Nanox.ARC Approved by FDA, Could Bring Medical Imaging to Millions
Overview
Nano-X Imaging Ltd. is a medical technology company that develops and commercializes a new generation of digital X-ray systems. The company's mission is to make high-quality, affordable medical imaging available to everyone, regardless of their location or socioeconomic status.
The company's flagship product, Nanox.ARC, was recently approved by the FDA to produce tomographic images of the human musculoskeletal system. Nanox.ARC is a new technology that uses nano chips instead of heat-generating X-ray tubes, which are currently being used. This makes it much cheaper to produce, as it does not require a cooling system and generates significantly less radiation, saving hospitals from lining their walls with lead. The company has set an ambitious goal to produce 15,000 units in the next three years.
The company has chosen a unique business model in which it will not charge hospitals and clinics for the machine, but will instead charge them on a per-image basis (MSAAS). This allows the company to access markets that lack the resources for traditional, expensive machines. The World Health Organization estimates that approximately two-thirds of the world's population does not have access to medical imaging at the moment, which is a very large potential market for Nanox.
Nanox plans to charge $14 per image, with a minimum of seven images per day. This would yield at least $25,000 per machine in one year. However, the company estimates that the average unit should return $40,000 per year.
On the surface, this looks like great news for equity investors in this company. By 2027, the company should have close to 20,000 machines operating and generating $800 million in revenue from Nanox.ARC, in addition to revenue from the teleradiology and AI segments of the business. At that point, the other segments should also be profitable. This should result in net earnings of almost $400 million, or approximately $6.50 per share (assuming a float of 60 million shares, current float of 55 million plus 4.9 million on the shelf).
It may be fair to say that the shares should still be trading at least 20 times earnings at that time, valuing the company at $130 per share, and a present value of $55 per share (using a 22.5% discount rate, the same rate the company used to value its AI business and seems fair for a company with an unproven business model, with approximately 4.25 years to the weighted average earnings of 2027), which would put the shares at a substantial discount.
However, we must first consider the cost of the machines to figure out how much cash the firm will need to build them. Although the company estimates that it will be able to eventually produce a machine for $35,000, we estimate that it will likely cost $50,000–$60,000 in the near future. This means that the revenue won’t cover the capital expenditures for at least 1.5 years. Assuming the company plans to produce 5,000 units in the first 1.5 years and 10,000 in the second 1.5 years, the company will need $250–$300 million for capex alone, ignoring the cost of current operations (the company consumed around $40 million in cash in 2022 and $11 million in Q1 23). This leaves us with the question, how will the company raise the capital needed to build all the machines?
The bull case
The company is able to take advantage of a rally in the share price (due to an approval or strong execution) and sell shares for a minimum dilution of 10-15%. It could also borrow money later on, once the company has a proven business model. This would reduce future earnings due to future interest payments, but only slightly. The fair value of the company on a per-share basis should be reduced by 15% due to the dilution effect, and in addition to a slight reduction in earnings, $45 may be a fair value, placing the shares at more than a 50% discount to fair value.
The bear case
The company may struggle to raise much additional capital without plummeting the share price. This would make it very difficult to raise a significant amount of capital, forcing the company to rely mostly on its own cash. If this is the case, the company will have to produce far fewer machines in the first three years. Even if they raise $100 million by selling shares (and significantly diluting equity investors), they may only produce 3,500 units in the first three years due to constraints on cash flow. In this scenario, the company should earn $54 million in 2027 and 77 cents per share on an EPS basis (assuming a float of 70 million shares or more). If we use the same earnings multiple of 20 that we used in the bull scenario and the same discount rate of 22.5%, we get a future value of $15 per share and a fair present value of $6, suggesting the share price is grossly overvalued by more than 200%.
Summary
We are bearish on Nanox as it doesn't seem likely that the company will be able to raise the capital required to achieve their ambitious goal without a very serious dilution, and that may also not be enough to produce 15,000 units. In addition, the company has significantly reduced headcount in the sales and marketing departments from 19 at the end of 2021 to 7 at the end of 2022, leading us to question whether the company actually believes its own story.
Conclusion
Overall, Nano-X Imaging Ltd. is a high-risk, high-reward investment. The company has the potential to revolutionize the medical imaging industry, but it faces significant challenges. Investors should carefully consider the risks and potential rewards before investing in the company. We lean bearish and have a bullish price target of $45 per share and a bearish price target of $6 per share.