Cabot Small-Cap Confidential Issue: May 4, 2023

The Big Idea

There are around 30 million people in the U.S. suffering from chronic back pain.

In 15% to 30% of these cases the root cause is sacroiliac joint (SI) dysfunction. It can lead to constant or intermittent pain in the lower back, butt, pelvis, groin and/or legs. It can also cause numbness, weakness and/or tingling in these areas.

SI joint pain often makes it hard for people to sleep, sit for long periods of time and simply go from a sitting to a standing position.

The challenge treating it is that SI joint dysfunction can be confused with other conditions of the spine, pelvis, and hip. Often there are other issues with the hip and/or spine that coexist with SI joint pathology.

That’s because there are many other structures in addition to the SI joint in the lower back and pelvic area that can cause pain. A short list includes a slipped disk, hip issue, arthritis, degenerative disk disease and more.

To really nail down SI dysfunction as a source of lower back pain patients need diagnostic imaging (X-ray, cat scan, MRI), a diagnostic injection of the SI joint (local anesthetic to see if pain is reduced by over 50%) and/or a series of provocative Si joint tests (doctor manipulates joints to determine if SI joint is the cause of pain).

Once the SI joint is determined to be the issue, the next step is to figure out how to fix it.

That’s where today’s company comes in. It specializes in minimally invasive Si joint fusion using a very specific type of proprietary implant and surgical screws. It just reported a terrific first quarter of 2023, and the trends look good for the rest of the year.

This is the company’s story.

The Company

Si-Bone (SIBN) is a small MedTech company (market cap of $858 million) specializing in implants that solve issues of the sacropelvic anatomy, which includes the sacroiliac joint (SI) and pelvis.

The company has developed minimally invasive, titanium surgical implant systems (a triangle-shaped implant as well as screws) to address sacroiliac joint (SI) dysfunction and other unmet clinical needs in pelvic fusion, fixation and management of pelvic fractures. It has also developed instruments to help place implants during surgery.

Si-Bone’s first product (2009) was the first generation iFuse Implant System to fuse the SI joint and treat SI joint dysfunction.

It has since launched three new FDA-approved product lines, including iFuse-3D (2017) for pelvic trauma, iFuse-TORQ (2021) for adult spinal deformity and iFuse Bedrock Granite (2022) for sacroiliac fusion and sacropelvic fixation.

In the U.S. these four solutions are cleared for application across SI joint dysfunction and fusion, adult deformity and degeneration, and pelvic trauma.

Altogether these three markets are worth around $3.7 billion, assuming 470,000 annual procedures in the U.S. Less than 10% of revenue comes from international markets.

Si-Bone believes its solutions are the only minimally invasive products for SI joint fusion available in the U.S. that are supported by clinical evidence, including the INSITE, iMIA, SIFI, LOIS and SALLY studies. Ongoing studies to build additional credibility include SALLY (five year), SILVIA and SAFFRON.

There are over 100 published papers on the benefits of Si-Bone’s technology, all of which have helped the company expand coverage to more than 300 million people in the U.S. So far, over 80,000 procedures have been completed by more than 3,000 surgeons.

Given the recent jump in the price of SIBN shares and potential market volatility following the Fed’s 25bps rate hike yesterday, we’ll start with a half-sized position.

Platform & Solutions

iFuse & iFuse 3D: Sacroiliac (SI) joint fusion is an operating room procedure done with general or spinal anesthesia. The iFuse/iFuse3D Implant System requires an incision about one or two inches long on the buttock. Then a special system will guide instruments to prepare the bone for placement of the titanium implants across the sacroiliac joint. It’s typical to use three iFuse/iFuse 3D implants during the procedure.

The actual devices are machined triangular titanium implants that resist twisting and rotating and help stabilize the SI joint. A porous surface promotes bone growth on/into the implant that results in fusion. It has 3 times the strength of a standard, 8mm surgical screw.

iFuse 3D is the second generation iFuse implant launched in 2017. It combines the triangular cross-section of iFuse with a proprietary 3D-printed porous surface and windows (i.e. fenestrated design). These surfaces harvest bone as it is impacted through the ilium (upper part of the hip bone) to increase fusion.

iFuse-TORQ: This threaded implant (fancy name for a screw) is intended for use in pelvic trauma (broken pelvis) as well as applications in SI joint dysfunction and degeneration. As compared to competing products the implant is roughly four-times as strong in bending and requires 10 times the rotational force to insert. These characteristics come from the large surface area and porous structure and give surgeons a ton of confidence in its holding power. In 2022 FDA clearance extended the use of iFuse-TORQ for acute, non-acute and non-traumatic fractures, as well as for the Bedrock technique, which means using it in a certain trajectory across the SI joint.

iFuse Bedrock Granite: Launched in May 2022 this implant provides sacroiliac fusion and sacropelvic fixation. It has a machined titanium core surrounded by a fusion sleeve that offers both significant surface area and self-harvesting cutting flutes. In layman’s terms, the screw is extremely strong and is designed to promote bone growth on and in the device. This helps to solve the problem of other solutions, which are prone to “backing out.” Given its ability to drive fusion and fixation iFuse Bedrock Granite was designated as a Breakthrough Device by the FDA and qualified it for a New Technology Add-on Payment (NTAP) of up to $9,828 for eligible cases. The NTAP is effective until October 1, 2025.

Surgical Tools: In addition to implant Si-Bone sells placement tools used during surgery that are compatible with Medtronic’s surgical navigation systems and Mazor surgical robots.

Growth Initiatives

Grow Surgeon Base: Si-Bone’s products are relatively new to the market and there is some education required for surgeons to understand the benefits of the procedures and implants. The company is investing heavily in this area, aided by clinical evidence and a portable surgeon training simulator. While the Q1 active surgeon growth rate of 40% (to 950 active surgeons) is probably inflated due to Q1 2022 being so depressed during the pandemic the big picture trends in surgeon growth are still very positive. Si-Bone has targeted 5,300 surgeons in the U.S. that could benefit from its solutions, as well as roughly 2,200 internationally.

Grow Procedure Volumes: More surgeons and greater awareness means more procedures and more revenue. In Q1 procedure volume grew 48% to over 3,500. Again, Q1 of 2022 was a depressed quarter. But it appears procedure trends remained strong exiting the quarter, implying Q2 should be another good quarter.

Grow The Salesforce: Targeted salesforce expansion and opportunistic cross-selling represent clear growth opportunities.

Market Expansion: Si-Bone has done a good job growing its addressable market by introducing new solutions (TORQ and Bedrock Granite). There remain opportunities to penetrate deeper into the target markets for these solutions (adult deformity and degeneration, pelvic trauma).

The Business Model

Si-Bone develops and sells medical devices, primarily in the U.S. through a direct sales force but also through agents and distributors both in the U.S. and abroad. Revenue depends on the volume of procedures performed and pricing per procedure. The company uses social media and other digital media to raise patient awareness.

The Bottom Line

Si-Bone grew 2021 revenue by 23% ($90.2 million) and 2022 revenue by 18% ($106.4 million). EPS in 2021 was -$1.71 and in 2022 EPS was -$1.79.

The company used some of the downtime during the pandemic to develop new solutions, build clinical evidence and get the word out to surgeons. Those investments appear to be bearing fruit now.

In Q1 2023 (reported Monday afternoon) revenue jumped 46% to $32.7 million, beating by $3.6 million. EPS of -$0.41 improved by 24%. The company had 950 active surgeons (+40%) in the U.S. and 3,500 procedures in the quarter (+48%).

Management increased full-year guidance by the amount of the Q1 beat to $128 - $131 million (+20% to 23%), suggesting there’s room to outperform expectations even as management is opting to take a conservative tone with respect to the rest of the year. Coming out of the quarter Si-Bone has great momentum due to rising procedure volumes, a larger product portfolio and expanding use of certain products for procedures that they weren’t necessarily expected to be used for.

Risk

The biggest risk is that there is some medical trend/innovation that pushes surgeons away from the types of procedures for which Si-Bone’s implants are designed.

Other forces (say, a pandemic) cause procedure volumes to dry up or become lumpy and unpredictable.

New products have been well received by surgeons and have expanded Si-Bone’s addressable market. Any reversal in these positive trends would curb growth.

Failure to gain FDA/foreign regulator approval for future innovations would also halt the company’s progress.

Competition

Globus Medical (GMED), Orthofix (OFIX), Medtronic (MDT) and SIGNUS Medizintechnik (Germany) also sell screw-based implants. Other competitors sell allograft bone implants, but those fall under a different form of FDA regulation than the type of hardware-based implants Si-Bone sells.

The Stock

Trading Volume: SIBN trades about 500,000 shares daily. We shouldn’t move the market, though given the market cap of only $866 million the stock will be pushed around when bigger investors make moves.

Historical Price: SIBN came public at 15 in October 2018. The stock traded in the 14 to 23 range until the pandemic struck (was at a high just prior) then fell to a low of 7.2 during the market crash. The pandemic bull market peak was 37.2, struck in May 2021. Over the next 12 months SIBN retreated, falling to just below 12 in May 2022. Shares made a run-up near 20 by the end of October, but sold off again in November, this time finding support around 11.2. SIBN perked up in early-January 2023 then launched to a 12-month high in the low 20s after the Q4 2022 earnings release on February 27. After consolidating for a few weeks in the 18-20 range, SIBN moved back above 21 on April 21. Monday’s Q1 2023 earnings helped the stock open above 23 on Tuesday. The stock was steady in the 24-25 range yesterday.

Valuation: SIBN currently trades with an EV/2024 Estimated Revenue multiple of 6.2, which is neither super cheap nor super expensive. Provided the company continues to grow as expected (or better) we should see multiple expansion on a higher revenue base push shares higher.

Buy Range: In the near term expect to buy SIBN in a roughly +/- 6% range (roughly 23 to 26). Ideally, we won’t see the stock dip much below Tuesday’s low of 23.7. Given the recent jump and potential market volatility following the Fed’s 25bps rate hike yesterday, we’ll start with a half-sized position. BUY HALF

The Next Event: Nothing on the calendar until Q2 2023 earnings.

Current Recommendations

Please email me at tyler@cabotwealth.com with any questions or comments about any of our stocks, or anything else on your mind.

Glossary

Buy means accumulate shares at or around the current price.
Hold means just that; hold what you have. Don’t buy, or sell, shares.
Sell means the original reasons for buying the stock no longer apply, and I recommend exiting the position.
Sell a Half means it’s time to take partial profits. Sell half (or whatever portion feels right to you) to lock in a gain, and hold on to the rest until another ratings change is issued.

Disclosure: Tyler Laundon owns shares in one or more of the stocks mentioned. He will only buy shares after he has shared his recommendation with Cabot Small-Cap Confidential members and will follow his rating guidelines.

The next Cabot Small-Cap Confidential issue is scheduled for June 1, 2023.