Is Second Sight Medical Products The Most Interesting And Disruptive Technology IPO Of The Year?
Nov. 19, 2014 10:01 AM • eyes
- After successfully commercializing technology to restore hearing to the deaf, billionaire Alfred Mann is now setting out to restore vision to the blind.
- Company has no direct competitors and is already commercializing its high-margin technology (roughly 90 patients treated to date).
- Dominant IP portfolio provides distinct competitive advantage in a large addressable market.
- Expansion plans into direct cortical stimulation holds potential for Second Sight to own a platform technology.
- Heavily oversubscribed IPO, plus unique Long Term Investor Right could lead to significant price increase in first day of trading.
The lame shall walk, the deaf shall hear and the blind shall see.
No, this isn't the launch point for a sermon. It's about the most interesting IPO of the year and the potential for disruptive technology companies to perform miraculous feats for humans and investors alike.
Sound too farfetched to be true? Consider:
- The lame shall walk. On September 12, Israel-based ReWalk Robotics Ltd. (NASDAQ:RWLK ), a maker of exoskeletons that enable paraplegics to walk raised $36.3 million in an IPO. Shares soared 113% in a matter of hours.
- The deaf shall hear: In 1993, billionaire Alfred Mann founded Advanced Bionics. which became a leading maker of cochlear implants that restore hearing to the deaf (including my blessed mother). In 2004, Boston Scientific acquired the company for $740 million.
- The blind shall see: The latest investment miracle in the works is also an Alfred Mann-backed company - Second Sight Medical Products (Pending:EYES ). It's focus? You guessed it. Restoring vision to the blind. And we'll soon find out how much its disruptive technology rewards investors, as shares are set to begin trading today.
First Things First - Is Curing Blindness Even Possible?
Before I get to a rundown on the investment opportunity and the key risks, though, there's an important question we need to answer first - is curing blindness even possible? If not, we'd be wasting our time even evaluating the company.
This YouTube video. which garnered over 1 million views since October 7 provides a pretty compelling case why we should take Second Sight seriously.
In September, Larry Hester, 66, who's been blind for half his life had an electronic stimulator from Second Sight, known as the Argus II, surgically implanted in his left eye. On October 1st, 2014, Duke eye surgeon Dr. Paul Hahn turned it on for the first time. And now he can see.
To be clear, the technology didn't restore his vision completely. It allowed him to perceive patterns of light. But based on his reaction, it's safe to say that going from living in total darkness to some light is a dramatic and welcomed improvement.
As you'll see in a moment, if Second Sight succeeds in further developing the technology, Mr. Hester's vision is likely to get even better.
It's important to note, too, that Mr. Hester isn't an anomaly. To date, almost 90 patients have successfully received an Argus II implant. The observed benefits range from being able to locate lights and windows, sort laundry, follow lines in a crosswalk, determine where other people were located in a room, and even read very large letters (about 9 inches high).
For those curious how this is technically possible, I encourage you to read the company's S-1 filing. as it provides a comprehensive overview. Here's a brief overview of how the system works:
From the S-1:
[A] miniature video camera captures a scene and the video is sent to the small VPU where it is processed and transformed into instructions that are sent back to the glasses. These instructions are transmitted wirelessly to the receiver coil in the implant. The signals are then sent to the electrode array, which emits small pulses of electricity. These pulses bypass the damaged photoreceptors and stimulate the retina's remaining cells, which transmit the visual information along the optic nerve to the brain. This process is intended to create the perception of patterns of light which patients can learn to interpret as real-time visual patterns.
What's most amazing to me is that the implant surgery is an outpatient procedure done with general anesthesia.
Now that we've established restoring vision for the blind is, indeed, possible, let's get to the investment considerations.
Key Investment Considerations
This isn't a science experiment: Second Sight represents nearly two decades' worth of research and development. But investors don't have to wait for commercialization to begin. It's already underway. A total of 20 operating centers are up and running in North America and the European Union. Discussions are underway with another 29 centers. Each one can be expected to perform 1 to 2 procedures per month.
Large addressable market: The Argus II is currently approved for the treatment of retinitis pigmentosa (RP), which impacts 375,000 people worldwide. The company is working towards FDA approval for the treatment of age-related macular degeneration (AMD), which is a much larger market of about 2 million people. If the company succeeds with all of its development plans, the technology could address an additional 5.8 million people suffering from blindness.
Early reimbursement milestones achieved: Insurance reimbursement is a necessary precursor to a ramp up in procedures and sales for
Second Sight. To that end, the company has made strong, initial progress securing reimbursement approval in Germany and France, as well as with several private payers in the U.S. and one Medicare coverage area. Discussions for broader coverage are already underway.
No marketing required: When you have a device that restores vision to the blind, there's very little need for marketing. Such a product tends to sell itself. To that end, the company has several staff members dedicated to handling inbound calls to direct them to nearby surgery centers, as well as provide assistance in securing reimbursement approval.
Margin-rich product: Based on an average selling price of $110,000 and a cost of $30,000, Second Sight's gross margins would check in at about 72%. As volumes increase, margins could expand to as much as 85%.
Significant, first mover advantage: Four other companies are working on technologies to restore vision to the blind. All remain largely academic experiments. None have FDA approval, yet. The cost and time involved to obtain it is significant, which means the competitive threat to Second Sight is a long way off, too.
Dominant patent portfolio: In today's hyper competitive world, being first-to-market is no longer a sustainable competitive advantage for companies developing new technologies. Only operating companies with a commitment to building a robust, unique and defensible patent portfolio stand a chance at true, long-lasting disruption. Second Sight definitely fits the bill. It boasts 207 U.S. patent grants, plus another 80 applications. It also has 79 foreign patents and 82 pending applications. The patents were written broadly, too, in order to cover cortical stimulation. This opens up the possibility for the company to license the technology for use in various other applications outside restoring vision. Speaking of which.
A potential platform technology: While many investors are bound to be fascinated by the company's efforts to cure blindness, that's not the most potentially disruptive aspect of Second Sight's technology. In coming years, the company plans to bypass the retina completely and instead, stimulate the visual cortex of the brain. Doing so would allow the company to restore vision in almost all cases of disease-related blindness. More significantly, figuring out direct cortical stimulation opens up countless other treatment applications. Since Second Sight controls the IP around these capabilities, it holds the potential to become a platform technology company.
Milestones drive early share price performance for disruptive technology companies. Here are the key milestones to track for Second Sight, as well as expected completion dates:
Software resolution enhancements: The company believes it's possible to enhance the resolution of existing devices by ten-fold or more, without increasing the number of electrodes. Regulatory approval is required for any software improvements. The company plans to complete the approval process by 2Q 2016.
Argus II for treatment of AMD: With no changes to the technology, preliminary evidence suggests the Argus II can restore vision for patients suffering from AMD. Enrollment in a pivotal study is expected by 2Q 2017.
Orion I for direct cortical stimulation. By making very minor changes to the Argus II, the company believes it can bypass the retina and restore vision by directly stimulating the brain. Enrollment in a human feasibility study is expected to be completed by 2Q 2017.
Key Investment Risks
No investment is without risk. Here are the ones to keep in mind with Second Sight:
Unproven management: Robert Greenberg boasts an impressive resume. However, it doesn't include public company experience.
No additional FDA approval: If Argus II doesn't receive FDA approval for AMD, the addressable market will be considerably smaller.
Complications: To date, there have been no serious complications for Second Sight. If any occur, it could dramatically impact the willingness of other patients to seek treatment. It is worth noting that the surgery is easily reversible.
Dilution: In order to reach its development milestones, it's highly likely Second Sight will need to raise additional capital.
Reduction in reimbursement rates: At some point, its conceivable reimbursement rates might be lowered, which would negatively impact Second Sight's profitability. That said, the company's high gross margins provide a sufficient buffer against any such reductions.
Worst-case scenario, Second Sight represents an admirable and worthy humanitarian endeavor. Best-case scenario, it produces life-changing results for patients and investors alike. We'll soon find out.
My sources say the IPO was significantly oversubscribed. As a result, I expect strong buying activity once the trading begins. And in this case, it could have profound effect on prices.
You see, the underwriters included a Long Term Investor Right in the offering. It entitles IPO investors to an additional share in the company if the stock price doesn't double in the first two years. That is, as long as they hold onto the shares the entire time.
The end result? There's next to no incentive for institutions to flip out of their shares for a quick profit today, which means very few shares will be available for trading. High aftermarket demand and limited supply could make this a very hot IPO.
Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.