Novadaq SPY deliveries to triple in second quarter
Novadaq Technologies (TSX:NDQ) expects to deliver about 70 of its SPY surgical imaging systems in the current second quarter, compared with 20 installations by its two partners in the first three months of 2011.
The SPY fluorescence imaging system allows surgeons to intra-operatively capture, view and archive high quality image sequences of blood flow in vessels and micro-vessels, tissue and organ perfusion, and lymph node localization. SPY can be used during a wide variety of surgical procedures, including plastic reconstruction and coronary artery bypass surgeries and cancer resections.
“With health care reform and budgetary constraints, our view is that the winners will not only be technologies that improve patient outcomes but also those that save money for the health care system and for the hospital,” VP of business development David Martin says in an exclusive interview with BioTuesdays.com.
“We think SPY imaging is well positioned in that macroeconomic environment. On top of that, we have two very good partners: Intuitive Surgical (NASDAQ:ISRG), which is the pioneer in the robotic surgery space, and LifeCell, which is the leader in plastic and reconstructive surgery.”
On its recent first quarter conference call, Novadaq suggested that the expected delivery of 70 devices in the second quarter is not likely to be a “flash in the pan”, indicating that it does not expect material declines as the company moves into the second half of 2011.
Mr. Martin says that because the revenue model is driven in large part by recurring revenues generated with each SPY use, as the install base grows, he expects a revenue lag of a few months. Once systems are installed and surgeons are trained, he expects that ongoing utilization of SPY will drive stable long-term revenue growth and profitability.
Intuitive has integrated SPY into the 3-D high definition imaging capabilities of its da Vinci Surgical Robotic System, obtaining FDA 510(k) marketing clearance for the integrated system last February. The da Vinci system is used routinely for radical prostatectomy and hysterectomy, with efforts underway to expand into other surgeries.
After deciding that plastic and reconstructive surgery would be a key market for SPY, Novadaq signed a five-year North American sales and marketing agreement last September with LifeCell, a unit of Kinetic Concepts (NYSE:KCI). The deal with LifeCell encompasses “open” procedures, including head and neck and gastrointestinal surgeries. At this point, the majority of clinical data has been published in breast reconstruction following mastectomy in breast cancer patients.
In a recent research report, Versant Partners analyst Doug Loe wrote that Intuitive and LifeCell are poised to drive SPY sales in 2011. The pace of activity by Intuitive and LifeCell is “at or above our expectations and gives us confidence in longer-term SPY adoption in global surgical markets,” he said. He rates the stock as a “buy,” with a 12-month price target of $4.75. It closed at $4.62 on Friday.
“We expect quarterly shipments to be around this level [of 70] during the ‘beta-launch’ stage for both firms, but we are confident that building an installed base at this pace in the near term will be positive both to capital equipment sales and also to ICG-based (indocyanine green) recurring revenue based on surgical procedural volumes in radical prostatectomy and reconstructive surgery,” Mr. Loe said.
Mr. Martin says SPY imaging has proven benefits versus clinical judgments by surgeons. He points to a study of 115 patients in breast reconstructive surgery by Dr. Glyn Jones of the Medical College of Illinois at Peoria in 2009. Using SPY, Dr. Jones reduced tissue necrosis rates to zero to 4% in several types of reconstructive surgery from historical necrosis data of 10% to 15% without SPY. “The 4% complication rate included cases where Dr. Jones overrode what SPY was telling him,” Mr. Martin adds. “Our understanding is that now, SPY is driving his clinical action in every case.”
Novadaq’s economic analysis has found that SPY imaging in breast reconstruction surgery yields significant costs savings to hospitals through reduced complication and revision rates and reduced time in hospital.
“Complications due to tissue necrosis resulting from poor profusion can require redoing a surgery which can cost up to $50,000,” Mr. Martin says. Other issues also come into play: systemic infection can occur, cancer treatment may have to be delayed, and necrotic complications can be very distressing to the patients who are already under a high strain.
Taking into account reduced complication rates and hospital stay times, Novadaq has worked with some hospitals and determined that the distributed cost savings per SPY procedure can be as high as of $6,000 in breast reconstruction. “And initial work with surgeons indicates that in certain gastrointestinal surgeries, the benefits may be even greater,” he adds.
In addition to plastic and reconstructive procedures and robotic surgery, Novadaq also believes its SPY technology can reduce complication rates and healthcare costs in the area of wound care. Wound care is a huge market, representing more than one million patients annually, and SPY has been shown in early studies to improve the treatment of diabetic foot ulcers, pressure sores and poorly healing incisions.
“We’re likely to partner wound care and work with the partner to rollout the development plan,” he says, adding that a partner could be named before the end of this year.
Novadaq’s next level of value creation is a company-owned SPY Scope. “SPY Scope is very similar to the imaging system that we provide to Intuitive, but [it is] used for minimally invasive surgery without the robot,” Mr. Martin points out.
The scope combines high definition visible imaging with the fluorescence imaging capabilities of SPY into a single system, replacing rigid endoscopes commonly used in endoscopic surgeries performed today. The SPY scope illuminates the area of interest, and the resulting color image is captured by the scope’s camera system and displayed on the HD video monitor, enabling visualization of vascular flow and perfusion during surgery. Mr. Martin says there has been substantial interest in using fluorescence imaging with the da Vinci robot in partial nephrectomy of cancerous tumors in the kidney, although surgeons are seeing utility in other procedures as well.
SPY Scope received premarket 510(k) clearance from the FDA in 2009 for use in minimally invasive surgery and is currently undergoing clinical and market development trials. The trials are designed to develop clinical data that would make a commercial launch successful in 12 to 18 months, Mr. Martin says.
Additionally, for both open and minimally invasive embodiments of the SPY technology, lymph node mapping is an emerging application that is potentially exciting, but it needs further development, he adds.
On the same day that BioTuesdays.com posted this Feature on Novadaq, Rodman & Renshaw initiated coverage of the company with a “market outperform” rating and 12-month price target of $6.
“Our valuation methodology employs a traditional discounted cash flow, using projected fiscal 2016 sales of $78 million, and a high-growth discount rate of 18%,” writes analyst Suraj Kalia.
The full report is available here.