GLAUKOS CORP GKOS S
September 20, 2017 - 4:18pm EST by
bigvic
2017 2018
Price: 32.62 EPS 0 0
Shares Out. (in M): 34 P/E 0 0
Market Cap (in $M): 1,123 P/FCF 0 0
Net Debt (in $M): -104 EBIT 0 0
TEV ($): 1,019 TEV/EBIT 0 0
Borrow Cost: Available 0-15% cost

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Description

Please note that this was written quickly and all the below are my opinions.  You should confirm everything first.

The thesis is pretty simple:

1. Massive competition whereby expectations are still too high and GKOS has helped keep those expectations high

2. 1 payor pushed back and more likely to come

3. Bad management

4. Valuation rich: trades at 6.5x FY17 revenue (pipeline is not expecedt to be on the market until 2H2018 and unlikely to be a quick launch and thus not impactful for approximately 9-12 months)

 

Here's more details:

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Quick backgrnd: GKOS has a product called iStent.  It's basically implanted surgically by eye doctors (ophthalmologists).  iStent is used for patients with both gluacoma and cataract and the device helps glaucoma (because it decreases eye pressure, which is elevated in glaucoma).  Pretty simple.  

Primer on payment: payment is made for each iStent implanted to 2 parties: the doctor (doctor fee) and the facility (to pay for the iStent device itself).  The procedure is done in both hospitals and ambulatory surgery centers (ASCs), which are often owned by doctors.  To simply it, let's focus on ASCs because there's where the majority (~70%) of the iStent procedures are done.

Let's look at doc payments first.  Doctor fee used to be ~$800-1000 per iStent placement.  1 major payor (called Noridian) cut that by ~50% (~$400-600).  What do you think happens when doctors are paid less to implant a "nice to have" but not a "need to have" device that now ALSO has a competitor to choose from?  Yes, decline in volume.

What I suspect will happen in the future is that more payors will follow Noridian.  This is one of those wake-up-in-the-morning press releases where the stock will be down 15%+ because another payor is cutting doctor payment.  And another payor, and another.  The train has started on this.  It is only going 1 direction: payors are in a cost-cutting environment.

Let's move to payment to the facility for the iStent device itself.  Interesting story here: Medicare massively increased the payment for iStents earlier this year.  This is great because ASCs can now make more money for implanting the device.  What GKOS did is that they followed suit and raised the price of their iStent to take that increase almost all for themselves!  Outrageous and unprecedented.  As you can imagine, ASCs (and the doctors who own these ASCs) were and still are irate.  Do your diligence and speak to a few of them.  When the competitor comes out, many will completely stop their use of iStents.

GKOS management has other red flags (clue: they lie).  There is more information below as I don't want to go off on too big of a tangent yet.

Back to ASCs payment: here's what's happening now: iStents cost more money because GKOS raised the price to get the increase that Medicare passed on to ASCs.  However, commerical insurance (non-Medicare payors) are only paying for iStents at the older, cheaper rates.  So, basically, GKOS' volume from patients who have commerical insurance have plummetted because commercial insurance just won't pay for the increased prices.

Again, GKOS management's actions are incredibly inauspicious.

Finally, in July, Alcon launched a competitive product called Cypass, which is taking market share.  How much? We don't know yet.  But something that GKOS forgets to mention is that Alcon has the financial resources to sample, ie give away free devices to introduce doctors to their product.  To that end, every sample Alcon gives away is 1 less iStent GKOS sells.  Also, Alcon also has a credible device and owns the cataract space.  It is seamless to use an Alcon product esp if you have never used a GKOS product before.  And also every cataract surgeon currently uses an Alcon product.

At the end of the day, Alcon is taking market share.  It will be much bigger than what GKOS wants you to believe because just ~1 month after they gave guidance in their most recent earnings, they LOWERED guidance.  In 1 month!  Management is either really or the business is imploding.  Or both.  What do you think it is?

Here's why Management is a liar.  Just 7 days before their 9/14/17 Investor Day at the Wells Fargo Conference, Joe Gilliam, the CFO, states they will not give guidance.  Read the transcript from 9/7/17 from the Wells Fargo conference.  Guess what happened at Investor Day just 7 days later?  Yes--Joe gave guidance and guided down!  Joe lied.

Also, JPMorgan stated that they spoke with the CFO and the CFO stated very clearly that new guidance is one where they can still miss: it is not a drop-dead or take-the-bath-now guidance.  Good management in the past typically underpromise and overdeliver.  If you're going to give out bad news, give it all out and sorely underpromise.  Don't try to finagle something in the middle.  Nope, Joe the CFO does not do that.  God bless you Joe--you are a brave man as you've already put your reputation at risk and now are putting your career at risk as well.

To that end, the CFO is basically telling us that they have a chance of missing and guiding down in the near future!  Confirm and speak with JPMorgan.  Do you call that good management?

Finally, valuation.  This is the squishy part.  What multiple should a company with massive market loss due to a incredibly strong and viable competitor with any-moment payor pushback with a bad management team worth?  I'd say 6x+ NTM revenue is rich. 

What about their pipeline?  Well, I can say that nothing meaningful will be out until 2H18.

These companies should be worth 3-4x revenue at best and 1-3x at worst in my experience.

 

I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise hold a material investment in the issuer's securities.

Catalyst

1. Payor pushback: something you may wake up to and the stock will be down 15%+

2. Earnings: continued miss and guide down 

3. Management: further lies or misdeeds

 

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