March 3, 2022

With so much going on in the world the trends are a bit messy. That said, I have noticed an uptick in several of the small-cap MedTech players on my watch list.

These businesses could be poised for a nice recovery in 2022 and 2023 as COVID-19 recedes. And the one that tops my list is posting massive growth as its revolutionary treatment for BPH has just gained full Medicare backing and is rolling out into U.S. hospitals.

With revenue set to grow by multiples in the coming years and the stock trading at an apparent steep discount to peers, we’ll jump in now.

Enjoy!

Company Overview

The Big Idea
Benign prostatic hyperplasia (BPH), a.k.a. prostate enlargement, is the most common prostate disease. It affects over 40 million men in the U.S. and over 100 million globally.

BPH develops from the gradual enlargement of the prostate, which typically doubles in size between the ages of 21 and 50, then nearly doubles again between 50 and 80. As the prostate gland presses against the urethra it can obstruct or restrict the flow of urine from the bladder.

The first line of treatment for BPH is drugs. But the cost can add up, and drugs aren’t helpful for around a third of men with mild-to-moderate symptoms, let alone more severe cases.

The next step is surgery, which typically involves some sort of heat-based method to reduce prostate tissue.

The most common surgery is TransUrethral resection of the Prostate (TURP), followed by Photoselective Vaporization of the Prostate (PVP) and finally by Laser Enucleation of the Prostate.

The problem is that all three can have high rates of irreversible complications, including incontinence, erectile dysfunction and more. With a decent chance of things not working out as hoped men are looking for a better option.

Thankfully, there is one. And the company behind the new technology just came public last September.

Its solution is a robot-guided procedure that uses waterjets to remove prostate tissue. The procedure takes about an hour and greatly reduces the chances of complications both immediately after the procedure as well as years later.

The company’s technology is FDA-approved, covered by Medicare and some commercial payors, and is being installed at hospitals across the country right now.

It’s an exciting story – especially for men dealing with BPH. I suspect more investors will be attracted to the massive growth accompanying the commercial rollout of this new technology.

New Recommendation and Updates

The Company
Procept BioRobotics (PRCT) is a surgical robotics company specializing in solutions in urology. It invented the AquaBeam Robotic System, an advanced, image-guided, surgical robotic system for use in minimally invasive urologic surgery.

The AquaBeam system gained FDA clearance in 2017 and is primarily sold to U.S. hospitals. Procept’s current focus is treating benign prostatic hyperplasia (BPH).

AquaBeam delivers Aquablation therapy to target and rapidly remove prostate tissue via automated robotics and heat-free waterjet ablation.

Aquablation therapy works regardless of prostate size and shape, or surgeon experience (the robot does the work). It means patients can get relief without having to look for options that have symptom relief on one end of the scale and irreversible complications on the other. AquaBeam lets them have both safety and efficacy.

In 2021 Procept gained final positive local coverage determinations from all local Medicare Administrative Contractors (MACs), which represent 100% of eligible Medicare patients. This means Medicare beneficiaries across all 50 states now have access to Aquablation therapy.

Procept has also gained favorable coverage decisions from many of the large commercial players, including Anthem, BlueCross (Massachusetts), Cigna, Emblem Health, Health Care Service Corp, and Humana. It will continue to pursue additional commercial payors.

All of this means Procept is growing extremely quickly and that revenue trends are rapidly evolving as the business scales up to address a $10 billion market opportunity.

The company’s initial focus is the 860 high-volume hospitals in the U.S. that, collectively, perform more than 200 BPH surgeries annually (70% of all hospital-based procedures). Procept will branch out to mid- and low-volume hospitals in time.

Recent progress is impressive, to say the least. Over the last nine months (through September 2021) revenue has grown by 880%, from $2.06 million to $20.2 million.

Roughly 83% of revenue comes from the U.S. (by far the fastest growing market), while the rest comes from international markets (mainly Germany).

Procept was founded in 2007 and is based in Redwood City, CA. The company came public via traditional IPO at 25 on September 15, 2021 and has a market cap of $1.1 billion.

Frederic Moll, founder of Intuitive Surgical (ISRG) and Auris Surgical Robotics and co-founder of Origin Medsystems, Hansen Medical, and Restoration Robotics became Chairman of the Board last March.

Platform & Clinical Trials
The AquaBeam Robot System is a surgical robotic system that delivers Aquablation therapy, a minimally invasive BPH surgery featuring heat-free waterjet ablation for precise and rapid removal of prostate tissue. The therapy has been evaluated in nine clinical studies and peer-reviewed in over 100 publications.

The most significant of these is the WATER pivotal trial. This is the only FDA study randomized against the standard of care for the surgical treatment of BPH, transurethral resection of prostate (TURP).

In the WATER study Aquablation therapy showed superior safety and non-inferior efficacy compared to TURP across prostate sizes between 30 ml and 80 ml. It also showed superior efficacy in a subset of patients with prostates larger than 50 ml. Just weeks ago, on February 14, Procept released five-year results showing durable benefits with very few men (51% as compared to TURP) needing retreatment (defined as BPH medication or surgical intervention).

Results from WATER had already helped Procept build relationships with key opinion leaders (KOLs) and spread the word about AquaBeam’s benefits (Aquablation therapy was added to clinical guidelines of the American Urological Association). This five-year data will only reinforce that. And it illustrates how AquaBeam has the potential to completely change how BPH is treated.

The Aquablation Procedure
Aquablation therapy is completed in an operating room after patients have received either spinal or general anesthesia. The AquaBeam Robotic System combines all the necessary technologies – cystoscopic visualization, ultrasound imaging, robotic controlled waterjet, planning software, etc. – into one unit to deliver the treatment.

Once the consumable, single-use handpiece (shown below) has been inserted into the patient’s urethra the surgeon has a multidimensional view of the treatment area. A custom treatment map is then created that is based on each patient’s anatomy and which specifies those areas of the prostate to be removed. This customization helps preserve all the necessary and desired prostate functions.

Once the treatment map is done prostate tissue is removed using a robotically controlled, heat-free waterjet. Tissue removal is rapid, taking about an hour, regardless of prostate sizes and shapes, and surgeon experience level.

Growth Initiatives
Grow Installed Base: Procept’s biggest growth driver is to get more systems installed around the world. As of September 30, 2021 it had 125 systems installed globally (75 in the U.S.). With 860 high-volume hospitals targeted in the U.S. there ther is huge room to grow in the coming years.

Increase System Utilization: Once a system is installed the next step is to crank up the procedures done every month (i.e. utilization). Procept has teams of Aquablation reps and clinical specialists dedicated to getting urologists to convert, then leveraging their experience to spread the word. With Q4 utilization rising above 5 (from 3.8 in Q3) the trend is strong.

Grow Reimbursement Among Commercial Payors: Getting positive local coverage from all local MACs in 2021 was a massive win that is helping drive hospital adoption of AquaBeam Robotic Systems. While Procept has made significant progress with commercial payors, there remain many more patients that can be covered.

International Expansion: There is huge potential beyond the U.S. to drive adoption of AquaBeam. While this is a longer-term growth initiative it could shape up more quickly if/as success builds in the U.S.

New Product Iterations: Procept is actively working on the next generation of software solutions, which will integrate AI, ML and computer-assisted anatomy recognition. These solutions should improve treatment planning and personalization and drive continued adoption of the AquaBeam Robotic System.

The Business Model
Procept sells medical devices and related software. Revenue is derived from sales and rentals of AquaBeam Robotic Systems and related software (66% of revenue), recurring sales of handpieces that are consumed during each surgery (31% of revenue) and, to a much lesser extent, services (3% of revenue).

Target customers are U.S. hospitals (today) and international hospitals (down the road). The company has a team of capital sales reps that are focused on hospitals that perform resective BPH surgery.

Procept manufactures the AquaBeam Robotic System (handpiece, integrated scope and accessories) at its facility in Redwood City, CA. Other components and sub-assemblies, including an ultrasound system and probe, are purchased from a network of global suppliers.

The Bottom Line
Procept is growing very quickly. Over the last nine months (through September 2021) revenue has grown by 880%, from $2.06 million to $20.2 million. Gross margin, which was -38% in the nine months ended September 30, 2020, jumped to 47% during the nine months ending September 20, 2021.

On January 11, 2022 management released preliminary Q4 and full-year 2021 results. Q4 revenue is seen in the range of $9.8 - $10.1 million (up 206% - 216%). This implies full-year 2021 revenue of $34.1 - $34.4 million (up 343% - 347%). No full-year guidance was given for earnings, but consensus suggests adjusted EPS should come in around -$3.04. That should be a low water mark which reflects increased costs from going public in 2021.

In terms of important metrics Q4 preliminary results suggest utilization (procedures per month) rose from 3.8 in Q3 to more than 5 in Q4. This level of utilization was not expected by analysts until later in 2023, indicating Procept is well ahead of schedule.

Given the trends Procept could easily be on target to exceed analyst expectations in 2022, which currently call for revenue around $50 million (up roughly 46%). Sales could easily double in 2023. We should know more this coming Tuesday, March 8, when official Q4 results come out.

As of the end of September 2021 (end of Q3) Procept had $321 million in cash and cash equivalents ($172.4 million was raised through the IPO). The company had $50 million outstanding on its loan facility (for up to $75 million) as of the end of September 2021.

Risk
COVID-19: The pandemic reduced the number of BPH procedures, adoption of AquaBeam therapy, delayed physician training and caused supply chain disruptions. While it seems trends are tracking in a much more positive direction now there remains the risk that variants could emerge and delay progress.

Slower Than Anticipated Installs: If hospitals are slow to install systems Procept’s revenue will suffer.

Urologist Adoption: Similarly, if urologist are slow to get on board with AquaBeam revenue growth will be slower than expected.

Sales Execution: During these early phases of commercial rollout it is crucial that the sales team executes at a high level to keep momentum going.

Reimbursement Risk: Procept will need to maintain coverage under Medicare for AquaBeam procedures, and to sustain (and grow) reimbursement from commercial payors.

Earnings Next Tuesday (3/8): While the earnings report next week shouldn’t be a major event given the January preannouncement, details from the report, as well as 2022 guidance, have the potential to make shares move significantly.

Macro Risk: Russia vs. Ukraine, interest rate policy, etc., will all have an impact on trading direction in the coming months.

Competition
Procept competes with pharmaceutical products marketed to treat BPH. Major players in this market include Boehringer Ingelheim, Allergan (AGN), GlaxoSmithKline (GSK) and Merck (MRK). It also competes with medical device companies that make resective and/or non-resective surgical alternatives for treating BPH. Major players in this market include Teleflex (TFX) and Boston Scientific (BSX).

The Stock
Trading Volume: PRCT trades around 190,000 shares daily, worth about $4.75 million.

Historical Price: PRCT came public at 25 on September 15, 2021 and jumped 68% the first day. Shares traded up into the mid-40s in October and early November, but then began to slide as investors sold higher growth names. The slide was very consistent for PRCT and by January 24 the stock was trading in the mid-teens. Shares appear to have bottomed in late January and began a steady recovery in February. Trading near 26 now, PRCT is back near its IPO price, 45% off its all-time high and 70% off the low.

Valuation: PRCT trades with a price-to-sales ratio of roughly 10x based on estimated 2023 revenue of $100 million. That is a very undemanding multiple that could easily move up toward 15x (or higher) based on Procept’s performance and peer multiples.

Buy Range: Look to buy in the mid-20s over the coming days. I expect to keep at buy provided shares stay in the 22 – 30 range through earnings (a drop to 20 would cause some serious reassessment).

The Next Event: Earnings expected Tuesday, March 8. Lockup expiration of 6.56 million shares on March 14.

Updates on Current Recommendations

Please email me at tyler@cabotwealth.com with any questions or comments about any of our stocks, or anything else on your mind.

Glossary
Buy means accumulate shares at or around the current price.
Hold means just that; hold what you have. Don’t buy, or sell, shares.
Sell means the original reasons for buying t Buy means accumulate shares at or around the current price.
Hold means just that; hold what you have. Don’t buy, or sell, shares.
Sell means the original reasons for buying the stock no longer apply, and I recommend exiting the position.
Sell a Half means it’s time to take partial profits. Sell half (or whatever portion feels right to you) to lock in a gain, and hold on to the rest until another ratings change is issued.

Disclosure: Tyler Laundon owns shares in one or more of the stocks mentioned. He will only buy shares after he has shared his recommendation with Cabot Small-Cap Confidential members and will follow his rating guidelines.

The next Cabot Small-Cap Confidential issue is scheduled for April 7, 2022.