PROCEPT BioRobotics Corporation

Moat: 1.5/5

Understandability: 3/5

Balance Sheet Health: 3/5

Procept BioRobotics Corporation is a surgical robotics company focused on developing, manufacturing, and selling robotic systems for minimally invasive urological procedures, particularly those related to benign prostatic hyperplasia (BPH).

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Business Overview: Procept BioRobotics is a medical device company that develops, manufactures and sells a robotics system called AquaBeam Robotic System. This system has been primarily designed to treat BPH, a condition that affects millions of men worldwide.

Revenues Distribution: The company generates revenues primarily from the sales of the AquaBeam system, related disposables, and service and maintenance contracts.

  • System Sales: This revenue stream can vary significantly based on the timing of new hospital adoption and the size of their orders. It’s highly dependent on capital expenditure budgets of hospitals and their willingness to adopt new technology. It would have been more than $7.5 million higher had one international customer not delayed its purchase and installation till 2023 (mentioned in the earnings call).
  • Recurring Revenue: The revenue from disposable products as well as the service and maintenance that must be done after the sale of the robot. This revenue is typically more stable and reliable. This accounted for roughly 50% of revenue this last quarter. (From the last earnings call)
    • The Company states that they have 100% visibility into recurring revenue with respect to the capital instrument base, even though that’s not for a given term or duration.
  • Geographic:
    • U.S. sales were $40 million, representing 91% of total revenue, which was a decrease from 95% in the previous year.
    • International sales, which are still a small part of the revenue, at $4 million.

Industry Trends:

  • Aging Population: The global population is aging, which will lead to an increase in the number of patients with BPH. * The demand for less invasive medical procedures is growing, and companies providing such are likely to see a revenue increase.
  • Technological Advancement: The medical device industry is rapidly evolving, and advanced technologies like robotics are playing a bigger role.
  • Regulatory Changes and Approvals: Regulatory approvals from the FDA in the United States and comparable agencies in other countries are required. They can delay or speed up the timeline of product availability and sales.
  • Healthcare Spending: Changes in healthcare spending, including insurance reimbursement levels and government regulations may influence a customer’s buying decision.

Competitive Landscape: The market for BPH treatment is competitive, with both pharmaceutical and surgical options being used. However, the surgical market space is mainly dominated by companies using transurethral resection of the prostate (TURP), laser treatment or Aquablation which PRCT uses. Other players in this field include: Boston Scientific, Teleflex, Olympus, and Coloplast. These options are less and more invasive, and vary widely on pricing structure.

What Makes PRCT Different:

  • Innovative Technology: The AquaBeam Robotic System is the company’s key differentiator. It is the only prostate therapy that uses an automated robot, image guidance and a heat-free water jet.
  • Clinical Data: Clinical studies have shown excellent results with few side effects, which has created interest for the product. The system is designed for the treatment of all forms of BPH.
  • Focus on Robotics: Since Procept only sells a robotic system, they do not have to compete for sales with other surgical equipment companies.
  • Focus on BPH: Unlike other companies, they are focused on BPH treatment. This makes them a specialist and allows them to get a bigger market share and a higher premium.

Financials Analysis:

  • Revenue Growth: The company has been seeing large revenue growth each quarter.
  • The revenue increased by 52% in the past quarter year over year. They are expecting 2024 total revenue growth to be between 45% and 60%. The revenue is currently around $44 million for the past quarter.
  • Gross Margins: The gross margin increased by 10 points, from 55.2% to 65.2% in the past quarter year over year. They are working to get that closer to 70%.
  • Improvement from higher sales volumes, lower costs as production scales, and ongoing focus on manufacturing efficiency.
  • Operating Expenses: The company is working to manage costs by lowering them as percentage of revenue.
  • Losses: The net loss narrowed from -$26.9 million to -$13.2 million year over year.
    • The company had a -30% operating margin compared to a -71% operating margin last year. This is mainly due to the increased sales volume combined with controlling expenses.
  • They still need to work on their marketing and research expenses, however, both are planned to increase. Management believes it is a positive that sales is still growing at such a rapid pace even with these expenses under control.
  • Debt: The company’s overall leverage is still fairly low, with total debt around $25 million.
  • Cash: The company also has cash and marketable securities of around $235 million.
  • Stock Based Compensation: Stock-based compensation, which is used to reward and retain employees, has been a significant expense and was $750 million in the past quarter.
    • The company uses mainly equity-based compensation because it does not want to spend cash on expenses. * Management stated on their most recent earnings call that they do not see it slowing down.
  • Dilution: With employee stock programs the share count is increasing and could decrease the value of the stock by diluting value per share.

Moat Rating: 1.5 / 5

  • While PRCT has a good product and has seen significant growth, we are not confident enough to give it a high moat rating. There is no true moat here for now, and if the technology is easily copied in the future, they might lose all competitive advantages.
  • The current advantage is that it is the only product which combines an automated robot, a heat-free waterjet and precise image guidance. Since they are using an established method (Aquablation) their moat is not that wide as the product is not a completely new innovation, just an improved one.
  • The company has a first-mover advantage in this sector and has a track record for successful clinical trials. Although clinical trials don’t guarantee future success, it provides a barrier to other companies who do not have similar results.

Risks:

  • Competition: There are several alternatives to Aquablation already on the market (TURP and Laser treatment), and it may have problems competing against these existing players, even with its benefits.
    • Other companies can also come up with new products that may be better than the one offered by PRCT.
    • Other new market entrants could also affect the company’s business.
  • Regulatory Hurdles: Delays in regulatory approvals and changes in reimbursement policies could limit their growth. New devices must meet stringent approvals, and that can be a tough barrier for smaller companies.
  • Adoption Rate: Hospitals may be slow to adopt new technologies, especially if the price is high. The price of the system is quite high and may be out of reach for several hospitals, limiting the companies revenue potential.
  • The company stated in their recent earnings call that they must work on educating customers on how the robot works, and that is an ongoing process.
  • Technological Obsolescence: If a superior technology emerges in the future, the AquaBeam system could become obsolete.
  • The R&D spend at the company must be continuous. The investment in research and development is the company’s largest expenditure.
  • Acquisition: The company is still small compared to major players, and a bigger company could easily take them over.
  • Profitability: The company currently operates at a loss and has been for a considerable amount of time. They may not reach profitability and may run out of cash if not careful.
    • The company has plans in place to improve operating efficiency and get closer to profitability.

Business Resilience:

  • Recurring Revenue: The company’s business model includes recurring revenue through disposables and service contracts, which provides some stability in a downturn.
  • Proprietary Technology: The technology used by the company is proprietary, which will provide some resistance against competitors.
  • Clinical Support: Since they are primarily focused on selling their system, they can provide a ton of support and training for new users, which provides a good benefit for those who buy the product.

Understandability Rating: 3 / 5

  • While the underlying technology, robotics, is complex, the company’s business model of selling robotic surgical systems and associated services is fairly understandable.
  • However, medical devices often have complexities of accounting and their revenue stream is hard to analyze (like the amortization of non-tangible assets).
  • Understanding the industry dynamics, medical device regulation, and the drivers of ROIC requires a fair amount of effort.
  • Additionally, for newer investors the company’s use of the Economic Profit Model for valuation could pose some difficulty.

Balance Sheet Health: 3 / 5

  • The company has a strong cash balance, but has a moderate amount of debt as well as employee obligations and stock options which has led to high dilution of the stock.
  • With the company still operating at a loss, there is still some risk involved.
  • The company must be able to successfully get to profitability with its large expenses to be considered healthy.
  • As it has mentioned on multiple earnings calls, it expects to generate lots of future revenue and profitability through existing systems and new additions.