Medical Systems Technology

 Performing surgery safer and faster with robotic vision

The Affordable Care Act (you know it as Obamacare) has been under attack for seemingly years now.  The debacle of the national health exchange rollout is just the latest of a series of missteps. Politicians are still pushing for its reform or repeal. But it’s not going to happen.

Health users and health providers will have to deal with that reality.

It includes hospitals. They constitute the backbone of the American healthcare system. There are 5,800 hospitals in this country housing 48,000 operating rooms. Their emergency rooms were inundated with almost 130 million visits in 2010 (the most recent year for which the Centers for Disease Control and Prevention have data).

And I have the distinct impression that hospital administrators no longer know what to expect given our new healthcare system.

As an investor, I think it’s pretty simple. If I were evaluating a hospital, I’d first look at volume. That’s how hospitals are paid, per procedure. And with Obamacare being implemented, I’d also look at the quality of the services. Why? Because Obamacare will be rewarding hospitals with good services.

And it will be punishing those with poor services. In fact, it has already started. The government has been cutting Medicare reimbursement since last October to hospitals with excessive readmission rates. In 2015, hospitals that still have high rates of hospital-acquired infections will see a further cut.

And, finally, as a stock investor, I’d make sure the hospitals were signing up enough people through the new health exchanges.

Hospitals right now are caught in a tricky transition period. They still have to chase volume but they also have to begin paying more attention to quality.

It’s a brave new world. Volume today versus quality tomorrow. It’s enough to make a hospital administrator’s head spin.

Already five major hospitals have closed their doors. And many more have cut back on their services to save money on costs. In September, for example, Vanderbilt told government officials that it will cut more than 1,000 jobs by the end of the year, partly due to the uncertainties of healthcare reform.

Hospitals have to figure out how to stay financially solvent during this transition. For many, it won’t be easy. But I have a suggestion.

Buy equipment that increases volume and at the same time upgrades quality.

I don’t have a laundry list of such medical equipment. They don’t grow on trees. But there is one company that has caught my attention.

You wouldn’t have heard about it for two reasons. It’s a tiny, privately held company. And the company hails from Israel.

So now let me give you a third fact about this company: It’s accepting investors in its latest round of funding.

The company, called Medical Surgical Technologies, or MST for short, has recently raised about a million dollars.

We’ve made a special deal with its lead investor, OurCrowd, a crowd funding platform for accredited investors only.

They’re giving exclusive access to new Members of the Chairman’s Circle to invest. No individual and no professional VC company at this time will be allowed to invest. More on the terms of the deal in a couple of minutes.

Right now I’d like to tell you more about this remarkable company and I’d like to start with its product.

MST makes a camera that automatically follows every subtle movement of a surgeon’s tool. It looks like this…

On the left is the Robotic Manipulator and on the right is the Video Analytics Processing Unit. MST describes the system as a “video analytics driven robotic manipulator.”

It also comes with a Ring Control Unit that the surgeon wears, typically on the fourth finger of her right hand (assuming she’s a righty). The ring instantaneously points the camera in the direction of the surgical tool being used.

How this is being done now, in the vast majority of cases, is that a surgeon’s assistant holds a camera and, as best as possible, tries to keep up with what the surgeon is doing.

The picture is often shaky and the image blurry. It’s so unreliable that sometimes the doctor’s instrument is pointed in one direction and the camera in another.

The result? A far-from-perfect working environment for the surgeon that can result in disrupted workflow.

Now look at how MST’s system works in action…

The image is clear and steady. The surgeon is proceeding without having to worry about a meandering camera.

This is what laparoscopic surgery should look like. By the way, laparoscopic surgery describes minimally invasive surgery requiring use of thin instruments and a video camera.

Doctors who have tried MST’s video system like it not only because they can do a better job. It also reduces their fatigue and the surgery usually goes faster.

From a patient’s perspective, it helps prevent adverse outcomes.

But it’s the hospital that would be paying for the system, so let’s delve into why hospitals would buy it.

I’ve already hinted at the reasons. But let me repeat them: money and quality of services.

Improved services are going to become increasingly important under Obamacare. But it’s the return on investment that should drive hospitals to purchase these systems.

So, this is how the math looks…

According to a study by Ronald D. Shippert in 2005, each minute at the operating table costs a hospital $66. (It’s most likely much more now!)

Based on this conservative $66 per minute cost, quicker operating time saves from $300 to $650. Not having to use an assistant to hold the camera saves another  $115 to $332.  On the expense side, the disposable ring costs $100 per operation.

MST’s video system costs $50,000. It saves $600 per procedure. Here’s the math. Average operating room (OR) time savings is $475 per procedure. Average labor savings is $222 per procedure. And it costs $100 for MST’s disposable ring.

These savings can generate a return on investment within less than a year of procedures (avg. sales price of $50K / average savings of $600 = 83 procedures).

So it would take  83 procedures to cover the cost of the purchase or fewer than three operations a week.

So, after the first year, the hospital makes well over $50,000 a year and perhaps two or three times that amount in pure profit while improving performance.

MST’s timing couldn’t be better. In addition to the Obamacare factor, the global market for laparoscopic-related devices and disposables has grown quite large. The total global market for devices clocks in at an estimated $2.3 billion and disposables at $1 billion (derived from the number of operating rooms and laparoscopic surgeries).

It’s still early days for MST. The company knows exactly what it has to do and seems very capable of pulling it off, but nothing is guaranteed. And there are bound to be unexpected twists and turns. Nor can you count out setbacks.

With that said, here are MST’s five big remaining tasks.

1. Continue to prove its system really works. So far, 18 surgeries have been performed, all in Europe by five different surgeons. Two of them are on record giving MST high grades. Says one: “With this device I am always in control. A single surgeon can do a procedure by himself. This is a very promising and very nice device. Says another: “I love this device. The stability of the video camera in 3-D is going to make this device even more important.”
2. All five surgeons give it high marks regarding system intuitiveness and ease of use, image stability and system efficiency. My advice to MST? Keep getting more testimonials.
3. Protect the technology.  MST has submitted 27 patent applications. Three have been approved so far. Twenty-four more to go.
4. Business development. MST has to attract strong partners and get sales going, both in Europe and in the U.S. It says it’s on track to do this in 2014. It is talking with several large corporations about distribution and manufacturing relationships. Next year it will be expanding its clinical sites in Europe (generating increased sales). And it also plans on opening its first clinical location in the U.S. in 2014.
5. Gearing up production. All systems are go. MST’s technology is ready for production.  The first batch of 10 systems is being manufactured in a “serial production setting.” They should be ready by February 2014. The first ones out the door will be shipped to Europe, the others to the U.S.

Why serial production? It entails a scalable manufacturing process (as opposed to how prototypes are often built). It takes longer to produce the first batch this way because it requires setting up the entire manufacturing process for the product. But it’s worth it. Using Israeli subcontractors, MST will be able to scale up to 100 systems a year very quickly.

During that time, MST will be setting up the infrastructure of a worldwide network of manufacturers that will enable it to expand and reduce costs while scaling up.

The “cost of goods sold” is about $22,000 with the first batch. MST projects that it will go down to about $12,000 or less when scaling up, a profit margin of 72% to 80%.

So far so good: Sales of these 10 devices will bring MST $500K in revenue, not an insignificant sum.

The company is doing everything a startup needs to do at this very early stage to become successful. Much of the credit goes to MST’s CEO, Motti Frimer.

I had the pleasure of meeting Motti a couple of months ago, something OurCrowd arranged for us and a few other interested parties. Motti is a sharp guy, with a CEO-worthy professional demeanor and a thoughtful answer to every question. His resume is quite impressive, having graduated from the MIT of Israel and then worked for one of the country’s finest defense companies, Rafael.

So How Do You Invest…

The good news here is that you’ll be investing alongside OurCrowd, same deal, same terms, but only if you mention that you’re a new member of Chairman’s Circle. As I said before, the deal is closed to everybody else.

You’ll be buying Series B Preferred Shares. They earn an interest rate of 8%, which you’d get when the company either IPOs or gets bought out. The price of your shares will be determined by the company’s current $9.6 million valuation. For example, $96,000 would give you shares amounting to 1% of the company’s total equity.

If you want to buy more shares at the company’s next fund raise, you can. Be aware they could cost more than shares from this round. How many shares can you buy? Continuing the 1% example, you can buy the number of shares that will bring your stake up again to the 1% level.

When do you convert your Preferreds to Common Shares? Anytime you want, but of course, the best time is in the event of liquidation. The best kind of liquidation event would be an IPO. So let me give you some examples of what your initial investment might be worth if MST eventually does an IPO. Remember, at this point, that’s a big if. We simply don’t know what will happen down the road and an IPO is certainly something you can’t count on. What I’m going to do right now is a purely hypothetical exercise.

So, hypothetically, let’s say that MST was given a valuation of $80 million for its IPO. You’d be taking home 8.3 times your original stake. Or perhaps MST was given a $150 million valuation. Then your profit would come to 16.9 times your investment. Moving up the ladder, let’s imagine that MST’s valuation reached $350 million. You’d be making 36.5 times your initial grubstake. And if MST is worth $800 million at its IPO, your gains would come to an astonishingly 83.3 times your investment.

By the way, I’ve taken these valuations from recent IPOs by companies from Israel and also by medical or healthcare companies. These are real-world examples of IPO valuations. But, let me repeat one more time, it’s impossible to predict what valuation MST would have at its IPO if it even does one. We’re just taking a peek into some possible IPO scenarios, no more no less.

So, back to the deal terms…

The minimum amount you can invest in MST is $10,000. This is a modest amount for a Series B investment. If you’re interested, you need to email MST’s lead investor, OurCrowd, or call the company at 858-546-4316. Ask for our colleague there, Jon Davidi, or email him at jon.davidi@ourcrowd.com.

In order to review additional diligence on MST or to eventually invest, you must first register on the OurCrowd site as an accredited investor. It’s free and takes 30 seconds. Go to ourcrowd.com and hit the “JOIN” button. The site will then take you through a three-step process. First step: Enter you nationality. Second step: Provide your contact information. Where it asks who referred you, enter Jon Davidi. Third step: Confirm your income or individual net worth to qualify as an accredited investor.

If you call OurCrowd, Jon will answer any of your questions about MST. Once you commit to invest, the OurCrowd finance team will send you documents followed by wiring instructions.

This special offer, available only to new Chairman’s Circle Members, is only valid until the end of the year. So I suggest you act quickly to lock in your investment in this remarkable company.

Important note to subscribers: Investing in startups is inherently risky. We recommend setting aside a small portion of your portfolio for such private investments. Then spread it out across 10-20 companies over the course of a year. This strategy minimizes risk. We also recommend contacting a professional advisor if you have questions, as we cannot provide personalized investment advice.