This week has been somewhat anticlimactic for my portfolio. It started with BiomX's (PHGE) disappointing data readout, leading me to exit my position. Additionally, Nano-X Imaging's Q3 2023 earnings report was rather neutral. Despite this, the week has been fairly good overall. I plan to dive deeper into the PHGE situation this weekend. For now, let's turn our attention to NNOX's earnings results, which warrants both optimism and pessimism. Let's explore these in detail!
Mastering the Art of Patience
Nano-X Imaging (NNOX) recently reported their earnings, missing on both revenue and earnings per share (EPS). However, for investors, this miss isn't a major concern. The company's flagship product, the Nanox.ARC, a cutting-edge 3D medical device, is not yet commercialized and therefore isn't contributing to revenue. The current revenue stems primarily from ancillary services. The company has started generating income from its 2D devices in select African regions (Ghana, Morocco, and Cameron), totaling around $99K.
Additionally, management has indicated that more details on their expansion plans and business model will be shared during their next Investor Day on December 4th, 2023. It's a bit puzzling to have the earnings call and Investor Day so close together, but this could offer a more comprehensive view of the company's strategy.
For those interested in understanding the core investment thesis behind Nanox and the unique market needs they aim to fulfill, I recommend referring to my earlier analyses in my archive. This context will help in evaluating the company's potential despite the recent financials.
Key Financial Highlights & Business Updates:
Partnership with Varex Imaging Corporation: On September 29, 2023, Nanox entered a significant agreement with Varex, a leader in X-ray imaging components. Under this agreement, Varex will supply X-ray tubes for the Nanox.ARC system. These tubes will be incorporated into Nanox.ARC systems globally, with a revenue-sharing payment model based on Nanox’s pay-per-scan revenue.
Revenue Growth: The company generated $2.5M in revenue for the third quarter of 2023, showing a slight increase from $2.4M in the same quarter of the previous year.
Expansion in the U.S.: Nanox established its first commercial site and demonstration center in New Jersey. This site not only operates patient imaging but also showcases the Nanox.ARC systems to medical professionals.
Collaboration with 626 OpCo, LLC: Nanox entered into an Evaluation Agreement with 626 OpCo, a renowned healthcare technology management company. This partnership will enhance services related to Nanox.ARC, including warehousing, installation, training, maintenance, and customer support.
Regulatory Approvals: The Nanox.ARC system received approval from the Ghana Food and Drugs Authority for use at the University of Ghana Medical Centre. Additionally, the system secured regulatory clearance from Israel's Medical Device Division of the Ministry of Health and a free sale certificate.
Progress Toward CE Mark in the EU: The company formally started the process for obtaining the CE mark, an essential certification for selling medical devices in the European Union.
Cash Reserve: Ended Q3 of 2023 with cash, cash equivalents, restricted cash and marketable securities of $95.6M.
This is not a bad quarter, it’s what I expected (which is why I said I was neutral). Erez Meltzer, CEO of Nanox, also expressed his excitement about the future developments, emphasizing the successful deployment of the first U.S. system in New Jersey and the company's ongoing global expansion. It should be noted that the company plans to go into more detail about commercialization for Nanox.ARC globally and their pay-per-scan model in the next Investor Day.
My Take
In evaluating Nanox's performance this quarter, I lean more towards optimism, though there are certainly areas of concern that warrant a careful examination.
The primary issue with Nanox currently is the slow pace of commercialization for the Nanox.ARC. Despite having agreements in place for deployment post-FDA approval, the company is now facing additional regulatory hurdles, particularly in selected African regions. Furthermore, Nanox's low cash reserves are concerning, given that the primary medical device is not yet generating revenue. This raises critical questions for investors about the costs associated with commercialization and the timeline for the company to turn profitable. The path to profitability seems distant, and the expenses related to ramping up operations—hiring a sales team, marketing, onboarding radiologists—could significantly strain the company's finances. These factors, combined with the lack of clarity on several key aspects, form a challenging scenario. The upcoming Investor Day is hoped to shed light on these issues.
On the brighter side, Nanox is making significant strides in global commercialization, particularly in the European Union, the United States, and Latin America. The commencement of the CE mark certification process in the EU is a positive step. In the U.S., the partnership with Varex for manufacturing and the agreement with 626 OpCo for logistical support are major developments. Additionally, the operational status of the New Jersey facility, which is expected to scale up by the end of this year or early next year, is encouraging. What's particularly intriguing is Nanox's potential collaboration with a U.S. government agency for defense-related applications, though details are currently sparse. The versatility and potential revenue streams from such a partnership could be substantial. The Investor Day might reveal more about these initiatives, along with other areas not yet discussed.
My conviction in Nanox remains unchanged. I see it as a high-risk, high-reward investment, either a failure or a massive success. Consequently, I’ve kept my position size below 2%. As I’ve mentioned in previous articles, I’m holding off on increasing my stake until I see tangible results from the commercialization efforts, which have yet to materialize. For now, I’m adopting a wait-and-see approach, observing developments closely.