Research Update
Investors should consider this report as only a single factor in making their investment decision.
Novadaq Technologies Inc.
Rating: Buy
Juan Noble
NVDQ $9.41 (NasdaqGM)
Total revenues (in millions)
Earnings (loss) per share*
February 26, 2016
2014A
$46.6
($0.41)
52 - Week range
Shares outstanding as of Dec. 31, 2015
Float
Market Capitalization
Tangible Book value as of Dec. 31, 2015
Price/Book
2015E
$63.8
($0.64)
$17.29 - $8.53
56.2 million
51.9 million
$759 million
$2.35
4.3X
2016E
$83.6
($0.54)
Fiscal year ends:
Revenue/share (ttm)
Price/Sales (ttm)
Price/Sales (2017)E
Price/Earnings (ttm)
Price/Earnings (2017)E
2017E
$113.0
($0.37)
December
$1.16
8.1X
4.8X
NA
NA
All amounts are stated in US dollars. *Per share results, and our discussion of operating results exclude warrant valuation adjustments.
Novadaq Technologies (NVDQ: NasdaqGM), headquartered in Mississauga, Ontario, Canada, manufactures fluorescence angiography
visualization systems that can be used in a wide range of surgeries, including reconstructive, gastrointestinal, cardiac bypass and wound
care procedures. Novadaq’s technology enables surgeons to monitor circulation and tissue perfusion in real time, making it potentially
useful in urological, gynecological, and gastrointestinal surgeries. SPY is adapted to open, minimally invasive and robotic surgery.
Key Investment Considerations:
Reiterating BUY rating but reducing our (12-month) price target to $13.00 from $16.50 due to diminished valuations
for both NVDQ and the medical device sector.
Quarterly results during 2015 reflect a successful transition to a direct sales model marked by renewed growth
momentum driven by a recovery in SPY Elite sales, PINPOINT and LUNA gains, and improved sales force
productivity, factors which should sustain revenue gains into 2017.
Recruitment and training of a direct sales force doubled selling & distribution expenses in 2015. But productivity per
sales professional increased to $800,000 (annualized) with the top performing group achieving twice that rate.
Novadaq incurred (reported on Feb. 17, 2016) a 4Q14 loss of $6.1 million, or ($0.11) per share, on revenue of $20
million. We projected a 4Q loss of ($0.16) per share on revenue of $17.4 million. In the year-earlier quarter, the
company lost ($0.19) per share on revenue of $13.1 million. In 2015, NVDQ lost ($0.64) per share on revenue of $63.8
million vs. a 2014 loss of ($0.41) per share on revenue of $46.6 million.
We project 2016 revenue of $83.6 million and a loss of ($0.54) per share. (Previous projections were revenue of $87.4
million and a loss of ($0.69) per share). For 2017 we project a rise in revenue to $113 million due to improved market
penetration stemming from improved sales force productivity and wider acceptance of new products. The 2017 loss
should narrow to ($0.37) per share as sales (and gross margin) increase and expenses are better leveraged.
See disclosures on pages 15 – 17
790 New York Ave., Suite 209, Huntington, N.Y 11743
(800) 383-8464 • Fax (631) 757-1333
Novadaq Technologies Inc.
Investment Recommendation
Reiterating BUY rating but reducing our (12-month) price target to $13.00 from $16.50 due to diminished
valuations for both NVDQ and a comparison group of medical device stocks.
Within the next year investors should accord the stock a valuation of 8X estimated 2017 revenue per share of $1.96,
discounted for execution risk to a year-ahead value of $13.00. Our target implies stock price appreciation of more
than 40% during the next 12 months.
A group of 30 medical instrument and supply stocks profiled by Capital IQ with market capitalizations between
$500 million and $2 billion shows a mean price to (trailing) sales multiple of 3.2X vs. 8.1X for Novadaq.
Valuations have compressed sharply since November 2015, when the comparison group traded at 4.8X vs. 12X for
Novadaq.
NVDQ has maintained a high valuation premium relative to its comparison group, reflecting comparatively high
growth expectations for Novadaq based on the clinical utility of its technology, growing acceptance of PINPOINT
and LUNA, the growing productivity of the company’s direct sales force, and potential for higher utilization of SPY
technology.
Overview
Novadaq’s patented visualization technology enables surgeons to monitor circulation and tissue perfusion
intraoperatively, facilitating surgical mapping and revisions during major procedures. The technology can also
visualize lymphatic systems, potentially detecting the extent of lymph node involvement in cancer cases, and
differentiate between normal and cancerous tissue on the margins of a surgical resection. SPY’s imaging technology
now has regulatory clearance for use in coronary artery bypass grafts, plastic and reconstructive surgery,
microsurgery, organ transplants and gastrointestinal surgery.
Novadaq estimates that there are two million patients in North America who annually undergo surgical procedures
in which SPY technology could be brought to bear. Roughly 40% of those patients’ surgical imaging needs could
potentially be fulfilled by SPY Elite® systems, with the rest fulfilled in roughly equal measure by PINPOINT and
LUNA systems. SPY Elite is rapidly becoming a standard imaging technology used in breast cancer surgery. The
rollout of PINPOINT, a SPY technology endoscopic fluorescence imaging system developed for use in minimally
invasive surgical procedures, and LUNA, which is aimed at the wound care surgical market, is ongoing.
The initial markets for PINPOINT include colorectal and esophageal surgery, laparoscopic cholecystectomy and
endometriosis. LUNA’s current target markets consist of non-healing wounds, diabetic foot ulcers and hyperbaric
therapy. Single-use surgical kits are also purchased for use in LUNA imaging procedures. Novadaq has added
DermACELL®, an allograft decelluarized dermal matrix made from human cadaveric tissue that is a biocompatible
scaffold that supports tissue regeneration.
Projections
Operations All profit or loss projections exclude warrant valuation adjustments.
2016 and 2017 revenue gains should be driven mainly by the increasing productivity of Novadaq’s sales force,
which now numbers 95 (up from 80 at year-end) and could expand to 120 later in 2016. Novadaq has targeted
annual sales rep productivity at $1 million to $2 million. In 2H15, roughly half the sales force achieved annualized
productivity of $1.25 million; the top quartile of the sales force achieved $1.6 million. In 4Q14, productivity per
sales rep averaged $800,000; productivity rates suggests ample upside stemming from improved experience and a
winnowing of underperformers. The most recently hired sales reps should approach targeted productivity rates in
the back half of 2016.
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Novadaq Technologies Inc.
Sales force productivity could be increased further by its January 1, 2016 reorganization into two groups: surgical,
which will concentrate on markets where SPY technology is used in surgical applications, and wound care, focusing
on wound care centers, thereby driving stronger sales of LUNA. Of the 15 reps hired since the beginning of the
year, 10 were assigned to wound care. Each target segment represents a separate call point driven by differing
customer objectives.
With SPY Elite employed in approximately 20% of US breast surgical procedures, penetration of this surgical
market should be sustained in the years ahead, with revenue potential enhanced by sales of LifeNet Health's
DermACELL tissue products.
We project a 31% rise in 2016 revenue to $83.6 million, driven mainly by a 32% increase in product sales to $80.2
million, and a loss of $30.4 million, or ($0.54) per share. (Previous projections were revenue of $87.7 and a loss of
$35.8 million, or ($0.63) per share).
Gross profit should increase 30.3% to $58.8 million, a gain driven a 31% rise in revenue, offset in part by gross
margin compression to 70.3% from 70.7% stemming from a rise in LUNA and DermACELL sales, which yield
lower margins. The effect of lower-margin products should be offset in part by the suspension of the US medical
device tax, a saving of roughly one percentage point on the cost of sales margin.
Operating expenses should be much better leveraged due to the sharp deceleration in sales force recruitment and
training costs. After doubling in both 2014 and 2015, selling & distribution expenses will increase only 11.6% to
$60.9 million. With R&D and G&A rising at slower rates, total operating expenses will increase only 10.1% to
$89.3 million, the most moderate rise in operating expenses since 2012.
Improved leverage of operating expenses will narrow the 2016 operating loss to $30.5 million from $36 million,
reducing Novadaq’s net loss to $30.4 million from $35.9 million.
For 2017 we project a net loss of $21 million, or ($0.37) per share, on a 35.1% increase in revenue to $113 million
driven mainly by a 36.3% rise in product sales to $109.4 million. Revenue should be sustained by the same factors
underlying 2016 gains –increased productivity of the sales force, higher utilization of SPY systems in service,
LUNA software enhancements, wider distribution of DermaCELL, the 2016 introduction of PINPOINT hardware
upgrades, and continued penetration of markets in Asia.
Although gross margin is likely to compress slightly as LUNA’s sales expand, gross profit should increase 35% to
$33.7 million due to revenue gains. Operating expenses will increase an estimated 12% to $100 million, led by a
14.4% increase in selling & distribution expenses to $69.6 million. As gross profit gains will outpace the increase
in operating expenses, leverage should narrow the operating loss to $21 million from $30.5 million, and reduce the
net loss for the year to $21 million from $30.4 million.
Finances 2016 cash burn of $16.9 million, and a $3.8 million increase in working capital stemming from increases
in receivables and inventory, offset in part by an increase in payables and accruals, and capital expenditures of $9
million will reduce cash by $27.3 million to $79.5 million at the end of 2016.
As losses narrow in 2017, cash burn should moderate, dropping to $5.8 million. But the rise in sales will increase
working capital by $8.5 million due to increases in receivables and inventory, partly offset by higher payables and
accruals. Cash of $13.7 million used in operations, and capital expenditures of $8 million will reduce cash by $19.9
million to $59.6 million at the end of 2017.
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Novadaq Technologies Inc.
2015 Fourth Quarter and Full-Year Results
Our narrative excludes
warrant
valuation
adjustments, which are
reflected on the as-reported
financial statements on the
next page. We cite year-onyear comparisons but in light
of the 2015 shift from a
distributor based marketing
strategy to a direct sales
force model, our discussion
touches more on the effect of
that change on operating
results.
Quarter ending Dec 31:
2015E
2015A
2014A
Product revenue
Royalty revenue
Deferred partnership fees
Service revenue
19,104
587
327
Total revenue
20,018
Cost of sales
Gross profit
17,407
457
% +/'15 vs '14
Year ending Dec 31:
2015
2014
% +/-
95%
(21%)
- 108%
60,799
2,023
210
9,802
745
2,317
158
18,073
13,022
54%
63,812
46,600
37%
5,649
5,422
3,898
45%
18,726
16,058
17%
14,370
12,651
9,124
57%
45,086
30,542
48%
13,157
4,817
2,587
14,187
5,241
2,259
7,506
3,393
3,934
75%
42%
(34%)
54,518
17,549
9,051
27,684
10,782
10,295
97%
63%
(12%)
991
40,696
1,909
3,292
704
49%
6%
- 41%
Operating expenses
Selling & distribution
R&D
G&A
Total
20,561
21,688
14,834
39%
81,119
48,761
66%
Operating income (loss)
(6,191)
(9,037)
(5,710)
8%
(36,032)
(18,219)
98%
(26)
(26)
48
4,500
(7,356)
74%
(105)
250
(0%)
NM
5,021
251
4,500
(1,836)
(17,517)
(34)
(44%)
(30,867)
36
(24,304)
50
27%
(17,552)
(44%)
(30,831)
(24,254)
27%
54,850
56,055
55,236
(0.32)
(0.19)
(0.55)
(0.64)
(0.44)
(0.41)
70.1%
57.6%
26.1%
30.2%
70.7%
85.4%
27.5%
14.2%
65.5%
59.4%
23.1%
22.1%
Interest expense
48
Interest/investment income
84
Operations
In 4Q15,
Rights termination charge
Novadaq incurred a loss of
Warrant valuation adjustment
(3,661)
$6.1 million, or ($0.11) per
(9,014)
Net income (loss)
(9,794)
share, on revenue of $20
Income tax recovery (expense)
(13)
million. We projected a 4Q
(9,014)
Net income (loss)
(9,807)
loss of ($0.16) per share on
56,448
Average shares outstanding
54,908
revenue of $18.1 million.
Capital equipment sales
Earnings (loss) per share
(0.16)
Reported
(0.18)
increased 89% to $12 million
(0.16)
Excluding warrant revaluation
(0.11)
and (recurring) sales of
Margin Analysis (on product sales)
consumable kits more than
70.0%
Gross margin
71.8%
doubled to $7.1 million. In
78.5%
Sales & marketing
65.7%
the aftermath of the
29.0%
R&D
24.1%
termination of the marketing
12.5%
G&A
12.9%
agreement with LifeCell,
Source: company reports and Taglich Brothers estimates
capital equipment sales by a
growing direct sales force
increased from $3.6 million in 1Q15 to $10.3 million in 4Q15.
(373%)
Recurring revenue, gains in which stemmed partly from full recognition rather than sharing of revenue with
LifeCell, increased from $4.9 million in 1Q15 to $6.7 million by 4Q15. Revenue directly earned by Novadaq
increased to $17 million (85% of total revenue) in 4Q15 from $8.5 million (73% of total revenue) in 1Q15.
Operating expenses were up 39% to $20.6 million, an increase lead, in dollar terms, by a 75% rise in selling &
distribution expenses to $13.2 million. This increase reflects the yearlong buildup in a direct sales force which
grew to 85 at the end of 2015 (95 as of February 2016) but has yet to achieve optimal productivity.
The increase in operating expenses offset gross profit gains, widening the 4Q operating loss to $6.2 million from
$5.7 million.
At the end of 4Q15, there were 650 SPY systems installed, largely unchanged since 3Q15, each generating an
average of $10,300 in recurring revenue, up from an average of $8,566 in recurring revenue in 1Q15. Of the
systems in service, 350 were out on evaluation, comprising the potential pipeline of capital equipment sales.
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Novadaq Technologies Inc.
In 2015, Novadaq lost $35.9 million, or ($0.64) per share, on revenue of $63.8 million, vs. a 2014 loss of $22.4
million, or ($0.41) per share, on revenue of $46.6 million. 2014 results reflect sharing of SPY Elite revenue with
LifeCell and a rights terminal charge (on the LifeCell agreement) of $4.5 million, approximately ($0.08) per share.
2015 revenue was up 37% to $63.8 million, led by a 49% increase in product sales to $60.8 million. Product sales
gains were driven in roughly equal measure (in dollar terms) by a 42% increase in capital equipment sales to $35.9
million and a 61% rise in recurring revenue to $25 million. Gains in recurring revenue (sales of single-use
procedural kits) stemmed from the recognition of all SPY Elite sales following the end of the LifeCell marketing
agreements in 4Q14.
Gross profit increased 48% to $45.1 million due to revenue gains and a gross margin improvement to 70.7% from
65.5% stemming from the increases in capital equipment sales and recurring revenue, offset in part by the loss of
partnership fee revenue due to the termination of LifeCell marketing agreements.
Operating expenses were up 66% to $81.1 million, led, in dollar terms by a doubling in sales and distribution
expenses to $54.5 million as Novadaq expanded its direct sales force, and increased spending on promotions and
sponsorship of clinical studies. R&D for the year increased 63% to $17.5 million due to increased patent and
trademark expenses, and higher salaries, stock options and clinical trial expenses. Despite an increase in salaries
and public company listing fees, G&A expenses dropped 12% to $9.1 million due mainly to a $2 million decrease
in bad debt expenses.
Due to the increase in operating expenses, the operating loss for 2015 doubled to $36 million from $18.2 million,
accounting for a widening of the year’s net loss (excluding warrant revaluations and termination fees) to $35.8
million from $17.9 million.
Finances In 4Q15 Novadaq burned cash of $3.3 million and increased working capital by $5 million due to
increases in receivables and inventory that were partly offset by increases in payables and accruals. Cash of $8.1
million used in operations and capital expenditures of $2.5 million reduced cash by $9.6 million to $106.8 million
at the end of the quarter.
In 2015, NVDQ burned cash of $23.8 million and increased working capital by $6.6 million due to increases in
receivables, inventory and prepayments, offset in part by an increase in payables and accruals. Cash of $30.1 million
used in operations and capital expenditures of $8.1 million, partly offset by proceeds from the disposal of fixed
assets and proceeds from options and warrants, reduced cash by $34.7 million to $106.8 million as of December
31, 2015.
Strategy
Development of new visualization indications and sponsorship of clinical trials, data from which can support the
adoption of SPY in more hospitals, increased utilization of the SPY systems already in service, penetration of
overseas markets (mainly in Asia), product enhancements and enlargement of a direct sales force all underlie
Novadaq’s growth plans. Near-term growth strategy includes the development and launch of new features and
capabilities for existing SPY platforms, including a handheld SPY Elite device that is compatible with the existing
SPY Elite interface, software upgrades for LUNA that enhance the system’s predictive value and user understanding
of images, and hardware accessories for PINPOINT.
With the enlargement of Novadaq’s sales and clinician field forces, the company aims to leverage points of contact
and pursue installation of multiple-application SPY systems in hospitals, and increase the utilization of SPY systems
already in service. Revenue from SPY Elite, PINPOINT and LUNA, all sold by its direct sales force will account
for an estimated 70% of revenue in 2016-17 (down from 80% in 2015), with overseas revenue and sales through
Intuitive Surgical contributing a combined 20% of revenue.
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Novadaq Technologies Inc.
Most of the systems currently in service are used in breast reconstruction and open gastrointestinal surgeries at
institutions where SPY Elite was installed through LifeCell. Novadaq’s 2013 deployment of PINPOINT in US
hospitals for use in laparoscopic colorectal surgery, initially cholecystectomies (surgical removal of the gall bladder)
and the excision of endometriosis lesions, will further expand and diversify the company’s surgical markets, as will
LUNA, and DermACELL, which are initially aimed at the wound care surgical market. DermaCELL should also
be well accepted among institutions that use SPY Elite for breast reconstruction procedures, the number of which
has risen significantly in the US since 2008.
Major Clinicial Trials Data from clinical trials is intended to increase clinician interest in PINPOINT. The
PILLAR (Perfusion Assessment in Laparoscopic Left Anterior Resection) III trial, which will enroll an estimated
1,000 subjects (125 recruited to date), began in 4Q14 and is projected to run through December 2016. PILLAR III
aims to determine the difference in post-operative anastomotic leak rate in low anterior resection procedures where
colon and rectal tissue perfusion is evaluated using PINPOINT as an adjunct to standard surgical practice compared
to surgical procedures performed according to standard surgical practice alone. Data should be available in 1Q17.
The FILM trial is designed as a prospective, open label, multicenter study to assess the safety and utility of
PINPOINT in the identification of lymph nodes in patients with uterine and cervical cancer who undergo lymph
node mapping. FILM, which will enroll an estimated 150 subjects; data should be available by 4Q16.
Collaborative/Distribution Agreements and Acquisitions Novadaq has distribution agreements covering all of the
large markets in Asia – China, India, Japan and South Korea.
The October 2015 co-marketing agreement with Arthrex, Inc., an orthopedic medical device manufacturer, should
greatly facilitate PINPOINT’s access to additional customers and penetration of additional accounts. PINPOINT
can be integrated into Arthrex’s Synergy System, which combines high-definition technology in tion cameras, LED
lighting, and image management with an intuitive graphical user interface.
In December 2014, Novadaq was appointed exclusive worldwide distributor of LifeNet Health's
DermACELL tissue products for wound and breast reconstruction surgery. The agreement has an initial 10-year
term and, subject to certain conditions and certain sales performance targets, will automatically renew for successive
five-year periods.
Technology and Products
Novadaq’s SPY imaging technology is based on the fluorescence properties of indocyanine green (ICG), a watersoluble dye that binds with albumin, the most abundant plasma protein in human blood. ICG’s affinity for albumin
confines the dye largely to the vascular system, an advantage underlying its widening acceptance since the 1980s.
ICG also shows low toxicity and is rapidly excreted from the body through the bile ducts. ICG fluoresces, or emits
light, when illuminated with a near-infrared laser beam, highlighting blood as its flows through blood vessels and
the capillary bed. This property is the basis for fluorescence angiography, an imaging technology refined by
Novadaq for use in a number of open, minimally invasive, and robotic surgical procedures.
SPY is a compact mobile system with an articulating arm that facilitates camera positioning, a rotating monitor, an
auto-focus camera and the laser light source. So far, Novadaq’s imaging system has been cleared by the FDA (510K) for coronary artery bypass grafts, cardiovascular surgery, plastic reconstructive and micro surgery, organ
transplant surgery, gastrointestinal surgery and minimally invasive surgery. SPY’s major variants include SPY
Elite, LUNA and PINPOINT, all of which are now sold by Novadaq’s direct sales force. Only the Firefly is sold
through a partner.
SPY Elite is cleared by the FDA for the visualization of blood flow in vessels and tissue perfusion during six
different open surgery applications. They are also CE-marked for sale in Europe and have regulatory approvals in
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Novadaq Technologies Inc.
Canada, Japan and other overseas markets. SPY Elite is used in plastic reconstructive, cardiovascular, colorectal
and general surgery, and in vascular intervention.
FIREFLY is integrated into Intuitive Surgical’s da Vinci Surgical Robotic System. FIREFLY is cleared by the FDA
for use in robotic surgery. The FIREFLY system is used in applications ranging from urology to gynecology.
PINPOINT
PINPOINT is an
endoscopic fluorescence imaging
system was developed for
minimally invasive (laparoscopic)
gastrointestinal,
gynecological,
thoracic and urological surgery.
Pinpoint
combines
the
fluorescence imaging with the high
definition visible light imaging
capabilities of a traditional
endoscopic
imaging
system.
PINPOINT can be used as a
traditional endoscope and to obtain
fluorescence images either on
demand or in a simultaneous
imaging mode during minimally
invasive surgery. PINPOINT aims
to provide minimally invasive
surgeons with better visualization
of important anatomic structures
during complex procedures. PINPOINT is FDA approved, CE- marked, and cleared for use in some other overseas
markets for minimally invasive surgical procedures. Novadaq and its Japan distributor are seeking marketing
clearance in Japan.
LUNA is cleared by the FDA for outpatient use in cardiovascular applications, such as the assessment of
blood flow and tissue perfusion in patients with complex wounds typically caused by peripheral vascular
disease. LUNA is also CE-marked for sale in Europe, and is cleared for use in Canada, Japan and other
overseas markets. LUNA has been developed primarily for wound care centers’ use for diagnostic
imaging, the assessment of vascular flow and perfusion at the site non-healing wounds caused by vascular
deficiencies that impede the healing of wounds caused by peripheral vascular disease. LUNA enables
surgeons to assess baseline perfusion at the site of the wound and perform serial assessments as wound
care options are evaluated.
Principal SPY Surgical and Wound Care Market Opportunities
Breast Reconstruction In 2014 (latest data published) there were 169,000 breast reconstructive surgical procedures
performed in the US, 60% of which were post mastectomy reconstructions. In addition there were another 41,000
breast reductions performed for cosmetic surgical purposes. Cosmetic reductions are not included in the chart at
right. By Novadaq’s estimates, SPY imaging is now used in 20% of US breast reconstruction procedures. The
number of US mastectomies has declined significantly during the past 10 years as surgeons have reduced the volume
of breast tissue excised in response to breast cancer. Nonetheless, the number of post mastectomy reconstructive
procedures is still significant and has increased since 2007 after falling for several years. In the last five years,
breast reconstruction procedures have risen as breast reductions have declined.
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Novadaq Technologies Inc.
Breast Reduction
Breast reduction
surgeries are technically less complex
than breast reconstruction but patients
are at risk for some of the same
complications – bleeding and tissue
necrosis.
Intraoperative
and
postoperative blood loss is rare but can
occur. A hematoma (collection of blood
in a body cavity) could cause pain,
infections, scar tissue, or other issues.
The fat, surrounding tissues, the incision
line and the breast envelope could
become necrotic due to lack of blood
supply. Nipple necrosis, which can lead
to loss of the areola and/or the nipple, is
a rare but serious side effect when
incisions are made near the areola,
particularly when the nipples and areolas
are cut away and repositioned.
SPY imaging could warn the surgeon of potential complications stemming from poorly connected blood vessels
and inadequate perfusion. Surgeons at Stanford University have estimated that the use of SPY imaging during
breast reconstruction could, if infections are reduced by half and tissue necrosis is reduced by 90%, potentially
reduce costs by more than $2,000 per patient.
Colorectal Surgery There are approximately 150,000 cases of colorectal cancer diagnosed annually in the US,
arguably a reasonable indication of the number of colorectal surgeries, all of which entail a surgical connection of
separate loops of intestine. Failed anastomosis i.e., an incomplete seal that results in leakage at the site of the
connection, is the most feared complication of colorectal surgery. According to a 2006 study by Murrell and
Stamos, rates of anastomotic failure range from 3% to 26% and are associated with a mortality rate of 6% to 39%.
Anastomotic leaks tend to be detected late in the postoperative period, frequently after discharge from the hospital.
A 2007 study of 1,223 procedures by Hyman et al found that of 33 anastomotic leaks that developed, 12 were
diagnosed an average of 12 days after surgery; the rest were diagnosed by imaging procedures an average of 16
days after surgery. Consequences of these leaks include abdominal pain, high fever, abnormally rapid heartbeat
and unstable blood pressure. Patients with anastomotic leakage generally have to return to the operating room and
undergo extended intensive care.
To avoid the complications and costs associated with anastomotic leakage, intraoperative detection of leaks is
crucial. SPY could enable surgeons to avoid resection (and attempted anastomosis) of areas of the colon where
perfusion is poor, potentially reducing rates of anastomotic failure.
PINPOINT visualizes in high-risk colon resection surgeries that entail rejoining (anastomosis) dissected ends of a
bowel section, e.g., Crohn’s disease and esophageal cancer. PINPOINT has also being developed for use in
cholecystectomies and removal of endometriosis lesions. The PILLAR II (Perfusion Assessment in
Laparoscopic Left Anterior Resection) study, conducted from March 2012 through June 2014, enrolled 147 patients
scheduled for laparoscopic left colectomy in the lower region (5 – 15 cm from the opening of the anus on the surface
of the body). The study aimed to determine how effectively PINPOINT can enable the surgeon to determine the
best site for colon resection, and assess perfusion in the mucous membrane lining the colon. The study also
measured all operative complications up to as long as 30 days after the procedure.
Surgical removal of endometriosis lesions is also a targeted indication. Endometriosis, which affects roughly seven
million women in the US, is a leading cause of female infertility, chronic pelvic pain, and gynecologic surgeries.
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Novadaq Technologies Inc.
Endometriosis is a consequence of the endometrial lining of the uterus attaching itself to other organs, preventing
it from leaving the body after it is shed during menstruation. This lining is aggravated by ovulation and menstruation
and can break down and bleed, tear away, or form painful scar tissue that continues to grow abnormally.
Vascular Surgery/ Wound Care Novadaq has evaluated SPY (branded as LUNA™ for the wound care market)
in clinical studies at four major US centers, assessing its ability to guide surgeons in decisions on managing the
consequences of peripheral vascular disease such as the need for limb salvage and amputations, and approaches to
lower limb amputation, i.e., above or below the knee.
Diabetic patients account for the majority of lower limb amputations. Centers for Disease Control (CDC) data for
1997 showed that of 131,000 lower extremity amputations reported, 87,700, or 67%, had diabetes. For 2004 the
CDC reported 71,000 lower limb amputations among diabetics, a figure that dropped to 65,700 in 2006. The
decrease in limb amputations attributed to complications from diabetes has been declining for the past 15 years due
to more effective management of the disease amid skyrocketing prevalence. However, the numbers are still
substantial and underlie an attractive market opportunity for SPY, more so due to ongoing efforts to reduce the ratio
of above the knee amputations.
SPY is also being evaluated,
with potentially promising
results, as a tool to assess
perfusion and tissue viability
in
extremities
where
debridement
is
being
considered.
Diminished
perfusion, which bodes poorly
for wound healing, can
potentially be detected more
effectively by SPY than just a
clinical
evaluation
and
improve limb salvage rates.
Peripheral vascular disease
has significant implications
for wound care, particularly
diabetic foot ulcers. A 2009
Clinical Evidence article by
Hunt observed that in
resource-rich countries, the
annual incidence of ulcers in
patients with diabetes is 2.5% to 10.7%. With a (diagnosed) diabetic patient population of 19 million, that range of
ulcer incidence rates would translate to 475,000 to two million cases of diabetic ulcers diagnosed every year in the
US. For patients with healed diabetic foot ulcers, the five-year cumulative rate of ulcer recurrence is 66% and of
amputation is 12%. Treatment of diabetic foot ulcers requires debridement (excision) of non-viable (poorly
perfused) tissue, leaving healthy wound edges where growth factors can promote healing. SPY can facilitate
effective debridement by enabling surgeons to distinguish between adequately and poorly perfused tissue.
Competition
There are no directly competing fluorescent angiography systems currently on the market but there are existing
technologies that are well entrenched, notably in cardiac surgery applications. Transit time flow measurement
(TTFM) and X-ray angiography have gained acceptance over the years. X-ray angiography, in particular, has been
widely accepted as a gold standard. Competitive challenges consist mainly of displacing these older technologies,
Taglich Brothers, Inc.
9
Novadaq Technologies Inc.
a process that could be slowed by capital spending and technology assessment hurdles, and by the established
presence of many larger manufacturers in the medical imaging industry, including General Electric, Siemens
Electronics and Philips Electronics, all of whom have blanketed the hospital sector.
The endoscopy market poses similar challenges. Endoscopes are manufactured by many large manufacturers,
including optics industry leaders Olympus, Pentax, and Fujinon, and medical technology firms such as Stryker
Corporation, which can cover the market with sales forces much larger than Novadaq’s.
Broad efforts to drive acceptance of the SPY product line include publication of peer-reviewed articles by surgeons
whose experiences attest to the clinical and financial benefits of adopting SPY. The company has supported a
registry (Victoria Multi-Center Clinical Registry) that collects cardiac surgical case data that differentiate coronary
artery bypass outcomes based on the use of SPY systems.
Novadaq’s competitive position has been buttressed by its intellectual property, relationships with strategic partners
that are the strongest in their respective markets, and widening acceptance of SPY technology. Even if competitors
can circumvent the company’s patent protection, establishing a market presence and achieving a clinical advantage
over SPY would represent formidable challenges.
Risks
In our view, these are the principal risks underlying the stock:
Regulatory Review Regulatory review requirements could potentially derail or delay the launch of a product with
substantive revenue potential. Each application of SPY technology is subject to regulatory review as a Class II
medical device (moderate level of risk to the patient) requiring a 510(K) clearance based on proof of substantial
equivalence (no clinical trials are required) to a device on the market or cleared by the FDA before 1976.
Competition The clinical utility and cost effectiveness of SPY relative to x-ray angiography and transit time flow
measurement have been amply demonstrated, but displacement of older systems could be slowed by capital spending
and technology assessment hurdles. Suppliers of imaging equipment to the hospital sector include multi-nationals
with large sales forces.
Reimbursement Reimbursements for SPY use in inpatient procedures are currently granted on a case to case basis.
The reimbursement Novadaq has targeted is modest relative to total procedure costs but an approval would speed
acceptance of SPY technology.
Intervening Technology Efforts to achieve improved clinical utility and cost effectiveness are ongoing. There is
always potential for new devices or pharmaceuticals that could displace existing technologies.
Microcap Concerns Shares of Novadaq have risks common to the stocks of other microcap (which we define as
market capitalizations of $250 mil or less) companies. These risks often underlie stock price discounts from the
valuations of larger-capitalization stocks. Liquidity risk, typically caused by small trading floats and very low trading
volume, can lead to large spreads and high volatility in stock price. The company has approximately 52 million
shares in the float. On average, 372,000 shares are traded daily.
Miscellaneous Risks The company's financial results and equity values are subject to other risks, including
competition, operations, financial markets, regulatory risk, and/or other events. These risks may cause actual results
to differ from expected results.
Taglich Brothers, Inc.
10
Novadaq Technologies Inc.
Balance Sheets
20132A–2017E
($ Thousands)
2013A
2014A
2015A
2016E
2017E
Cash + equivalents
Accts receivable
Inventory
Prepayments & other
182,330
8,502
1,032
3,846
141,448
14,336
6,798
1,235
106,790
21,768
10,681
3,363
79,459
25,555
14,632
2,509
59,568
34,522
19,841
3,389
Total
195,710
163,816
142,602
122,155
117,319
13,361
13,648
14,830
15,222
13,758
ASSETS
Current assets
Long-term investments
Fixed assets (net)
Deferred development costs & charges
Intangibles
3,304
20,250
18,540
17,736
16,932
212,374
197,714
175,972
155,113
148,009
Accts payable & accruals
Provision for warranty claims
Deferred revenue - current portion
Deferred rev (curr) - sales/marketing agreement
Income taxes payable
Distribution rights payable
7,124
187
380
1,300
6,178
335
404
12,146
455
1,125
14,510
250
585
17,801
250
791
250
13
250
250
250
Total
9,009
7,167
13,987
15,595
19,092
194
1,992
26,066
552
849
650
650
25,873
1,631
16,438
1,735
24,618
1,725
35,037
1,725
TOTAL ASSETS
LIABILITIES AND EQUITY
Current liabilities
Deferred revenue
Deferred rev - sales/marketing agreement
Shareholder warrants
Distribution rights payable
Shareholders' equity
175,115
162,491
142,962
112,525
91,505
TOTAL LIABILITIES AND EQUITY
212,374
197,714
175,972
155,113
148,009
Source: Company reports & Taglich Brothers estimates
Taglich Brothers, Inc.
11
Novadaq Technologies Inc.
Annual Income Statements
2012A–2016E
($ Thousands)
2013A
2014A
2015E
2016E
2017E
Product sales
Royalty revenue
Deferred partnership fee revenue
Service revenue
31,018
1,890
1,300
812
40,696
1,909
3,292
704
60,799
2,023
80,245
1,939
109,402
1,977
991
1,450
1,600
Total revenue
35,021
46,600
63,812
83,634
112,980
Cost of sales
12,933
16,058
18,726
24,874
33,729
Gross profit
22,088
30,542
45,086
58,760
79,250
14,061
7,974
7,234
31
26
27,684
10,782
10,295
54,518
17,549
9,051
60,858
18,946
9,473
69,596
20,944
9,771
Total
29,326
48,761
81,119
89,276
100,311
Operating income (loss)
(7,238)
(18,219)
(36,032)
(30,517)
(21,061)
(105)
(104)
(104)
250
184
145
Operating expenses
Selling & distribution
R&D
G&A
Inventory write down
Equipment write down
Interest expense
Gain (loss) on investment
Interest income
Rights termination charge
Warrant valuation adjustment
(182)
25
109
(15,015)
25
226
(4,500)
(1,836)
5,021
Pretax loss
Income tax recovery (expense)
(22,301)
(1)
(24,304)
(50)
(30,866)
36
(30,437)
0
(21,020)
0
Net income (loss)
(22,302)
(24,354)
(30,830)
(30,437)
(21,020)
48,482
55,350
56,055
56,575
57,575
(0.46)
(0.15)
(0.44)
(0.41)
(0.55)
(0.64)
(0.54)
(0.37)
63.1%
40.2%
22.8%
20.7%
65.5%
59.4%
23.1%
22.1%
70.7%
85.4%
27.5%
14.2%
70.3%
72.8%
22.7%
11.3%
70.1%
61.6%
18.5%
8.6%
Average shares outstanding
Earnings (loss) per share
Reported
Excluding warrant revaluation
Margin Analysis
Gross margin
Sales & distribution
R&D
G&A
Source: Company reports and Taglich Brothers estimates
Taglich Brothers, Inc.
12
Quarterly Income Statements
($ Thousands)
2015A- 2017E
2Q15A
3Q15A
4Q15A
2015A
1Q16E
2Q16E
3Q16E
4Q16E
2016E
1Q17E
2Q17E
3Q17E
4Q17E
2017E
11,067
452
172
14,337
540
189
16,290
443
303
19,104
587
327
60,799
2,023
991
18,148
473
350
19,625
481
350
20,602
490
375
375
21,870
495
375
80,245
1,939
1,450
23,424
512
375
25,638
481
400
28,315
490
400
32,026
495
425
109,402
1,977
1,600
Total revenue
11,691
15,066
17,036
20,018
63,812
18,971
20,456
21,467
22,740
83,634
24,311
26,519
29,204
32,946
112,980
Cost of sales
4,220
4,381
4,477
5,649
18,726
5,691
6,035
6,440
6,708
24,874
7,293
7,956
8,761
9,719
33,729
Gross profit
7,471
10,686
12,559
14,370
45,086
13,280
14,422
15,027
16,032
58,760
17,017
18,563
20,443
23,227
79,250
12,498
3,623
2,687
15,493
5,129
2,459
13,370
3,981
1,319
13,157
4,817
2,587
54,518
17,549
9,051
15,651
4,743
2,371
14,831
4,705
2,352
15,027
4,723
2,361
15,350
4,775
2,388
60,858
18,946
9,473
16,410
5,105
2,431
16,574
5,237
2,387
17,668
5,330
2,482
18,944
5,271
2,471
69,596
20,944
9,771
18,807
23,080
18,670
20,561
81,119
22,765
21,888
22,110
22,513
89,276
23,946
24,198
25,480
26,686
100,311
(11,336)
(12,394)
(6,111)
(6,191)
(36,032)
(9,486)
(7,467)
(7,084)
(6,481)
(30,517)
(6,928)
(5,635)
(5,038)
(3,459)
(21,061)
(26)
54
(26)
56
(26)
56
(26)
84
(104)
250
(26)
49
(26)
48
(26)
45
(26)
42
(104)
184
(26)
39
(26)
37
(26)
35
(26)
33
(104)
145
Operating expenses
Taglich Brothers, Inc.
13
Selling & distribution
R&D
G&A
Total
Operating income (loss)
Interest expense
Interest income
Rights termination charge
Warrant valuation adjustment
23
6,339
2,321
(3,661)
5,021
Net income (loss)
Income tax recovery (expense)
(11,285)
(6,026)
(3,760)
48
(9,794)
(13)
(30,866)
36
(9,462)
(7,445)
(7,065)
(6,465)
(30,437)
(6,915)
(5,624)
(5,029)
(3,452)
(21,020)
Net Loss
(11,285)
(6,026)
(3,712)
(9,807)
(30,830)
(9,462)
(7,445)
(7,065)
(6,465)
(30,437)
(6,915)
(5,624)
(5,029)
(3,452)
(21,020)
56,427
56,677
56,198
54,908
56,055
56,200
56,450
56,700
56,950
56,575
57,200
57,450
57,700
57,950
57,575
(0.20)
(0.20)
(0.11)
(0.22)
(0.07)
(0.11)
(0.18)
(0.11)
(0.55)
(0.64)
(0.17)
(0.13)
(0.12)
(0.11)
(0.54)
(0.12)
(0.10)
(0.09)
(0.06)
(0.37)
63.9%
106.9%
31.0%
23.0%
70.9%
102.8%
34.0%
16.3%
73.7%
78.5%
23.4%
7.7%
71.8%
65.7%
24.1%
12.9%
70.7%
85.4%
27.5%
14.2%
70.0%
82.5%
25.0%
12.5%
70.5%
72.5%
23.0%
11.5%
70.0%
70.0%
22.0%
11.0%
70.5%
67.5%
21.0%
10.5%
70.3%
72.8%
22.7%
11.3%
70.0%
67.5%
21.0%
10.0%
70.0%
62.5%
19.8%
9.0%
70.0%
60.5%
18.3%
8.5%
70.5%
57.5%
16.0%
7.5%
70.1%
61.6%
18.5%
8.6%
Average shares outstanding
Earnings (loss) per share
Reported
Excluding warrant revaluation
Margin Analysis (on product sales)
Gross margin
Selling & distribution
R&D
G&A
Source: Company reports and Taglich Brothers estimates
Novadaq Technologies Inc.
1Q15A
Product revenue
Royalty revenue
Service revenue
Novadaq Technologies Inc.
Cash Flow Statements
2012A–2016E
($ Thousands)
2013A
2014A
Operating activities
Net income (loss)
4Q15A
2015A
2016E
2017E
(Quarter only)
(22,302)
(24,354)
(9,807)
(30,830)
(30,437)
(21,020)
3,368
57
335
(25)
169
4,906
1,305
5,135
7,709
9,464
803
(25)
423
1,710
1,693
1,693
26
104
104
104
2,544
15,015
(838)
4,372
1,836
(12,461)
1,100
3,661
(3,291)
5,074
(5,021)
(23,829)
4,000
4,000
(16,931)
(5,759)
Accts rec
Inventory
Recoverable income taxes
Prepayments & other
Accts pay and accruals
Deferred revenue
(4,445)
(2,163)
(3,032)
(1,285)
13
58
(879)
132
(8,264)
(3,883)
42
(2,158)
6,983
721
(3,787)
(3,951)
(6,680)
(5,209)
(9)
3,671
(216)
(5,834)
(2,953)
34
(237)
(773)
(1,277)
854
2,364
720
(656)
3,292
720
Changes in working capital
(3,164)
(11,038)
(4,993)
(6,558)
(3,800)
(8,533)
Decrease - long-term deferred revenue
(1,300)
(1,633)
214
297
600
600
Net cash from (used in) operations
(5,302)
(25,133)
(8,070)
(30,089)
(20,131)
(13,691)
Capital expenditures
Disposal of fixed assets
Purchase of intangibles
Redemption of LT investments
Acquisitions
(6,424)
388
(2,517)
25
(6,400)
1,206
(12,369)
25
(2,494)
573
(8,058)
1,741
(9,000)
(8,000)
Net cash from investing
(8,529)
(17,537)
(1,922)
(6,317)
(9,000)
(8,000)
Exercise of options/warrants
Proceeds - issuance of stock
Transaction costs - common shares/warrants
Repayable gov't assistance
3,106
162,544
(8,226)
(204)
1,830
372
1,814
1,800
1,800
Net cash from financing
157,221
1,812
372
1,814
1,800
1,800
(15)
(24)
(12)
(64)
Net change in cash
143,376
(40,882)
(9,632)
(34,656)
(27,331)
(19,891)
Cash - beginning
Cash - ending
38,954
182,329
182,330
141,447
116,422
106,790
141,447
106,790
106,790
79,459
79,459
59,568
Depreciation/ amortization
Inventory/equipment write down
Intangible asset write-down
Gain on investment
Imputed interest expense
Impairment of long term investment
Stock based compensation
Warrants revaluation adjustment
Cash earnings (burn)
Investing activities
Financing activities
Exchange rate effects
(18)
Source: Company reports and Taglich Brothers estimates
Taglich Brothers, Inc.
14
Novadaq Technologies Inc.
Price Chart
Taglich Brothers Current Ratings Distribution
Investment Banking Services for Companies Covered in the Past 12 Months
Rating
#
%
Buy
2
8
Hold
Sell
Not Rated
Taglich Brothers, Inc.
15
Novadaq Technologies Inc.
Important Disclosures
At this writing, no Taglich Brothers employees owned or controlled any of Novadaq’s common shares.
Taglich Brothers, Inc. does not have an investment banking relationship with the subject of this report
and was not a manager or co-manager of any offering for the company within the last three years.
All research issued by Taglich Brothers is based on public information. Novadaq Technologies does not
pay Taglich Brothers for the creation and dissemination of research reports.
General Disclosures
The information and statistical data contained herein have been obtained from sources, which we believe
to be reliable but in no way are warranted by us as to accuracy or completeness. We do not undertake to
advise you as to change in figures or our views. This is not a solicitation of any order to buy or sell.
Taglich Brothers, Inc. is fully disclosed with its clearing firm, Pershing, LLC, is not a market maker and
does not sell to or buy from customers on a principal basis. The above statement is the opinion of Taglich
Brothers, Inc. and is not a guarantee that the target price for the stock will be met or that predicted business
results for the company will occur. There may be instances when fundamental, technical and quantitative
opinions contained in this report are not in concert. We, our affiliates, any officer, director or stockholder
or any member of their families may from time to time purchase or sell any of the above-mentioned or
related securities. Analysts and members of the Research Department are prohibited from buying or
selling securities issued by the companies that Taglich Brothers, Inc. has a research relationship with,
except if ownership of such securities was prior to the start of such relationship, then an analyst or
member of the Research Department may sell such securities after obtaining expressed written
permission from Compliance.
Analyst Certification
I, Juan Noble, the research analyst of this report, hereby certify that the views expressed in this
report accurately reflect my personal views about the subject securities and issuers; and that no
part of my compensation was, is, or will be directly or indirectly related to the specific
recommendations or views contained in this report.
Public companies mentioned in this report
General Electric
Digirad
Intuitive Surgical
Koninklijke Philips Electronics NV
(NYSE: GE)
(NasdaqGM: DRAD)
(NasdaqGS: ISRG)
(NYSE: PHG)
Olympus Corporation
PLC Systems
Siemens Aktiengesellschaft
Stryker Corporation
Taglich Brothers, Inc.
16
(OCPNY OTC)
(PLCSF OB)
(NYSE: SI)
(NYSE: SYK)
Novadaq Technologies Inc.
Meaning of Ratings
Buy – The growth prospects, degree of investment risk, and valuation make the stock attractive relative to the
general market or comparable stocks.
Speculative Buy – Long term prospects of the company are promising but investment risk is significantly higher
than it is in our BUY-rated stocks. Risk-reward considerations justify purchase mainly by high risk-tolerant
accounts. In the short run, the stock may be subject to high volatility and could continue to trade at a discount to
its market.
Neutral – Based on our outlook the stock is adequately valued. If investment risks are within acceptable parameters,
this equity could remain a holding if already owned.
Sell – Based on our outlook the stock is significantly overvalued. A weak company or sector outlook and a high
degree of investment risk make it likely that the stock will underperform relative to the general market.
Dropping Coverage – Research coverage discontinued due to the acquisition of the company, termination of
research services, non-payment for such services, diminished investor interest, or departure of the analyst.
Some notable Risks within the Microcap Market
Stocks in the Microcap segment of the market have many risks that are not as prevalent in Large-cap, Blue
Chips or even Small-cap stocks. Often it is these risks that cause Microcap stocks to trade at discounts to
their peers. The most common of these risks is liquidity risk, which is typically caused by small trading floats
and very low trading volume which can lead to large spreads and high volatility in stock price. In addition,
Microcaps tend to have significant company specific risks that contribute to lower valuations. Investors need
to be aware of the higher probability of financial default and higher degree of financial distress inherent in
the microcap segment of the market.
From time to time our analysts may choose to withhold or suspend a rating on a company. We continue to publish
informational reports on such companies; however, they have no ratings or price targets. In general, we will not rate
any company that has too much business or financial uncertainty for our analysts to form an investment conclusion,
or that is currently in the process of being acquired.
Taglich Brothers, Inc.
17