Have you heard of this company...Glaukos (GKOS)?

Over the years, we have written about the Classic Growth Stock Theory of Investing (see for example this post and this post).

We have also periodically highlighted companies which we believe exhibit these characteristics and which we own in the portfolios we manage for our investors (or which we owned at the time of publication when we wrote about them). Some examples of companies we have written about in the past include Tractor Supply Co* and Amphenol.*

Today, we're highlighting the business of another company which we own for our investors in our Core Growth Strategy, the medical device company Glaukos (ticker symbol GKOS). It has a market capitalization of about $1 billion on trailing twelve-month revenues of about $150 million (and no dividend).

Glaukos pioneered a new approach to the treatment of certain types of glaucoma, which is an irreversible and progressive eye condition that can cause vision loss and eventually blindness. As Glaukos explains on the company website:

Glaucoma is commonly associated with increased pressure in the eye due to an imbalance in production and outflow of ocular fluid. In a healthy eye, fluid is produced to help maintain the eye's shape. Normally, this natural fluid flows out through an area called the trabecular meshwork, and is absorbed into the bloodstream. If the fluid does not drain at the same rate that it is produced, pressure will begin to build in the eye. Over time, this increased pressure can damage the optic nerve and destroy vision.

Glaucoma is commonly treated with drugs which can help decrease the production of ocular fluid and the resulting pressure buildup, and in more extreme cases it has traditionally been addressed with surgery. However, Glaukos invented a miniature stent which can be inserted into the eye to reopen the body's natural drainage channels, and has proven to help restore balance and reduce the pressure that can damage the optic nerve. This stent, called the iStent, is the smallest known medical device ever to be approved for insertion into the human body, and can be seen on the face of a US penny for size perspective in the video above.

This procedure ushered in a new type of treatment for glaucoma, which has been called "minimally-invasive glaucoma surgery," sometimes abbreviated as MIGS. At present, the procedure is done in conjunction with cataract surgery: both glaucoma and cataracts are diseases of the eye which are most common among older patients (although not exclusively so).

About 3.9 million cataract surgeries are performed per year in the United States, and about 20 million per year worldwide. Between 15% and 19% of those getting these surgeries are also taking medication for glaucoma, and with the advice of their healthcare professional may elect to have the the MIGS surgery to attempt to restore the natural outflow mechanism for drainage of ocular fluid (that adds up to about 700,000 candidate procedures for MIGS per year in the US alone). Studies have shown that most patients are able to maintain normal ocular fluid pressure after receiving the iStent, without the need to continue taking medication.

Currently, less than half of the eye doctors in the US who do cataract surgery have been through the training for the iStent. We believe that in the future, patients may seek out doctors who are able to provide MIGS, as the benefits of this minimally-invasive device become more apparent.

Additionally, Glaukos has products in the development pipeline which (if approved by the appropriate regulatory agencies) could be used for minimally-invasive glaucoma remediation outside of cataract surgery (more discussion of the Glaukos pipeline below).

We believe that Glaukos is an innovative and well-run company which is improving the world with its products and is positioned in front of potentially fertile fields for future growth. It has basically created an entirely new category of treatment for glaucoma (MIGS).

However, Glaukos investors have experienced dramatic share-price declines in 2017, as seen in the long-term stock chart below (which goes back to the company's IPO in July of 2016). The stock has dropped nearly 29% in price over the past twelve months, despite the fact that the company's operating earnings growth over the similar period is 120%.

Some of the reasons for the stock decline during 2017 appear to be short-term in nature, such as delays in the number of patients getting surgeries due to the hurricanes in Florida and the Gulf coast region. However, investors have also shown concerns over competitors entering the market with competing minimally-invasive glaucoma surgery devices, as well as concerns over Medicare reimbursement rates in the US.

In July of this year, the US Food and Drug Administration approved competitor Alcon's CyPass micro-stent for use in cataract surgery with patients on medication for mild to moderate open-angle glaucoma. Alcon is a large and well-known company, and they aggressively marketed their alternative to the Glaukos iStent.

Although the introduction of CyPass is now giving Glaukos competition in the category of minimally-invasive glaucoma surgery that Glaukos pioneered, there are several reasons that we believe that the Glaukos approach will continue to be preferred in the future. First, the CyPass device is a lot bigger than the iStent. Second, it targets a different space to create drainage for the ocular fluid (creating a new incision rather than using the body's natural canal that is used in a healthy eye but which has become clogged up in a patient suffering from certain types of glaucoma). Because of these differences, there may be more potential for complications after the surgery.

The compensation issue is somewhat complicated and beyond the scope of this blog post to explain fully, but it involves the payment to the surgeon who inserts the iStent, rather than the compensation that Glaukos receives from the clinic or hospital where the surgery is done (which pays for the stent itself and other materials used in the surgical procedure). At present, the surgeon's compensation is set by the different "Medicare Administrative Contractors" that contract with the Center for Medicare and Medicaid Services in different regions of the US. These different contractors in different regions have been setting the surgeon's compensation for the iStent procedure at levels that have some marked differences around the country. We believe these differences are likely to get sorted out over time, but right now they are causing some consternation among investors.

Because of these issues, investors have been cautious on the Glaukos story during the second half of 2017 and going into 2018. They may become more constructive after the company issues its 2018 guidance, which is scheduled to be issued in February.

We also believe that the pipeline of products in development at Glaukos are not being fully appreciated by the investment community at this time. Glaukos has a very robust pipeline of products moving their way through research and development and into clinical trials. These products include
a) the iStent Inject, which is a needle that is pre-loaded with two iStent devices instead of just one, so that a surgeon can enter once and implant twice,
b) the iStent Supra, which targets a different drainage pathway for certain patients,
c) the iStent SA, for patients who do not need cataract surgery,
d) the iStent Infinite, which has three stents in one injection for patients with very severe glaucoma, and
e) the iDose, which is similar in form-factor to the other iStent devices but includes a tiny reservoir which contains glaucoma medication that will drip out over a long period of time, perhaps up to twelve or eighteen months.

We believe Glaukos is an example of the kinds of companies that investors who follow the classic Taylor Frigon growth philosophy should find very interesting. Often, a multi-year story will have some twists and turns and bumps in the road along the way. However, we believe that the characteristics of a classic growth company will eventually provide good results for investors over time -- and we believe that Glaukos is a company that fits that definition.




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* At the time of publication, the principals of Taylor Frigon Capital Management owned securities issued by Tractor Supply Co (TSCO), Amphenol (APH), and Glaukos (GKOS).

Disclosures: Please remember that past performance may not be indicative of future results.  Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by Taylor Frigon Capital Management LLC (“Taylor Frigon”), or any non-investment related content, made reference to directly or indirectly in this blog will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful.  Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this blog serves as the receipt of, or as a substitute for, personalized investment advice from Taylor Frigon.  To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing.  Taylor Frigon is neither a law firm nor a certified public accounting firm and no portion of the blog content should be construed as legal or accounting advice.  A copy of the Taylor Frigon’s current written disclosure Brochure discussing our advisory services and fees is available upon request. If you are a Taylor Frigon client, please remember to contact Taylor Frigon, in writing, if there are any changes in your personal/financial situation or investment objectives for the purpose of reviewing/evaluating/revising our previous recommendations and/or services, or if you would like to impose, add, or to modify any reasonable restrictions to our investment advisory services.

Investment Climate Jan 2018: The 4 Pillars

Markets charged higher again in the fourth quarter of 2017 continuing the pace of record highs in all the major stock market indices.  One nuanced change in the 4th quarter is that many income-oriented investments also demonstrated positive performance as the fear of global recession subsided, at least for the moment, evidenced by the fact that the spread between yields on “high yield” investments (sometimes thought of as “junk bonds and securities”) and investment grade securities narrowed markedly.  We have no idea how long this will last, but we thoroughly expect that the “pessimistic punditry” will find something to revive the negative drumbeat about the economy at some point in 2018, as it has almost like clockwork each year since the 2008-2009 financial crisis.  We have begun to view such negativity favorably as it has been so completely wrong for so long. We worry that if it stopped, the economy really would weaken.

We believe the likelihood of an economic downturn anytime soon has been dramatically lessened given that the largest tax reform legislation in the United States in over 30 years was passed by Congress.  While we prefer a more aggressive tax reform, particularly on the individual side, the impact that the reduction in corporate tax rates from 35% to 21% will have on economic activity cannot be underestimated, in our view.  This has led us to revisit our long-held analysis of the “four pillars of economic health”: taxes, interest rates, inflation and global freedom.  We believe these collectively cover the gamut of factors that affect economic health.  Taking the time to ponder the state of each is helpful in developing a sound “big picture” view.  Here is our view on each:

Pillar I: Taxes – As we stated, in the US the tax picture has just become much more favorable given the passing of new tax legislation.  On the corporate side, regardless of the political nonsense surrounding the debate, lower corporate tax rates are a major stimulus to capital investment and ultimately economic activity.  We come from the perspective that corporate tax rates should be 0%.  That’s right, ZERO!  Contrary to popular opinion, corporations are not “the Wealthy”, they are entities, behind which are employees, shareholders and customers (consumers), both wealthy and non-wealthy.  Corporate taxes simply lessen employee pay and shareholder returns, and increase the prices customers pay for the product or service the corporate entity provides.  We want corporations to have nothing to do with the tax code and simply grow, invest, pay people, and provide products/services to customers.  We realize that in any political environment, such an approach is virtually impossible.  In the current political environment, it is impossible.  However, the new tax law makes it far more possible for corporate entities to do the things they should do, and on a much more competitive basis with other countries who have had lower tax rates than the US corporations for years.  We could analyze tax policy for pages and pages, but suffice it to say, tax policy has moved in a very favorable direction.

Pillar II: Interest Rates – While closely related to inflation, it is important to understand that low interest rates are not necessarily always the best policy, either for curtailing inflation or for providing the best economic environment.  In recent years, we have argued that interest rates are far too low and the Federal Reserve (the Fed) policy keeping short term rates so low was creating economic distortions.  Over the last year or so, the Fed has finally begun the long overdue increase in interest rates.  We are pleased to see this and only hope that they are not too late and so far behind the curve that it is impossible to avoid over-tightening (raising rates too high) at the worst time (when the economy does inevitably slow).  Notwithstanding these concerns, interest rates are moving in the right direction and getting into balance with economic activity.  We will consider this mildly favorable.

Pillar III: Inflation – It is notable that inflation has not been considered to be a problem in recent years.  Even with a 2% inflation rate (which is essentially the Fed’s target), in 10 years the dollar will devalue by more than 20%!  Make no mistake: it is an invention of the neo-Keynesian sect that has propagated the myth that such a result is ok!  By all means, inflation, and its opposing twin, deflation, are equally devastating in the event of either occurrence.  However, deflation is not the problem today, and is virtually impossible to experience for any extended period given that fiat currencies (currencies tied to nothing) are in use the world over.  Nonetheless, it is safe to say we are not experiencing, nor do we anticipate, the type of hyperinflation that can be catastrophic.  We consider inflation to be neutral.

Pillar IV: Global Freedom – This may be the most important of the pillars.  It is the freedom of the human spirit that enables creativity, innovation, and human progress.  For people to be truly free, their governments must allow for the basics of property rights, freedom of expression and, above all, the rule of law.  Every year we review the Heritage Foundation’s “Index of Economic Freedom” which considers the state of freedom around the world, and has been doing so for the last twenty years.  Fortunately, for the fifth straight year in 2017, the index suggested the world has become more “free”.  As investors who seek out innovative companies in which to place our capital, it goes without saying that this is very encouraging.  In listening to the daily broadcasts about the state of the world, one can often become discouraged.  This sensationalism is missing the signs around the world that such a dire view is unwarranted.  We encourage readers to check out the details of the study.

One negative in the study is that the United States has fallen further in ranking on the list.  It is now 17th in the world.  It is not even considered a “free” country, but only “mostly free”.  This is due to the increased level of government control and regulation that has been enacted in the 21st Century in the United States.  We have railed against this many times in recent years and believe that recent moves to reduce the level of regulation in the country will help to improve the standing of the United States in the index in the future.  We view the Global Freedom pillar as favorable.

The net effect of our recent assessment of the four pillars and how they relate to the Investment Climate give us a high degree of confidence that much of the “crisis” mentality of the early 21st Century has run its course and investors should be rewarded even more than they have been for staying the course, particularly those invested in the innovative, high-potential growth companies.  As always, we continue to seek out, invest in, and diligently monitor the progress of those companies on a daily basis for our investors.

Disclosures: Please remember that past performance may not be indicative of future results.  Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by Taylor Frigon Capital Management LLC (“Taylor Frigon”), or any non-investment related content, made reference to directly or indirectly in this blog will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful.  Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this blog serves as the receipt of, or as a substitute for, personalized investment advice from Taylor Frigon.  To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing.  Taylor Frigon is neither a law firm nor a certified public accounting firm and no portion of the blog content should be construed as legal or accounting advice.  A copy of the Taylor Frigon’s current written disclosure Brochure discussing our advisory services and fees is available upon request. If you are a Taylor Frigon client, please remember to contact Taylor Frigon, in writing, if there are any changes in your personal/financial situation or investment objectives for the purpose of reviewing/evaluating/revising our previous recommendations and/or services, or if you would like to impose, add, or to modify any reasonable restrictions to our investment advisory services.