shareholders can expect to be hit with a continuous string of funding that will water down people’s shares.
The company states: “Until we generate a sufficient amount of product revenue to finance our cash requirements, which may never occur, we expect to finance future cash needs primarily through public or private equity offerings, debt financings or strategic collaborations.”
Investors have seen more evidence of pending dilution just in the last few days…
*More Dilution Looms
The FDA clearance of Senhance triggered the expiration of a raft of warrants to purchase stock at $1 per share. There are 25 million shares worth of warrants. Now those holding the cheap stock warrants have only until Halloween to exercise their warrants or watch them go up in smoke.
So it’s no surprise that holders are racing to exercise the warrants so they can sell their stock and cash in. Within a few days of the 31st, we’ll likely see more file notices like the one below.
(Source: Company SEC filing)
*Underwriter Ups Price Target
Meanwhile, RBC Capital recently increased TransEnterix’ price target from $4 to $5. This is no great shock since RBC co-underwrote the company’s 2014 and 2015 stock offerings and could profit handsomely if it handles the company’s next raise.
The firm is generally considered lower-tiered because it has been fined millions of dollars and censured numerous times for alleged violations, according to more than 400 FINRA disclosures.
In our view, not only is a looming dilutive raise a concern, so is RBC Capital’s possible handling of such a stock sale. A good company with a promising product would be able to attract top underwriters less focused on blatantly hyping the stock.
Motley Fool on Wednesday followed RBC’s raised price target with another hype piece. This one contends TransEnterix has potential, naming off supposedly novel TransEnterix attributes also exhibited by da Vinci, while admitting sales have been slow.
Slow? The robot failed overseas. It’s absolutely absurd to assume the bot can transition to the United States and win over the world’s greatest medical minds while fighting the da Vinci gold standard plus the coming Google/J&J creation.
Indeed, the company isn’t even expecting to sell a robot in the US for a year to 18 months (here).
There’s no way TransEnterix will build a business worthy of today’s nearly $500 million stock market valuation. We believe the company, which has accumulated over $333 million in losses, would be overpriced at a price-to-sales less than a fifth of the current 94 ratio.
The stock is dangerously ahead of itself and we expect a sudden, near-term 60% drop off the cliff.
* Important Disclosure: The owners of TheStreetSweeper hold a short position in TRXC and stand to profit on any future declines in the stock price.
* Editor’s Note: As a matter of policy, TheStreetSweeper prohibits members of its editorial team from taking financial positions in the companies that they cover. To contact Sonya Colberg, the author of this story, please send an email to firstname.lastname@example.org.