Procept BioRobotics: Risk Capital Unlock With FDA Hydros Approval

seekingalpha08-27

The FDA's approval of Procept's Hrydos system is a meaningful catalyst to the investment debate.Investors have added ~$5/share in market value since the announcement.PRCT's Q2 '24 numbers were equally...

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20:30 GMT+8&nbsp;&nbsp;&nbsp;<a href=https://seekingalpha.com/article/4717323-procept-biorobotics-risk-capital-unlock-with-fda-hydros-approval><strong>seekingalpha</strong></a>\n\n\n</h4>\n\n</header>\n<article>\n<div>\n<p>The FDA's approval of Procept's Hrydos system is a meaningful catalyst to the investment debate.Investors have added ~$5/share in market value since the announcement.PRCT's Q2 '24 numbers were equally...</p>\n\n<a href=\"https://seekingalpha.com/article/4717323-procept-biorobotics-risk-capital-unlock-with-fda-hydros-approval\">Source Link</a>\n\n</div>\n\n\n</article>\n</div>\n</body>\n</html>\n","isBrief":false,"type":0,"news_type":1,"symbol":"LU1804176565.USD","symbol_name":"EASTSPRING INV GLOBAL GROWTH EQUITY \"A\" (USD) 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meaningful catalyst to the investment debate.Investors have added ~$5/share in market value since the announcement.PRCT's Q2 '24 numbers were equally as strong and exhibited an extensive runway of growth ahead in my view.Pgiam/iStock via Getty Images Investment update Following my last publication on PROCEPT BioRobotics Corporation (NASDAQ:PRCT) around 12 months ago, the stock is +146% and now trades above $78/share. The most recent catalyst was the FDA's 510(k) approval of the company's HYDROS Robotic System (\"Hydros\"), extending PRCT's offerings in benign prostatic hypertrophy (\"BPH\") even further. Investors have bought PRCT on the news + the stock gapped above a key ~$70/share technical level in the days following (Figure 1). This is meaningful as it nudged this level 3x and was rejected on each attempt, now investors price the stock >$75/share as mentioned. Arguably, the approval has added ~$5/share in immediate market value, therefore, given the change in valuation multiple. This is now a $4Bn company by market value, >2x gain since I originally rated this name a buyback in '22. Here I'll run through PRCT's latest developments + provide some colour on the Hydros approval, reiterating my buy thesis in doing so. This is a name I am tremendously familiar with having covered it extensively the last few years here on Seeking Alpha. Check out the coverage here:  Procept BioRobotics: Aquablation System Meaningful Insulator BioRobotics: Positioning Into FY22 Earnings (Technical Analysis) Procept BioRobotics: Adding Value Through Robust Unit Economics, Reiterate Buy  Figure 1. TradingView Investment thesis The integration of artificial intelligence (\"AI\") and technology into invasive surgery has already produced exceptional advancements across the treatment spectrum. Founded in 2007 and headquartered in San Jose, California, PRCT is a BPH pure-play. In my view, its AquaBeam/Aquablation therapy 1) has the potential to create a medical breakthrough in BPH treatment, 2) is a potential long-term compounder, and 3) has interesting economics in the mix. Aquablation is differentiated to other forms of BPH treatment as a heat-free option using heat-free waterjet resection. I continue to rate PRCT a buy due to 1) business momentum [FY'24 guidance reaffirmed], 2) long-term outlook [sales ramp + underlying market] + 3) the FDA's Hydros approval adding ~$5/share additional market value. Net-net, reiterate buy. Compelling catalysts (1). Hydros (overview + differentiators) The Hydros system is an advanced iteration of PRCT's Aquablation therapy. There are four main \"components\" of the system, which is shown in Figure 2, including the following:  AI-Enhanced treatment planning using \"FirstAssist AI\", an artificial intelligence tool developed from a comprehensive repository of previous Aquablation therapy procedures. Utilizing advanced image recognition algorithms, this tool aims to assist in identifying critical anatomical structures on ultrasound imaging (see: Figure 3). Advanced imaging integration: that merges ultrasound with digital cystoscopy + dual high-definition touchscreens. The dual-modality imaging is said to provide a better view and distinction of anatomical structures, theoretically enabling more precise interventions. This is a major advantage of Aquablation in the first place (accuracy) thus any addition to its precision should be given high marks in my view. Robotic-assisted resection that utilizes a heat-free waterjet for tissue resection, guided by AI - this is the same as the current AquaBeam etc. except it will be guided by a treatment plan developed through FirstAssist. There are a couple of upsides to this - (i) again to accuracy, but (ii) there's scope to offer more 'standardized' BPH procedures based on the anatomical variances seen within patients. This might be a bit into the future, but PRCT has been using this kind of language for the last 18 months or so. Workflow optimization by streamlining the Aquablation therapy process. This is due to 1) design, 2) ergonomics and 3) interface - ultimately, the better the surgeon experience, the better the patient outcomes will be, and the more of these they will place.  Figure 2. PRCT Website Figure 3. PRCT Website I wanted to see how Hydros stacks up against competing offerings (exc. AquaBeam) so I completed a comparative analysis with Teleflex (TFX) UroLift and Boston Scientific's (BSX) Rezum Water Vapor system [I am buy on TFX buy the way, check out my analysis here - was part of my play on BPH + prostate cancer alongside EDAP (EDAP) and Profound Medical (PROF)]). Critically, the major differences are 1) in the use of AI, and 2) training requirements in the use of robotics vs. non-robotic system. Each has its own benefits, but I must say, the use of AI in precision + imaging could be a long-term plus in my opinion. Figure 4. Company filings, Author (2). Fundamental momentum  PRCT's Q2 FY'24 earnings were strong in my view and exhibit the continued momentum it is embarking on. The installed base was +72% higher YoY to 400 systems in the field. Even though <60% of this base has been active >12mo, management reported monthly utilization was +15% YoY. So 1) the installed base is on the way to doubling, and 2) each site is more productive with utilizations up as a whole. Revenues of ~$53mm were produced by 40 sales reps [$1.3m per rep] and this is great as it's added +10 reps since FY'23 getting us an additional $40mm in top-line revenues on a TTM basis. The average sales price on its AquaBeam system in Q2 was $378K, and it sold 47 of them. CMS rules are exquisitely important here. CMS posted its '25 proposed rule back in July, and management's language on the Q2 call explains codes on its Aquablation system well: The Level 6 APC code for Aquablation has a proposed payment that would provide the hospital $9,209 and the ASC setting $6,666 for each Aquablation procedure which is a 5% and 7% increase respectively over the 2024 rates. As such, we're looking at +500-700bps or rate increase and this is a tailwind in my view - especially given recent FDA approvals, as further favourable increases aren't out of the question. Both handpieces revenue + international sales were large contributors in Q2, up 101% and 79% YoY respectively. Handpiece ASPs came to ~$3,200 to drive this result, and it shipped ~8,000 units during the period. The handpiece is proving to be an attractive tail of sales for the company once systems are placed - i.e., the razor + razor blade model. Meanwhile, gross profits earned on total assets employed on the balance sheet have stretched up to $0.26 on the dollar in Q2 (Figure 5). This has increased from <$0.10 on the dollar in FY'21, indicating 1) the higher units placed, 2) the tail of income built from handpieces, and 3) the increased utilization of the entire installed base. Figure 5. Company filings Valuation and conclusion ORCT sells at ~19x forward sales and investors continue paying this on expected growth. It is expecting ~$216mm in FY'24 sales under these assumptions and valued in market at $4.12Bn. Consensus eyes $216mm this year as well, stretching 40% higher in FY'25E to $304mm. If the business does hit these estimates (my numbers imply ~$340mm see: Appendix 1) the same 19x multiple gets us to $5.7Bn or $111/share, otherwise 42% upside from today. In my view, this is high and the margin of safety is high at 19x as we can compress to 15x and still trade at $87/share under these assumptions (21% contraction still providing ~6% upside). In my view, PRCT is worth at least what we pay for it today in the downside scenario, and worth multiples of in the upside case. As such, I reiterate PRCT as a buy, eyeing $111/share as the next price objective. Risks Key downside risks to the thesis include 1) management hitting <25% sales growth as this hurts the valuation, 2) pace of new installed base slowing to zero, 3) valuations compressing <10x sales (I give this ~10% probability), and 4) the broader set of macroeconomic risks that must be considered at this point in the cycle, namely the inflation/rates axis, and geopolitical risks that could spill over into broad equity markets. These factors cannot be ignored, as they may have an outsized effect on PRCT. Investors must recognize these risks in full before proceeding further. Appendix 1.  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