Israel-based company Nano X Imaging Ltd. (NNOX, Financial) has made headlines recently with its futuristic X-ray machine design and claims that it can significantly reduce the cost of scans. It wants to achieve this by using a new type of X-ray source (called the Nanox.ARC), which will provide digital scans that can be uploaded to the internet and analyzed remotely by a network of radiologists and artificial intelligence.
The company went public last month, and its stock was quickly bid up by investors who were eager to participate in the growing business, peaking at $64 (although it has since slid back to $27, close to its post-initial public offering price of $22).
The science doesn't add up
Right off the bat, a number of questions arise. First, it's not clear why a revolutionary, digitally-controlled X-ray source would be cheaper than the old-fashioned method. The second, and perhaps more cogent, argument for cost reduction is the "cloud computing" one. But again, digital X-rays have existed for a long time and there are plenty of companies out there offering remote diagnostic services, by professional radiologists as well as by computers, so I have doubts about whether this is really a new idea.
Furthermore, there are no studies of the ARC being used in a hospital setting, to say nothing of peer review. There is no data comparing the ARC's imaging capabilities with that of a standard computerised tomography scanner.
Too good to be true
If you read Nano-X's F-1 filing with the Securities and Exchange Commission, one of the things that jumps off the page immediately is how little the company has spent on research and development - just $7.5 million over its entire existence. Remember, this is a business that claims to have achieved a breakthrough in imaging that would bring down costs by "orders of magnitude" - something that established industry leaders have not been able to do. You don't have to be an engineer for this to seem suspicious.
Although it has been a publicly traded company for just one month, Nano X has become the target of not one, but two well-known short selling firms - Muddy Waters and Citron Research. In its report, Citron pointed out that General Electric's (GE, Financial) medical device arm, GE Healthcare (one of the leading imaging companies in the world), spent more than $1 billion on research and development just last year.
Finally, there is the question of Nano X's contractual agreements. The company claims to have standing orders to deliver more than 4,500 ARC machines, but a closer look at the agreements demonstrates that a lot of these deals have opt-out clauses that allow the contracting party to void the agreement.
More egregiously, investigations carried out by both Muddy Waters and Citron demonstrates that a number of these companies, located in places like Taiwan, South Africa, Belarus and Russia, may either be fictitious (in the Taiwaneese and South African cases) or are run by individuals who have a less-than-stellar record. The proprietor of the Russian partner company was dismissed from his post at one of Moscow's airports in the early 2000s for embezzlement, and has since been implicated in a number of other fraudulent schemes.
In short, there are so many questions around this company that it seems almost impossible that they will be answered satisfactorily (if at all). I will be keeping a close eye on whether Nano X responds to the questions posed by these short sellers' reports.
Disclosure: The author owns no stocks mentioned.
Read more here:
- Nassim Nicholas Taleb: The Federal Reserve Cannot Prevent All Problems
- Mohnish Pabrai on How He Stumbled Into Owning a 60-Bagger Stock, Part 3
- Mohnish Pabrai on How He Stumbled Into Owning a 60-Bagger Stock, Part 2
Not a Premium Member of GuruFocus? Sign up for a free 7-day trial here.
