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).
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