MSON - Misonix

[Guest Schwab711]

I have a number of new ideas that I'm hoping the forum will pick apart.

 

Misonix is a lot like ISRG in the sense that it sells surgical equipment for their proprietary procedure. Their devices primarily cover spinal surgeries and elective plastic surgeries (among others). The estimated aggregate annual value of the surgeries covered by their 3 devices is ~$1b in the US and ~$3b worldwide.

 

From 2008-2012 they divested their non-core businesses to focus solely on improving the usage rates (by converting/training top doctors) of their proprietary procedures. Their IP is protected by a portfolio of 40+ patents and it seems likely that they will continue to improve upon their patents to extend their protection period. Their procedures have extremely significant advantages over the current standard procedures by drastically reducing blood-loss and patient recovery.

 

MSON uses the razor blade business model by selling their equipment for low margins to ensure high-margin reoccurring business (~$400-$500/procedure). Reoccurring revenue currently represents 56.6% of total rev and MSON would currently be profitable solely on a reoccurring basis (which is the problem that ISRG investors ran into - what is profitability once every hospital has the equipment and you are only selling blades). If all of their devices become the standard procedure then revenue will likely peak around $250m-$300m (with extremely high net margins). Revenue growth is 40%-50% for each of their devices Y/Y and the top specialist doctors have already converted to the procedure (meaning growth is likely to continue). Units sold/placed drives consumables revenue (the blades) and consumables used is the driver of future revenue. Valuing MSON becomes an exercise in estimating %s of %s (a scary thought for value investors). Ultimately, I think MSON has much better busness model fundamentals when compared to ISRG because their device ASP vs aggregate annual consumables from the device is no-where near as drastic as it is for ISRG. This makes it easier for both doctors and hospitals to invest the time and money in the device/procedure vs ISRG. The speed and breadth of doctor conversions seems to support this belief.

 

Why I haven't invested:

* Royalty income of ~$4m annually will cease after 2017

* Current MC takes away most of the upside. Based on current consumable/unit sold ratios, MSON devices need to become the standard procedure across the board to grow into the current valuation

* Lack of technical understanding of the device benefits (other than what the company tells me)

 

What I like:

* High margins/royalty-like consumables business

* Recession-proof

* Good mgmt

* once a unit is purchased there is minimum order requirements that provide protection even if doctors decide to go with different procedures (also provides incentive for hospitals to train doctors)

* Large market size in the US provides significant upside

* ~30%-40% of revenues are international so MSON is being accepted globally

 

http://phx.corporate-ir.net/phoenix.zhtml?c=117022&p=irol-irhome

[jawn619]

I have a number of new ideas that I'm hoping the forum will pick apart.

 

Misonix is a lot like ISRG in the sense that it sells surgical equipment for their proprietary procedure. Their devices primarily cover spinal surgeries and elective plastic surgeries (among others). The estimated aggregate annual value of the surgeries covered by their 3 devices is ~$1b in the US and ~$3b worldwide.

 

From 2008-2012 they divested their non-core businesses to focus solely on improving the usage rates (by converting/training top doctors) of their proprietary procedures. Their IP is protected by a portfolio of 40+ patents and it seems likely that they will continue to improve upon their patents to extend their protection period. Their procedures have extremely significant advantages over the current standard procedures by drastically reducing blood-loss and patient recovery.

 

MSON uses the razor blade business model by selling their equipment for low margins to ensure high-margin reoccurring business (~$400-$500/procedure). Reoccurring revenue currently represents 56.6% of total rev and MSON would currently be profitable solely on a reoccurring basis (which is the problem that ISRG investors ran into - what is profitability once every hospital has the equipment and you are only selling blades). If all of their devices become the standard procedure then revenue will likely peak around $250m-$300m (with extremely high net margins). Revenue growth is 40%-50% for each of their devices Y/Y and the top specialist doctors have already converted to the procedure (meaning growth is likely to continue). Units sold/placed drives consumables revenue (the blades) and consumables used is the driver of future revenue. Valuing MSON becomes an exercise in estimating %s of %s (a scary thought for value investors). Ultimately, I think MSON has much better busness model fundamentals when compared to ISRG because their device ASP vs aggregate annual consumables from the device is no-where near as drastic as it is for ISRG. This makes it easier for both doctors and hospitals to invest the time and money in the device/procedure vs ISRG. The speed and breadth of doctor conversions seems to support this belief.

 

Why I haven't invested:

* Royalty income of ~$4m annually will cease after 2017

* Current MC takes away most of the upside. Based on current consumable/unit sold ratios, MSON devices need to become the standard procedure across the board to grow into the current valuation

* Lack of technical understanding of the device benefits (other than what the company tells me)

 

What I like:

* High margins/royalty-like consumables business

* Recession-proof

* Good mgmt

* once a unit is purchased there is minimum order requirements that provide protection even if doctors decide to go with different procedures (also provides incentive for hospitals to train doctors)

* Large market size in the US provides significant upside

* ~30%-40% of revenues are international so MSON is being accepted globally

 

http://phx.corporate-ir.net/phoenix.zhtml?c=117022&p=irol-irhome

 

Keep em coming Schwab. I enjoy reading about these companies that I'm guessing not a lot of people have looked at.

[LanceSanity]

CASM is another med equipment co you might be interested in. Also similar to razor blade business model (capital equipment, disposable sensors). I found this yesterday and haven't researched yet.

[Guest Schwab711]

CASM is another med equipment co you might be interested in. Also similar to razor blade business model (capital equipment, disposable sensors). I found this yesterday and haven't researched yet.

 

CASM sells tissue sensors which seems like an extremely competitive market that is only $500m in aggregate size. I like the secular trends of sensors in general, this looks like a tough operating environment. Thanks for the idea though, any others?

[60North Investments]

Repro-Med Systems is another one operating the razor-blade -model. A real micro cap company too with its $15m market cap. Can't say I've got a lot of knowledge on REPR though.

[orthopa]

I would need to do more work on the exact procedures these products are used in to see if there are simpler alternatives. The reason being as medicare and insurance companies resort more to global payments for services the first products to go are the most expensive. Ie if another device is available that is much cheaper the surgeon is going to be pressured to not use the higher priced product. There are many ways to go about this.

 

Many of these companies sell the products promising shorter hospital stays because they are "minimally invasive" but that does not cover a needed conversion to an "open" procedure due to intra procedure complications or post op complications due to co-morbidities. Allowing use of expensive materials on the front end, ie surgery can come back and bite the hospital if the pt has to stay even 1 extra day.  Not to mention any subsequent readmission with medicare is not reimbursable at all within 90 days I believe.

 

This it the biggest risk to an idea like this I believe. That initial low margin machine can easily be mothballed if the hospital finds its use non necessary or too expensive.

[Guest Schwab711]

I would need to do more work on the exact procedures these products are used in to see if there are simpler alternatives. The reason being as medicare and insurance companies resort more to global payments for services the first products to go are the most expensive. Ie if another device is available that is much cheaper the surgeon is going to be pressured to not use the higher priced product. There are many ways to go about this.

 

Many of these companies sell the products promising shorter hospital stays because they are "minimally invasive" but that does not cover a needed conversion to an "open" procedure due to intra procedure complications or post op complications due to co-morbidities. Allowing use of expensive materials on the front end, ie surgery can come back and bite the hospital if the pt has to stay even 1 extra day.  Not to mention any subsequent readmission with medicare is not reimbursable at all within 90 days I believe.

 

This it the biggest risk to an idea like this I believe. That initial low margin machine can easily be mothballed if the hospital finds its use non necessary or too expensive.

 

Absolutely agree. If anyone can provide some technical background I'd really appreciate it. I'll share some of my notes.

 

Bonescalpel: Mainly used for spinal surgeries such as removing loose bone fragments.

* Has increased "units placed" by 300%+ over 5 years

* Here are some articles I can't understand: https://scholar.google.com/scholar?hl=en&as_sdt=0,33&as_vis=1&q=bonescalpel

* http://www.misonix.com/wp-content/uploads/2013/11/BS-1301_Rev_B_-BoneScalpel_Abstracts_on_Clinical_Use_Brochure.pdf

A study of surgery efficiency and blood loss for Bonescalpel vs competing devices  (compilation published by Misonix; could there be publishing bias?). Looks to be equal in effectiveness (not good) but with a statistically significant decrease in blood loss. I'm not sure how blood loss during these surgeries is prioritized or how it affects patient outcomes though.

* Another study by Stavya Spine Hospital (India; http://www.news-medical.net/news/20140604/Comparative-study-shows-ultrasonic-Bonescalpel-makes-spine-surgery-safe-efficient.aspx). Again looks to be statistically significant for blood loss alone.

* I haven't been able to find a summary document outlining what the major spinal surgery types are, what devices are used for each, frequency of each type of surgery, and costs of devices (I can find, but is misleading at best without the rest of the information).

 

SonaStar: Seems insignificant to future revenue/profit forecasts. It is interesting to note that a 2013 Misonix presentation estimates ~$100m worldwide market size vs ~$120m in the 2015 presentation. Lots of inflation...

* Also of note, revenue is only $8m from $2.3m in 2007. If this really was as useful as promoted then growth would likely be more impressive. However, we can reasonably assume that a fairly large proportion of existing customers have not switched devices over that time.

 

SonicOne: Used for Ultrasonic Wound Debridement, specifically diabetic foot ulcers.

* "Units placed" have decreased from 2013 to 2014 and look to again decrease in 2015. Not a good sign...

* However, MSON is collecting ~$4m annually in royalty payments that represent $80m in annual revenue for Covidien who acts as their distributor. The royalty payments have been increasing at roughly the same rate as MSONs direct SonicOne revenues. When the royalty payments end in 2017, will MSON be able to start directly servicing Covidien's current accounts to fully replace the royalty income?

* The royalty seems to imply that SonicOne has ~$80m in annual revenue vs an estimated market size of ~$850m (MSONs estimate was ~$400m as recently as 2013, which is a concern). This implies that SonicOne has market share of ~10% currently, which has decreased from roughly 15% - 20%. I'm not sure if I'm misunderstanding Misonix's worldwide market size estimates or if SonicOne really is that commonly used.

* https://clinicaltrials.gov/ct2/show/NCT01973361

* http://www.prnewswire.com/news-releases/additional-data-confirms-reduction-in-blood-loss-with-misonix-sonicone-or-in-burn-patients-at-2015-national-american-burn-association-meeting-300071165.html

* Again, studies seem to only show statistical significance for blood loss reduction. I'm not well versed on the prioritization of blood loss, competing devices, ect.

 

Major competitors as a whole seems to be Medtronic and smaller, focused device makers. There is certainly significant competition and any competitive advantage is fleeting at best. However, there is a lot of money to be made if any of these products spend a reasonable period of time as "the best value" device.

 

2013 MicroCapClub presentation: