Israeli medical imaging company Nanox Vision (Nasdaq: NNOX), which is developing inexpensive, lightweight and portable X-ray scanners, rode the Covid tech wave with a highly successful IPO in August 2020. The company achieved a valuation of $800 million and saw its market cap jump to $3.5 billion by early 2021, even though it had no approved product and no revenue.
In August 2021, Nanox acquired Israeli company Zebra Medical Vision, which develops AI systems for reading scans, for $200 million in shares. On paper, the two companies have ideal synergy, with Nanox producing innovative medical imaging equipment that would make X-ray scanning more accessible and at a lower price and Zebra autonomously reading the results through AI powered computerization.
But since then, Nanox’s share price has collapsed by 84% and currently has a market cap of $560 million and by 60% since it acquired Zebra.
According to certain market sources, the story goes like this: through phenomenal public relations, Nanox succeeded in holding an IPO on Wall Street and its share price rose far beyond the value of its technology. In the next stage, Nanox used its shares, with their inflated price, to acquire a company with real activities that had fallen on difficult times, and paradoxically became the owners of real activities.
Delving more deeply, it seems that the story is more complex. Nanox’s activities are perhaps more real than the market gives it credit for, and Zebra may actually be the less stable activity. But together are they still worth $560 million - significantly more than other Israeli medical device companies in much more advanced stages? The burden of proof rests with the merged company.
The IPO was an exceptional event on the capital market
Nanox was founded in 2012 by serial entrepreneur Ran Poliakine, 54, who had previously founded Powermat, which pioneered wireless charging solutions for mobile phones. Poliakine founded Nanox based on technology for televisions developed by Sony and adapted for radiology, together with its original inventor Hitoshi Masuya.
Nanox’s IPO in August 2020 was considered an exceptional event on Wall Street because a company with no product with marketing approval or even broad scale clinical trials indicating efficacy, and of coursed no revenue, was able to raise $165 million at a company valuation of $800 million. This after the company had previously raised $138 million as a privately-held startup from such investors as Korea's SK Telecom, Industrial Alliance, Yozma Korea, Foxconn, Fuji, and Jin Ji Full.
The lead consultant for the IPO was A-Labs, managed by former senior executives at Israeli tech company Emblaze, identified with its founding entrepreneur Eli Rifman, who was convicted and imprisoned over a decade ago for offenses including fraud and forgery. A-Labs, which received millions of dollars for its services to Nanox, has strenuously denied any connection to Rifman, although its founder and CEO Doron Cohen says that Rifman is a friend and sometimes advises him as a friend. As far as is known, Nanox currently has no connection with A-Labs.
Lost 60% of its value within two weeks
Nanox’s IPO was led by well known US banks like CIBC, Cantor Fitzgerald and Oppenheimer. The research departments of some of these banks even published analysts reports about the share with a price significantly higher than the market price.
And indeed, within a short while of its Nasdaq IPO, Nanox’s share price began to soar, rising by 200% in the first month, perhaps due to declarations of intent to brings thousands of devices to the market through deals that were already signed.
The upward trend changed sharply in September, a month after the IPO, among other things due to two reports by short-seller investment firms that claimed Nanox’s device did not work and that the distributors who has signed agreements with it were not really distributors. They even called Nanox’s device a "fraud." Within two weeks, Nanox lost 60% of its market cap.
The rollercoaster in the share price continued at the start of 2021 as it began to climb again to a new peak valuation of $3.5 billion in February 2021. In April, Nanox reported that it had been awarded FDA approval for its first generation product, which proved that it worked, even if it hadn't reached the full promise of the second generation device. The installation of the company's first 1,000 devices, as promised in its prospectus in 2020, is also yet to happen.
Later in the year, the FDA rejected Nanox's application for its second generation product and requested additional information. Thus the company's product on which it has built its marketing plans is still not ready.
Gradually, the share price began to fall, and even the acquisition of Zebra Medical, despite the major logic behind it in terms of Nanox's business model, did not halt the slide. On the contrary, it was interpreted by some investors as an indication from Nanox that the revolution it was starting was not sufficient.
Founder and CEO Ran Poliakine recently stepped down from managing the company and Erez Meltzer, the former CEO of irrigation equipment giant Netafim and Africa-Israel Investments and chairman of Hadassah Hospital, stepped in to replace him. Meltzer has inherited a company rich in cash with a respectable market cap, and now it is up to him to prove its worth.
This is what we know about Nanox at the present time.
The second generation device is still in development
The promise made to investors by Nanox at its IPO was a digital revolution in the X-ray imaging sector by making a device that was smaller, lighter, cheaper and produced less radiation. There were those in the market who wondered why with such a technology as this, which is so good and accessible, why one of the giants in the field was not developing something like this or seeking to acquire Nanox. Such a question in this instance is relevant because Nanox's value derived from this technology alone and no other existing activities.
Nanox's first generation device has received the FDA's marketing approval. This product can undertake a two-dimensional local scan. But approval of the second generation device that Nanox wants to market was rejected and it was asked to make additions and amendments. In the coming year, Nanox is not expected to receive FDA approval for the second generation device, which is still in the final stages of development, but it is expected to sell them in developing countries, where regulation is simpler. Only in 2023, does the company plan entering the US market.
Business Model: Payment for use
Nanox has an interesting business model. The company plans manufacturing hundreds and perhaps even thousands of devices in the coming year. Nanox already has orders from distributors, through which the scanners will be given to customers on a pay as you use basis or medical screening as a service (MSaaS) business model.
Every end-user or customer will be required to commit to a minimum of seven scans per day at $14 per scan, and this price might subsequently rise. Nanox will also offer to read the scans at an even higher price through USARAD, which it acquired last August, and its radiology-as-a-service business model. Nanox could also market its first generation device, which is approved by the FDA, although its capabilities are much more restricted.
If the devices are distributed and the customers pay up then Nanox will already have a revenue stream in 2022. In the absence of a strict regulator, customers will have to judge if the device scans well and brings benefits that justify the price. Until they vote with their pockets, it's impossible to know.
It should be mentioned that other Israeli companies, at a similar stage to Nanox ahead of commercial operations of a medical device, and even with FDA approval and clinical trials and peer criticism backing their claims, are traded at lower market caps than Nanox. Entering the market with an innovative medical device is known as a long, complicated and very expensive process.
The question of Zebra Medical's revenue
Sharp eyed observers would have noticed that until today Nanox has not published anything about Zebra Medical's revenue, which is today called Nanox AI. This suggests that we are not talking about impressive numbers. Zebra Medical was founded and originally managed by the entrepreneur Eyal Gura and today Nanox AI is managed by Zohar Elhanani, and it is considered one of the most impressive digital health companies to have been founded in Israel. Zebra Medical pioneered computerized imaging, an area which will certainly greatly develop in the future. Its technological achievements and R&D collaboration contracts saw it listed time and again as one of Israel's most promising startups.
But sometimes companies are ahead of their time and that can harm their activities. Zebra seeks to help hospitals identify patients requiring attention while still waiting in line to have their scans read by a doctor. It seems there aren't many patients needing that and insurance companies were not prepared to pay for computerized scan reading to identify such rare cases.
Zebra tried to change its business model and switched to reading scans already conducted by health funds to identify any illnesses that the patients did not know that they had. For example, it is possible to scan all the breast images conducted because of respiratory problems and identify risks like osteoporosis before it becomes severe. There is more demand for this solution and the company recently received two insurance CPT codes from companies that intend paying for its services.
There is also a potential future synergy. If Nanox is able to produce cheap scanners for places that don't currently have them, then somebody has to read them and it is possible that Nanox's customers will use computerized reading, at least for simpler scans. This is on condition that the scan images and the computer reading are on level with what is available in the market.
In other words, if Nanox succeeds, then Zevra can piggyback on the success. But nothing is certain.
Questions still left open
Nanox still has some other problems including an investigation by the US Securities and Exchange Commission (SEC) into the company's declarations about the pricing of its product. Nanox also faces several lawsuits from investors following the dramatic fall in the company's share price and must answer the questions posed in the reports by short-seller investment firms.
Another problem is that Moshe Mualem, a major shareholder in Nanox, is pushing the share price down. Mualem received his shares in a compromise settlement with Poliakine over other companies in which they were partners. Mualem has a 4.4% stake in Nanox, after selling more than half of his shares.
For investors who have been burned by the steep fall in Nanox's share price and those buying the company's stock now, the big questions are whether the company will receive FDA approval for its second generation device, whether it can generate revenue from the developing world, and whether it can increase the activities of Zebra Medical in the US.
Published by Globes, Israel business news - en.globes.co.il - on January 26, 2022.
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