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TitanMedical:DissectingValue

Summary

• Titan Medical is a pre-revenue corporation that is planning to launch its Minimally Invasive Surgery (MIS) Robot: The SPORTTM Surgical System

• Titan has favorable market conditions as the medical robotics industry is estimated to rapidly grow at a CAGR of 22%

• The MIS robotic surgery space is dominated by Intuitive Surgical’s da Vinci®. However, SPORT’s price tag is half of da Vinci’s, and it is smaller and portable, giving it a distinct competitive advantage

• Using a data-driven approach incorporating market factors, we estimated SPORT’s 15 year cumulative sales to be 1965 units

IntroductionTitanMedical(TSE:TMD)operatesinthemedicalroboticssurgeryspace.In2017,itplanstosubmit510kandCEMarkapplicationsfortheSPORTSurgicalSystem(SinglePortOrificeRoboticTechnology),whichisasurgeon-controlledsingle-incisionroboticplatformincorporatinga3Dhighdefinitionvisionsystemaccompaniedbyanergonomicandeffectivesurgeonworkstation.Thisportablemachineisdesignedtoperformcomputerassistedroboticsurgery.SPORTisexpectedtobepricedlessthan$1MUSD,whichisabouthalfthepriceofdaVinci,theroboticsurgicalsystemthatcurrentlyholdsamonopolyinthisspaceinUSandEurope.GiventhatTitanMedicalispre-revenue,muchuncertaintyhassurroundeditspotentialmarketopportunity.Here,NextLevelAnalytics(NLA)outlineswhatTitan’ssalescouldlooklikeovera15-yeartimeframe.Wehaveusedananalytical,data-drivenapproachtoestimateunitsalesoverthisforecast.BackgroundRoboticSurgeryIndustryTheglobalmedicalrobotindustryisforecasttogrowby22.2%CAGRto$11.4Bin20201.Thisgrowthisdrivenbyincreasedtechnologicadoptionbyhealthcarefacilitiesaswellastheneedtocutdownonhealthcarecosts.Robotsarebecomingmoreprecise,andpatientsoftenviewhealthcarefacilitiesthathaverobotsastechnologicallyadvanced.Infact,intheUnitedStates,havingamedicalrobotatahospitalisamarketingtacticaspatientsoftenperceiveitasanindicatorofsurgicalquality2.Surgeonsoperateinasimilarway,causinghealthcarefacilitiestopurchasemedicalrobotsfortalentacquisition

1http://www.marketsandmarkets.com/PressReleases/medical-robotic-systems.asp2http://www.healthline.com/health-news/is-da-vinci-robotic-surgery-revolution-or-ripoff-021215#4

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purposes3.Formanysmallandmid-sizedhealthcarefacilities,existingmedicalrobotsmaycomewithapricetagthatistoohightobeaffordable.TheMinimallyInvasiveRoboticSurgeryLandscapeMinimallyInvasiveSurgeryMinimallyinvasivesurgery(MIS),incontrasttoopensurgery,isperformedbymakingmultiplesmallincisionsthroughtheskin.Athin,tube-likeendoscopiccameraispassedthroughoneoftheincisions,andamagnifiedviewofthesurgicalareaisdisplayedontoamonitorintheoperatingroom.MISsurgeriesaretraditionallyperformedbyhand,withthesurgeonusingavarietyofdifferentlaparoscopicinstrumentsthroughtheincisions.Intuitive’sdaVinci®SurgicalSystemIntuitiveSurgical(NASDAQ:ISRG)isamedicalroboticscompanythatoperatesoutofSunnyvale,California,USA,withamarketcapitalizationof$24B(June2016).ItcommercializedthedaVinciSurgicalSystemin2000,whichisastationaryrobotthatperformsMISprocedures.Itfeaturesthreesurgicalarmsthatholdmedicalinstruments,andafourtharmforanendoscopiccamera.Thesurgeoncontrolsthemachinefromaconsole,whichprovidesa3Dimageoftheprocedure.Sinceitslaunch,IntuitiveSurgicalhasdominatedtheMISroboticspace:thereisaninstalledbaseof3660unitsworld-wide.ThepricetagforitsSiversionisaround$2M(alldollarfiguresarequotedinUSD).Althoughwidelyadopted,thedaVincihasbeencriticizedforitscost4,5aswellasconcernsaboutperformance6,7.Titan’sSPORTTMSurgicalSystemTitanbeganoperationsin2008inToronto,Canada.UnlikedaVinci,theTitanSPORTSurgicalSystemperformsMISproceduresusingasingleincision,andhasonlyonearm.UniqueadvantagesofSPORTarethatitissmallandtransportable.ItwouldalsocosthealthcarefacilitieshalfthepriceofadaVinciatanestimatedpricetagof$1M.Bothmachineshavesimilarsurgicalcapabilities,however,SPORTspecializesinsimple,highfrequencyprocedureswhereasdaVincifocusesoncomplex,lowfrequencyprocedures.Titaniscurrentlyintheprocessofcommercializingthisproduct,astheyareundergoingtheirHumanFactorsandUsabilityTrials.TheyplantofileforFDAapprovalinthesecondhalf2017,andareanticipatedtobegindeliveriesaroundlate2017orearly2018.

3https://www.advisory.com/daily-briefing/2014/04/22/when-a-small-hospital-wants-a-surgical-robot4http://www.ft.com/cms/s/0/f13a18be-e1cb-11e4-bb7f-00144feab7de.html#axzz4CJw0s0vL5http://www.healthline.com/health-news/is-da-vinci-robotic-surgery-revolution-or-ripoff-021215#66https://www.lawyersandsettlements.com/articles/da-Vinci-robot/davinci-lawsuit-robot-2-18655.html?utm_expid=3607522-13.Y4u1ixZNSt6o8v_5N8VGVA.0&utm_referrer=https%3A%2F%2Fen.wikipedia.org%2F#.UXbJQytVTeI7http://surgicalwatch.com/davinci-robot/lawsuit/

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SPORT’sMarketPotentialPre-revenuecompaniesareoftenchallengingtovalue,largelyduetothedifficultyofforecastingsales.Astherearenohistoricalnumberstoreference,therecanbealotofuncertaintyregardingmarketadoptionofanewproduct.Withthegiveninformationonthemarket,landscape,andplayers,weattemptedtousearobust,data-drivenapproachtogetanaccurateestimationofSPORT’smarketpotential.Webeganbyestimatingmarketsize,andthentranslatingmarketsizeintoyearbyyearprojectionsofunitssold.Datawasaggregatedprimarilyfromthefollowingsourcesforthisanalysis:CenterofMedicareandMedicaidServices(CMS),AmericanHospitalDirectory(AHD),Intuitive’sannual/quarterlyreports,andIntuitive’slistofdaVincisurgeons.EstimatingMarketSizeWeconsideredthreedifferentmarketsegments:UShospitals,USambulatorysurgerycenters(ASCs),andhospitalsinEurope.ThesemarketsaretheimmediateaddressablemarketsforTitanastheyarepursuingFDAapprovalandCEmark.

FIGURE1:MARKETSEGMENTS

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USHospitalsWeusedprobabilisticrecordlinkagetomergefourdatabases.Usingthelocationofeachhospital,wewereabletogetregionalaverageincomeandregionalpopulation.Ninetypercentofourdatabaseaccuratelymatchedthroughrecordlinkage,withtheremainingmanuallymatchedorimputed.OurconsolidateddatabasehadalistofallUShospitals(5661total)with23associatedfields:

WethendeterminedwhichhospitalshadadaVincimachine,usingthelistofIntuitivesurgeons’employers.Wecreatedseveralfinancialratiosfromthedataandidentifiedanumberofrelevantfactorsusingalogisticregression.Thelogisticregressionmodelused“havingadaVincimachine”(0or1)asthedependentvariableandthevariousfactorsandfinancialratiosastheindependentvariables.WedevelopedaReceiverOperatingCharacteristic(ROC)totestthequalityofourlogisticregression.TheAreaUndertheCurve(AUC)was0.93outof1.00,indicatingaverygoodmodel.WethenadjustedourfactorstoaccountforSPORT’scapabilities(e.g.,focusonhighervolumeprocedures)andprice(e.g.,financialratiosweremodifiedtoaccountforthedifferenceinpricebetweenadaVincimachineandaSPORTmachine),andusedthecoefficientsfromthelogisticregressionmodeltoestimatetheprobabilityofahospitalpurchasingaSPORTmachine.Thesumoftheprobabilitiesfromallhospitalsistheexpectedmarketsize.Resultsaresummarizedbelow:

1. APC = Ambulatory Payment Classification (Classification for out-patient hospital procedures) 2. DRG = Diagnostic Related Group (Classification for in-patient hospital procedures)

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FIGURE2:USHOSPITALSRESULTS

USASCsWethenlookedintoASCs.AlthoughASCshavealowerbudgetthanhospitals,andveryfewhaveadaVincimachine,ASCscanbeagreattargetforSPORTconsideringSPORT’seconomicaladvantage.WeusedCMSdataon4300ASCs,andtobeconservative,wefilteredoutASCsthatdidnotmeetaminimumlaparoscopicsurgeryvolumeof230procedures/year(whichistheaveragenumberofprocedures/yearforadaVincimachine)tojustifythepurchaseofaSPORT.Withtheremaining1700ASCsweusedourcalculatedhospital-equivalentperformancemetricsfortheseASCs.WematchedtheASC’stothehospitalpredictionprobabilitiesbytheirperformancemetricsusingthek-NearestNeighborsalgorithm.ThisgaveusalistofASC’sandtheirestimatedprobabilityofpurchasingaSPORTmachine.ThetotalmarketsizeforASCswas181ASCs.EuropeanHospitalsTheonlyinternationalsegmentweconsideredwasEurope,whichwasdonebecauseTitaniscurrentlyseekingCEMarkapproval.FortheEuropeanmarketwedidnothavecompletedatasetscomparabletothoseavailableintheUS.WethususeddaVinci’sEuropeansalesfiguresasaproxy.DaVinci’sEuropeansalesasapercentofUSsalesareonaverage26%.WeappliedthisnumbertoSPORT’shospitalmarketsizetogetthemarketpotentialof193hospitalsforEurope.

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FIGURE3:EUROPEANHOSPITALSRESULTS

Thetotalpotentialmarketsize(N)acrossallthreesegmentsforTitanis1118healthcarefacilities.Sincethedatabasesforhealthcarefacilitiesincludes2014data,thisisthemarketsizeinyear2014.Althoughthemedicalroboticsmarketisgrowingrapidly,partofthisgrowthstemsfromdiffusionofproductsinthemarket.Inordertoremainconservative,weassumedalong-termannual2%growthonthemarketsize,inlinewithUSAandEuropeanGDPgrowth.Thus,weassumedthatthemarketpotentialvalueNwillgrowat2%yearoveryearwhenprojectingunitsales.

SalesProjections8TheestimatesfromtheprevioussectionrepresentedtotalmarketpotentialforSPORTunits.However,thesesaleswouldnotoccurinstantly.Thus,weprojectedyearbyyearsalesforTitan.Thefollowingisasummaryofthesaleschannelsweconsidered.8Inthisanalysis,Year1isdefinedasThefirstyearofsalespostregulatoryapproval.

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FIGURE4:SALESCHANNELSCONSIDERED

WeusedaBassModeltoestimatemarketdiffusion.TheBassmodelisusedtoprojectadoptionofnewproducts,andincorporatesthreeparameters:marketsize,N,(generatedfromthehospitalanalysisabove);acoefficientofadoption,p(representingthosewhopurchasetheproductthroughdirectsalesefforts);andacoefficientofinitiation,q(representingthosewhosepurchasedecisionsarestronglyinfluencedbythepurchasedecisionsofothers).OurcoreassumptionwasthatSPORT’sdiffusionwouldfollowthesamepatternasdaVincisincetheyaresimilarproducts.ThepandqcoefficientswerefittedtodaVincihistoricalsales,andweusedtheNvaluesforeachofthesaleschannelsfromthemarketpotentialanalysis.

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FIGURE5:SAMPLEBASSMODEL

FirstUnitSalesWestartedbyprojecting1stunitsalesforallthreemarketsegmentsusingtheBassmodel.Theresultsofour15-yearbassmodelprojectionsaresummarizedbelow:

FIGURE6:FIRSTUNITSALESRESULTS

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SecondUnitSalesSomehealthcarefacilitiesthatpurchaseadaVincimachinealsopurchaseasecondorthirdoperatingunit.Therefore,weassumedthatthiswouldalsobethecaseforSPORT.Weusedourlogisticregressionmodeltoestimatethemarketpotentialforsecondunits.Toremainconservative,weassumedthatafacilitywouldnotpurchasemorethantwooperatingunits,andthatonlyUSHospitalswouldbecandidatesforpurchasingasecondunit.Toquantifyhowmanyhospitalswouldpurchaseasecondunit,weadjustedprocedurevolumeforeachhospitalbysubtractingthenumberofproceduresbasedonSPORT’scapacityfromthetotalnumberoflaparoscopicproceduresdoneatthathospital.Wegeneratedforecastsfortheprobabilityofpurchaseofasecond,giventhatthehospitalhadalreadypurchasedaunit,usingthelogisticregressionmodel.Wecombinedtheseestimateswiththeprobabilitiesofpurchasingafirstunittofindtheprobabilityofpurchasingasecondunit.Thesumoftheprobabilitiesacrossallhospitalswastheexpectedsecondunitmarketsize,whichwastreatedasthemarketpotentialwhenforecastingtotalsales.WethenappliedtheBassmodeltogenerateyearoveryearprojections.Toremainconservative,weassumedthat2ndunitpurchaseswouldonlyoccurtwoyearsafterSPORT’scommercialization.Theyearbyyearsalesof2ndunitpurchasesaresummarizedbelow:

FIGURE7:SECONDUNITSHOSPITALSALESRESULTS

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ReplacementSalesSPORTunitshaveausefullifeofapproximately5years9,whichisthesameasdaVinci.Thus,replacementsalesalsoneededtobebuiltintotheprojections.The5-yearlifespanwasoperationalizedas20%oftheinstalledbasebeingreplacedeveryyear,starting5yearsafterthefirstsale.Wealsoapplieda5%“churnrate”10whichreducedthenumberofreplacementsales.Thisledto444replacementunitssoldwithinthe15-yeartimeline.

FIGURE8:REPLACEMENTSALESRESULTS

9http://www.ct.gov/dph/lib/dph/ohca/condecisions/03-30049dec.pdf10Percentofmachinesthatareattheirendoftheirusefullives,butwillnotbereplaced

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TotalResultsOverall,ourprojectionsshowthatTitancansell1965unitswithina15-yeartimeframe.ThefollowinggraphshowsTitan’syearbyyearsales,brokendownbysaleschannels.

FIGURE9:YEARBYYEARSALESESTIMATION

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Weranasensitivityanalysisonour15yearcumulativesalesfigure.Titan’ssalesestimatesrangefrom1202(mostconservative)to2237(mostoptimistic).

FIGURE10:SENSITIVITYANALYSIS

LimitationsAswithanyanalysis,therearelimitations.Giventhedepthandbreadthoftheanalysiswehaveconductedhere,therearecertainapproachesorassumptionsthathaveweaknesses.Wehavetriedtomitigatetheseweaknessesasmuchaspossible.Thefollowingisatablelistingwhatweconsiderourprimarylimitationsinthisanalysis,andhowwehavemitigatedtheimpactoftheselimitations.

FIGURE11:LIMITATIONSANDMITIGATION

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AnalysisandConclusionWecombinedbothanalyticaltechniquesanddeepunderstandingofmarketconditionstoprojectTitan’smarketpotential.Giventhegapinthemarketforalow-costMISsurgicalrobot,webelievethatTitancanfulfillSPORT’smarketpotential.Withuniquefeatures,focusonhigh-volumeprocedures,andportability,theSPORTsurgicalsystemisanattractiveproductforhealthcarefacilitiesthatwanttocapitalizeonthegrowingtrendofmedicalrobotics.Althoughasecondmover,webelievethestageissetforTitan,givenfavorablemarketconditions.SPORThasauniquecompetitiveadvantageandwilladdresshealthcarefacilitiesthathavebeenuntappedbydaVinci.ThisanalysisonlyfocusesontheUSandEuropeanmarkettobeconservative.However,therewillcertainlybeopportunitiesforSPORTinothercountries,particularlyastheyestablishapresenceinthismarket.Furthermore,theanalyticaltechniques,assumptions,andgrowthratesweremadetobeconservativetoavoidanypossibleoverestimationofthemarket.Increatingprojectionsforapre-revenuecompany,wehopethatthesenumberscanbeusedbyinvestorstounderstandthemarketpotentialandvaluethecompany,orbyTitaninternallytounderstandtheirdemand.DisclosureNextLevelAnalytics(NLA)providesconsultancyservicesforTitanMedicalandreceivedfundingforthisstudy.ManyfactorsorrelatedassumptionscouldcausetheCompany’sactualresults,performanceorachievementstobemateriallydifferentfromanyfutureresults,performanceorachievementsthatmaybeexpressedorimpliedwithinthispresentation,including,withoutlimitation,thoserisksandassumptionslistedinthe“RiskFactors”sectionoftheCompany’sAnnualInformationFormdatedMarch30,2016(whichmaybeviewedatwww.sedar.com).