In September 2013, the FDA released its final rule concerning the identification of medical devices. Under its terms, manufacturers must label the devices with a unique identifier and register the identifier with the FDA administered Global Unique Device Identification Database. The FDA has established a set of compliance dates that will phase-in the requirements of the new rule in stages, over a period of 7 years, with the completion of the first phase set for September 2014. This regulatory ruling presents VeriTeQ Corp. (VTEQ), a company that operates in the unique device identification space, with a potential revenue stream far in excess of its current market capitalization. In addition, the company's other operations stand to double this potential. In short, if the company can meet its own projections, its five year revenues could total half a billion dollars. Here is how.
First, What Does VeriTeQ Produce?
VeriTeQ develops a number of implantable devices based on radio frequency identification (RFID) technologies. The current focus areas of the company include an implantable unique device identification (UDI) technology and a radiation dosimeter technology.
The first of these technologies, the UDI, is the one that will address the FDA mandate outlined in the introduction to this piece. The UDI is a miniature, heat resistant device (see below image) that breast implant manufacturers insert into the implants.
Once inside the body and when scanned using a handheld device also manufactured by VeriTeQ, the UDI records and reports a 15-digit identification number. This identification number links to a database that contains the manufacturer's details, a lot number and a batch number. In the event of a recall, as with the Poly Implant Prothèse implants in Europe during 2010, a simple scan would be all that is required to determine whether the patient's implants are subject to the recollection. The technology is FDA cleared and in August 2013, VeriTeQ announced a supply partnership with Establishment Labs, a Costa Rican company that manufactures breast implants under the brand Motiva.
The second technology, the radiation dosimeter, is an FDA marked and CE cleared RFID implant that measures, reports and records the levels of radiation a patient is subject to during radiotherapy and CT scans. The images below illustrate both the external and internal models of the technology.
As with medical device identification, this area has also been subject to regulatory scrutiny over the last few years. In 2009, for example, the FDA issued an alert relating to the use of CAT brain scans in a number of top hospitals across the US. The investigation found at least 385 patients that underwent CAT scans at the hospitals involved had been subject to excessive radiation. It turned out to be a fault of the machines involved, not the hospitals administering the scans, but the end result to the patients was an increased susceptibility to issues caused through radiation poisoning. VeriTeQ's radiation dosimeter wirelessly reports radiation dose delivery in real time, eliminating the possibility of excessive dosage. Further, in the instance of radiotherapy, it identifies and reports the location of the target tumor.
Currently, the majority of the opportunity stems from the UDI and the radiation dosimeter. VeriTeQ has made a number of projections based on market size and penetration.
First, a look at the UDI projections. Revenue streams include the chips, which VeriTeQ sells to the device manufacturer for $10-12, and the scanners, which sell to clinics and hospitals for $500. The company has projected first year revenues from breast implants of $11.54M, from artificial joints of $4.96M and from vascular ports of $2.08M, totaling $18.59M. The company expects gross profit during the first year to total $9.87M from the UDI across all three applications. The projections come in the form of a five-year financial proforma prepared in September 2013, meaning it is reasonable to assume that year one refers to fiscal 2014. From year one, the projections increase based on market penetration at a rate of 10 percent per year with a penetration cap at 50 percent.
During the fifth year, fiscal 2018, VeriTeq projects $46.56M in breast implant revenues, $15.29M in artificial joint revenues and $8.36M in vascular port revenues, totaling $70.22M. The company expects gross profit during the fifth year to total $44.51M.
Now, a look at the radiation dosimeter projections. Revenue streams include a one dose (skin adhesive) reader kit, priced at $499, and a DVS (implantable) kit, priced at $1,200. VeriTeQ projects zero dosimeter revenues during fiscal 2014. During year two, fiscal 2015, the company projects dosimeter revenues of $8.85M and a gross profit of $6.19M. At an incrementally increasing penetration rate capped at a 30 percent market share, VeriTeQ expects to generate $154.01M in revenues from its radiation dosimeter during fiscal 2018, with a gross profit of $107.81M.
In total, from both the UDI and dosimeter revenue streams, VeriTeQ projects five-year revenues of $542.22M, with a gross profit of $358.80M. All of these projections are publicly available here.
As with any development stage company, investment in VeriTeQ involves substantial risk. While recent events in the medical implant industry suggest there could be a market for devices the company produces, this remains as yet unproven. The company is basing its financial projections on widespread market acceptance of both the UDI and the radiation dosimeter, which may never materialize. The UDI in particular competes with simple direct marking of devices, which may make it difficult to sell to device manufacturers. Having said this, the UDI costs just $10.
Further risk lies in dilution of any early stage investors' holdings. Of the company's $7.2M in total assets, 92 percent is intangible, consisting of various patents protecting its product design and manufacture. VeriTeQ's current cash position suggests additional funding will be required to meet the market potential of its products, which will likely come in the form of equity financing. While in the long term this financing might add value, in the short term it will be dilutive.
In addition,The company's intellectual property rights are also at risk under the terms of an asset purchase agreement VeriTeQ entered into with SNC Holding Corp in December 2012. SNC is the company from which VeriTeQ acquired its radiation dosimeter technology, and as a result of the asset purchase agreement, owns approximately 19 percent of VeriTeQ. Under the terms of the agreement, VeriTeQ must meet certain royalty obligations and make sublicensing payments to SNC between now and 2017. If it fails to meet either of these requirements, the intellectual property rights associated with the technology revert to SNC. Such a reversion would make it difficult for the company to meet its dosimeter revenue projections. Mitigating this risk however, is the aligned incentives of the two companies resulting from SNC's large position in VeriTeQ.
The final rule issued by the FDA concerning medical device identification does not require implants to be identifiable. This final ruling differs from the FDA's initial indications, to which VeriTeQ refers on numerous occasions in its SEC filings and investor relations material. This could have an effect on the company's ability to meet its UDI revenue projections.
At its current market capitalization, $7.6M at Friday's close, the market for VeriTeQ stock is likely to remain illiquid for the foreseeable future. Illiquidity could make it difficult for investors to sell their stock in the event of a decline.
Finally, the company has just 9.3M shares outstanding and a float of just 2.52M. The laws of supply and demand subject the stock of a company with a float of this size to high price volatility.
If VeriTeQ meets its own projections for the coming five fiscal years, the company could generate revenues exceeding half a billion dollars. At its current market capitalization, there could be huge upside potential in its stock. Having said this, investors should be wary of blindly following VeriTeQ's projections. They require widespread market acceptance of the company's products and, until this materializes, are just numbers.
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