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Glaukos eyed for potential trouble

April 10, 2017

In its brief time as a publicly traded company, medical-device maker Glaukos has led a charmed life. Its pioneering iStent device, used to treat glaucoma, a leading cause of blindness, has benefited from the virtual absence of competition in the U.S.

The company’s shares (ticker: GKOS) have soared more than 150%, to a recent $50 from a June 2015 initial-public-offering price of $18. Fueling the gain, in part, was a 60% increase in 2016 revenue, to $114.4 million—nearly all of it from iStent, a device used in micro-invasive glaucoma surgery, or MIGS. Glaukos also swung to its first net profit last year—$4.5 million, or 12 cents a share, from a loss of $37.2 million, or $2.13, in 2015.

But Glaukos’ extraordinary success, including 14 consecutive quarters of 40% sales growth and 85% gross profit margins, has now attracted rivals, including Novartis’ (NVS) Alcon unit and Allergan (AGN), among others. As a result, Glaukos is about to face more challenges, especially since it’s unlikely to have a new product on the market before the second half of 2018, or later. Short interest in the stock—2.2 million shares at March 15, and nearly 10% of the public float—has generally risen steadily since September.

Glaukos sports an astonishing valuation, with shares trading for 300 times expected earnings and 10 times forecast sales. Even a minor setback in the next year could send the stock down more than 30%.

Glaucoma is a progressive eye disease caused by elevated pressure in the eyeball, which damages the optic nerve. It currently afflicts more than 60 million people worldwide. The only proven therapy is reducing that pressure, which has been done with eye drops, laser surgery, or traditional surgery. But each method has drawbacks.

Glaukos’ tiny titanium iStent, smaller than the date on a Lincoln penny, offers another approach. To lower intraocular pressure, the iStent is inserted into the eye’s Schlemm’s canal. The device was approved in mid-2012 by the Food and Drug Administration to treat “open angle” mild to moderate glaucoma in conjunction with cataract surgery. The iStent has been used on some 200,000 eyes to date, according to Glaukos.

So far, Glaukos has had this market to itself in the U.S., but Alcon, the world’s largest eye-care firm, with 2016 sales of $5.8 billion, gained FDA approval in mid-2016 for a competing product, the CyPass. Although some doctors have used CyPass, a full rollout is expected later this year in the U.S., Glaukos’ largest market by far. Michael Onuscheck, global head of Alcon’s surgical division, says training began last year for its sales staff and this year, for physicians. “We expect to take a large portion of this market,” adds Onuscheck, who declined to discuss product pricing.

CyPass is placed in the suprachoroidal space, an area of the eye with slightly higher associated risks. But in testing, the device proved highly efficacious in reducing pressure. Barron’s spoke with several prominent ophthalmic surgeons who have used both products and say outcomes are comparable. Which micro-stent device is used depends on the patient’s condition, the surgeon involved, and to some extent, the insurance coverage. Some surgeons with whom we spoke were compensated by one or both companies in the past as consultants or researchers.

Glaukos has validated the CyPass approach to some degree by seeking regulatory approval for its own suprachoroidal stent, the iStent Supra, which could reach the market in late 2019 or 2020. Some industry insiders predict that Alcon will gobble up market share in the eye-stent market before then, particularly because it will be able to bundle other cataract-treatment equipment, such as lenses, with the CyPass.

In addition to tempering Glaukos’ growth, heightened competition could reduce micro-stent prices, which currently average roughly $1,400 per implant. Indeed, the company has guided Wall Street to expect a drop in sales growth this year to 40%-44%. Glaukos claims to have a “midteens” share of the addressable market, suggesting the company sold roughly 90,000 iStents in the U.S. last year.

Roughly 3.9 million cataract procedures were performed in the U.S. last year (counting each eye separately), and 10% to 20% of these patients had moderate to mild open-angle glaucoma, the target population for micro-stent devices. Cataract surgeries are expected to grow by 2% to 3% annually. Not all cataract patients have glaucoma or will select stent-related surgery to treat it.

On a March 1 earnings call, Glaukos management said it recently had instituted price increases for some customers, typically ambulatory surgical centers, and hospitals. But it noted on the call that some price discounting also had occurred.

It is a good bet that new competition will limit price hikes in the future. Glaukos acknowledged on the call that it faces rising competition and cited CyPass in particular. The company said it might lose money in 2017 due to rising operating and research expenses. Yet Wall Street analysts look for Glaukos to earn 17 cents a share this year. The company has guided for 2017 revenue of $160 million to $165 million.

Glaukos is working on iStent product extensions, but the first expected—the iStent Inject, a two-stent insertion packet already selling in some European countries—won’t be available in the U.S. until the second half of 2018 or early 2019, pending regulatory approval. Meanwhile, sales of Alcon’s CyPass are expected to ramp up in the second half of this year. Nor is it clear that iStent Inject will lead to incremental sales, rather than cannibalizing existing iStent sales. As competition ramps up, Glaukos’ sales growth and stent prices could suffer.

Glaukos declined to comment for this story.

GLAUKOS SHARES HAVE HAD setbacks. The stock fell more than 40% at one point in 2015 after a court dismissed the company’s claims that the CyPass infringed its iStent Supra patents. With shares at far loftier levels today, and potential challenges more numerous, a downdraft could be prolonged.

Bullish analysts and investors say that Glaukos could attract buyout interest. Yet the stock’s rich valuation could be a deterrent, as could some tough antitakeover provisions in the company’s bylaws.

Although Glaukos dominates the stent market in minimally invasive glaucoma surgery, it is still a small company reliant on just one product for the foreseeable future, as bigger rivals emerge. That’s a prescription for disappointment, and a potentially steep stock-price decline.

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