Surgical Science Stock Is a Pure Play on Medical VR

The truth is that digital actuality (VR), augmented actuality (AR), and different riffs on these digital interfaces haven’t lived as much as the hype. The newest hype cycle bought underway round 2015-16. That’s when the vaunted Oculus Rift headset hit shops and Magic Leap got here out of stealth mode. The previous did not launch the VR gaming revolution and the latter just about did not launch to expectations. This interprets to few alternatives for retail traders. Simply two AR/VR shares will be present in our Nanalyze Disruptive Tech Portfolio which might be pick-and-shovel performs on the theme, and each are largely predicated on the success of the metaverse, which seems to be spinning nowhere, just like the blue wheel of demise on the pc display screen. Nonetheless, if any of these market stories out of Mumbai are to be believed, the present VR/AR market is just not inconsequential.

Sadly, the above chart doesn’t break down the numbers between shopper and enterprise markets. We suspect extra of the expansion is occurring on the enterprise facet. Purposes vary from digital collaboration to development and engineering to healthcare. Use circumstances round medical digital and augmented actuality are significantly intriguing. These applied sciences handle every thing from ache administration to medical coaching. We lately got here throughout a pure-play medical expertise inventory, Surgical Science Sweden (SUS.ST), which develops VR {hardware} and software program for schooling and coaching. The corporate greater than doubled revenues final 12 months and is pushing arduous into the robotic surgical procedure market.

About Surgical Science Inventory

As you may guess from the corporate’s full identify, Surgical Science relies in Sweden. Based in 1999, the corporate is a self-proclaimed “world chief within the growth of digital actuality simulators for evidence-based coaching.” Its core proprietary software program and {hardware} applied sciences simulate interactions between devices and anatomy to coach surgeons and different medical specialists. Since 2017, Surgical Science has additionally been engaged on simulation options for medical system corporations, significantly in robot-assisted surgical procedure. The corporate splits its enterprise between its core Training market and the rising Trade/OEM market.

Earlier than 2021, annual revenues had been modest at about $10 million. Then revenues greater than tripled to about $33 million in 2021 after which greater than doubled in 2022 to $72 million. The sudden burst in revenues will be largely attributed to a few acquisitions. In 2019, Surgical Science acquired a fellow Sweden-based medical simulator software program developer, SenseGraphics, for $32 million. The corporate went on a much bigger shopping for spree in 2021. It acquired U.S.-based Mimic Applied sciences, with experience in robotic surgical procedure simulation and coaching, for $18 million. It then spent $305 million in money and inventory to amass Simbionix, a large competitor that principally operates out of Tel Aviv, Israel. You’ll be able to see the massive bump in income from the mixed firm starting in Q3-2021.

Like Surgical Science, Simbionix generates earnings partly from its proprietary simulators throughout medical procedures, together with areas equivalent to normal surgical procedure, endoscopy, urology, and others. It additionally licenses simulation software program to robotic surgical procedure corporations, together with Intuitive (ISRG) and Medtronic (MDT), which acquired Mazor Robotics about 5 years in the past. Each had been additionally prospects of Surgical Science previous to the acquisition of Simbionix, which had almost $41 in income in 2020, although that was down from greater than $45 million in 2019. Little doubt the Rona was in charge, however primarily based on Q1-2021 outcomes of $9.7 million, Simbionix was on tempo for flat or barely decrease revenues earlier than it was absorbed by Surgical Science. It’s extremely unlikely we’ll see income double once more in 2023 because the mud settles on these acquisitions (extra on future outlook beneath).

The Robotic Surgical procedure Marketplace for VR Simulation Coaching

Whereas the lion’s share of income at present comes from Training merchandise, Surgical Science believes its “strongest future development” will come from the Trade/OEM phase the place it will possibly leverage its previous R&D to simply (i.e., extra profitably with greater gross margins) combine product-specific simulations into scientific medical merchandise. The VR firm is especially bullish on robotic surgical procedure, which it calls the “key buyer group for the enterprise space.” The principal enterprise mannequin entails a growth charge for customizing or integrating with a buyer’s merchandise, together with a software program license charge primarily based on every unit, the put in base, or on utilization. Seems like possibly they’re nonetheless understanding which method works finest.

Surgical Science at present claims to have 10 to fifteen robotic-surgery prospects, which in all probability represents a large portion of the prevailing business. Intuitive is way and away the largest, with an estimated 80% of the present market with $6.2 billion in revenues final 12 months and seven,500 put in machines. That begs the query: Simply how large is the chance right here for Surgical Science, particularly if Intuitive is already a buyer that represents greater than 10% of income? The corporate argues (and our personal analysis exhibits) that robotic surgical procedure remains to be in its infancy, with a worldwide penetration throughout all medical procedures of simply 3% to 4%. As well as, a variety of Intuitive patents expire in 2017, doubtlessly opening the gates to extra opponents.

Nonetheless, it’s unclear how a lot headway the small-cap robotic surgical procedure corporations are making. One of the best might be an organization known as Accuray (ARAY), which is a robotics platform that delivers radiosurgery remedies to most cancers tumors, with about $450 million in 2022 revenues. Behemoth medical system firm Stryker (SYK) and its Mako Robotic-Arm Assisted Surgical System might be the largest income maker after Intuitive, with some estimates suggesting greater than $1 billion in annual income from gross sales and repair contracts. However the expense of those robotic surgical procedure platforms, together with the prices of consumables and companies, would appear to restrict upside and long-term market penetration.

Ought to You Purchase Surgical Science Inventory?

One of the best measure of how effectively Surgical Science is rising is license income inside Trade/OEM, which it solely began monitoring final 12 months. Luckily, the corporate is offering extra granularity into its two essential income streams, and we are able to certainly see the expansion story is alive and effectively within the first half of 2023 (all numbers are in Swedish krona, with $1 USD = 11 SEK):

And, sure, license revenues are up about 55% this 12 months in comparison with the primary half of 2022, whereas general web revenues have elevated 22% by the primary six months of 2023 versus final 12 months. These numbers might inch greater, particularly within the Training phase, because the fourth quarter of the 12 months is usually the corporate’s strongest. That’s as a result of most Training prospects are hospitals, which often maintain off on purchases till they will see what funds stay within the finances in direction of the tip of the 12 months. That additionally means these prospects see VR coaching as a nice-to-have fairly than a necessity, which might disrupt the underside line when budgets are tight. Triple-digit development is already a distant reminiscence.

Surgical Science administration claims the corporate remains to be on monitor to achieve $135 million in annual gross sales with an adjusted revenue margin of at the very least 40% by 2026. Whereas the shape appears achievable, the latter would require the corporate to considerably increase its present revenue margin of 23% primarily based on a gross margin of 66%. That’s the place these licensing revenues will play an enormous half.

In case you one way or the other had the foresight to purchase a little-known Surgical Science inventory when the VR simulation firm IPO’d again in June 2017, you’d be up almost +900% in your funding in comparison with about +100% for the Nasdaq. On the top of the pandemic tech increase in 2021, Surgical Science inventory was up by greater than +2,700%. That’s some critical volatility for a corporation solely very lately realizing vital revenues, largely primarily based on very latest acquisitions.

The volatility and brief historical past of income development are sufficient to present us pause. The corporate’s present market cap of about $750 million is below our threshold as effectively. A easy valuation ratio of about 9 (market cap/annualized income) means that Surgical Science inventory isn’t excessively overvalued in comparison with our catalog common of 5. These with a high-risk tolerance related to small-cap shares like Surgical Science inventory and fascinated about investing in VR might do loads worse. 

Conclusion

As risk-averse traders, we are going to proceed to observe Surgical Science inventory and see if it will possibly develop recurring license revenues and hit its monetary targets. Key for us might be breaking the $1 billion market cap threshold at a good valuation. The choices for investing in a top quality digital actuality firm have been almost nonexistent. Nonetheless, we aren’t going to put money into VR only for the sake of investing in VR.