Nano-X (NASDAQ:NNOX) is a medical device maker based in Israel. The company has made a technological breakthrough in medical diagnostics.
If you’ve seen the TV show House, you know how important diagnostics is to the practice of medicine. Diagnostics is a major part of healthcare. In fact, I daresay it’s the key to healthcare. To treat a patient, first you have to figure out what is wrong with the patient. Everything starts with diagnostics.
How does a doctor diagnose what’s wrong? Often you need to peek inside a patient with an X-ray. Imagine Dr. House trying to diagnose a patient without an X-ray. That would be hard. As the doctors at Columbia University put it, “In today’s world, doctors order X-rays to diagnose all sorts of problems: a broken bone, pneumonia, heart failure, and much, much more. Mammography, the standard screening method for breast cancer, uses X-rays. We barely think about it, it’s so ubiquitous.”
I love that quote because in one way, it’s exactly right. In the United States and Europe and other parts of the world, we take X-rays for granted. Doctors order them up all the time. We even do X-rays in veterinarian clinics. It’s super-common. In the old world, and the new world, to say that “X-rays are in all the hospitals” is to say something completely obvious.
What about the third world, though? What about emerging markets that are not rich? What about places where there are lots and lots of poor people, and not a lot of money for expensive CAT scans?
The World Health Organization estimates that two thirds of the world’s population has no access to X-ray images. That’s kind of horrifying if you think about it. But it’s also a magnificent opportunity for Nano-X. That’s because the company’s multi-scan X-ray machine is two orders of magnitude cheaper than a high-end CAT scan machine. One of those babies – which you often see on House – can run $1 million or more.
Nano-X’s multi-source device — the one that was just cleared by the FDA — costs about $10,000 to manufacture. And the resulting X-rays are the same quality as from a CAT scan! As any radiologist can tell you, an X-ray is an X-ray. This means that Nano-X’s machine will compete with high-end CAT scanners already on the market. And now that U.S. regulators have cleared the device, you can toss all those fraud claims about Nano-X out the window. This device is legit, and we are about to see a revolution in diagnostics around the world.
$10,000 machine versus $1,000,000 machine?
As many value investors will tell you, cheap is better than expensive. Imagine you’re running a hospital and you’re facing budgetary constraints. And the doctors and patients are complaining because the wait time for a CAT scan is way too long. So would you add another $1,000,000 CAT scanner? Or would you add a few of these $10,000 babies from Nano-X?
So while Nano-X has a very large opportunity in emerging markets, there are plenty of potential buyers here in the U.S. Here’s a horror story of a hospital charging a patient $3,394.49 for an emergency room X-ray. In places like Canada with socialized medicine, patients might have to wait months to get a CAT scan. Desperate Canadians sometimes opt to cross the border and pay out of pocket to get an X-ray in the U.S.
When your high-end X-ray machine runs over $1 million dollars, what’s going to happen? You are going to try to charge a lot of money for the X-rays to pay for your expensive machine. And the wait times are going to be prohibitive. So while much of the Nano-X opportunity is in developing countries where billions of poor people live, I would suggest there’s a sizable opportunity here in the USA, as well as in Europe and around the world.
X-ray machines are indeed ubiquitous. And while many hospitals have CAT scan machines, there aren’t enough to meet the demand. Hospitals that are budget-constrained might prefer to buy a $10,000 multi-scan machine from Nano-X rather than a $1,000,000 CAT scanner from, say, GE HealthCare (GEHC). Indeed, you might want to buy several of the Nano-X machines at $10,000 a pop and use your remaining $900,000+ dollars elsewhere in your hospital.
Why is the Nano-X device so cheap?
The Nano-X machine is based on “cold cathode” technology. With this device, there’s no need for the incredible heat generation (up to 2000 degrees Celsius) that a CAT scan requires. So you know in House when a patient rolls into a massive CAT scan machine in order to peek inside her body? That machine is so large because it has to power up the device for all the X-rays to work.
Nano-X’s machine is skinny and light. It’s designed like the Star Trek bio-bed. It’s based on “cold cathode” technology, which means the X-ray operates at room temperature. There’s no need for firing up a CAT machine to reach 2000 degrees Celsius. (For us Americans, that’s a scorching 3,632 Fahrenheit!)
So that explains the vast difference in price between the machines. Nano-X’s device amps up at room temperature to take its X-rays. As you might imagine, it costs a lot of money to get an X-ray machine to power up to over 3,000 degrees. That’s why your typical CAT scan machine is so big and bulky and expensive.
There hasn’t been a major change in X-ray technology since the rays were accidentally discovered back in the 19th century. Hospitals have just been packing in more and more X-ray devices (the “multi-source”) into one machine, requiring more and more power to generate the photos. But thanks to its cold cathode breakthrough, Nano-X is able to power its X-ray far more cheaply.
How does this “cold cathode” discovery actually work?
Like a lot of “overnight” success stories, the Nano-X breakthrough actually took a long time to happen. In fact it’s been a work in progress for about 25 years. It all started back in 1998, in Japan, with research and development funded by Sony (SONY). Sony was competing with other flat-screen television manufacturers in Japan, and it was Sony’s engineers who made the breakthrough and got their name on all the patents. It took several years and (rumor has it) almost $1 billion to get the cold cathode system to work.
The problem Sony ran into is that the company could never make it cost-effective. $10,000, after all, is very expensive for a flat-screen TV. So after many years of development, Sony decided to cancel the project. But that left this cool tech just sitting there. And the engineers decided to make a shift from flat-screen TVs to high-end X-rays. And all of a sudden, $10,000 started to look really cheap.
A Japanese venture capitalist named Hitoshi Masuya started funding (along with Sony) a new company that would attempt to radically alter the high-end X-ray market around the world. Sony would eventually drop out of the project. And that’s when a serial entrepreneur in Israel, Ran Poliakine, jumped in, and Nano-X (pronounced “Nanox”) was born.
The start-up created an X-ray tube with a semiconductor chip that is made up of 100 million nano-cones. It’s a “cold cathode” tube because no heat is necessary to send electrons from the chip. And since there is no requirement for massive heat generation, the X-ray device also does not require giant cooling mechanisms, either.
The start-up went through several funding rounds, and multiple players in Asia joined in, eager to manufacture all these future devices. While Sony is no longer associated with the project, a lot of big names in Asia are backing Nano-X, including SK Telecom (SKM) in South Korea, Foxconn in Taiwan, and Fujifilm in Japan.
Financials and risk assessment
Biotech investing is the riskiest sector in the stock market, in my opinion. That’s because it can take years for a biotech to get its science approved by regulators. Biotech companies are heavily regulated by the FDA, and that’s the #1 risk in investing in this sector. Until your pharmaceutical or your medical device gets the green light, a biotech company not only has no profits, it has no revenues. So there’s no P/E ratio, because there are no earnings. And the P/S ratio is sky-high.
Nano-X stock has skyrocketed over the last week because this major regulatory risk has just gone away. Now that the FDA has cleared the device, the sales numbers are poised to soar higher. Last quarter the company reported that it has started shipping its device to hospitals in Africa.
At the end of 2022, Nano-X had $77 million in cash and short-term investments. The biotech had $88 million at the end of 2021, so it burned about $11 million last year.
I expect the company’s cash needs will expand as it begins to scale up its business. Nano-X has a tiny debt burden at the moment ($3.5 million in long-term debt), so I would expect that number to go higher as the company will need to raise cash at some point.
The major risk at this point is execution risk. Nano-X is competing against legacy players who will continue to try to sell the high-end CAT scanners (also known as CT scanners) in the marketplace. This bulky equipment is state-of-the-art, and very expensive. Getting a green light from the FDA is just the beginning. Over the next year we will see how successful Nano-X is in making sales around the world — and whether the company and its Asian manufacturing partners can meet the demand.
Millennials ought to make a small investment now
Nano-X went public in August 2020, and due to investor excitement, the stock spiked much higher, even though (like a lot of biotechs), the company had no earnings and barely had any revenues. On the first day of its IPO, the stock came public at $18 a share, and finished its first day at $21.70.
Due to investor enthusiasm, the stock spiked all the way to $94 a share in January 2021. Since then the stock has been killed, making it super-cheap. A year ago I wrote, “while there might be more delays in the short term, I expect that ultimately the FDA will give Nano-X clearance for its device.”
Despite the incredible run-up this week, the stock is still under its IPO price of $18 a share. It’s super-cheap, in other words, and with the FDA clearing the device for sale in the U.S., the future looks very bright indeed.
This is a long-term story and it will take a decade or two to play out. My advice to Millennials is to make a small investment now and keep it under your pillow for 10 to 20 years. It’s not a scam. The FDA clearance validates the science. And I believe NNOX stock has incredible upside, as its technology makes the CAT scan obsolete over time.
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