Better Robotic Surgery Buy: TransEnterix, Inc. vs. Johnson & Johnson

By Markets Fool.com

Image source: Getty Images.

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The robotic-surgery space is forecast to explode at a compound annual growth rate of more than 22% over the next five years, making it one of the fastest-growing industries in the healthcare sector. As Johnson & Johnson (NYSE: JNJ) and TransEnterix (NYSEMKT: TRXC) are both angling to be key players in this emerging field, I think it's definitely worth taking the time to consider which stock offers investors better access to this red-hot market.

TransEnterix is a high-risk, high-reward play

TransEnterix's stock has fallen on hard times this year after itsSurgiBot System failed to meet the criteria for substantial equivalence to another previously-approved product, which is a necessary regulatory hurdle to clear with the FDA in order to bring a new device to market. The SurgiBot System is critical to TransEnterix because this product is specifically designed to made inroads against Intuitive Surgical's (NASDAQ: ISRG)market-leadingda Vinci surgical system by offering more user-friendly options, such as allowingsurgeons to operate within the sterile field.

Image source: TransEnterix.

Putting this into financial terms,Intuitive'sda Vinci surgical system is still posting double-digit sales growth, despite being approved almost 16 years ago and generating billions in revenue for its manufacturer over the years. The point is that TransEnterix was painfully close to launching a potentially superior product into a multibillion-dollar market that's still growing by leaps and bounds -- which would have been a huge win for a small-cap company with an extremely limited revenue stream.

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Complicating matters further, the company has yet to receive definitive guidance from the FDA on a regulatory path moving forward forSurgiBot, although management is of the mind that a breakthrough on this front is close at hand.

Now, the silver lining is that TransEnterix is reportedly making progress on a regulatory filing for its other major system, known as theSenhance Surgical Robotic System, formerly called theALF-X Robotic Surgical System, that already hasCE Mark approval in the European Union for minimally invasive surgery procedures. So, in theory, this small-cap robotic-surgery company could have two products under review in the United States within the next few months.

The chief risk with TransEnterix is that the company simply isn't in great shape financially. After all, TransEnterix exited the most recent quarter with less than $65 million in cash, meaning that its current cash runway extends to perhaps the third quarter of 2017 before funds run dry.

J&J is a well-rounded healthcare company with a deep interest in robotic surgery

Although J&J already sports a fairly robust medical-device business that hauled in more than $6 billion in revenue in the third quarter of 2016, this healthcare behemoth still lacks a sizable commercial footprint in the robotic-surgery space. However, J&J is looking to change this situation through its recent joint venture with Alphabet's (NASDAQ: GOOG) (NASDAQ: GOOGL) Verily Life Sciences division. Specifically, the two companies decided to form Verb Surgical with the stated goal of bringing cutting-edge robotic systems to market within a few short years.

Perhaps the real headline, though, is that Verb Surgical is attempting to develop products that don't simply enhance a surgeon's abilities to perform minimally invasive procedures, but rather aim to replace humans in the surgical theater altogether.

That being said, investors may want to pump the brakes on any notions that Star Trek-like robotic-surgical systems will be emanating from this joint venture anytime soon. Alphabet's Verily healthcare team, after all, has been resoundingly criticized for its poor understanding of biological systems, leading to an exodus of keymanagers, engineers, and scientists over the past year.

Even so, Verb's latest update did paint a rather optimistic picture about the newly formed company's progress so far, suggesting that afull working prototype of its first digital surgery product could be unveiled to Alphabet and J&J's executives before the end of 2016.

Putting the hype and sky-high expectations aside, though, the bottom line is that J&J may ultimately have to turn to more traditional approaches -- such as acquiring companies such as Intuitive or TransEnterix that already have surgical robotic systems in place -- to break into this high-growth market in the near future. Verb, after all, might be an exciting joint venture, but it's arguably a long way away from producing a commercial-stage product.

Which stock is the better buy?

If you're solely looking for ways to gain exposure to the high-flying robotic-surgery market, I think TransEnterix is the better way to go. Despite its vast resources and clinical experience, J&J decided to go the moonshot route by collaborating with Alphabet on robotic surgery -- and this speculative effort may never produce a single commercial product. The heart of the matter is that Verily seems to be more interested in generating buzz than actual medical advancements -- at least according to its various critics. TransEnterix, on the other hand, does have two robotic surgical systems ready to go, if the company can get past the FDA's somewhat fuzzy review process for novel medical devices.

Of course, TransEnterix should only be considered by highly risk-tolerant investors, and in a broader "better buy" battle, Johnson & Johnson would win every time. The highly diversified conglomerate has an outstanding track record of consistent growth, an impressive dividend, and multiple irons in the fire to fuel future returns. Whether robotic surgery turns out to be one of these future growth drivers is not going to make or break this top-notch stock.

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Suzanne Frey, an executive at Alphabet, is a member of The Motley Fools board of directors. George Budwell has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Alphabet (A shares), Alphabet (C shares), and Intuitive Surgical. The Motley Fool recommends Johnson and Johnson. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.