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Nanox Imaging, the young vendor which hopes to bring 3D medical imaging to a bigger audience with a new, more affordable modality has recently released its first quarter 2022 results.

The figures were a mixed bag. Revenues of $1.8m marked a considerable improvement on no revenue for the comparable quarter in 2021, and a fair improvement on the $1.3m taken in the prior quarter. Of this revenue $1.7m came from teleradiology services stemming from Nanox’s 2021 acquisition of USARAD, while another $0.1m came from AI solutions brought in by the vendor’s acquisition of Zebra Medical Vision last summer. As such the vendor generated no revenue from its flagship Medical Imaging-as-a-service product.

Although revenues grew, so did losses, with Nanox reporting a net loss for the period of $21.7m, $9m greater than for the same period last year. The Israeli vendor pins this loss on expenses related to the consolidation of its acquisitions.

The Signify View

It is easy, and very often unfair, to take an innocuous moment and bestow it with undue significance, but on occasion, for those scrutinising a company’s strategy, those moments are hard to resist. So it was during the analyst call for Nanox’s first quarter results. As the Q&A portion of the call began, the first question pertained to the expected timeframe for the regulatory approval of the vendor’s key, multisource scanner. The device around which the company’s entire business is hung.

“For some reason I can’t hear you” came the response from Nanox CEO Erez Meltzer.

The question was asked again.

“I can’t hear for some reason” Meltzer repeated, “There’s a lot of noise in the background.”

“Can you repeat the question?”

Eventually, the message got through, and Meltzer offered a response, albeit one that failed to elaborate on details given elsewhere. It would, however, have perhaps been easier for Nanox had these technical difficulties not been resolved.

The Nanox Keystone

The Israeli vendor’s strategy is, after all pinned to the success of its Nanox.ARC multisource tomosynthesis system. This scanner, which is reliant on the vendors’ proprietary cold-cathode X-ray source, sits at the heart of an ecosystem that brings together scanners, AI tools, cloud-based imaging software and teleradiology services into a single, affordable, ongoing service. Approval for this tomosynthesis system, has however not been forthcoming. Originally, Nanox planned to deploy scanners in the first half of 2021, this date got pushed back and last spring was revised to a “late 2021” launch. Now, having submitted 510(k) documents to the FDA in June 2021, responded to a request in August, withdrawn the submission in January 2022, applied via a different pathway in January 2022 giving details of a refined version of the scanner, the vendor is in dialogue with the FDA and expecting to submit supplementary information and an entirely new 510(K) application in the future. Notably, no time frame, other than noting the FDA’s 510(K) process usually takes three to 12 months, has yet been given for these stages.

But without approval, other than revenues which are, quite frankly, insignificant for a vendor that raised more than $160m in its IPO, the company cannot hope to stem its losses and begin generating more palatable returns. With approval, however, the vendor can look to quickly scale, utilising its new chip fabrication plant in South Korea to produce ARC scanners in significant numbers. These can be deployed for minimal upfront cost for the customer, with Nanox instead deriving revenues from their use of its teleradiology services, AI tools, and software packages, as well as paying a fee for each use of the scanner. This is when Nanox hopes to be able to begin justifying the excitement and investment it has enjoyed.

Agree to Disagree

There is, on the face of it, considerable appetite for this approach. Nanox has already entered into 11 agreements to deploy 6,500 systems in 17 countries, which, according to the vendor’s Form 20-F will bring in a minimum of $187.5m annually. There are some caveats to this rosy response, however.

Many of these agreements were made in 2020. At this time there was a lack of clarity surrounding the expectations for Nanox’s ARC scanners, with since-removed images claiming capability equal to tomography rather than tomosynthesis systems.

The customers’ expectations about the Nanox.ARC may have been quite different to the actual systems that Nanox is (assuming FDA approval) ultimately able to deliver. Another pressing concern for Nanox is that in some cases the initial terms of these early agreements are quickly approaching. With the earliest coming in February 2023. Given Nanox’s difficulties in bringing the products to market, and the now clearer understanding of what the ARC scanners are actually capable of, it is possible that many of these early customers will choose not to continue with their initial orders, an eventuality given more credence by the fact that the vendor only signed two new agreements in 2021, with none more recent than October last year.  It is also interesting to note that, despite Nanox’s self-prescribed mission of bringing medical imaging to parts of the world where such capability is scarce, many of these deals are with distributors and resellers in developed markets. Not only does this raise questions about claims from Nanox and others who plan to ‘democratise medical imaging’, illustrating that perhaps the cost of the hardware itself is only one reason for the lack of adoption, with lack of infrastructure, lack of healthcare professionals and lack of onward treatment facility all also hindering the uptake of medical imaging. The lack of orders also raises questions about Nanox’s stated aim of expanding the total market rather than competing with the existent incumbents. The vendor’s 11 initial agreements suggest that this opportunity for market expansion might have been overestimated.

A final facet to these agreements is Nanox’s acknowledgment that, according to the recently submitted Form 20-F, these customers should provide Nanox with a letter of credit or financial guarantee, however, as Nanox notes: “There can be no guarantee that our counterparties will be able to obtain such letter of credit or financial guarantees”. A note which raises questions about the ability of these entities to ultimately pay those minimum fees on which Nanox is counting.

Straws on a Camel’s Back

In isolation, none of these challenges are too much to overcome, but combined and compounded leave Nanox looking like a vendor with a forward looking concept, which aims to usefully connect separate pieces of the medical imaging puzzle in a helpful and ultimately noble way. Assuming the technology is legitimate, and the most scathing early criticisms prove to be unfounded, there are still so many disparate strands, with numerous barriers in each, that must be woven together before Nanox’s vision can be realised. As these numerous individual tasks are countenanced, not only will money begin to run out, but other factors such as the languishing share price and the declining employee numbers will start to eat away at morale and diminish any hope, making success seem even further out of reach.

One comment in a press release from the vendor noted that 15 years and more than $1bn has been invested in developing the cold-cathode X-ray source technology that underpins Nanox’s scanners and is so pivotal to the company’s future success. Impressive figures no doubt, but also numbers which highlight how underwhelming the company’s Q1 figures really are. As Nanox stated in its 20-F filing, “We anticipate that our future cash requirements will continue to be significant” and “we expect that we will need to obtain additional financing to implement our business plan”. At the end of 2021 the company had marketable securities, cash and cash equivalents of $156.6 million, and given the upward trend in losses and the further delays to the launch of Nanox.ARC, the company may need additional funding before the year’s out. Yes, there may be a bright future for the would-be-disruptor’s vision, but investors have only so much patience and requests for more time and money will be met with increasing disdain if Nanox cannot show any progress quickly.

Instead, it is looking more likely that, while FDA approval will eventually be forthcoming, profitably connecting its hardware with the revenue-generating service side of the business looks too much of a mountain to climb. The vendor still has a chance to silence its critics, but time is running out. Every results announcement without a huge increase in revenue, and every month that passes without good news about FDA approval, is another step closer to the vendor selling up and letting investors take the hit.

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This Insight is part of your subscription to Signify Premium Insights – Medical Imaging. This content is only available to individuals with an active account for this paid-for service and is the copyright of Signify Research. Content cannot be shared or distributed to non-subscribers or other third parties without express written consent from Signify Research. To view other recent Premium Insights that are part of the service please click here