TransEnterix Earnings SWOT Analysis
TransEnterix ($TRXC) released earnings Tuesday morning and the stock got crushed, trading down over 11% on the day.
Is it an overreaction? Possibly.
We're talking about a startup robotic surgery company, so wild trading days are to be expected. There will always be profit taking, as one year ago today, the stock was trading at .70. Even being down over 11% today, the stock is still at $4.70.
Was the report earth shatteringly good or bad? No to both.
As we've mentioned in the past, when analyzing TransEnterix, you need to look at the company from a long game perspective. The capital equipment sales process within a hospital system can take between six months to over a year. TransEnterix CEO, Todd Pope, has consistently made this clear, always using a four to six quarter metric when discussing Senhance system sales.
Our goal with this post is to breakdown the earnings report and conference call with a SWOT (Strengths, Weaknesses, Opportunities and Threats) analysis. By breaking down the business, we can better determine how the company is performing compared to their goals.
- Total revenue of $6.4 million, including the sale of four Senhance Systems
- Received FDA clearance for expanded indications for use for Senhance System
- Filed FDA 510(k) submission for additional Senhance System Instruments including 3mm diameter instruments
- Entered into financing agreement providing the company with up to $40 million in term loans
“Our performance during the second quarter was solid as we continued to drive system sales both in the U.S. and abroad, while simultaneously making significant progress towards our 2018 goals, including the expansion of Senhance’s indications for use and broadening our portfolio of instruments,” said Todd M. Pope, President and CEO at TransEnterix. “We look forward to leveraging the significant progress we made during the first half of the year to drive increased global adoption of our Senhance System.”
- Management team sticks to a process - Todd Pope has been consistent during each call, starting out with the key priorities for TransEnterix in 2018 and how they are measuring against those goals. Winning starts with a process and the team is executing that plan.
- Four Senhance system sales: one sold in the U.S. and three sold in the EMEA (Europe, Middle East, and Africa) region.
- Solid cash position: TransEnterix has cash and restricted cash of approximately $98.5 million as of June 30, 2018. This should be sufficient cash to fund the business into 2020, exclusive of the $20 million in potential future debt tranches.
- Expanded Indications: TransEnterix received FDA 510(k) clearance for expanded indications of its Senhance System for laparoscopic inguinal hernia and laparoscopic cholecystectomy (gallbladder removal) surgery.
- There are approximately 760,000 inguinal hernia and 1.2 million laparoscopic cholecystectomy procedures performed annually in the U.S.
- With this clearance, Senhance System's total addressable annual procedures in the U.S. has more than doubled to over three million.
- Intuitive Surgical has significantly increased their general surgery revenue over last two years. Not having a variety of clearances for general surgery procedures was likely impairing TransEnterix reps as they tried to sell against Intuitive Surgical.
- With Senhance now cleared for the most common abdominal surgeries including procedures in general surgery and gynecology, their sales reps can confidently offer Senhance to more institutions, particularly those with a busy general surgery practice.
- Distributor Network: The foundation of a good international distributorship network seems to be in place.
- In the quarter ending June 30, 2018, TransEnterix sold three in the EMEA (Europe, Middle East, and Africa) region.
- On June 7, 2018, the Company announced that it had filed an FDA 510(k) submission for additional Senhance System instruments, including 3 millimeter diameter instruments.
- Weak U.S. Senhance Sales: In listening to the conference call, Pope did make a point to focus on the pipeline activity in the U.S. He knows the U.S. is what most investors care about. U.S. sales also generate the most revenue. International sales are fine but they are rarely close to full price and they aren't as clean as a U.S. sale to a U.S. hospital. Those sales also carry more weight to physicians in the U.S.
- Analysts are curious too, wondering when they will finally start to hit an inflection point with more robot sales. They've listened to the calls and have heard the pitch that it will take between four to six quarters to start seeing the capital pipeline come to fruition.
- Senhance was approved in October of 2017 and the sales team has almost had a full year (four quarters) to fill their pipeline.
- During the call, Pope mentioned that this is a slow quarter, which is historically true.
- On the contrary, the busiest quarter in medical device sales, including capital equipment, is the fourth quarter. This would be five quarters since Senhance clearance, meaning, if the sales team has been sticking to their processes, the company should see some of those pipeline targets start to fall in the fourth quarter of 2018 and the first quarter of 2019. If they don't, there should be reason for concern.
- Pope confirmed this thinking during the conference call, saying, "Q3 that it's typically seasonally slow and I think in fairness, Q4 is typically a little stronger quarter for capital equipment for a multiple reasons and a lot of patients have reached deductible limits of their scheduling surgeries at year-end."
- Q4 2018 and Q1 2019 should give a good sense on how the commercial team is performing.
- While the company isn't providing system sales guidance, they are doing a good job providing commentary on their progress. They currently anticipate three Senhance sales in the third quarter; one in the U.S. and two in EMEA.
- Not enough sales reps - This is a catch-22 as adding more reps cost money, but as a point of reference, Intuitive Surgical has hundreds (maybe thousands) of sales, training and service reps running around the U.S.
- During the call, Pope addressed this, "we still have a small sales force in the U.S., kind of in the mid-teens as we've talked about in the past, so where we're focusing, we're having good momentum. Now that we're understanding the way that Senhance is being received, we probably will continue to -- as our pipeline progresses -- look at different geographies and add people as it makes sense when we get a sales person that has multiple leads and they really can't follow up with the timeliness that we want. We'll cut in another territory there, and then over time, we'll move out a little further west and we haven't really put a footprint out in the western part of the United States."
- There has to be a balance as a high performing sales rep will cost money. There is salary, probably a guarantee for a year, training, travel, etc. Clearly Pope and the team know this, but at some point, the company will need to add if they want to be a true competitor to Intuitive Surgical.
- Best guess is the company gets leads at trade shows and from their mobile training labs. If there is significant interest from a surgeon or hospital where there isn't currently a rep, the company will hire a rep in that geography. This would be the strategy until they have the revenue ramp to hire more reps.
- Increased surgeon training - TransEnterix is following an industry trend by hosting mobile training events, which is a great idea to bring awareness to a device over the course of a couple of days.
- Here are a couple of examples of these labs that Pope mentioned during the call:
- "We continue to host a variety of mobile events throughout the United States. These multi-day events allow us to provide surgeons, clinical staff and executives quality hands on time with Senhance by bringing the Senhance to them. In the second quarter, over 75 physicians were able to test-drive and evaluate the system at these events."
- "To highlight one such event that speaks to both the benefit of these programs as well as the significant interest Senhance is receiving in the market, we recently hosted a week-long mobile event at an academic medical center. This gave us exposure to over 20 surgeons from six different hospitals and hospital networks at one location and included extended hands-on experience with the Senhance. We continue to be very pleased with the steady flow of surgeons, administrators and surgical staff actively looking to educate themselves on Senhance in the United States."
- While the company is still short on sales reps, they are doing a very commendable job with these surgeon training labs. They can potentially host these labs in geographies where they do not have a local rep. This could potentially provide a lead strong enough to get a system sale. They can hire a rep at that point.
- Here are a couple of examples of these labs that Pope mentioned during the call:
- Go where Intuitive Surgical isn't - Intuitive Surgical is huge.
- Based on size alone, TransEnterix is significantly outmatched. They've already said they don't have representation on the West Coast. They have a rep count in the mid-teens.
- So what do their reps do? Most sales reps like to grow their business close to their house and then expand. This is the luxury you have when your company has so much business. When you don't have that luxury, go where competitive reps don't spend a lot of time.
- While Intuitive Surgical has reps far and wide, there are always pockets in a region that do not get covered as consistently as they should. The TransEnterix reps need to find those pockets in their territory and start working with those surgeons and hospitals.
- Partnering with other local reps - TransEnterix has mentioned that Senhance works well with other operating room equipment right out of the box. Companies like Stryker and Novadaq were mentioned. Many reps don't use these relationships as well as they should. Stryker sales reps have great relationships with a variety of surgeons, hospital staff and administrators. It never hurts to have these reps on your side.
- Intuitive Surgical - Already mentioned and should be obvious.
- Competition coming down the pike - They need systems in hospitals to protect from competitors that are coming down the pike. Yes, they have time to do this as competitors aren't coming tomorrow. However, the sooner they can get systems sold, the faster they can expand their reach across the U.S.
- To further this point, TransEnterix is likely being kept out of hospitals by Intuitive Surgical as they've done such a great job locking accounts down. There may be one or two surgeons who really like Senhance but the Intuitive Surgical reps have done a great job convincing the other 10 surgeons at the hospital that the da Vinci is the way to go. Additionally, many community hospitals don't have the funding for multiple systems. Speed is key when growing, which is why getting traction with system sales in the U.S. is so critical. It will be fun to see this play out over the next two quarters.
We could list numerous threats that would be out of control to TransEnterix (economic slowdown, decreased hospital spending) but that wouldn't be fair and is not the point of this excercise. We want to address what the company can control.
Overall, the TrasnEnterix management team is sticking to their process, which is commendable considering all of the moving pieces involved in growing a robotic surgery platform like Senhance. While they would have liked more domestic Senhance sales by now, they are still within the timeframe set forth (four to six quarters) when Senhance was cleared in October 2017.
This may be hard for an investor to sit through, but the 4th quarter of 2018 will provide an accurate picture of how the commercial team has been performing. If they have truly been sticking to the process, and having the sales team stick to that process, the capital sales will start to fall at the end of the year. Pope admitted that's the time for sales and it is. Discretionary hospital dollars magically appear at the end of the year. It's up to each of those reps to get what becomes available.
TransEnterix has performed well since Senhance clearance. We don't know how well though. The answer is coming soon.