Tenon Medical, Inc. (NASDAQ:TNON) is a pioneering medical device company at the forefront of transforming care for patients suffering from certain sacroiliac joint (SI joint) disorders. With its proprietary Catamaran SI Joint Fusion System, the company has developed a novel, less invasive approach to addressing the most common types of SI joint dysfunction, which can cause debilitating lower back pain.
Business Overview and History
Tenon Medical was incorporated in the State of Delaware on June 19, 2012, and was initially headquartered in San Ramon, California. In June 2021, the company relocated its headquarters to Los Gatos, California. Since its inception, Tenon Medical has been focused on the development and commercialization of its flagship product, the Catamaran SI Joint Fusion System, which received FDA clearance in 2018.
The company's primary focus has been the U.S. market, with a national launch of the Catamaran System taking place in October 2022. Tenon Medical's commercial strategy revolves around three key opportunities: primary SI Joint procedures, revision procedures of failed SI Joint implants, and SI Joint fusion as an adjunct to spine fusion constructs.
Throughout its history, Tenon Medical has financed its operations through various means, including public equity offerings, private placements of equity securities, certain debt-related financing arrangements, and sales of its product. The company has consistently invested its resources in research and development, regulatory matters, and sales and marketing efforts for the Catamaran System.
It's worth noting that Tenon Medical has incurred net losses since its inception in 2012, reflecting the significant investments made in developing and bringing its innovative technology to market. As of September 30, 2024, the company had an accumulated deficit of $65.66 million. The company's financial strategy has been focused on supporting its growth initiatives and advancing its mission to provide effective solutions for SI joint-related pain and dysfunction.
In its business operations, Tenon Medical grants unsecured credit to customers based on evaluations of their financial conditions, and historically, has not experienced significant credit-related losses. As with many companies in the medical device industry, Tenon may potentially face legal challenges in the normal course of business, although no specific lawsuits are mentioned.
Financial Overview
Financials
Tenon Medical's financial performance has been characterized by consistent revenue growth and improving gross margins. For the first nine months of 2024, the company reported revenue of $2.51 million, an 18% increase from the same period in the prior year. Gross profit margin during this period improved significantly, reaching 54% compared to 32% in the prior year period. This margin expansion was driven by the absorption of more production overhead costs into the company's standard costs, as well as operating leverage from higher revenue.
For the most recent quarter (Q3 2024), Tenon Medical reported revenue of $887,000, a decrease of 6% compared to the same period in 2023. The decline in revenue was primarily due to a 15% decrease in the number of surgical procedures in which the Catamaran System was used, which the company attributes to a longer timeline of implementation, training, and development of its restructured sales operation, as well as unexpected reimbursement pre-authorization impacts. Despite this, the company achieved a gross profit of $418,000 and a gross margin of 47% for the quarter.
Operating expenses for the third quarter of 2024 totaled $3.63 million, a decrease of 7% compared to the same period in 2023. Research and development expenses decreased 11% to $657,000, while sales and marketing expenses decreased 21% to $1.21 million, and general and administrative expenses increased 7% to $1.76 million. The decrease in operating expenses was primarily due to lower professional fees, payroll, and commission expenses, partially offset by increased insurance and legal costs.
For the fiscal year 2023, Tenon Medical reported annual revenue of $2.12 million, with a net loss of $12.45 million. The company's annual operating cash flow for 2023 was negative $9.90 million, while free cash flow stood at negative $12.87 million.
The company has been strategically investing in its growth initiatives, including the expansion of its sales force and the development of new product offerings, such as the recently introduced Catamaran SE system. These investments have contributed to a net loss of $10.6 million for the first nine months of 2024, compared to a net loss of $12.6 million in the same period of the prior year.
Liquidity
Tenon's balance sheet has been bolstered by recent equity financing transactions, including a $9.6 million capital raise in the third quarter of 2024. As of September 30, 2024, the company had $9.16 million in cash and cash equivalents and no outstanding debt, providing ample resources to fund its ongoing growth initiatives.
The company's financial position is further strengthened by its favorable liquidity ratios. As of September 30, 2024, Tenon Medical reported a current ratio of 3.52 and a quick ratio of 3.33, indicating a strong ability to meet short-term obligations. The debt-to-equity ratio stood at a low 0.06, reflecting the company's minimal reliance on debt financing.
Product Innovation and Clinical Milestones
A key strategic focus for Tenon Medical has been the development of innovative products and technologies to address the evolving needs of the SI joint treatment market. The Catamaran SI Joint Fusion System offers a novel, less invasive inferior-posterior approach to the sacroiliac joint using a single, robust, titanium implant. The system features the Catamaran Fixation Device, which passes through both the axial and sagittal planes of the ilium and sacrum, transfixing the SI Joint along its longitudinal axis.
The implant design consists of two hollow fenestrated pontoons with an open framework to facilitate bony in-growth through the SI Joint, joined by a patented osteotome bridge. One pontoon fixates into the ilium and the other into the sacrum. The osteotome is designed to disrupt the articular portion of the joint to help facilitate a fusion response.
In addition to the original Catamaran System, the company recently introduced the Catamaran SE, a smaller and less invasive version of the implant, designed to cater to physicians' preferences for a smaller access profile.
The company has also made significant progress in its clinical research efforts, underscoring the safety and efficacy of the Catamaran System. In the third quarter of 2024, Tenon announced the first peer-reviewed publication of its interim analysis from the MAINSAIL study, a prospective, multi-center, post-market clinical investigation evaluating the Catamaran System. The interim results, based on the first 33 consecutive patients, demonstrated statistically significant improvements in pain and disability scores, a robust safety profile, and radiographic evidence of fusion at 12 months post-procedure.
These clinical milestones are expected to be instrumental in driving broader physician adoption and payer coverage of the Catamaran System, as Tenon continues to build a robust body of evidence supporting the technology's benefits for patients.
Competitive Landscape and Market Opportunity
The SI joint treatment market is a rapidly growing segment within the broader spine and orthopedics industry, driven by the increasing recognition of SI joint dysfunction as a significant contributor to chronic lower back pain. Published clinical studies have shown that 15% to 30% of all chronic lower back pain is associated with the SI Joint. Tenon Medical faces competition from established players in the SI joint fusion market, such as SI-BONE, Inc. and Xtant Medical Holdings, Inc., as well as emerging technologies.
However, the company's unique Catamaran System, with its minimally invasive approach and demonstrated clinical outcomes, positions Tenon as a leading innovator in this space. The company estimates the total addressable market for SI joint fusion procedures in the United States to be approximately $1 billion, providing significant growth potential as Tenon continues to expand its commercial footprint and gain market share.
Risks and Challenges
While Tenon Medical has made significant strides in its product development and commercialization efforts, the company faces several risks and challenges that investors should be aware of:
1. Reimbursement and Payer Coverage: Securing consistent payer coverage and favorable reimbursement rates for the Catamaran System remains a key challenge, as the company works to demonstrate the clinical and economic value of its technology to healthcare payers. The company experienced unexpected reimbursement pre-authorization headwinds in the third quarter of 2024, which it believes to be transient in nature.
2. Competitive Landscape: The SI joint fusion market is becoming increasingly competitive, with established players and new entrants vying for market share. Tenon's ability to maintain its technological edge and differentiation will be critical to its long-term success.
3. Regulatory Compliance: As a medical device company, Tenon must navigate the complexities of the regulatory environment, including ongoing compliance with FDA requirements and potential changes in regulations that could impact its operations.
4. Financing and Liquidity: While the company's recent capital raise has strengthened its balance sheet, Tenon may need to secure additional funding in the future to support its growth initiatives, which could result in dilution for existing shareholders.
5. Dependence on Key Personnel: The company's success is heavily dependent on the continued contributions of its management team and other key personnel. The loss of any of these individuals could have a significant impact on Tenon's operations and future prospects.
Outlook and Conclusion
Tenon Medical is well-positioned to capitalize on the growing demand for innovative solutions in the SI joint treatment market. The company's proprietary Catamaran System, with its unique design and minimally invasive approach, has demonstrated promising clinical outcomes and is gaining traction with healthcare providers.
The recent introduction of the Catamaran SE and the positive interim results from the MAINSAIL study are expected to further strengthen Tenon's competitive position and drive increased adoption of its technology. Additionally, the company's strengthened balance sheet and focus on expanding its sales force and market access efforts position it for continued growth in the coming years.
Tenon Medical expects future coding clarity and their recently published clinical data to positively impact the reimbursement issues going forward. The company plans to expand its sales force in 2025 to be positioned for future growth and believes their stable cost structure will maintain gross margin performance at recent levels and improve with increases in revenue in the near-term due to their planned growth initiatives.
The company expects the trend of building momentum in their sales operations to continue as the team develops and grows. Tenon plans to use the $9.6 million in net proceeds from recent equity financings to expand their sales force, continue their post-market study, and advance the launch of the new Catamaran SE system.
However, Tenon must navigate the challenges of the competitive landscape, reimbursement hurdles, and ongoing regulatory requirements to fully capitalize on the significant market opportunity. Investors should closely monitor the company's progress in executing its growth strategy and managing these risks.
Overall, Tenon Medical's innovative approach to SI joint treatment, combined with its growing body of clinical evidence and strengthened financial position, make it a company to watch in the dynamic spine and orthopedics industry. The company's focus on addressing the underserved market for SI joint dysfunction treatment, coupled with its commitment to product innovation and clinical validation, positions it well for potential long-term success in this growing medical device segment.