2023-06-16 06:13:55 ET
Summary
- Glaukos Corporation has 3 catalysts to price change going forward.
- These involve the company's performance, growth, and potential future developments.
- Revising to buy on fundamental, sentimental grounds.
Summary of updated investment thesis
Following my hold rating in February and in August '22 before that, Glaukos Corporation (GKOS) has caught a heavy bid and rated 36% to the upside at the time of writing. There are two identifiable catalysts to the sharp repricing:
- The FDA's acknowledgement of GKOS' previously submitted new drug application ("NDA") on its iDose TR segment.
- The company's latest financials, showing there is likely a reasonable growth period ahead of GKOS.
With the market paying a higher value to buy GKOS stock, it is fruitful to see what's changed since the Q1 results, based on the above points. On very close inspection, there are catalysts to further price change forward, including an upshift in sentiment, and fundamental catalysts. I'll be discussing these here today. Net-net, I revise my rating on GKOS stock to a buy on the improved outlook.
Figure 1.
Changes to critical facts
When the investment facts change, so to should the investment debate. The two major catalysts listed above have seen ADMA breakout above a long-term resistance level [Figure 1]. The market expectations are higher for ADMA, therefore, and I have also revised my internal expectations.
iDose TR NDA momentum
ADMA received the "Day 74" notification from the FDA, which acknowledges a previously submitted NDA for its travoprost intraocular implant ( iDose TR ) segment. This acknowledgment signifies that the NDA is ready to be put to the FDA for a substantive review.
As a reminder, i Dose TR is a micro-invasive intraocular implant designed to lower intraocular pressure ("IOP") in patients with open-angle glaucoma or ocular hypertension. Its design allows for the continuous delivery of the of the company's travoprost label.
What sets the iDose TR apart is its ability to be removed and replaced with a new unit. The major benefit of this, is it potentially offers a long-term, dropless alternative to the daily use of eye drops. This could address compliance issues, and chronic side effects associated with eyedrops. In other words, a potential remedial breakthrough, in my view.
The FDA's goal date for completing the NDA review is December 22, this year. The good sign is this date aligns with ADMA's expectations for the 505(b)(2) filing on the line– if these two are put through together, then my expectation is the market will be very favourable on this, based on the latest reactions.
Here's a more detailed explanation of the notification:
- The NDA submission for iDose TR encompasses data from two Phase 3 pivotal trials, which successfully achieved their primary endpoints.
- Safety and tolerability data held up well in these trials over a 12-month evaluation period, showing the data is robust and effects lasting.
- Additionally, the submission includes data from the iDose TR Exchange trial. This involved a second administration of iDose TR, and the removal of the original unit. Critically, the 2nd administration demonstrated a better safety profile over the 12-month evaluation period, supporting GKOS' hypothesis.
The market potential for iDose TR is substantial in my opinion, considering the widespread need for effective and convenient glaucoma treatments. Glaucoma is a chronic condition that affects ~3mm Americans and nearly 2% of all adults over 70 in Europe. The current standard of care, eye drops and so forth, often require daily administration, leading to patient non-compliance. This is the basis of the company's unit, and if it can improve compliance, and reduce side effects, the uptake could be large in this populous.
Fundamental catalysts
The company's latest numbers , posted in early May, add a strong layer of fundamental momentum to the debate. It booked Q1 revenues of ~$74mm, 900bps growth compared to the previous year's figures. Growth was underlined by its Glaucoma segment, posting $56.2mm in quarterly turnover ($224.8mm annualized). I'd also point out that Corneal Health's net sales were up 10% in the same period, but that's not central to my investment thesis.
Looking to the additional fundamental drivers, these have the potential to extend GKOS' sharp repricing. Why?
One, the company achieved a gross margin of ~76% in Q1, above the sector's gross of 55% by a sizeable amount. If the company maintains >75% gross moving forward I'd accept that, because that will mean more than 3/4 of the turnover is pulling below costs of revenue as the top-line grows.
Two, management raised guidance for FY'23 based on its Q1 performance. The company now expects $295mm–$300mm, compared to the previous guidance of $290mm to $295mm. This tells me of the company's confidence to sustain its recent spate of growth, and I am definitely aligned with these figures. This calls for 6% YoY growth,
Three, there is undeniable evidence of the company's long-term growth record, having compounded its top-line at an average 30% over the last 10-years, 28% for gross profit:
Table 1. GKOS long-term growth display
With the factors discussed thus far, there is all reason to believe these trends will continue at a similar stride into the coming periods.
Four, the company is executing on the growth strategy within its core businesses, particularly in its glaucoma domain. International glaucoma revenues were up 20% YoY, supported by another 10% growth in its corneal business. Notably, the company is actively involved in the ASCRS meeting in San Diego , showcasing an extensive array of symposia to highlight its novel technologies. Difficult to tell the ROI on this, but potential investors can spectate the products in person.
Sentiment and valuation catalysts
1. Change in sentiment
Following the announcements, analysts have turned heavily bullish on the stock and revised their price targets to the upside. There has been 12 revisions to revenue from the sell-side in the last 3-months. This is telling as well, as these targets imply higher expectations for GKOS moving forward.
Figure 2.
Following that, the price action and recent momentum is equally as revealing on the market's revised expectations. The stock trades above all its moving averages (10, 50, 100 and 200 day respectively), and investors are paying much higher multiples as the bidding war continues. It is now trading above all of its previous time ranges as a further indication of the same. It is trading 52% higher than it was 5 years ago, very telling that the market expects it to be outperforming that period.
Critically, changes in sentiment are an essential component to any 'alpha' opportunity. It is difficult to advocate a stock will trade higher if there is a lack of buyers or support behind it. Both the revisions in revenue estimates on the sell-side and the price action demonstrated by investors are clear evidence of this change in sentiment for GKOS in my opinion.
Figure 3.
2. Valuation factors
If you're bullish on GKOS, it's wise to know that investors are currently selling their GKOS stock at around 11x forward sales, 143% premium to the sector. But as noted above, investors are paying this multiple hand over fist, an indication of the forward expectations.
That's $11 for every $1 of the company's future revenue, not even earnings. The market isn't silly though– it knows there is likely a large growth factor to make up the difference. Still, it is difficult to observe a potential mispricing on valuation factors in my view, as 11x sales is pricey.
However, I typically look for 2 from 3 of fundamental, sentimental, and/or valuation catalysts to suggest a re-rating. In that vein, I am willing and able to pay current market multiples to participate in the projected future good fortune of GKOS, with 2/3 fulfilled. In terms of price targets, I have obtained upside targets to $71.5 and then $81 on my point and figure studies, adding confidence on another move higher. These have served well to date. In that vein, my price objectives are $71 then $81.
Figure 4.
In short
There are three identifiable catalysts that could see GKOS attract a higher market valuation into the coming periods. These centre around the company's iDose TRA segment, along with fundamental and sentiment catalysts. I see that sentiment has improved, along with the company's revised FY'23 guidance, and strong Q1 FY'23 numbers. These catalysts imply that GKOS could attract further investment, on-top of the recent rally. Technical studies have thrown off price targets to $71 then $81, and these are my next two objectives. In that vein, revising to buy.
For further details see:
Glaukos: Revising To Buy On These 3 Catalytic Factors