March 27, 2014

Could Titan Medical Storm The Robotic Surgery Market?

by Alpha Deal Group LLC

It may never replace human hands, but Dr. Robot is becoming more and more of a presence in the operating room. Used in surgical procedures from bladder reconstruction to open-heart operations, robots give doctors enhanced precision, dexterity and visualization. They can even perform surgery remotely, with the human doctor controlling the robot from many miles away. We look at a small robotics company that may hold great promise – Titan Medical (TMD.V).

The surgical robotics market is estimated to grow at an annual rate of 12% through 2018, reaching a size of $18 billion. Now the market is dominated by Intuitive Surgical’s (ISRG.O) Da Vinci Surgical System, but Toronto-based Titan Medical is now offering a smaller and cheaper alternative, the SPORT™ Surgical System.

Company overview

Titan focuses on the design, development and commercialization of new surgical robotic technologies and its management team and medical board consist of surgeons specializing in robotic solutions.

During Alpha Deal Group’s initial due diligence call, CEO John Hargrove said the company is aiming to develop a robust product portfolio with the objective of meeting current needs in surgical procedures which could benefit all stakeholders, including patients, surgeons, and hospitals.

Its SPORT™ system includes a single-port surgeon-controlled robotic platform with a 3D vision system and interactive instruments for performing minimally invasive surgery. It also features a surgeon workstation that provides an interface to the robotic platform for controlling the interactive instruments and a 3D endoscopic view of the inside of the patient’s body.

The main advantages of the SPORT™ system over the Da Vinci system are a smaller footprint and lower price – less than $1 million, as opposed to $1.5-$2.3 million for the Da Vinci system — plus mobility. These make Titan’s system attractive not just for hospitals that have not yet bought a surgical robot – some 3,000 in the U.S. alone — but also for those that use a Da Vinci Surgical System, which accounts for about one-third of all U.S. hospitals.

Titan plans to initially target mid-size hospitals, but its system could theoretically be used in anything from large hospitals to ambulatory surgery centers, given its lighter weight and mobility.

Industry background

Surgical robots have been around since the 1980s but the market segment is still in its infancy. However, developments have been robust in the past few years, with global annual medical robotics revenues currently estimated at about $4 billion and expected to grow by 12% annually to $18 billion in 2018 and more than $20 billion in 2020.

This growth reflects surgeons’ drive to make use of the benefits minimally invasive surgery offers. These include the ability to do smaller and more precise surgeries with better visualization, mitigation of surgeon tremor, greater range of motion approximating the human wrist and shorter learning curve. The benefits for patients include reduced blood loss and post-operative pain, limited use of narcotics and shorter hospital stay. All this could result in better performance for hospitals, with the potential for improved ROI and enhanced reputation, which would in turn attract better surgeons and higher patient numbers.

Flagship product

Titan Medical’s system is being designed with the stated goal of expanding robotic surgery into areas that are currently underserviced. This will allow surgeons to perform procedures within small to medium-size surgical spaces, making an inroad for surgical robots into the area of general surgery.

Currently, the most common medical procedures for which robotic systems are used are hysterectomies and prostatectomies, but Titan plans to target the field of general surgery which to date represents 37% of the market, as well as ear, nose and throat procedures, and cholecystectomies.

Financial position

Titan is listed on the Toronto Venture Exchange and the OTCQX in the U.S. and ended the last quarter of 2013 with a market capitalization of C$112 million and C$4 million in cash, which the company says could be used to sustain its product developments. Since its IPO in 2008, the company has raised more than C$40 million. Moreover, Titan has at present a zero debt level that gives it a comfortable financial position and adds a competitive edge.

Table 1: Titan Financial Strength


Source: Thomson Reuters

Looking ahead

Analysts estimate that by the end of 2016, Titan could have an installed base of 60 systems, generating revenue of $30 million during that year. Based on the average market valuation for the sector and $10 million per installation, this would imply a total value of $300-$600 million. Using a 25% discount rate to reflect both time and execution risk, we arrive at a valuation range of $250-$450 million.

If we assume the company will issue equity to be able to execute its plan and that it will have 100 million shares outstanding once it starts to commercialize its SPORT Surgical System™, that would imply a target share price range of $2.50-$4.50, compared to a current $1.35. Once the company starts to meet its milestones and visibility improves, we believe the stock will trade at a lower discount rate, which could drive it above that target price range.

Chart 1: Titan Stock Price


Source: Thomson Reuters

Recent news

In order to sustain the ongoing development and commercialization of robotic surgery technologies and satisfy general working capital requirements, CEO Hargrove said the company had closed its previously announced public offering pursuant to an agency agreement dated Feb. 10, 2014 with Dundee Securities Ltd. Titan sold a base offering of 7,950,000 units and a full over-allotment of 1,192,500 units for aggregate gross proceeds of $12,799,500.

The bulk of value-enhancing milestones, such as pre-clinical and clinical tests and approval procedure launches, are set to take place next year, including the start of an approval procedure for the European market and subsequent commercialization there, as well as the start of a clearance process with the FDA and the launch of large-scale manufacturing. If the company succeeds in keeping this timeline, it might prove worth some investor attention.

This research note is provided by Alpha Deal Group LLC. Alpha Deal works for buy-side clients on special situation deal intelligence in select regional capital markets on mispriced equity idea generation, deal sourcing and deal networking introductions.

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