Sensus Healthcare Inc $SRTS
Leader in Non-Invasive Treatment of Skin Cancers at 4.12 EV/EBIT
With the FED caught between fighting inflation, staving off another banking crisis, and a looming recession, why not look at a cheap, growing, under followed, non-cyclical, small cap stock that's mostly uncorrelated with major indexes.
Sensus Healthcare Inc ( NASDAQ : SRTS ) primarily earns revenue through sale of its SRT-100 lineup of Superficial Radiation Therapy devices for the treatment of non-melanoma skin cancer and keloids.
Non-melanoma skin cancers (NMSCs) are the most common cancers, projected to affect 1 in 5 Americans. The Sensus SRT-100 is able to treat these cancers noninvasively with near identical efficacy as Mohs surgery, traditionally, the first-line treatment for NMSCs.
The SRT-100 works by zapping cancer lesions with low energy x-ray radiation. Generally pain free, scar free, and is over 95% effective. The radiation does not penetrate the skin more than 5mm, and the exposure typically lasts less than 30 seconds. The company states that patients are seeing the marketing and demanding non-invasive cures. I can't argue with that logic, if it were me in that situation, I would demand the same.
If you have diabetes, history of heart disease or stroke, or if your cancer is located on your face (as is common), this treatment is likely by far a preferable treatment to the Mohs surgery alternative.
Though it sounds like a science project company, I don't invest in science projects, Sensus has sales, growth, earns income, and controls their R&D expenses effectively.
Sensus Healthcare Inc stock has the following attractive attributes:
It is cheap (4.12 ev/ebit) and profitable
No Debt, $25m net cash
Growing top line and unit sales
Improved CMS reimbursement rate for SRT
Lower CMS reimbursement rate for Mohs Surgery
High Insider Ownership/Shareholder alignment
Positive demographics & customer base
Their product offers highly effective non-invasive cure to common skin cancers as an alternative to surgery.
History
Sensus healthcare was founded by Joseph C. Sardano (current CEO), Richard Golin, Kalman Fishman, and Stephen Cohen in 2010 and, completed its initial public offering in 2016, with corporate headquarters located in Boca Raton, Florida.
The use of Superficial Radiation Therapy against non-melanoma skin cancers is not new, it's in fact one of the oldest known cancer treatments, dating as far back to the 1920s. Large, expensive and complicated machinery requiring constant calibration, dedicated facilities, dedicated radiologists, increased regulation and decreases reimbursement rates, and the advent of surgical techniques saw Mohs surgery become the first-line treatment for NMSCs.
Technology can evolve over time, and the Sensus SRT-100 is a device which offers innovations that have solved many of the legacy issues which counter-intuitively led to invasive surgeries becoming first-line treatments over non-invasive options.
SRT-100
Sensus Healthcare earns most of its revenue from sales of its SRT-100 machines, additionally they have been focusing a lot of attention and integrating their HIPAA compliant Sentinel asset & patient records management software platform into their products which has allowed them to grow their service revenue and currently accounts for ~10% of sales
As you can see, the Sensus SRT-100 is a relatively compact and mobile device, it offers a dermatologist the ability to deliver treatment directly themselves without a dedicated radiologist, requiring minimal shielding, or having to make referrals to other specialist practitioners. It's auto calibrating, it is safe, only delivering low energy radiation to where it is needed and nowhere else, penetrating skin to a depth of no more than 5mm.
SRT-100 Vision - Image Guided Superficial Radiation Therapy
The device pictured above is the the SRT-100 Vision, an upgrade to the base unit, offering image guided SRT, which is unique to Sensus, and I estimate accounts for over 70% of recent unit volumes - based on quarterly disclosures in their news releases and conference calls.
Using high frequency ultrasound, their machines can distinguish cancer cells from healthy cells, allowing physicians to see and treat target areas and provide added assurance to patients.
Vision provides the user with a unique superficial radiation therapy-tailored treatment panning application that integrates an embedded high frequency ultrasound imaging module, volumetric tumor analysis, beam margins planning, and comprehensive dosimetry parameters.
These additional options allow for dedicated treatment planning and full treatment progression documentation in a patient’s record, treated lesion monitoring. full record and treatment tracing, operator-level access and functional control, audio-visual patient and treated lesion monitoring, and advanced dosimetry setting and tracing.
Competition
It is important to note that Sensus does have competition, they don't by any means have a monopoly on the market. Aside from the competition from Mohs Surgery, SRTS does have some competitors distributing alternative products and technologies in the United States and in other parts of the world.
One competitor is Xstrahl, which offers an even more compact treatment device which can uniquely deliver treatment via multiple radiation treatment modalities, either SRT or electronic brachytherapy (eBt). eBt can be used as an alternative to Mohs or SRT, each therapy may be considered more appropriate for specific lesion variants. eBt is typically higher cost when compared to SRT.
When compared to Mohs Surgery, one downside of SRT and eBt is that a course of treatments requires approximately 8 to 14 separate treatments. Each visit would consist of ideally a 15 minute visit to a clinic. Though Mohs isn't necessarily one and done either, follow up visits are required to assess healing, additionally there are higher risks for infection, discomfort, and further complications.
While SRTS does not have a monopoly, it does have some defensible intellectual property that does make it an appealing choice, and it does have a leading competitive position in a large NMSC treatment market which isn’t a “winner take all” situation. There are not enough Mohs surgeons, or therapy devices deployed to satiate the demand of the aging baby boom generation.
SRTS states the following about the addressable market in the United States:
Our SRT systems are well positioned in a large and largely untapped market consisting of some 14,000 dermatologists and 1,000 Mohs surgeons in the U.S., representing more than 8,500 offices, not to mention a further 6,500 plastic surgeons and 5,500 radiation oncologists. Our systems provide a compelling alternative to surgery for millions of patients and arguably, the only solution to prevent the recurrence of keloids following surgical excision. In addition, skin cancer is a large and growing condition with estimates that 1 in 5 Americans will develop skin cancer during their lifetime. This tells us that nearly 70 million people will contract non-melanoma skin cancer in this country.
SRTS isn't constrained to the US market, it is shipping internationally also:
international business is also doing well as we shipped a record 16 units during the 2022 and 6 during the fourth quarter, most of which went to Asia.
Intellectual Property
Sensus holds a number of patents - primarily protecting their SRT-100 vision capabilities for the next decade, plus additional undisclosed patents pending. Since SRT-100 vision represents an estimate of over 70% of unit sales, this suggests that this feature alone offers an attractive basis for their competitiveness in the NMSC treatment market.
U.S. Patent No. 7,372,940: Radiation therapy system with risk mitigation (expires September 30, 2025)
U.S. Patent No. 7,263,170: Radiation therapy system featuring rotatable filter assembly (expires September 30, 2025)
U.S. Patent No. 10,596,392: Dermatology Radiotherapy System with hybrid Imager (expires July 28, 2038)
U.S Patent US11027149B2 Hybrid Ultrasound-Guided Superficial Radiotherapy System and Method (expires 2034?)
A total of 22 patent applications were pending at December 31, 2020 and additional patent applications are in process.
CMS Reimbursement Rate Improvements
SRTS claims the following, if true, these Centers for Medicare & Medicaid Services reimbursement changes would improve SRTS competitiveness, and aid in sales of their products to customers.
SRT Reimbursement Rates for radiation treatment delivery revised upward 66% effective Jan 1, 2021
Mohs surgery Reimbursement revised downward 8%
Centers for Medicare & Medicaid Services (CMS) has issued a new, final reimbursement amount for CPT® code 77401 of approximately $41 per treatment. CPT code 77401 covers the delivery of Superficial Radiation Therapy (SRT) and this new amount represents a 66% increase from current levels. This is the first meaningful revaluation of CPT code 77401 since 2002.
In addition to this revaluation, Evaluation & Management (E/M) codes that CMS directs users of SRT to utilize also are increasing by double-digit percentages. All these increases are effective as of January 1, 2021.
SRTS claims that breakeven for doctors is 2 patients per month when financed via their lease program, however they state that the vast majority of purchases are for cash. This doesn't seem like a very high bar, and could suggest that the SRT-100 can deliver good value to clinics.
Unit Sales
With all that said, the proof is in the pudding, are they making sales?
As of YE2022 Worldwide installed base is currently 650+ SRT-100 systems. Sales were severely affected by the pandemic in 2020 and at least partially in 2021. A few patterns to take note of:
They are growing, though not necessarily linearly - the pandemic data adds noise to the data.
Sales have strong seasonality with Q2 and Q4 are consistently strong quarters, while Q1 and Q3 are consistently weak.
SRTS has maintained 65% gross profit throughout its history (except during the pandemic affected periods)
Capital Structure
Sensus continues to not have any borrowings under their revolving line of credit.
$25m in cash as of YE2022.
16,694,311 shares outstanding as of Dec 31, 2021
Compensation & Insider Ownership
Co-founders (current and former insiders) as well as one large shareholder control over 3.6m shares or over 20% of the company,
Joseph Sordano, CEO takes home about $650k in compensation
Share Ownership
1.1m (7%) shares Joseph Sardano,
1.5m shares (9.5%) - Edwin L Solot Jr. ( Large Shareholder)
1m (6%) Stephen B Cohen (Former co-Founder & Insider)
Share Based Compensation:
On February 1, 2020,a total of 35,000 shares of restricted stock were issued to employees and were recorded at the fair value of $4.11 per share
On July 21, 2021,a total of 130,000 shares of restricted stock were issued to employees and board members and were recorded at the fair value of $3.84 per share. The restricted shares vest 25% at grant date and 25% per year over a three-year vesting period
Equity compensation plan approved by security holders. 229,334 shares to be issued upon exercise of $5.55
Also of note, Joseph Sordano, did unload over 300k shares when the SRTS stock was trading around the $13 range in 2022. ( A significantly higher range than the current $5.11)
I don't believe any of the compensation plans are egregious, and given the significant ownership stakes, it's in the CEOs best interest to optimize for shareholder returns.
Pipeline
Though the vast majority of their sales come from the SRT-100, Sensus does have other products in its portfolio. Including:
TransDermal Infusion System ™ (TDI) for needle-free delivery of aesthetic medicines which carries a cost of about $28k per unit, vs the $200k+ pricetag of the SRT-100
Not a material contributor to revenues, though they expect that might change by 2023Q4
This may appear as a diversion from SRT-100 focused sales, however I can also speculate and say that having some aesthetics products in the portfolio may have the potential to open doors to SRT-100 sales as they may target the same clinics.
In 2022, they sold their Intra-Operative radiation therapy device they called Sculptura and related IP to Empyrian Medical Systems for $15m.
I can speculate that this is important for several reasons.
It demonstrates that SRTS is indeed focused, Sculptura clients are not the Dermatology market. Selling Sculptura requires re-investment and salesforce focus outside of SRTS' primary dermatologist client base.
Almost all of SRTS patents name Kal Fishman as inventor, including Scultura related patents. Kal is a co-founder of SRTS, but also the Founder CEO or Empyrian. Interesting.
* Kal does not have SRTS shares registered with the SEC, this would suggest that he has moved on from the company and is now pursuing the commercialization of Sculptura, but no longer working for the benefit of SRTS.
On one hand, Kal is clearly a bit of an inventor, and SRTS would not exist were it not for his contribution. On the other hand, I hate investing in Science project companies, so the fact that Kal is no longer a part of SRTS gives me some peace of mind that their capital deployment will likely be targeted more towards shareholders than at fruitlessly expanding their R&D budgets for more science projects which risk shifting focus away from their core business.
Research and development expense for the fourth quarter of 2022 was $1.2 million, unchanged from the current year quarter. We expect R&D expense to remain at this general level each quarter of 2023
Operating Performance
SRTS reported substantial growth over 2021, those growth rates need to be taken with a grain of salt though, as they were still dealing with the effects of the pandemic. Nonetheless, there appear to be no obvious redflags in their earnings, if anything their guidance is very promising.
SRTS commented as follows in their 2022Q4 news releases and conference call:
Revenues for 2022 were $44.5 million compared with $27 million for 2021.
65% increase was driven by a higher number of unit sold in 2022 due to the increase in demand. Cost of sales for 2022 were $14.9 million compared with $10.1 million for 2021, with an increase reflecting the higher number of units sold. Gross profit for 2022 was $29.6 million or 66.5% of revenue compared with $17 million or 62.8% of revenue for 2021.The company reported other income for 2022 of $13.2 million compared with $0.01 million for 2021. The increase was mostly related to a gain on the sale of a noncore asset. (Sculptura)
Net income for 2022, excluding a gain on the sale of a noncore asset, was $11.5 million or $0.69 per diluted share. Adjusted EBITDA for 2022 was $28.1 million compared with $5.1 million for 2021. Turning now to our balance sheet. Cash and cash equivalents were $25.5 million as of December 31, 2022, compared with $14.5 million as of December 31, 2021. The company had no outstanding borrowings under its revolving line of credit as of December 31, 2022 or 2021. In preparation for the future growth , we placed orders for inventories. We stood at $3.5 million in inventory and $6.3 million in prepaid as of December 31, 2022, up from $1.8 million in inventory and $1.9 million in prepaid a year ago.
Gross profit for the fourth quarter of 2022 was $8.4 million or 63.7% of revenue compared with $8.9 million or 68% of revenues for the fourth quarter of 2021
decrease was primarily driven by the higher manufacturing costs in 2022, all due to inflationary pressures
Price Action
There appears to be a severe divergence between decent reported operating performance, and good guidance and hideous stock price performance over the last two quarters.
I can only speculate as to the reasons why:
CEO sold off shares near peak prices prior to reporting Q3 2022 (@ almost 200% premium to todays price).
Q3 is a seasonally slow quarter, 2022Q4 while seasonally strong, sales only matched but did not exceed 2021Q4 Totals. This may be due to pent up demand during the pandemic, or timing of contracts/manufacturing, which may be sending mixed signals to growth investors.
revenues for the fourth quarter of 2022 were $13.1 million and this compares with revenues of $13 million for the fourth quarter of 2021
Note though, SRTS is guiding Topline revenue growth for 2023
We expect continued top line momentum in 2023
Q1 is typically seasonally weak, what is unusual, is in 22Q4, SRTS guided growth in Q1
Expect continued topline growth in the first quarter of 2023 and full-year profitability
Valuation
I almost never attach price targets, all I can say is that I believe there is a strong dislocation between price performance and operating performance of this stock. It has potential to grow the top an bottom line, but is priced at a 4.12 ev/ebit when almost any stock with growth prospects in the SNP500 has ev/ebit over 20. A 75%+ small cap discount seems more than a little bit severe to me.
Meanwhile if indexes sell off, large cap stocks will feel the indiscriminate selling, SRTS will not. SRTS stands a pretty good chance to experience significant multiple expansion, if not, it will likely earn its enterprise value within a reasonable amount of time to offer satisfactory returns to the patient investor.
P.S
Also, have a look at @Adil ‘s excellent, and recent writeup on SRTS