Second Sight Medical Products (EYES) stands at a crossroads, and the future is murky for a company that restores functional vision to patients who previously had none.
I've written about EYES before and its game-changing Argus II retinal implant. Argus II uses a series of electrodes to bypass photoreceptors in an eye damaged by degenerative conditions such as retinitis pigmentosa (RP) and to process signals sent from an external video camera via the optic nerve into patterns of light and shapes. Simply put, it allows people who have gone completely blind to see once again.
EYES shares have been hammered, but not because of the efficacy of Argus II, which has three- and five-year data supporting its success for patients with RP and is now in clinical trials in the U.K. on patients with dry age-related macular degeneration (AMD).
No, the problem facing EYES was driven by a decision made by the Centers for Medicare & Medicaid Services (CMS), which established a reimbursement rate for Argus II of $95,000. According to EYES CEO Will McGuire, this decision was based on a misinterpretation by CMS of very limited data from 2014 implantations.
I first met EYES Chairman Dr. Robert Greenberg on the day of the company's initial public offering in November 2014 and was the first to publish an analysis on the company. I can state without hesitation that management has never mooted any price for implantation (device plus procedure) in the U.S. other than $150,000, so it's still unclear to me what happened with CMS. However, EYES has had to cut the price of Argus II for 2016 to $92,000 from $144,000 in order to convince implanting centers that the procedure would not be uneconomic for their doctors to perform.
In any event, the confusion has caused a slowdown in the rate of implantation in the U.S. (one in the first quarter of 2016 versus six in 1Q 2015) and the implantation rate in Europe has not been strong enough to offset that drop. EYES management is working diligently to ensure that CMS sets a rate for 2017 that is commensurate with its costs.
So, Second Sight's cash burn rate has increased -- it was $5.72 million in 1Q 2016 -- and the short-selling sharks have been circling. With $10.2 million in cash as of March 31, EYES likely could only make it two more quarters at that burn rate -- a fact noted by management in the first-quarter 10-Q.
So, EYES is raising capital -- a gross amount of up to $19.8 million -- through a rights offering. Each EYES shareholder as of May 13 has the right to invest 55 cents per EYES share owned at a share price that either will be $4.25 or 85% of the closing price of EYES on May 31. EYES is trading today at $3.80.
Clearly the company needs the nearly $20 million in capital to continue to market Argus II, and early investors have been supportive. EYES board member and early investor Gregg Williams has committed to contributing $8.5 million, and another early investor, Easton Invest AG, has committed to $4.25 million.
EYES was founded by legendary med-tech pioneer Al Mann, who passed away earlier this year, and Mann's trust owns 31.1% of Second Sight's shares. There is no indication in the prospectus as to whether the Mann trust would participate in the rights offering, but if it does, the $19.8 million in raised capital would be easily achievable.
I think Second Sight gets the deal done. I think that investors buying at $3.23 (the implied deal price as of today's $3.80) are getting the deal of a lifetime and the opportunity to confirm the existence of a company that truly does good. EYES went public at $9 a share and in the past 18 months the clinical data has done nothing but support Argus II's revolutionary status. The financial results have been another matter, obviously, but timing is key in investing and I think EYES shares will pop dramatically if the rights offering proves to be successful. I'm buying it for my clients today.