Description

Corindus Vascular Robotics:

Thesis: I believe Corindus Vascular Robotics (CVRS) shares have 75% downside. CVRS is a one product company (CorPath) that claims to offer a system to place catheters robotically so the interventionist doesn’t need to do it manually wearing a lead suit. The problem is the product doesn’t work very well, can’t be used on complex cases, and is hard to use. Additionally the capital and cassettes are an un-reimbursed expense to hospitals. These commercial challenges are all evidenced by extremely low system sales over a multi-year period as well as terrible utilization rates on existing systems in the field.

After a blistering 400% rally in shares since January and despite never having exceeded $2.9m in revenue in any 12 month period and burning $30m per year in cash CVRS currently has a market cap of $400m, an enterprise value of $380m based on a year- end 2017 cash estimate of $20m. Trading at 145x revenue on the back of a hot biotech market and likely heavy retail involvement CVRS shares have gone from $.40 to $2.10 this year.

CVRS shares are orders of magnitude mispriced. They have also set very aggressive guidance for F17 of $13-15m in revenue. They set this guidance when the stock was near $.50 and the management team desperately needed to raise money to avoid bankruptcy. Even based on this guidance which I believe they will miss by a mile the stock trades at 27x revenues.

Based on my revenue estimate of $5-6m for 2017 revenue and a 10x multiple, the stock should soon find a home at $.36/share or 80% below current trading prices.

History:

CVRS was a reverse merger penny stock that uplisted to NYSE in 2015 and subsequently did a deal with Cowen and Stifel.

CVRS received FDA 510k approval and began commercialization in 2012. In the subsequent 4 years they have achieved an installed base of 45 systems with a typical ASP < $200k. Utilization on their systems has been awful.

CVRS has been unable to break through the $3m in revenue per year mark and generated $700k in revenue during Q1’17. Revenue in years 2014 through 2016 totaled $2.9m, $2.7m, and $2.8m respectively. Gross profit margins were negative in all three years.

Since the beginning of 2014 they have spent $55m in SG&A to generate a grand total of $9.3m in revenue. The past two years they have averaged just under $30m in cash burned per year. Shares outstanding have gone from 73m to 187m (or 192m including impact of in the money warrants).

Utilization reflects problems with the system:

Disposable cassette sales show a measure of system utilization. Despite taking the installed base of systems from 38 at end of 2015 to 45 at end of 2016 we can see that cassette and accessory revenue actually declined from $700k in 2015 to $600k in 2016. Our friendly Stifel analyst was kind enough to provide the following analysis of utilization using 2015 volumes from his initiation report. Despite his projections for utilization in 2016 it didn’t so the 2015 math is still relevant to look at utilization today.

Conclusion: On the 48 cath labs where a CorPath system has been installed, 90% of procedures done in those labs are done manually and not robotically! If this doesn’t speak to the product not working very well at all then I don’t know what does.

Bull Promote/Here are a few quotes from Stifel reports:

“Encouraging Initial 2017 Guidance Provided…But 2016 Top-Line Revised Lower”

“1Q17 revenue at $0.8M fell short of our $1.5M estimate, but more important, the company communicated a very healthy GRX-driven backlog.”

“Under the terms of the private placement, Corindus will sell roughly 67.9 million shares at $0.6616 per share; which represents roughly 60% of Corindus’ current diluted shares outstanding”

This is not NVDQ or MAKO:

For anyone shorting med device, these stocks both acquired at big premiums must come to mind. In fact if you put a NVDQ take out multiple of 6.5x forward sales on CVRS’s 2017 guidance you would get a $.54 stock for nearly 75% downside. Using MAKOs take out multiple of 12.5x times you would get a $1 stock for nearly 50% downside. Mind you I believe CVRS will fail to achieve their guidance.

Unlike CVRS which has proven they cannot sell their product, despite all of their respective problems both NVDQ were close to $100m revenue companies with healthy gross margins. They had impressive clinical studies

Why this opportunity exists:

Promotional management team

Small cap underfollowed stock, only two analysts covering are investment bankers

Irrational extrapolation of the NVDQ take out to ascribe a higher value for CVRS

Crazy hot biotech market in last month Extremely active retail involvement (see stocktwits)

Catalyst

Cash burn and further dilutive financing

Revenue missing guidance and consensus