LESS PAIN, MORE GAIN: TREATING SKIN CANCER WITH SENSUS HEALTHCARE INC.

90 Day Update: 

Since our original profile, Sensus Healthcare, Inc ($SRTS) has only looked better and better. This microcap growth bet closed out 2018 with record revenue of $26.4 million, representing  28% growth over the previous year. Cash flow turned positive, and a substantial equity raise continued to have no negative effect on the stock price, as the shares soared towards $8 for the first time. The icing on the cake is that Sensus has just announced FDA Clearence for it’s new, Sculptura Radiation Oncology System. This new system represents the posibility of breaking into a whole new market in medical radiation, and could mean millions more in diversified revenue for the growing microcap.  

What if I told you that I could sum up an exciting investment opportunity for you in just three letters?  Here they are: T.A.M.

TOTAL ADDRESSABLE MARKET.

This is the total size of a market that a product or service could be applied to. So, for example, if I were opening up a business that sold wheelchairs, and I wanted to go national, then my TAM would be equal to all mobility impaired adults in the United States. That would be a nice market, right?  What if I told you that Sensus Healthcare, Inc, is targeting an even more juicy market than that?

In fact, Sensus is targeting a market so big that sooner or later, it could effect just about every adult in the United States.  Now what, in this modern era of division and strife, could every adult in the United States have in common? How about skin.

 Sensus Healthcare engineers, manufactures and sells dermatology machines that focus on very common skin problems such as Non Melanoma Skin Cancer (NMSC). Just how big is this market? According to skincancer.org, an estimated 4.3 million Americans each year are diagnosed with Basal Cell Carcinoma, the most common kind of skin cancer. With the Baby Boom Generation only getting older, and many sun soaked rock concerts and surfing safaris on their resume, experts predict that skin cancer cases will skyrocket in frequency over the next twenty years.  

Sensus is a micro cap company out of Boca Raton, Florida that has designed and successfully launched a range of machines aimed at this growing market. While initial growth has been strong, the powerful demographics related to skin cancer  could mean, “you ain’t seen nothin’ yet” in terms of revenue.

THE SKIN YOU’RE IN

Long term success for Sensus investors would mean that the Sensus management team is successful in changing the current paradigm related to skin cancer treatment. Sensus’s machines (the SRT-100 line) use pinpointed, targeted radiation to kill nascent cancer cells.  While there are dozens of studies proving efficacy for this approach, it has not been the norm.

Today most skin cancers are treated through Mohs surgery.  This technique, created by Dr. Mohs in 1938, often involves taking a scalpel to the patient’s face, very often to the nose. This is a very effective technique, and produces cure rates of 95% or above. However, it may also result in significant pain, discomfort and scarring; it’s not uncommon for the patient to leave the office missing a large chunk of his face.

The Sensus approach allows the patient to remedy his cancer with no pain, no scarring, and 0% chance of disfigurement.  The downside is that cure rates have historically been slightly lower than Mohs, and a Mohs surgeon may be able to explore facial tissues more deeply to ensure that every little bit of cancer is removed in one sitting. Although radiation has long been shown to offer greater than a 90% cure rate, the higher precision and cure rate with Mohs tipped the balance in  favor of this procedure for many years.

If radiation therapy has existed for years, and dermatologists have consistently chosen Mohs surgery instead of the less painful alternative, why would the founders of Sensus believe that they could suddenly change the paradigm?

CH, CH, CHANGES…

The answer boils down to three key changes. Changes in the patient population, changes in technology, and changes in the business of dermatology.  The founders of Sensus saw opportunity in these changes; maybe you will too.

1. Change In Patient Population.  When we are busy fighting for survival every day in our work environment, we like to daydream by envisioning our fantasy retirement. Surely we will look just like those happy silver foxes we see in the Centrum ads: playing tennis, walking on the beach, socializing. And it is very likely that many of us will be active, healthy, seniors. For a while.  But the reality is that, with many seniors currently living well into their 80’s or even 90’s, our health system is being swamped by legions of frail, unhealthy old folks. Anyone who has cared for an aging parent or grandparent knows how tough those last few years of life can be. Loss of mobility, loss of hearing or sight, and even loss of lucidity are quite common.

The Sensus opportunity centers around one simple question.  If you could avoid putting your 92 year old grandma under the knife, wouldn’t you?   If someone you love already is incontinent, half blind, and demented, do you really want to wheel them out of the dermatologist’s office missing a quarter of their nose?

The aggressive approach of Mohs surgery will always make sense for many “junior seniors,”  you know, the kind you see on TV running the Supreme Court or the U.S. Senate. But for millions of feeble elderly, greater comfort and less trauma may trump all other considerations.

2. Changes in Technology. While radiation therapy has been an option for skin cancer for decades, the technology hasn’t always been this easy to use in the comfort of a dermatologist’s office.  Sensus’s Chief Technology Officer, an Israeli engineer by the name of Kal Fishman, has pioneered a variety of advances, that, taken together, make radiation easier to use, more thorough, and more cost effective than the equipment of the past.  Mr. Fishman and Sensus hold a variety of patents on these technological advances, and the company is relentless in “raising the bar,” having already released several updated models in it’s short corporate history.

3. Changes in the Business of Dermatology.  Note that I said “business” of dermatology, not “medicine of dermatology.”  Most lucrative derm practices these days consist of one or two licensed physicians,  maybe one or two nurses, and a whole lot of poorly paid young girls in white coats who inject, peel and burn all day long in what is effectively an ATM machine masquerading as a medical practice.  Real medicine doesn’t equal real money for most derm practices. Additionally, your average employed Mohs surgeon commands more than half a million dollars in annual salary (Becker’s Hospital Review).  

Given these facts, many dermatology practices today refer out skin cancer patients. They are effectively bleeding patients that they can’t find an easy way to profit from.  Enter the SRT-100. This is an expensive machine, but once purchased, it can be run by a medical assistant earning $15 an hour. It can be run again and again, all day long, weekends, nights, without limit. Good luck if you can find a Mohs surgeon to do that for you.

When a practice decides to purchase an SRT-100, the dynamic changes. Now they can keep each and every patient that walks through the door. They have added another service to the practice in a rapidly growing market, without the medical risk and financial risk of Mohs surgery.  Even though the Sensus offerings are not cheap ($100,000+) most derm practices have already purchased a variety of machines in that price range, and anything is cheaper than hiring a full time Mohs surgeon.

These three factors have meant early success for Sensus. In just a few years of operation, they have already sold more than 400 machines globally, and revenue grew at a 32% clip in the latest quarter.  The company estimates that they have only penetrated about 1% of the total market so far…

BUT WAIT!!! THERE IS MORE…

Once you research Sensus Healthcare Inc, you will clearly see that business development and salesmanship is baked into the young company’s DNA. CEO and lead founder Mr. Joseph Sardano is a tireless promoter who constantly criss crosses the United States seeking to spread the message that there is a better way when it comes to skin cancer.  Both Mr. Sardano and his executive team have a rock solid career track record of selling big machines at big prices. But any salesman knows that, the more good products you have to sell, well, the more sales you make.

In that light, Sensus is not content with simply targeting the skin cancer market.  The same machine that is used to treat cancer can also be used to treat Keloid Scars, a very common skin condition in people of color.

In addition to the SRT-100 (and subsequent advances on the basic SRT-100) the company has recently launched a line of cosmetic lasers. As CEO Sardano has grown the company’s sales team, this product launch will give salespeople a full arsenal of products to sell. Once a sales person has a relationship with a medical office, why stop at hawking just one product?

The company has inked a number of international partnerships to begin capitalizing on the vast international opportunity that exists. Recently, Sensus has opened a research and development hub in Israel, which gives the company outstanding logistical reach into Europe and the Middle East. The new office also provides Mr. Fishman access to the high grade tech talent that has made Tel Aviv famous.

As if all that weren’t enough, Sensus is on the verge of boldly entering a whole new radiation market: IORT Radiation to treat Breast Cancer and other types of cancer.  While this machine will represent an entirely new market in terms of marketing and revenue potential, the technology is not entirely new to Mr. Fishman and the Sensus engineering team; the company is simply leveraging it’s existing radiation knowledge and infrastructure to seek additional revenue sources. And what a revenue source it would be!  If the Sculptura launch is a success in 2019 and beyond, each sale could add as much as $1.4 million in revenue per sale. For a company that will do less than $30 million in revenue for 2018, a successful launch of this product could mean 40 or 50% revenue growth IN ADDITION to the ongoing revenue growth achieved through the dermatology business.

If even some of these new product launches find success, it’s not unrealistic to think that Sensus could triple or quadruple revenue in just a few years.  In these kinds of scenarios, growth in share price typically mirrors revenue growth…

DUE DILIGENCE

While Sensus presents a bright investment outlook for many potential shareholders who seek long term growth, there are a few risks that must be weighed against the exciting prospects outlined above.

1. This company still doesn’t make money.  Sensus management has chosen to grow the company at a rapid clip, which has meant a lot of investment in new technology, new staff, and new marketing campaigns. These investments have paid off in the form of rapid revenue growth, but profit has so far been elusive due to constant reinvestment into this growing company. The company recently had a very successful capital raise, meaning that corporate coffers are now well loaded for continuing investment, and corporate debt is virtually zero.  However, investing in a young, “hyper growth mode” company has its risks, and isn’t for everyone. If you are looking for steady cash flow and slow but steady growth, look elsewhere.

2. Sensus is very dependent on the efforts of the founding members. Mr Sardano has been relentless in his promotion efforts on behalf of shareholders, and Mr. Fishman only seems to be getting warmed up in terms of his medical engineering prowess. However, what would happen to shareholders’ interests if something were to happen to one, or both, of this dynamic duo?  Hard to say.

3. Microcaps are microcaps. The share price gyrates a lot, often for no obvious reason. Sensus could be punished (or rewarded) for developments in the biotech category that have nothing at all to do with individual corporate performance.  Even with solid leadership, innovative technology, and very favorable demographics, investing in Sensus is not for the faint of heart.

So the next time you go to the beach, play a game of tennis, or enjoy a bike ride on a  gorgeous day filled with sunshine, just remember those three little letters: T.A.M. Total Addressable Market.  

Then remember Sensus Healthcare, Inc.

DISCLOSURE:  The Sick Economist owns shares of $SRTS