TM editors' note: This article discusses a penny stock and/or microcap. Such stocks are easily manipulated; do your own careful due diligence.

It's important to thoroughly understand all possible risks behind an investment that makes up a very large chunk of your portfolio, which in my case, is TransEnterix. It's especially important to reevaluate those risks on a day when the stock is poised to make a strong run in the midst of a positive news release and an analyst conference on the same day (TransEnterix traded up 57% after hours yesterday on minimal volume). In my opinion, here are the potential risks behind TransEnterix, and my rationale for each one.

#1. Perhaps the biggest, most obvious risk of them all: The FDA denies the SurgiBot approval.

Rationale:

• TransEnterix formally received feedback from the FDA on its upcoming 510(k) filing in the summer of 2014 through a pre-submission filing, which was filed in March 2014. The company essentially submitted a rough draft of the SurgiBot 510(k) filing, the FDA told them what worked and what didn't, and TransEnterix is now acting accordingly and expects to submit the 510(k) filing by July 1.

• The FDA desperately wants competition in the surgical robotic market. Nobody benefits from a monopoly except for the company in control, which in this case is Intuitive Surgical. Intuitive has been selling the Da Vinci since 2000. Competition brings lower pricing, faster innovation, and more choices for consumers. In the case of robotic surgery, it means hospitals won't be paying an arm and a leg for a surgical robot, surgeons will quickly adopt better technology that is constantly improving, and less patients will be subject to potentially life threatening complications during surgical procedures due to the inclusion of tactile feedback in the SurgiBot, among other features. Here's an excerpt from a law firm's website that specializes in robotic surgery lawsuits:

  Da Vinci robot surgical complications can occur because the surgeon is given no tactile feedback to gauge the grip of the robot probes. As a result, the manipulation arms can accidentally tear through body tissues, sever small blood vessels, or puncture organs. In some cases, these errors will not be discovered for hours or days after the operation has been completed, when the patient begins exhibiting symptoms that something has gone wrong.

• TransEnterix's previous product, the SPIDER System, is considered a similar device to the SurgiBot, which means that TransEnterix is allowed to include human data from the 4,500+ surgical cases already performed with the SPIDER in the SurgiBot 510(k) submission. The SurgiBot System utilizes the same core technology found in the SPIDER System: a single incision operating platform that includes 4 channels where flexible or rigid instruments and a camera can be inserted at the operating site. The SPIDER received 510(k) approval in 2009, and European CE mark the following year.

#2. The FDA will decide that the SurgiBot should not be classified as a class II medical device, which would result in the need for human clinical data and delay the approval of the SurgiBot by ~3 months.

Rationale:

• I cannot find a single surgical robot that is not FDA approved as a Class II medical device, from Intuitive Surgical's da Vinci System, and its single port add-ons, to Stereotaxis' Vdrive, to Mako Surgical's RIO Robotic Arm (there are plenty more). IMRIS' Symbis will be added to this list if it receives approval in mid 2015.

#3. The Intuitive Surgical single port offerings (da Vinci Sp and Xi) will prove to be stiff competition to the SurgiBot.

Rationale:

• Both single port add ons for the da Vinci System still lack tactile feedback, still puts the surgeon outside of the sterile field away from the patient, still has high capital costs of ~$2 Million, and is still a massive machine that cannot be easily moved between operating rooms.

• The Surgical Robotic market is still growing, and remains unsaturated. Less than 1% of the 5,000+ private U.S. surgery centers are equipped with a surgical robot, and a large majority of the 3,000 U.S. Hospitals that have less than 500 beds do not have a surgical robot. Clearly, the market is big enough for a few players. Also, don't forget about the international market. TransEnterix's CEO Todd Pope has stated that he sees TransEnterix expanding the robotic surgery market as they target the smaller hospitals/surgery centers that Intuitive does not target (due to da Vinci's high cost, procedure mix, and more), rather than directly competing with Intuitive

#4. TransEnterix will be subject to the same costly personal injury/accidental death lawsuits that Intutive Surgical is constantly dealing with.

Rationale:

• While this is no doubt a possibility, the fact that the SurgiBot includes tactile feedback, 3D vision for both the surgeons and assistants, and is a patient side system, a lot of this risk is potentially mitigated. Having internal triangulation, true left hand/right hand control, and the ability to clutch instruments into an ergonomic position and reposition, along with several other safety features, also doesn't hurt.

#5. Management will have a tough time executing its strategic goals and selling the device.

Rationale:

• TransEnterix has high quality management. CEO Todd Pope was president of a multi billion dollar division within Johnson and Johnson, CFO Joseph Slattery played an instrumental roll in the growth of Digene Corp, and Mohan Nathan spent a considerable amount of time at Intuitive Surgical. The nine member board is also an impressive team that includes a former Boston Scientific executive.

• Management at TransEnterix has been able to convince Billionaire Dr. Phillip Frost and Dr. Jane Hsiao, six different healthcare oriented venture capital firms, BlackRock, Fidelity, Putnam Investment Managers, and sovereign wealth funds in the Middle East to invest, among others. If management could convince these high profile investors that they can execute their strategy, they could (and did) convince me. These investors own roughly 65% of TransEnterix.

• Todd Pope has already indicated that the company is receiving inbound calls about the SurgiBot, and is also receiving strong interest for the product from South America, Japan, Europe, and the Middle East. Pope has also signaled that the first 50 purchase orders for the SurgiBot will be represented by large hospital teaching institutions. Given the SurgiBot's initial $500,000 price tag and the growing surgical robotic market, it shouldn't be a tough sell.

#6. Surgical Robotics in general will receive increasing scrutiny from the public and their supposed benefits will be questioned, especially given the tight capital spending environment at hospitals following the passage of the Affordable Care Act (ACA).

Rationale:

• TransEnterix plans to release a white paper on the results of the 4,500+ surgeries conducted with the SPIDER System that should refute critics of single port surgery. Cold hard data should help its case.

#7. TransEnterix will need to raise more funds in the future and dilute current shareholders.

Rationale:

• Given my long term investment horizon for TransEnterix, I do not necessarily view this as a risk. Capital infusions are required to expand business operations, and the company will have lots of growing to do. I do acknowledge that any secondary offering will serve as short term weakness for the stock performance.

#8. TransEnterix will be attacked by short sellers in the event of any meaningful pop in stock price.

 Rationale:

• It's tough to argue against this one. It is in the nature of shorts to bet against companies that have a high P/S ratio with no earnings and an accumulated deficit. Only walking the walk can route this risk, which will take time.

#9. TransEnterix faces lawsuits for patent infringement from competing companies.

Reasoning Against:

• VP Kathleen Frost oversees patent/legal/regulatory work for the company and has more than 25 years of experience in the medical device industry. Frost's previous experience includes work at the FDA, where she evaluated 510(k), Investigational Device Exemption, and Premarket Approval submissions as a member of the Office of Medical Device Evaluation. This is also a strong point to add to the first potential risk at the top of this post regarding FDA denying approval of the SurgiBot. Frost adds tremendous insight into the FDA approval of 510(k) products for TransEnterix. She also specializes in patents and works to make sure TransEnterix is not infringing any existing patents and helps file patents.

• Intuitive Surgical's patents expire in 2016, so they should not pose a threat from an IP standpoint, not to mention the technology behind these two companies is different, so there probably would not be any patent infringement in the first place. TransEnterix has upwards of 20 patents approved and pending, and some will not expire until 2035. 

#10. Small cap stocks rollover and drag TransEnterix down with it

Rationale:

• TransEnterix was included in the Russell 2000 index in the summer of 2014. This is a definite possibility worth considering as it may put some downward pressure on the stock. The Russell continues to make new highs, but if it breaks below that wedge, it can experience a meaningful correction. This is a short term risk, and in the long term, is just noise.

Am I missing any potential risks that you see? Let me know and I will include them and my reasoning in an updated post.