Spruce Point Capital Management Announces Investment Opinion: Releases Report and Strong Sell Research Opinion on PROCEPT BioRobotics (NASDAQ: PRCT)

NOTE TO EDITORS: The Following Is an Investment Opinion Issued by Spruce Point Capital Management

Provides Evidence That Procept's Vision of Addressing "All Prostates" Is Highly Exaggerated

Raises Serious Concerns About Procept's Market Size Estimates, Procedure Competitiveness, and Aquablation Adoption Hurdles

Questions Procedure Safety, the Quality Track Record of Procept Equipment, and the Value-Add of and Market Reception to the Company's New HYDROS System

Highlights Disturbing Data Points Suggesting Growing Business Challenges, Relevance of Key Metrics, and Financial Model Concerns

Estimates That Procept Shares Face 30%-60% Long-Term Potential Downside Risk Given Its Niche Solution, Structural Growth Challenges, and Emerging Competition

Spruce Point Capital Management, LLC ("Spruce Point" or "we" or "us"), a New York-based investment management firm that focuses on forensic research and short-selling, today issued a detailed report entitled, "Pulling Back the Curtain on Procept," that outlines why we believe and estimate that shares of PROCEPT BioRobotics (NASDAQ:PRCT) ("Procept" or the "Company") face up to 30% – 60% potential long-term downside to approximately $29 - $54 per share and has market underperformance risk. Download and view the report, disclaimers, additional information, and exclusive updates by visiting www.SprucePointCap.com.

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Spruce Point Report Overview

Procept is a medical technology company offering a surgical procedure for benign prostatic hyperplasia ("BPH"), the enlargement of the prostate as a man ages, which can disrupt or block the urethra and the bladder, causing a range of lower urinary tract symptoms ("LUTS"). Well over half of men over the age of 60 will develop BPH, seemingly presenting a large potential market for new treatments. The Company's transurethral Aquablation procedure uses a waterjet to destroy prostate tissue, and its efficiency and lower risk of sexual side-effects versus other resective procedures has resulted in the penetration of over half the high-volume hospitals for BPH procedures in the US. As a result, Procept revenue has grown to $200 million from under $10 million since 2020. Given Procept's incorporation of robotics and artificial intelligence ("AI") into its equipment, the Company has drawn comparisons to robotic surgery pioneer Intuitive Surgical, Inc. ("Intuitive Surgical") and been similarly endowed with a super-premium 14x revenue multiple.

However, we view Procept's depiction of its market potential and any comparisons to Intuitive Surgical as nonsensical. After a multi-month investigation, we have significant concerns over the credibility of Procept's claims regarding its addressable market, market position, equipment, procedures, and growth prospects. In addition, we question the credibility of Procept's key business metrics, sell-side financial projections, and bull case arguments. Lastly, we highlight the disturbing rise to all-time highs of Procept days sales outstanding ("DSOs"), which we show has previously been a harbinger of business and accounting issues for medical technology companies. The issues we analyze in our report include:

• In contrast to Procept's pitch, there is no one-size-fits-all BPH treatment. In fact, we find Aquablation is most competitive for a very small segment of the patient population.
  • Procept wants investors to believe it will fundamentally change current BPH treatment protocol. Procept has stated a vision of migrating patients directly to the most invasive treatment option, but there is already a clear standard of care for BPH that logically ramps the level of intervention based on the severity of patient symptoms. That is, well over 90% of BPH patients suffer from mild to moderate LUTS with minimal impact on quality of life and are either "watchful waiters" or take medications. When LUTS become more severe, two types of surgical interventions can be pursued: minimally invasive surgical therapies ("MISTs") or more invasive, resective surgical procedures, such as Aquablation, which remove a portion or all of the prostate. Patients only progress to surgery when LUTS become severe, which typically involves the inability to urinate, bleeding, or infection. Moreover, insurance companies will only approve/reimburse procedures that are indicated, enforcing the matching of LUTS to treatment option. Thus, Procept's vision of resective procedure expansion is questionable.
    
    
    
    
  • The practical reality is that numerous patient and urologist factors drive treatment selection. The average BPH surgery patient is 71 years old, making other health issues, level of sexual activity, and anticipated lifespan key decision factors. In addition, prostate shape and size can drive treatment selection. On the other hand, about half of practicing urologists in the US are in private practice and are thus strongly motivated by procedure efficiency and profitability, driving a strong preference for MISTs over any resective procedure. In addition, over half of US urologists are over 55 years old, and many have strong biases for, and expertise in, different surgical techniques. Aquablation is also unlikely to be used when surgery must address multiple pathologies, which one urologist we spoke with estimates occurs about half the time.
    
    
    
    
  • Arguably the most exciting development in the market for BPH treatments has been the innovation of various MISTs. MISTs are simple, quick outpatient procedures that come with practically zero risk of sexual side-effects. While they are less effective with larger prostates, they are a clearly superior option compared with resective surgeries, which are performed in a hospital, typically require an overnight stay, catheterization, and a multi-week recovery, and have high rates of irreversible sexual side-effects. Moreover, we find concerns over durability (pushed by Procept and others) are misplaced. As a result, MISTs demonstrated materially higher early adoption compared to Aquablation and have grown from zero to approximately 40-45% of BPH surgeries since 2014.
    
    
    
    
  • MISTs are also the area with the most promising innovative solutions on the horizon, suggesting they will continue to take share from resective surgeries. Importantly, MISTs address the largest portion of the BPH market, men with smaller (<80g) prostates. This market is also the portion of the patient population most likely to be treated should emerging MISTs and a (potentially) changing BPH treatment paradigm drive earlier intervention. Thus, although 54% of Aquablations to date have been performed on prostates below 80g, we believe the prospects for continued growth in this market segment are questionable. Based on our research, Aquablation is most competitive for larger prostates (over 80-100g), but research suggests that is a dramatically smaller market, as just 4% of men over 70 have prostates above 100g. Thus, we believe Aquablation is effectively a niche solution.
    
    
    
    
• We believe Procept dramatically overestimates its addressable market and that investors underappreciate structural growth inhibitors.
  • Despite Procept's best hopes, Aquablation is likely to be limited to simply replacing a limited portion of existing resective procedure volumes, a market we believe is much smaller than Procept represents. Based on "internal estimates", the Company pitches that there are ~400,000 BPH surgeries each year in the US, ~290,000 of which are resective procedures. However, after an examination of numerous large population-based scientific studies (each employing a different methodology or dataset) and our own analysis using an entirely different database and another top-down methodology, we believe the volume of procedures in the US is dramatically (well over 50%) smaller than what Procept claims. While we acknowledge that some of the datasets involved have limitations and may suffer from exclusions, we cannot generate a procedure volume anywhere close to Procept's figures. And to make matters worse, when we calculate the implied annual procedure volume based on Procept's market assumptions and system sales, we find it generates figures 75% - 110% above Procept's actual handpiece sales, generally considered a proxy for the number of Aquablations because one disposable handpiece is used per procedure.
    
    
    
    
  • Beyond a smaller-than-represented addressable market, we find numerous structural inhibitors to growth. We believe Procept's high hospital penetration to date means incremental gains will be harder to come by, and our research suggests that (1) very few hospitals require more than one system, and (2) that the prospects for penetrating smaller low volume hospitals with a relatively expensive, single-indication, single-specialty system are poor. In addition, based on our research, we believe that urologist capacity constraints, desire for practice diversity, and stable levels of surgery activity will create real headwinds to increased utilization (thus, handpiece unit sales). We also find that the demographic bull case for Procept simply hasn't played out, as procedure volumes have undergrown the aging of Boomers, and annual intervention rates have largely stalled at just 2% of active patients over the past ten years. Finally, the initiation of Medicare audits is already making it more difficult for patients to qualify for Aquablation. Procept's only other source of growth is its nascent prostate cancer initiative, but our conversations with experts and review of current treatment trends suggest those efforts should be heavily discounted.
    
    
    
    

• Procept has a questionable track record of procedure safety and product quality, and we believe the Company over-hypes both the "robotic" and "AI" capabilities of its solution.
  • We believe Procept rarely acknowledges the issues and limitations of Aquablation. One of the biggest issues with Aquablation is heavy bleeding, since the waterjet does not cauterize the tissue. This presents material health risks for older patients or those with hemophilia and requires the surgeon to manually perform a separate cauterization after the waterjet finishes, which adds time and expense. We also identified research that found higher rates of adverse events for Aquablation compared to other BPH procedures, as measured by reporting to the FDA's Manufacturer and User Facility Device Experience (MAUDE) database. More troubling, when we reviewed more recent MAUDE data, we identified a spike in Procept equipment malfunctions in late 2023, which coincided with the Company's move to a new manufacturing facility, making us question whether Procept potentially sold faulty products. At the same time, we highlight that Procept recently increased the breadth of health risk disclosures related to Aquablation. Moreover, we find lingering concerns about using Aquablation on patients with undiagnosed prostate cancer. Finally, while study results to date have been positive, the long-term science around Aquablation remains unsettled.
    
    
    
    
  • Best described as "automated" we believe, Procept systems do not enable any new functionality that could not already be performed by a surgeon, and we find many urologists were dismissive of the new HYDROS system's AI capabilities. Based on our research, we find that Procept's claims that its system is a "robot" are exaggerated. Procept requires that a sales representative be present in the operating room for every Aquablation procedure, and many surgeons and nurses rely heavily on them. And while Procept focuses on its automation capabilities to promote that Aquablation results are "independent of surgeon skill", we found evidence that the procedure learning curve may be longer than the Company suggests. Procept sought to address these issues, at least in part, by introducing a new, second-generation system named HYDROS in Q3 2024. Mechanically similar but with modest improvements in configuration and ease of use, Procept has, for obvious reasons in the current market, heavily promoted the inclusion of AI capabilities in HYDROS. However, urologists we spoke with were highly dismissive of the new AI functionality (with some users calling it "a pain in the ass" or saying it "sounds a lot cooler than it actually is"). This directly contradicts bull case theses surrounding the new machine, including the ability to spur incremental demand or replacement activity, command dramatically higher ASPs, reduce procedure time leading to higher hospital ROI, and reduce the cost burden associated with having Company representatives in the operating room for all procedures. Thus, we sense Procept may be potentially exaggerating the value of its AI functionality.
    
    
    
    
• We believe there are signs that Procept's growth momentum is stalling, further jeopardizing what may be a structurally unprofitable business model.
  • DSO warning signs are flashing. Despite consumables increasing from 33% to 51% of revenue over the past three years (resulting in more revenue derived from lower-value invoices that hospitals presumably pay faster), Procept's DSOs have risen from 47 to 130 days. Yet, we also find that many customers finance system purchases and generally keep low stocks of handpieces. We believe this is a major red flag, as high and/or rising DSOs have been a telling warning sign for numerous medical equipment companies either targeted by activists or that subsequently disclosed fraudulent sales transactions or accounting. When we put the pieces together, including all-time high DSOs, all-time high finished goods inventory (equating to as much as 2.6 quarters of handpieces), generally flat utilization, and a smaller than estimated procedure market size, we can only surmise that Procept and its customers are stuffed with excess handpieces. We also find that nearly every market participant we spoke with referenced renting systems rather than outright purchases. We find these data points inconsistent with Procept's disclosures of very small rental activity and wonder whether they are indicative of a change in business practice, potentially in response to friction in closing sales.
    
    
    
    
  • To make matters worse, we found a datapoint that calls into question the credibility of a major key performance indicator for Procept: utilization. When we solve for "US procedures" from Procept's proxy disclosures, we find that US handpieces sold were 12% higher than implied "actual" procedures in 2023, an amount that by itself would largely nullify LTM utilization growth. But also, since utilization represents handpieces "sold" and not "used" and rising DSOs suggests customers have purchased more than they need, we fear Procept's utilization metric may be effectively meaningless.
    
    
    
    
  • We are also skeptical of consensus expectations for improved operating leverage. Analyst estimates call for over 500 bps of gross margin expansion over the next two years. However, we find that none of Procept's peers were able to achieve such levels of gross margin expansion when they grew from approximately $200 to $400 million of revenue. Additionally, we believe that Procept handpieces contain little differentiated or unique content and suspect that they are ripe for price compression over the coming years. Moreover, given the Company's history of frequent reclassifications and changing definitions, we have concerns about Procept's inventory, cost of goods sold, and thus gross margin accounting, particularly since the Company's lead audit partners have minimal to no experience with revenue-generating companies. We also lack confidence that Procept will be able to reduce the cost burden of its utilization representatives, who will only become less efficient as the Company penetrates smaller, more geographically dispersed hospitals, and we note that the Company is still spending $700,000 in non-GAAP sales and marketing expense (excluding stock-based compensation) to sell each ~$425,000 ASP system. Thus, we believe Procept may be structurally unprofitable.
    
    
    
    
• Procept trades at a $4.7 billion market capitalization and a 14x 2025E revenue multiple despite being an unprofitable, niche, highly disruptable, single-product company with structural growth barriers.
  • Procept's valuation disconnect is particularly pronounced when compared to peers, which average just 5.5x revenue. We believe Procept is benefitting from its association with the "robotic surgery" and "AI" themes, even though both are questionable descriptors of the Company's business or capabilities. In fact, when we compare Procept to robotic surgery pioneer Intuitive Surgical, the valuation north star for Procept bulls given its sector leading multiple, we find that any comparisons between the two are inappropriate. We also highlight that many of the bull case arguments of some sell-side analyst cheerleaders stand in direct conflict with Company statements and our research.
    
    
    
    
  • We highlight the irrationality of Procept's valuation with an illustrative analysis of the Company's aggregate revenue and EBITDA opportunity over the next ten years. Despite making highly optimistic assumptions, we estimate that Procept's total 10-year revenue opportunity is just $1.9 billion, or less than half its current enterprise value. We see declining revenue growth rates for Procept, the death knell for super-premium multiples. Based on our belief that Procept is likely to face growth challenges, we believe the Company should trade at 5x to 9x 2025E revenue, implying a price target range of $29 to $54 per share, or 30% to 60% downside from current levels.

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Please note that the items summarized in this press release are expanded upon and supported with data, public filings and records, and images in Spruce Point's full report. As a reminder, our full report, along with its investment disclaimers, can be downloaded and viewed at www.SprucePointCap.com.

As disclosed, Spruce Point and/or its clients have a short position in PROCEPT BioRobotics (NASDAQ:PRCT) and owns derivative securities that stand to net benefit if its share price falls. Following publication of the report, we intend to continue transacting in the securities covered therein, and we may be long, short, or neutral at any time hereafter regardless of our initial opinion. For additional important information, please review the "Full Legal Disclaimer" contained in the report.

About Spruce Point

Spruce Point Capital Management, LLC is a forensic fundamentally-oriented investment manager that focuses on short-selling, value, and special situation investment opportunities.

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Daniel Oliver

Spruce Point Capital Management

[email protected]

(914) 999-2019