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Cognizant Looks Poised For A Breakout

By The Wall Street Fox → Wednesday, January 18, 2017
I have been long shares of Cognizant Technologies (CTSH) since late 2016. Shares caught a bid after it was revealed that activist investor Elliot Management took a 4% stake in the company in late November 2016.

Shares have been consolidating in the $55 - $57 range for over a month, the 50 day moving average is trending up, and it looks poised to cross above the 200 day moving average. This is known as a golden cross, which is a popular buy signal for technicians. RSI is trending up after bouncing off of the 50 level multiple times.

My eye sees an ascending triangle that, if broken to the upside, could see a swift move to the $60's. I will remain long my core position and will cut my losses if shares decisively break below its 50 day moving average.


Longer term, if CTSH manages to break out of its ascending triangle, a measured move target points to $66.

Time To Short Coal?

By The Wall Street Fox → Sunday, November 20, 2016
Coal has had a phenomenal 2016, with the Coal ETF (KOL) up nearly 200% YTD. This extraordinary performance followed a miserable 2015, which saw a number of coal giants file chapter 11 bankruptcy, trim the fat, and reemerge as a lean coal mining machine. Trump definitely helped boost the performance of coal, promising to bring back coal jobs and loosen environmental restrictions on coal plants.

That's all fine and dandy, but here's the thing: government can't revive a dying industry by loosening regulations when there are cheaper, cleaner alternatives out there. For one, the price of natural gas, coal's biggest competitor, is sitting near all time lows, and solar power prices have dropped to roughly the same price as coal in terms of electricity generation, and solar prices are showing no signs of stopping their violent fall.

So, fundamentally, the revival of the coal markets seems slim, and if it truly comes back, most of that may be priced in with the 200% increase in 2016. A number of the holdings in KOL are not profitable, and the ones that are profitable sport a P/E of more than 50x. 

Technically, now may be a great time to short coal via the KOL etf. 

On the weekly chart, KOL was decisively rejected at its 200 week moving average on heavy volume. The stock was overbought for ~6 months and is showing signs of breaking down. MACD looks primed to flash a sell signal.


On the daily chart, KOL has flashed signs of negative divergence since the beginning of October, with the price rising but RSI and MACD falling. A spinning top was formed last week on heavy volume, showing signs of distribution rather than accumulation. I'd expect KOL to bounce off of its 50 day MA one last time before breaking down. KOL is a structural short that should take months to unwind. This first price target, after it decisively breaks below its 50 day MA, is $9 range, which is where the 200 day MA is, along with the 50 week MA. 


I believe KOL is a strong short candidate. Trump can't save the coal markets, and fundamentally, these companies are either not profitable or extremely expensive. I am currently short KOL and looking to sell calls or buy puts after it bounces off that 50 day MA one last time (hopefully). 

Is This Lights Out For Neovasc?

By The Wall Street Fox → Monday, October 31, 2016
Update -- 11/6/2016

Last week, Neovasc informed investors that it planned to appeal the latest court ruling that denied Neovasc a new trial, awarded CardiAQ (now a subsidiary of Edwards Lifesciences) an extra $21M (bringing total judgement Neovasc owes to CardiAQ to $91M), and added CardiAQ inventors to Neovasc's Tiara patent. Neovasc expects the appeal process to take at least a year. Neovasc is also seeking to immediately stay the $91M payments until the appeal process is complete.

Neovasc is trying to buy as much time as possible. Smart. The company is currently valued at $35M and has ~$25M in cash (Q2 cash levels - average quarterly burn rate). The company is cash strapped and doesn't have the means to pay the $91M fine (if they are on the hook for it after the appeal process). Legal costs have amounted to ~$4M per quarter. With the expected appeal resulting in another four quarters (at least) of legal proceedings, it is clear the Neovasc needs to raise money and dilute. Neovasc should be focusing on Reducer commercialization in Europe, moving Reducer through FDA 510K pathway, and furthering Tiara trials/development, not lawsuits.

Until Neovasc can settle the CardiAQ litigation and raise enough money to fund Tiara and Reducer to the U.S. market, shares will be dead money, with the occasional pop on positive Tiara data updates. With ~$25M cash on hand, another year of legal proceedings that at current legal burn rate will cost at least $16M, and the need to remain competitive in the race to develop the first market-ready mitral valve, Neovasc needs to raise money and dilute shareholders. At a current $35M valuation, dilution would hurt existing shareholders, terribly. I expect my long position in my ROTH IRA to be dead money for years, and years, and years. A buyout is always possible, but not until that CardiAQ litigation is settled.

_________________________________________________________________________________

Trick or treat?


Neovasc investors experienced a nice week long treat after shares jumped more than 100% on considerable volume in anticipation of positive data for both the Tiara mitral valve and Reducer stent to be presented at TCT 2016.

We knew the Reducer data would be positive, as it was in the multi-year COSIRA trials, so nothing new here. Given that Tiara is considered the front runner in the mitral valve space and based on previous data presentations, positive Tiara data presented at the conference should also not be considered a surprise to investors (AKA PRICED IN).

What should be considered a surprise to investors, is the trading halt that occurred in afternoon trading today, and the subsequent news that the judge in the Neovasc vs. CardiAQ (now a subsidiary of Edwards LifeSciences) trial has ordered Neovasc to pay an additional $21M to CardiAQ (BAD NEWS) in addition to the $70M granted by the jury, has denied an injuction/halt of Tiara development (GOOD NEWS), has denied Neovasc a retrial (BAD NEWS), and has ordered two CardiAQ executives to be listed as co-inventors on Neovasc's Tiara patent (BAD NEWS). Investors were tricked.

Shares remained halted into the close and should open tomorrow morning with an official announcement from the company. 

Let's asses the damage.

At the end of June 30th, Neovasc had ~$36M in cash. Given that Q2 cash burn was $13M (higher due to legal costs), the company probably has $20M- $25M in cash as of the end of September 30th. Another whammy is that due to Neovasc's decision back in 2014 to prioritize its focus on Tiara development and shift away from its revenue generating soft tissue business, revenues will continue to decline. While Reducer sales are picking up in Europe, they are immaterial, with a current annual run rate of ~$1M.  

The company now owes $91M to CardiAQ, unless they appeal the entire decision to a higher court, which would delay their payment to CardiAQ, but eat up a considerable amount of their current cash pile in the form of legal fees, with uncertainty that an appeal would even result in a positive outcome. Also, it's worth noting that Neovasc requires tens of millions of dollars (possibly $100M+) to continue the development of Tiara and get it to market, which analysts don't expect to happen until 2019 at the earliest (and that was before the lawsuit debacle). 

With a $91M judgement hanging over itself, Neovasc has little negotiating power. The company will not be able to secure debt to pay off CardiAQ. Instead, they will either raise money from investors and dilute at a crazy depressed level (current market cap of $50M doesn't help), or be acquired by EW, BSX, ABT, MDT or another player at fire-sale prices

The Tiara no doubt has immense value. It is a best in class device that is farther ahead and has better data than the mitral vale programs at multi billion dollar medical device companies, and its peers have been acquired for up to $400M. Fully developed and on the market, Tiara would be a multi billion dollar device given the projected size of the nascent mitral valve market. But I don't think a large company would be so kind and pay that kind of money given that Neovasc is under capitalized and has a $91M judgement hanging over its head. Instead, these companies can wait for Neovasc to go under and buy the company for pennies on the dollar. 

In my mind, if the $91M judgement stands and is FINAL, the best case scenario for Neovasc is to dilute the crap out of their stock and raise the money to pay off the penalty and move forward with the development of Tiara. The company currently has 67M shares outstanding. Even if they raised the money at $0.50/share and bumped the outstanding shares up to 400M, way down the line (years), with Tiara on the market and Reducer commercialization ramped up, at a $1B-$2B valuation, shares could trade at $2.5/share - $5/share range. That's my last hope.

The lights are incredibly dim at Neovasc right now, but not out....yet.

I am long Neovasc in my IRA at ~$3.00 cost average. 




Neovasc Crumbles Following CardiAQ Litigation Update

By The Wall Street Fox → Tuesday, August 9, 2016
Neovasc was off more than 40% in after hour trading following release of its Q2 earnings. The earnings report and conference call was a mixed bag, with more bad than good.


1. Revenues from Neovasc's tissue and consulting business declined nearly 30% year over year, partly due to a customer delay that has since been resolved, and partly due to the fact that Neovasc has been slowly diverting resources from its low margin tissue business to commercialization of Reducer, clinical development of Tiara, and higher margin tissue clients. Revenues from this tissue/consulting business peaked at nearly $16M in 2014.

2. CardiAQ has filed a motion requesting that Neovasc be ordered to halt development of its Tiara device for 18 months, arguing that Neovasc got an unfair head start in the development of its pivotal device that treats mitral regurgitation (heart failure). This would be a devastating blow to Neovasc, as nearly all of its value when it was a ~$600M, $10/share company in early 2015 was tied to the impressive data and headstart Tiara had over its multi billion dollar competitors.

The court is expected to issue a judgement on this motion and others filed by Neovasc and CardiAQ shortly after August 12th.

3. It is 99.99% likely that either party appeals the upcoming court judgement, and extends this litigation for another year or longer. Neovasc expects it will require an additional $5M for future litigation fees, in addition to the $17.7M that has already been spent. This will continue to be a cash drain for Neovasc, and I'd imagine Edwards Lifesciences will delightfully attempt to drain as much litigation fees from Neovasc as possible by lengthening the process.

4. The company has $36M as of June 30. At current burn rates, expect Neovasc to explore a burdensome debt offering, or an extremely dilutive capital raise in Q4.

5. On a positive side, Tiara enrolled its 19th patient and the data following the operation remains as encouraging as the previous Tiara implants. While Neovasc is behind its initial enrollment target, it's far ahead of its competitors and seems to be picking up momentum with the recent addition of the approved 40mm sized tiara valve.

6. Revenues from EU Reducer commercialization continue to post strong growth, albeit off a very low base. The device has been gaining traction in Italy. In the right hands (distributor or potential acquirer), Reducer can become a sizable business, given the market size and unmet clinical need for high risk patients suffering from refractory angina.


Neovasc has been an amazing trade vehicle over the past four months, with a 200% rise, followed by a 60% decline, followed by a nearly 100% rise, followed by a 40% decline. I expect this to continue with the most important catalyst yet coming up soon: the court judgement.

If the court upholds the $70M payment and the 18 month operational hold on Tiara, expect Neovasc to drop to pennies. If the court eliminates or reduces the $70M payment and rejects the 18 month operational hold on Tiara, I wouldn't be surprised to see shares of Neovasc double, triple, or even quadruple to $2.00 per share. The judge also needs to rule on patent ownership of Tiara technology, so that decision will also move the needle for Neovasc's share price.

This is an incredibly binary catalyst that will result in either you losing well more than 50% of your capital, or easily doubling it and quite possibly tripling it. I have zero insight into what the judge will decide. This is a gamble, a lotto ticket. Tread carefully.

There is no doubt in my mind that the underlying technology of the Reducer and Tiara are conservatively worth upwards of a billion dollars (based on fact that analyst estimates peg the Mitral Valve market to be upwards of 4x the size of the Aortic valve market, and Tiara is the front runner in being the first commercialized mitral valve device). If Neovasc didn't have this potential bankruptcy inducing lawsuit hanging over its head, it would be trading closer to a $300M valuation, roughly the average its private competitors were acquired for by Abbot, Edwards, and Medtronic.

Even the most experienced trial experts didn't have a handle on the ultimate jury decision (granted juries are unpredictable). Take a look at this note from Leerink earlier this year, and how wrong it ended up being.



AGAIN, at this point in time, this is a gamble, a lotto ticket. TREAD CAREFULLY.

Four Red Flags At Titan Medical

By The Wall Street Fox → Saturday, August 6, 2016
I originally discovered Titan Medical when I was studying Finance and Management. At the time, I was taking a small business/start up class and gave numerous business pitches to peers, professors, and eventually venture capitalists/angel investors. The start up pitches we were presenting were riddled with the generic TAM SAM SOM diagrams and a lot of dialogue regarding market size, trends, and potential. "If we can capture just 1% of the total addressable market, we will be a multi billion $ company." Sound familiar? Less focus on the product, management, and strategy that would be implemented to execute on the idea, and more focus on potential, potential, potential.

Titan Medical reminds me of those presentations. Probably because Titan Medical has been a research and development company for nearly a decade and continuously touts the vast market potential on its website and during conference calls/presentations, but fails to execute on its strategy. The company originally spent its first 5-6 years developing the Amadeus, a multi port surgical robot meant to compete with Intuitive Surgical. Amadeus was scrapped, and while I could not locate an official reason as to why Amadeus was shelved, I've heard patent infringement of ISRG's da Vinci was a possibility.  Development of the SPORT has been going on since 2012.

When I first discovered Titan Medical, I saw the potential immediately. A single port surgical robot that would be cheaper, smaller, and more mobile than Intuitive Surgical's market dominating da Vinci.  Practically identical to my bullish thesis on TransEnterix, which has yet to pan out. But I soon realized there were stark differences between Titan Medical and TransEnterix as I diligently followed the moves by management of both companies.

Put simply, management at Titan Medical is inept. Given its current state, Titan Medical should either be a private company and continue to develop its surgical robot at a snails pace, or management should get serious, conduct a reverse split and uplist to a major exchange, which would allow them to receive Wall Street analyst coverage, and more importantly access a massively larger capital market than the TSX/OTC, which would enable them to raise a substantial amount of cash at an attractive valuation, rather than raising $10M in small placements with private, sometimes unnamed investors on a frequent basis.

I am long TransEnterix, and have no position in Titan Medical, so I am biased. But let's just lay out some facts and point out the red flags I see at Titan Medical.

1. Dennis Fowler, an executive at Titan, said this in a 2015 alumnus update:

"Alternatively, interactions with investors and traditional board members is often frustrating because their focus is exclusively financial, and they don't always fully understand the potential clinical and human impact of what we're trying to do."

I don't think any executive of any public company should say this in a public setting.

Dr. Fowler is responsible for clinical affairs and Titan’s regulatory approval process plan, including its pre-clinical and clinical testing strategy. He works closely with the clinical regulatory department of Ximedica, a medical products development firm, in solidifying Titan’s clinical strategy for the regulatory review and approval by the FDA and by the EU of the SPORT.

Here's another quote from Fowler that would worry me as an investor in Titan given that Fowler is responsible for preparing the FDA 510(k) submission for SPORT.

"Although obtaining regulatory approval for marketing the robotic technology is the responsibility with which I have the least experience, I have enjoyed learning about this and embraced the challenge."

Source: http://scholar.googleusercontent.com/scholar?q=cache:W9aAJG0oFJsJ:scholar.google.com/+%22titan+medical%22&hl=en&as_sdt=0,5&as_ylo=2015

In no way am I trying to attack or disrespect Dr. Fowler. He is a respected surgeon who has had an incredibly successful career and is the co-inventor of the underlying SPORT technology, which is impressive. I appreciate his candidness and I don't think he expected any investors to see that update directed to his Alma matter...damn internet!

I am simply questioning whether this is the appropriate person to have in place for charging Titan's regulatory approval process. Keep in mind, TransEnterix disclosed that their 510(k) submission for SurgiBot was more than 11,000 pages long, they had a couple executives with experience submitting successful 510(k) applications and/or working at the FDA evaluating 510(k) applications, and their SurgiBot application still got denied. This is no walk in the park. Perhaps Titan should outsource this work to an experienced third party that submits 510(k) applications on a regular basis, similar to how they outsourced the entire development of the SPORT to Ximedica.

2. Titan Medical recently published a discounted cashflow valuation summary of itself on its website. I have never seen a public company do this before. To me, it reeks of desperation and is an example of poor judgement by management to post this on their website. According to Titan Medical, under a series of assumptions, its stock could be worth $4.02 per share, representing a more than 500% increase from current levels. The work was done by Next Level Analytics, a consulting firm that specializes in modeling and analytics. In my opinion, this was a poor use of Titan's resources.

Titan must be really itching for some Wall Street analyst coverage. Gives itself price target of $4.02 (500%+ upside).

The problem I have with this valuation table, besides it being posted to the company's website, is that it assumes a possible scenario where Titan sells over 2,000 SPORT units and only has 173M shares outstanding. As of March 31, 2016, the company had 145M total diluted shares outstanding, and the company will need hundreds of millions of $ to finance its forecast of selling 2,237 SPORT units in 15 years. Titan has 72.5M warrants outstanding, at strike prices as low as $1.00 and as high as $2.75, with the potential of bringing in $119M in proceeds. Definitely a nice chunk of change if all of the warrants are exercised, but not enough to finance the assumption in the valuation model, and even if it was, that would bring total shares outstanding to ~218M, not 173M.

Consider this: Titan Medical has ~$14M in assets as of March 31, 2016, and requires an estimated $24M to fund its 2016 goals of initiating and completing human factors and usability trials. With an expected $8M to have been spent in Q2, that leaves Titan with only $6M at the end of Q2. The company needs to raise at least $10M ASAP. The company announced it would receive a $16M investment from a Chinese firm in June, and expected the first part of the deal to close by June 30th. However, Titan announced that at the Chinese firms request, the closing of the deal be delayed to mid August, and they will evaluate any offer from other interested parties, which is not a good sign. Hopefully Titan can complete the deal soon to continue its development of the SPORT system.

Titan Medical also expected a large investment from Long Tai, a Chinese distributor, but that deal didn't close as Titan announced in May a three month extension of the negotiating period. Why aren't these unheard of Chinese firms closing their investments in Titan Medical? Maybe because the stock price of TITXF is at multi year lows?


UPDATE: Titan has removed the valuation table from their website.

3. Titan Medical has an unlimited amount of authorized shares. Just like #2, I have never seen this before. Usually, shareholders vote to increase or decrease the amount of authorized shares, it acts as a system of checks and balances, a last resort for shareholders to send management a strong message if they vote against a proposed increase to authorized shares. Is this more common with Canadian companies? I'm not sure, but I don't like it one bit. I do commend Titan shareholders for recently voting against nominating John Hargrove as Chairman of the company.


4. Titan Medical Insiders only own 4.48% of the company, and institutional investors are non existent. I'd like to see more insider ownership and some institutional holdings, alas, this should be expected for an OTC penny stock that has a history of missing expectations and consistently delaying timelines to commercialization.


Compare Titan's 4.48% insider ownership to its closest peer, TransEnterix.

Conclusion

I am bullish on the future of surgical robotics. I think the first few market entrants to compete against ISRG will be able to take market share and thrive. There is room for more than one, two, or three players in the market place, and the SPORT technology is a contender. But at this point in time, given the numerous timeline delays for SPORT commercialization, and Titan's current status as an R&D company that is constantly raising money in small placements and diluting shareholders, I'm on the sidelines.

Titan doesn't expect to generate revenue until 2018, so there is plenty of time before SPORT hits the market to reevaluate Titan as a potential investment. That is of course unless Titan is acquired prior to commercializing SPORT, which is always a possibility, but it's never a good idea to invest in a company solely on the thesis that they will be acquired.

I'm more comfortable in investing in TransEnterix given the high quality of their management team, the fact that they have two compelling surgical robots that address different price points for different sized hospitals, and the fact that ALF-X is second to market and already has a sale under its belt (simply put, TRXC is now generating revenue and TITXF won't generate revenue for another two full years).

My advice to Titan management would be to conduct a R/S, uplist to a major exchange, and stop diluting shareholders in small private placements at an unfavorable valuation. Hopefully the new Chairman of Titan will realize this. 

Positive Tiara Data Could Give Neovasc A Much Needed Boost

By The Wall Street Fox → Wednesday, June 8, 2016
Neovasc suffered a huge blow last month when a jury awarded CardiAq (now a subsidiary of EW) $70M in a trade dispute/IP lawsuit related to Neovasc's Tiara mitral valve. Valued at over $600M in early 2015, Neovasc is now worth only $30M. The comany has ~$50M in cash and is in the midst of enrolling patients into its pivotal Phase I Tiara trial. The judge threw out 2 of 3 remaining claims against Neovasc last week, but still has yet to finalize the $70M penalty and has yet to rule on the change of inventorship. CardiAq would be listed on the patents for Tiara along with Neovasc, likely resulting in Neovasc having to pay CardiAq a royalty on future sales IF the judge rules in favor of CardiAq--this scenario would crush Neovasc's stock (again). An appeal from either CardiAq or Neovasc is possible and would push out the final judgement another year or more.


Tiara is the front runner device in the mitral valve space, which is an untapped market that is estimated to be 2x-4x the size of the aortic valve market. A lot is at stake here.

Neovasc is also in the midst of a limited commercial launch of its Reducer device in Europe, which helps relieve patients suffering from refractory angina. Revenues jumped 429% in Q1 to $213K. It will take a few years for Reducer to generate meaningful revenue.

The real catalyst to boost Neovasc shares from current depressed levels is positive data presented at the Transcatheter Valve Therapies meeting. Neovasc presents June 16. Based on the previous successful implants of the Tiara, the data is expected to be positive. At this point, given the unknowns regarding the trial damages and patent ownership, this is an extremely speculative play. But there is still upside potential if NVCN presents positive Tiara data at TVT meeting, and
if the judge rules favorably for NVCN by either A) reducing $70M penalty, B) ruling against CardiAq RE: claims to ownership of Tiara, or C) both.

Leerink note below (from May 2016)

Emerging Markets Looking Ripe For Gains

By The Wall Street Fox → Tuesday, June 7, 2016
I consistently observe a trepidation within the industry RE: allocating to emerging markets (EM). Why? Past performance. Emerging markets are at the same level today as they were back in early 2006. Flat for ten years. Of course, depending on market entry timing, long term EM investors may be up 40%, down 40%, or somewhere in between. But the growth prospects for EM vs. developed nations don't compare, so is now a good time to allocate to EM?

There was an insightful presentation on emerging markets from the people behind EMQQ last month that illustrated the growth prospects of emerging markets and the flaws with today's EM investment vehicles.

A bulk of EM indexes, ETFs and mutual funds hold many state owned companies, which breed corruption, have terrible corporate governance, and put shareholders interests near the bottom, and don't hold e-commerce/technology names that are listed on U.S. exchanges. To catch the real growth of emerging markets, you need to be invested in technology, namely e-commerce. Why e-commerce? Because EM doesn't have the retail infrastructure in place like the U.S. does. They don't have giant shopping malls, plazas, department stores, etc. Lack of infrastructure and the recent surge in smartphones has allowed EM to entirely skip the brick and mortar retail era and instead shop online, which has resulted in staggering growth. These EM e-commerce companies, from WUBA to BABA to MELI, have been growing at an average annual rate of 40% since 2009, and are showing no signs of slowing down.

When will the market catch on? Based on the EEM chart, soon.


EM has been coiling for 10 years. A failed breakout, combined with an inverse head and shoulders, may lead to a powerful move to the upside. A measured move price target derived from the H&S pattern points to $43, representing ~25% in potential upside. A stop loss near the rising trend line, ~$32, represents downside risk of ~7%. Expect some congestion near the $37 resistance level.

Trade Ideas 05/19 -- Cempra, Stoneridge, Kodak

By The Wall Street Fox → Thursday, May 19, 2016
Cempra -- Short Idea Descending triangle pattern. Continuation to downside if break-down below $15

Kodak -- Long/Short Idea Break coming soon. Short idea if rejected at falling resistance near $12, long idea if clears above $12 resistance AND $12.50 horizontal resistance.

Stoneridge -- Long Idea Nice ascending triangle. More room if it can decisively clear $15.50 resistance.


TransEnterix Retains First Mover Advantage As Bad News Spills Over Into Titan Medical

By The Wall Street Fox → Tuesday, May 17, 2016
Recall late 2014 -- TransEnterix had already completed its pre submission filing for SurgiBot, received feedback from the FDA, and was preparing its 510(k) filing with the FDA with the expectation that it would be submitted by the end of 2014. Titan Medical was still in the early stages (no design freeze) of developing its SPORT surgical robot, and expected to launch SPORT in Europe during the first half of 2015.

TransEnterix announced in November 2014 that it's COO would be leaving the company and it had delayed SurgiBot 510(k) filing submission by 6 months to mid 2015. Shares plummeted. A week later, Titan Medical announced that it was delaying its commercialization timeline by more than a year. Shares plummeted.
                                                                                                                  
2014 commercialization timeline
2015 commercialization timeline

                                                                                                                 





Fast forward to today, and TransEnterix received a denial from the FDA for SurgiBot, likely delaying FDA approval of SurgiBot to the second half of 2017. Shares of TransEnterix plummeted, largely because TRXC was viewed as the first ISRG competitor to enter the market, and now they would be neck and neck with the launch of Titan Medical's SPORT system. Not so fast.

Earlier this week, Titan Medical announced, again, that they would be delaying commercialization of the SPORT. The company plans to submit SPORT to the FDA by the end of 2017, implying an approval decision by mid 2018. TransEnterix will retain first mover advantage for SurgiBot and ALF-X in the U.S.

2016 commercialization timeline
While Titan's SPORT has the potential to gain traction once it eventually hits the market, its stock will not fare well in the mean time unless it is acquired. As of March 31st, the company had $12M in cash, and requires $24M to complete just its 2016 milestones. 2017 milestones are also costly, but the company is trying to soften the blow to its retail investor base and not estimate the costs (hint: it's $30M-$50M). Given Titan's history of rampant dilution, expect the company to conduct a few more back to back $10M overnight offerings, slowly eroding the share price. Why Titan management has not already up-listed to a major exchange to expand access to capital and raise $ in one offering, and in turn limit dilution, is beyond me. The picture of Titan is the same as it was two years ago, not much has changed. 

In the meantime, TransEnterix will be focusing on generating revenue via ALF-X sales in Europe as it continues to add direct capital sales reps and distributors. Although ALF-X received CE mark in 2011, it has never been formally marketed until late last year when TransEnterix acquired the unit from SOFAR, a small Italian pharmaceutical company that did not have the resources related to building out infrastructure to build and sell a $1.8M surgical robot.

Despite a large selloff on FDA denial news, shares of TRXC continue to be accumulated
ALF-X sales will not happen overnight, as competition is already heating up. TransEnterix indicated that Intuitive Surgical is combating ALF-X in Europe by offering deeply discounted refurbished da Vinci models from 6-7 years ago, signaling that ISRG views ALF-X as a credible threat. Management needs to quickly post ALF-X sales to shore up its stock price and regain its image as the first real threat to Intuitive Surgical's 15 year surgical robotic monopoly.



Lamar: Buy Boring Billboards Business?

By The Wall Street Fox →
I recently road tripped down to New Orleans (2,800 miles round-trip), and in the process I viewed a ton of billboards. I have been watching Lamar Advertising (LAMR) for a while now and this trip solidified my bullish thesis.

Lamar had a strong presence in the Midwest. Of the ~500 (best guess) Lamar billboards I saw, I counted only four empty/ad-free.

This advertising space has a high barrier to entry. New billboards have to be approved by local governments on a case by case basis, and billboards are ugly, so new entrants can't set up shop overnight.

Although billboards command little market share in the advertising industry, vehicle miles traveled on U.S. roads is at an all time high.



The slow conversion towards electronic billboard displays is the growth driver behind this industry.

Lamar converted to a REIT a few years ago and currently yields 4.7%, and a forward P/E of 19x.



Lamar has rallied nearly 30% off its mid February low. The stock put in an inverted head & shoulders and reached its $7 measured move target of $63. I like Lamar long term for my personal IRA, but will be waiting for a pullback before initiating a position. On watch for now, in no rush given current market environment.

Other players in the billboard space are CCO and OUT.

Here's What's Next For TransEnterix

By The Wall Street Fox → Sunday, April 24, 2016
Following disappointing, and equally surprising, 510(K) SurgiBot rejection news from the FDA, shares of TransEnterix dropped more than 65% in intra-day trading. The company said it will communicate its regulatory strategy regarding SurgiBot on its May 10th Q1 earnings call. Fear is high in this name, and this has magnified the sell off, thanks to retail investors heavily piling in to the stock because of a constant newsletter pump from January to March by Money Map Press (to be clear, TransEnterix was not behind the pump/did not compensate anyone for the newsletter pump).

So, what's next for TransEnterix?

Cash Position

As of February 29th, TransEnterix had $47.1M in cash, expected to last until early 2017. The company also has a $44M ATM in place, meaning that the company can raise funds at any time by selling shares directly into the open market. I would suspect that following the 200%+ run in shares from Jan - April, the CFO took advantage of the stock price and raised capital via the ATM. TransEnterix does not need to raise capital funds until late 2016/early 2017, or mid 2017 if the CFO took advantage of ATM, so I would not expect dilution at current stock price of ~$2.00. At $1.8M + ~$400K in a reusable instrument set, a few ALF-X sales would also mitigate cash needs.

From Stifel's Rick Wise, "With some level of cash-conservation, we believe TRXC can fund operations for 18-24 months."

European Sales of Alf-X 

TransEnterix acquired the ALF-X last year from Milan-based SOFAR for $25M in cash, $~40M in stock, and a potential ~$31M in milestone payments. While bears believe that ALF-X is a dud because there have been no sales since the robot obtained CE Mark in 2011, the fact is that ALF-X was in the hands of a small pharmaceutical company that could not afford the costs related to the infrastructure build out/marketing of a multi million dollar surgical robot even in front of surgeon interest, therefore, SOFAR focused on going the pharma route by conducting two human trials with hundreds of patients, collecting data, and publishing results in peer reviewed journals.

Intuitive Surgical acknowledged during its Q1 earnings call that a slow down in sales of the da Vinci system in Europe was directly due to hospitals now reviewing the ALF-X system before making a decision. One ALF-X sale represents the same revenue of ~4 SurgiBots. An ALF-X sale in Q1 of 2016 would be a positive surprise and boost the stock price, but it's a stretch given that the capital sales cycle for surgical robots is 6-12 months. I'd expect the first ALF-X sale to occur in Q2 or Q3.

During Q4 earnings call, management gave the following update on ALF-X commercialization:

  • Extremely high market interest. 23 employees focused on commercialization and support.
  • Contacted over 5,000 surgeons and hospital administrators in EU/Middle East.
  • Generated hundreds of high quality leads. 65 sales presentations through February.


Europe has nearly double the amount of hospitals than the U.S. and surgical robotic market penetration is less than 1% in Europe, compared to ~5% in the U.S. The main reason why Europe hasn't adopted surgical robotics as quickly as the U.S. is because there is bigger scrutiny on costs/economics on a per procedure level. ALF-X per procedure costs will be $500-$700, compared to $1,500-$3,000 for da Vinci.


Public hospitals in particular must go through a tender process, which means they must evaluate all potential product options when buying $1M+ capital equipment. Any public hospital that is interested in acquiring a da Vinci robot must now thoroughly review the ALF-X robot before making a decision.

ALF-X boasts favorable per procedure economics, which is essential to European hospitals, haptic feedback, 3DHD vision, an eye tracking system, and an open architecture platform where the surgeon is scrubbed in. These are the differentiators between ALF-X and da Vinci--but make no mistake, ISRG is a behemoth and directly competing against them won't be a walk in the park. Either way, the market potential is large, barely penetrated in Europe, and the ALF-X system addresses all the needs that have hindered the adoption of surgical robotics in Europe. Most analysts covering TRXC expect 3 ALF-X system sales in 2016.

From BTIG's Sean Lavin, "We spoke to one surgeon who was seeing the product (ALF-X) for the first time. His multiple centers own over 20 da Vinci units. When we asked him how many of his next 10 would be ALF-X, he said all so long as when he demoes it he feels it drives well (which we think it does)."

What's Next For SurgiBot?

SurgiBot is not dead, even though the stock is acting like it is. Shares of TransEnterix have behaved as if SurgiBot was a pharma drug that just failed its pivotal phase III trial. This is not the case, and TransEnterix has several pathways to commercialization for the SurgiBot.

First, some background. SurgiBot was submitted via the 510(k) pathway, which is an expedited pathway to approval that bases the product on a predicate device that is similar and already approved/marketed in the U.S. SurgiBot's predicate device was SPIDER, a laparoscopy device developed by TransEnterix that utilizes the same flexible instrumentation found in SurgiBot (internal triangulation, full 360 degree movement etc). SPIDER was used in 4,000 operations. The FDA signaled to management that human trials would not be necessary for SurgiBot approval and that instead they could use the SPIDER data as a predicate device.

One reason why 510(k) applications receive "not substantially equivalent" designations is because of "New Technology" -- the technology (in this case, SurgiBot) is not substantially equivalent to the predicate technology (in this case, SPIDER)." This makes sense, as the SurgiBot is a massive upgrade to the SPIDER, as SPIDER is manual and SurgiBot has motors and a plethora of other moving parts not found in SPIDER.

Receiving a "not substantially equivalent" designation automatically classifies the product as a Class III device, akin to artificial hearts, heart valves, and breast implants (products that stay inside you after procedure). Class III medical devices require a lengthy and costly PMA approval process that entails human trials.

TransEnterix can instead take the De Novo reclassification pathway, which requires the company to submit an application that shows SurgiBot is not as dangerous as Class III devices and instead is just as safe/comparable to Class II devices. For reference, Intuitive Surgical's da Vinci is classified as a Class II device. TransEnterix needs to submit the application within 30 days of April 19th. It is a 120 day review process, meaning TransEnterix can hypothetically have SurgiBot on the market before years end. IF that's the case, this 65% decline will prove to be a great buying opportunity.



However, if the FDA decides that SurgiBot needs to go through the lengthy PMA approval process, SurgiBot will not be on the U.S. market for 1-2 years, and last week's price action was appropriate. If this turns out to be the case, it is my opinion  that TransEnterix should conserve cash and ditch FDA approval prospects in the near term, and should instead seek European CE Mark for SurgiBot, which is a less rigorous and time consuming process than the FDA, and focus on ALF-X sales in Europe. TransEnterix can build out its commercial presence in Europe/Middle East, collect data from the procedures, and submit that data for the PMA approval process.

We will have a clearer picture of what TransEnterix plans to do on May 10th.

Buyout

I don't think this happens, but anything's possible. Maybe 5% chance, tops. But, worth noting the connecitons. CEO Todd Pope was a former J&J exec while serving as the President of Cordis. J&J signaled that they are looking to acquire medical device makers, and even though they teamed up with Google to develop a surgical robot, that is still years away from hitting the market, where as TRXC already has ALF-X on market and SurgiBot is closest robot to being approved. Meanwhile, a director of the board, Dr. Jane Hsiao, and her business acquaintance Dr. Phillip Frost collectively own 8% of TransEnterix, fueling speculation that Opko Health could take over TRXC. Meanwhile, the surgical robotics industry is projected to more than triple over the next five years and a number of healthcare companies will be looking to cash in (Stryker, Medtronic, EW, BSX, SNN etc).

Ownership

TransEnterix is heavily owned by insiders and the VC's that funded the company when it was private. It is worth noting that not one VC has sold shares of TRXC since the company went public via a reverse merger in late 2013. Collectively, the board of directors of TransEnterix owns nearly 50% of the company.


Conclusion

TransEnterix suffered a disappointing setback last week, but the company is not a one trick pony. Commercialization of ALF-X is underway in Europe, and SurgiBot will eventually be approved by the FDA. I expect shares to remain in the low $2.00 range until management gives its update. I will continue to generate income on my underlying investment by selling covered calls. I have been long TRXC since it was SafeStich Medical on the OTC board in 2013. This is a speculative investment, do your own due diligence.