Glaukos Corporation

Moat: 2/5

Understandability: 3/5

Balance Sheet Health: 4/5

Glaukos Corporation is a global ophthalmic medical technology and pharmaceutical company focused on developing novel therapies for the treatment of glaucoma, corneal disorders, and retinal diseases. They are at the forefront of using micro-invasive technologies for eye care.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Moat Analysis:

  • Limited Moat: GKOS possesses a narrow, but not wide, moat. They primarily benefit from their innovative technologies and strong patent protection, which are significant barriers to entry in the short-term. However, their primary products aren’t entirely free from substitutes. Competitors can and do come up with alternative procedures and solutions.

    • Intangible Assets: Patents and regulatory approvals are key to Glaukos’ moat. They hold patents for their micro-invasive glaucoma surgical (MIGS) devices and pharmaceutical therapies, creating a legal barrier to competition. This helps them command higher prices because competitors cannot make exact replicas of these products. The FDA approval process for drugs and devices also creates a high barrier to entry.
    • Switching Costs: Switching costs for glaucoma treatment are moderate. Some patients may have a preference for more invasive solutions (like traditional surgeries), which may make them less willing to switch.
    • Lack of Network Effects: The company doesn’t benefit from network effects. This type of moat typically arises when more users make a product more valuable (like in social media) or if a platform is used for transactions. However, their product’s value doesn’t depend on other people using them.

  • Justification for a 2/5 rating: While GKOS has intangible assets that provide short-term competitive advantage, these assets are not immune to challenge or substitution over the longer term. Competitors with superior technology and better distribution can affect them. Therefore, their moat is likely narrow, rather than a strong/wide moat.

Legitimate Risks to the Moat and Business Resilience:

  • Technological Disruption: Competitors could develop more effective glaucoma treatments. They need to maintain their innovation.
  • Regulatory Changes: Changes to reimbursement policies or drug approval processes by regulatory authorities can immediately affect their profitability.
  • Intellectual Property Challenges: Their patents may face legal challenges or expiration, making it easier for competitors to enter the market.
  • Competition: They face direct competition from traditional, invasive options for glaucoma treatment as well as competing non-invasive products. These competitors could increase in prominence and take away market share from Glaukos.
  • Clinical Trial Risks: There is considerable amount of risk when it comes to clinical trials and regulatory approvals. The new medicines and surgical approaches may fail testing which would put a severe dent in company profitability and future revenues

  • Economic Conditions: Since elective surgeries like MIGS procedures have a dependency on the state of the economy, a slow down in the economy could affect sales.

    • Business Resilience: The company has so far maintained a good financial profile which could enable them to withstand a period of stress. While it has been able to reduce losses, it continues to be an unprofitable company as of the latest reporting periods.

Detailed Explanation of the Business:

  • Revenue Distribution: The company derives revenue from two main segments: iStent franchise (MIGS devices), and pharmaceutical and drug delivery products. The revenue stream is global with a significant presence in the US and increasing revenue in overseas markets.
  • Trends in the Industry: Glaucoma and other eye disease treatments are seeing a shift from traditional, more invasive options towards more effective and less invasive solutions. Technology advancements are helping increase the patient base as treatments become more acceptable for various patients, regardless of age. There is an increasing prevalence of eye disorders with the aging population.
  • Margins: Gross margins are high, generally in the range of 70-80% (although gross margin has decreased to 72% this quarter from 78% last year due to changes in product mix) as their products command premium prices. This shows they have pricing power.
  • Competitive Landscape: Glaukos faces competition from traditional glaucoma treatments such as eye drops and more invasive surgical methods. New competitors with innovative medical and pharma devices also enter the market which reduces their moat.
  • What Makes the Company Different: Glaukos has been a pioneer in micro-invasive glaucoma surgery and has been at the forefront of this technology for many years, building a loyal customer base. They have a good pipeline of new products to grow. The company’s focus is solely on eye care, which makes them an expert in the field.
  • Other Relevant Info: They recently received FDA approval for iDose. They have also had some clinical trial results that are promising in helping treatment of various retinal problems.

Financials In-Depth:

  • Revenue Growth: The company is showing impressive revenue growth quarter on quarter, reporting $74.7 million revenue for the quarter ended September 30th, a 39% increase year-over-year. While strong, the company has not been able to consistently maintain these numbers year to year.
  • Profitability: The company has struggled with profitability, but this seems to be changing as they have reduced losses year over year. This quarter, they reported a net loss of -$14.1 million compared to -$36.7 million in the corresponding period last year.
  • R&D Spend: They spend a substantial amount on research and development ($35 million this quarter), which is necessary to grow their pipelines.
  • Guidance: Management has raised guidance for fiscal 2023 to $284 million. The company also expects to hit profitability by 2024.

  • Cash and Equivalents: The balance sheet shows that the company is relatively healthy financially, having cash and equivalents of $205.9 million, as well as short term investments of $21.9 million.

  • Latest Earnings Call Highlights: The company’s management has expressed optimism over the recent FDA approval for its iDose and has stated it can be a game changer, they have also increased guidance due to the commercialization of iDose. The management also discussed that while their core business growth is slow due to lack of capital expenditure by hospitals, they are very happy with the growth for their pharmaceutical products.

  • Recent Issues: The company’s revenue growth had been relatively slower previously due to lack of hospital capital expenditure and limited sales team. However, both these issues have been mitigated to some extent now. Also, it is worth mentioning that the company’s net income is still negative.

Understandability Rating: 3 / 5

  • Justification: The business is relatively easy to understand, though some medical terminology can be confusing for some. The business model is fairly straightforward and their products are all related to eye care, and so are their operations.
    • However, because there are many different products, surgical and pharmaceutical, and the technology behind each is quite technical, it can make understanding their overall business a bit hard. A layman will not truly be able to fully grasp the company’s value and risk factors.

Balance Sheet Health: 4 / 5

  • Justification: The company holds a good balance of cash and equivalents, which are sufficient to cover for any short term obligations, as well as a good current ratio of about 2, the debt to equity is low. While the company is still unprofitable, it continues to lower its net losses, which indicates its overall business is in a good shape. They have also increased the time to pay off their debt obligations, which gives them more breathing space. However, there has been a trend of increase in goodwill and other intangibles.

Conclusion

Glaukos is an interesting company that operates in an industry with a strong tailwind of an ageing global population and increasing instances of lifestyle diseases. They have a narrow moat that they need to defend by continuously innovating and bringing new products. However, the company is still early in its growth phase and should benefit from their innovative approach to treating eye diseases.