“We’re going to wait until regulatory approval happens and revenues start trickling in before we take another look at Nanox (NNOX).” That’s what we wrote nearly three years ago in a piece titled Nanox Reinvents X-Ray Machine, Files IPO which noted the company’s goal – “to finalize deployment of the initial 15,000 Nanox Systems by 2024.” Our response was to quote the great American philosopher Mike Tyson – “everyone has a plan until they get punched in the mouth.”
Three Years Later
Three years later and the plan to have 15,000 x-ray machines in the field has moved to three years following an FDA approval that took place in spring of this year.
Following receipt of clearance from the FDA, and if authorized by similar regulatory agencies in other jurisdictions, our goal is to finalize deployment of the initial 15,000 Nanox System units within three years following receipt of FDA clearance for our multi-source Nanox.ARC (including the Nanox.CLOUD).
Credit: Nanox
Why three years? Wasn’t the $100 million from the IPO supposed to fund the creation of these 15,000 machines which should have underway in time for FDA approval? Instead, they appear to have focused on acquisitions and have recently raised $30 million from an institutional investor to extend their runway. If we’re to expect 15,000 deployments by April 2026, and their operating burn rate averaged $40 million annually over the past two years, that suggests the $108 million (includes the recent raise) won’t be enough to last them through the giant rollout that’s happening in the coming several years.
As the company deploys machines into Ghanna, Morroco, and Nigeria, we’re less convinced that FDA approval was the bottleneck keeping them from becoming a great medical device success story. We’re told they’re now “working to establish a demonstration center in Fort Lauderdale, Florida for the Nanox.ARC (including the Nanox.CLOUD), subject to receipt of an import license.” FDA approval is supposed to result in product revenues, not demoes. Those are what they should have been doing while they waited three years for FDA approval. And what exactly happened to the last FDA approval they received?
Says the above article:
Once cleared, Nanox could begin distributing its end-to-end system as soon as the fourth quarter of 2021, Ran Poliakine, the company’s chairman and CEO, said in a statement. In the U.S., Nanox has penned a deal with USARAD to deploy an initial order of 3,000 systems across the country once it receives the go-ahead from the FDA.
Credit: Fierce Biotech
What happened to that plan? The Rona? The old “macroeconomics headwinds?” This is precisely why we don’t invest in companies until they show meaningful revenues. Promises of future growth and $5 might get a large chili at Wendy’s sans onions and cheese.
Show Us the Money
Let’s forget about Nanox’s failed acquisitions which have culminated in a combined offering that can’t be sold for more than it costs to produce.
Let’s assume, as the company tells us, that 15,000 machines will be deployed in three years’ time. That’s about 5,000 machines per year or 416 per month or about 14 machine deployments per day. Is shipping some machines over to Africa getting us there quicker? How many units do they expect to deploy following the establishment of a demonstration center in Fort Lauderdale Florida? The next critically important milestone for investors would involve two key metrics: number of machines generating revenues, and total revenues received from all machines. The latter revenue segment is provided by the company in the financials, so it shouldn’t matter if they choose an “as-a-service” business model or sell the hardware outright, we’ll see revenues start popping up here (highlighted in yellow is the segment to watch).
As always, it comes down to revenue growth that comes from selling a product or service for more than it costs to produce. Until we see some revenues, we won’t know how profitable this operation will be. Investors shouldn’t get distracted by acquisitions the company made which were supposed to generate synergies but appear to have failed in that regard.
Acquiring Progress
Healthcare is an investment thesis that explains itself. We all understand the importance of staying healthy and would spare no expense to make sure ourselves, and our loved ones, stay healthy. Medical devices have provided a lucrative path to revenue growth for firms such as Becton Dickinson, Stryker, and Medtronic. While Nanox deploys machines in some difficult jurisdictions to navigate and lines the pockets of attorneys, large medical device manufacturers are making actual progress in whatever niches they’re dabbling while spending billions of dollars on research and development to figure out the next big thing. The longer it takes Nanox to commercialize a product – that means economically viable revenues, not just deployments – the less likely we are to believe they’re ready to unleash the Holy Grail of x-ray technologies onto the world.
Companies that aren’t making the sort of progress they’d hoped for often supplement their organic growth story with bolt-on acquisitions that are meant to show progress. Inevitably, the acquired technology will be spun into some complimentary competitive advantage for the core product offering. That’s what Nanox seems to have done when they acquired Zebra Medical Imaging, a company that we profiled in our piece on The Future of Medical Imaging and Machine Learning. The all-stock deal was valued at approximately $110 million at closing, with up to $84 million more in additional stock for the completion of various performance milestones.” Around $50 million of that acquisition price was in the form of goodwill, nearly all of which was evaporated in an impairment charge last year. In other words, Nanox overpaid for their acquisition, and “the expected synergies from combining the operations of Zebra’s AI solutions with the Company’s tomographic imaging systems” weren’t realized.
The acquisition of Zebra becomes even more questionable when you consider it only generated $343,000 in revenues last year (up from $270,000 the year prior) with a cost of goods sold (COGS) exceeding $8.5 million. Contrast this to the other acquisition Nanox made around that time – some teleradiology services which generated $8.2 million last year at a gross margin of 16%. In other words, nearly all the revenues realized by Nanox last year came from a standalone product, and we’re still waiting to realizing revenues from their core product offering – a nanotechnology-enabled x-ray bed that’s supposed to democratize access to x-rays.
Given all the great medical device companies out there, a handful of which are dividend champions, we’re puzzled why anyone would take an interest in Nanox until they’ve realized traction in the form of meaningful revenues – ten million dollars per year or more – from their core product offering. Should that happen in the future, we’d still be hard pressed to revisit this company given the tepid execution observed across the board and many red flags raised – like the subpoena from the SEC “requesting that the Company provide documents and other information relating to the development cost of the Company’s Nanox.ARC prototypes, as well as the Company’s estimate for the cost of assembling the final Nanox.ARC product at scale, among other things.” For those of you willing to take the plunge anyway, you’ll be buying shares of a company that are priced to absolute perfection.
Price Targets and Valuation
Nanox investors sure got punched in the mouth as shares plummeted 54% since the IPO compared to a Nasdaq return of +30% over the same time frame. Plenty of hype followed that IPO with shares breaching the $75 mark before settling to around $10 a share where they trade today. The resulting $554 million market cap gives the firm a simple valuation ratio (SVR) of 57. Investors always clamor for a price target, so here’s one for those who still believe that Nanox is three years away from a huge medical device success story.
The richest stocks in our catalog like Snowflake (SNOW) trade at an SVR of around 20, so we certainly wouldn’t pay more for Nanox. Our hard cutoff of not paying more than 20 means that even if Nanox was curing cancer, we wouldn’t pay more than $3.55 a share based on Q1-2023 revenues. They’re not though, and we’d argue their execution thus far has been lackluster at best, so there’s no reason this company should trade above our catalog average of 6.5. That means that shares ought to be trading around $1.15 a share right now which would represent a more reasonable valuation based on the progress made so far. Again, we come back to the need for strong revenue growth which would help justify these lofty valuations.
Conclusion
Our time is limited, and so is our money. Quickly dismissing stocks based on red flags allows us to use our precious time focusing on companies that are actually realizing benefits from emerging technologies and capturing market share. Nanox has more red flags than a North Korean birthday celebration, and we’re not the only ones to notice. Apparently, Muddy Waters issued a short report against the company which we’ve yet to crack open. We’ve seen enough, but if you need some more convincing, read their short report next. Sure, Muddy Waters is incented to espouse the worst bear thesis, but there’s usually some fire to be found in all that smoke. Some revenue growth would go a long way towards instilling confidence among the Nanox investor base, and this should be right around the corner with FDA approval out of the way.