Developing a new advanced-imaging technology is difficult. Bringing one to market is even harder, as companies must navigate regulatory and commercial landscapes.
I should know -- I developed proof of concept for a novel hyperspectral imaging system in 2012.
Nano-X Imaging (NNOX) has learned these lessons the hard way. The Israeli company captured the imaginations of retail investors shortly after debuting on the public market two years ago but has encountered multiple regulatory and manufacturing setbacks. The shares have declined 40% since their debut.
The company has the ambitious goal of commercializing a new digital X-ray technology. It plans to sell both machines (hardware) and artificial-intelligence tools (software) for interpreting results.
On paper, the system could significantly simplify medical-imaging procedures performed on bulky and costly X-ray and CT machines. It could address the shortage of radiologists, too.
Disrupting an entrenched global market won't be easy. But the task is impossible without the proper regulatory approvals, demonstrating basic manufacturing competencies, and executing a realistic commercial strategy.
The last part doesn't get much attention from investors, but it's worth thinking about more critically.
Focus on Launch Markets
Nano-X Imaging hasn't executed well. In June 2021 the business submitted a 510(k) application to the Food and Drug Administration for its flagship Nanox.ARC system, but regulators requested additional information. In the following months, management continued to tell investors not to worry, but by early 2022 the company decided to withdraw the submission altogether.
The medical-device company has instead filed a Q-submission for a next-generation Nanox.ARC system. This submission process enables companies to solicit feedback from regulators ahead of a formal 510(k) application. This isn't necessarily a poor strategy, but it leaves investors with no regulatory timeline.
In addition to regulatory delays, Nano-X Imaging hasn't demonstrated the ability to manufacture its machines. It has attributed this to supply-chain disruptions. Regardless of the reason, the FDA will likely require information about manufacturing processes in regulatory submissions. After all, the FDA needs to ensure the systems can be reliably produced to the proper specifications.
Despite regulatory and manufacturing uncertainties, Nano-X Imaging has maintained its long-term guidance to have 15,000 Nanox.ARC machines deployed and operational by the end of 2024. That's 16 months away.
More curious is the company's commercial strategy. The tried-and-true approach for launching a new medical device is to focus on one or two markets, iron out the inefficiencies in the commercial infrastructure, and then strategically expand into individual markets over time.
Nano-X Imaging instead plans to place Nanox.ARC systems across the globe from day one.
The business has announced agreements to supply 6,500 machines across 17 different regions. These include countries with developed medical infrastructure, such as Australia, Taiwan, and South Africa. But agreements also cover countries with less robust health care infrastructure, such as Brazil, Belarus, and Peru.
Keep in mind that no systems have been delivered because the machines haven't been manufactured or earned regulatory approvals.
Nano-X Imaging has agreed to supply the machines, which will remain its property. Does it have the resources to repossess systems across the globe if customers fail to pay?
The company has also agreed to provide radiology, maintenance services, and training for each local workforce. That will require speaking many different languages, understanding many different customs, and navigating many tax and payment landscapes.
The commercial strategy also calls into question the ability to deliver on the company's medical-screening-as-a-service business model. What if customers in Guatemala can't perform the minimum number of scans per day written into their contracts? What if customers in Belarus can't pay their invoices? Will a strong U.S. dollar crush this strategy before it ever gets off the ground? What if Nano-X Imaging never earns FDA clearance or demonstrates manufacturing capabilities?
This is why it's important to focus launches on a core market or two -- and to expand only when ready.
Take a 'Show Me' Approach with Nano-X
Investors certainly grasp the disruptive potential of the company's digital X-ray technology. Most people have had an X-ray or CT scan. It probably wasn't the best experience. The Nanox.ARC system could modernize a creaky part of global medical infrastructure and help shorten times to diagnose various injuries and ailments.
But it's always important to remember that you invest in businesses, not technologies. Nano-X Imaging hasn't demonstrated the ability to deliver on its stated goals. It has encountered regulatory setbacks and has no timeline in place for receiving FDA clearance for its flagship Nanox.ARC system. It cannot reliably manufacture machines.
Most curious, the company's commercial strategy hinges on launching globally from the outset. That's a questionable approach for a young, inexperienced company that held only $127 million in cash at the end of June.
Considering international customers represent nearly half its 2024 deployment goal (most of which remains unaccounted for), investors should dial back their expectations for success.
