Sensus Healthcare (SRTS)

I’ll admit it. I own entirely too many shares of Sensus Healthcare (NASDAQ: SRTS).

Even while markets experience volatility and face many factors that are creating a formidable wall of worry, I think it is best to continue to focus on fundamental research. This ultimately helps investors not get scared out of promising investment opportunities.

As it relates to Sensus, my scuttlebutt research and channel checking indicates that revenue growth is accelerating within Sensus’ core superficial radiation therapy (“SRT”) equipment which is used by dermatologists and radiation oncologists to treat non-melanoma skin cancers and keloids.

What kind of growth are we talking about? Over the last couple of years, Sensus recorded around 30% growth rates. The install base of its SRT machines should expand to greater than 400 by year-end 2018, and most sales are trending towards its feature-rich SRT-Vision system with an $375,000 list price. Sensus’ base line is called the SRT-100 ($200k list price), and provides basic SRT treatment, but omits features such as image-guided therapy.

Meanwhile, the company introduced the SRT-100+ ($250k list price) which adds incremental features to the SRT-100, including cloud-based electronic medical record access and remote treatment monitoring, and made its first commercial sale in early November 2018.

Sensus also introduced a line of lasers for various cosmetic treatments, and CEO Joe Sardano said three units were in the backlog and ready to be delivered in Q4 2018. The key to Sensus’ success is expanding its sales force, product line and geographic reach. I’m expecting lasers to contribute $100k to Q4 sales.

Based on my research, I believe Sensus can deliver 20+ SRT-Vision units in Q4 which equates to $7.5M in Q4 revenue. While I don’t have a good view into SRT-100(+) sales, it appears like Sensus was selling at least 6-12 units per quarter since Q1 2017, while Q3 2018 came in at only 3 SRT-100 units. Based on comments from management, it appears as if former SRT-100 customers are trading up to the feature-rich SRT-Vision line, and the SRT-100 sales are generally trade-ins and sold used.

In addition, only the SRT-100 is approved in various international markets such as China, Mexico and others, so its a bit opaque around what the SRT-100 sales activity will be in any given quarter. That said, it is becoming a de minimus part of the business, but I’m expecting that Sensus and its channel partners can place 5 SRT-100(+) in Q4 which is a seasonally strong quarter. If we use an $150k ASP (to account for trade-in’s and used sales), that adds another $750k to Q4 sales.

Finally, Sensus has a very disruptive product – an intraoperative modulated radiation therapy device called Sculptura — hanging in the balance for FDA 510(k) clearance with the FDA. Sensus’ CEO Joe Sardano indicated the list price will start at $1.45 million, and the company is currently manufacturing 4 beta models to be placed at luminary institutions with IRB status at “very special” pricing.

I think IORT represents a compelling upside option for SRTS shares given the large addressable market for the equipment. Mr. Sardano suggested the reception for IORT at the ASTRO conference was overwhelmingly strong, and radiation oncologists were eager to use the device.

Given SRTS trades at $5.75 as I write this narrative, equating to a $92M market cap, or $75M enterprise value after backing out $17M in net cash, I don’t think the IORT is priced into SRTS shares at current levels. To that end, if Sensus can deliver $8.5M in Q4 revenue ($7.5M SRT-Vision sales, $750k SRT-100(+) sales, $100k laser sales, and $150k in services sales), it would equate to 31% growth YoY and drive about $27M in full year 2018 revenue. At $8.5M revenue at 65% gross margin, that yields $5.5M in gross profit dollars, and I’m assuming about $5M in total operating costs, driving a $500k pre-tax operating margin, or 3 pennies EPS per share (versus a loss of 3 pennies in Q4 2017).

I believe investing in microcap stocks before a GAAP profitability inflection point and/or growth acceleration is one method to drive “alpha” in any market environment. That is the set up we could see for Sensus as it drives patient and dermatologist awareness about its products, and enters the radiation oncology market for IORT.

I’m not sure if or when Sensus will receive FDA clearance to market IORT commercially in the United States, but the company has been actively hiring qualified sales personnel from companies such as Elekta and IBA. If Sensus can sell all 4 “beta” IORT’s to the luminary institutions, and layer in 4+ commercial sales of Sculptura in 2019, coupled with continued 30% growth in SRT sales, Sensus has a path to $45M in 2019 revenue which would drive 67% growth over 2018 revenue ($27M, my estimate), and generate GAAP profits.

How much is the stock worth? I think there is a path to 5-7x 2019 revenue, which would imply a $270 million market cap at the midpoint. There are about 16M shares outstanding, and 2.3M warrants with an exercise price of $6.75 which expire on June 2 2019. If we include the 2.3M warrants in the share count, I’m estimating that there is a path to $15 per SRTS share (not including current cash or cash from warrant exercises in the valuation) if the market warms up to SRTS growth opportunity in SRT and IORT.

One note: there is an overhang from a recent sell-side analyst report who questioned the relationship with Sensus’ largest customer, a turnkey provider of SRT treatments. After considerable due diligence on this relationship, I believe it is a normal and customary relationship, and that the SRT-Vision machines that are being put in the field are highly utilized, and when coupled with additional reimbursements by the CMS, it appears as if the SRT machines throw off enough cash flow to scale the relationship considerably in 2019.

Disclosure: Long SRTS