Description

Introduction

RxSight has a new, exciting technology which I expect to take significant share in the market for cataract surgery.  This is a small company which had $5.8 million of revenue in Q3 2021.  Given that RxSight has compelling technology, can take valuable market share from large incumbents, and will benefit from being dropped into the distribution and marketing channels of a large company, it is likely RxSight will ultimately be acquired by a large player such as Alcon, Bausch & Lomb. or JNJ.  The CEO and founder Ron Kurtz is a former ophthalmology professor who has had success with vision-based startups in the past.    

Inside our eyes, we have a natural lens.  The lens (and technically in conjunction with cornea as well) refracts light rays that come into the eye.  As light rays travel parallel to your line of sight, they hit the lens complex and are refracted so that images are focused on your retina.  You can think of your lens as a parabola (say x=y^2, centered at origin) and the image is projected onto the “focus” of the parabola which lies along the x axis.  Vision problems essentially stem from the mechanics of this not working, and this can happen in many ways.  For instance, if you are near-sighted, then the image is focused in front of your retina.  In any case, if you have a cataract (which unfortunately we all will get over time), your lens becomes cloudy.  Images become hazy, blurry, and less colorful since proteins in the lens break down.  And a cloudy lens interferes with the aforementioned refraction process.  

The company’s technology is the first IOL (an intraocular lens is an artificial lens replacing the eye’s natural lens during cataract surgery) technology which allows for adjustability after cataract surgery.  This enables doctors to customize and optimize visual acuity for patients after surgery.  With this technology, the doctor performs a standard cataract procedure using RXST’s LAL (light-adjustable lens) and then determines the refractive error after the patient has healed.  The surgeon uses RXST’s LDD (light delivering device) to modify the lens with the precise amount of visual correction to achieve patient satisfaction.      

Why is this superior to the alternatives?  Alternative IOL technologies cannot be adjusted.  Therefore patients have to indicate their visual preferences before surgery, and this can often lead to subpar outcomes. 

The lens is implanted using typical cataract implant techniques.  Because the lens can be adjusted, the initial implantation is less stressful for the surgeon and the pre-surgical diagnostic workflow is reduced.  The refractive error is also determined using standard refractive techniques.  When the eye heals, there is typically a shift in the lens and other refractive changes that occur.  With RXST’s system, the doctor solicits direct input from the patient and then uses the LDD to alter the polymers in the lens to achieve the desired outcome.  The first adjustment occurs a few weeks (about 17 days) after the surgery.  3 subsequent adjustments can be made before the lens is “locked” in.  Patients love the product since they actively participate in fine turning their vision.             

I came across the opportunity as I know an ophthalmology group that recently started using the technology.  They have found the superiority of the technology overwhelmingly clear.  This is a very rational practice which also has a talented business consultant.  I will go into the specifics in detail below, but the technology provides superior visual outcomes to patients and compelling unit economics to doctors.  A few months ago, the practice spent about $125,000 on the machine (one-time purchase), and is paying approximately $1,000 per lens (recurring).  Given that this is a significant capital cost, they went through the prospective economics and payback in detail.  RXST sells both the machine and the lens.  In Q3 2021, RXST sold 1,977 lenses.  This does not sound like much, and the RXST’s marketing team is small.  However, each doctor in the practice I mentioned above is implanting about 3-4 lenses a week, and I would expect each of them to do 200+ per year.  Eventually I think RXST’s technology will be used in about one-third of this practice’s cataract volume.  I have had similar conversations with other ophthalmology practices that are using the technology.  Not all of the 26,000 ophthalmologists in the U.S. will use the technology, but I think the market share will end up being significant as the technology is superior and unique.  To be clear, this technology addresses the major shortcomings of competitive premium IOLs.  It’s a mistake for most ophthalmologists to not use the technology, and once doctors purchase the machine they tend to be more committed to its continued penetration and use in their practices.      

Detail on the market

Interestingly, cataract surgery is the most common surgery in the world.  There are 4 million cataract surgeries annually in the U.S., and 20 million worldwide.  Half of people over 60 have a cataract, and 80% of cataract patients have cataracts in both eyes.  A patient can choose to have a conventional or a premium IOL implanted.  The global IOL market is very concentrated with Alcon and JNJ having a combined share of 55%.  The cataract market in general is expected to grow mid single digit for a long time, and the premium IOL market is expected to grow at 15%.  About 16% of the U.S. market and 11% of the global market consists of premium IOLs.

Premium IOLs, unlike conventional IOLs, treat refractive conditions.  A conventional IOL replaces only the spherical power of the removed natural lens.  By spherical, we mean that the correction for nearsightedness or farsightedness is spherical, equal in all meridians of the eye.  This indicates the amount of lens power, measured in diopters (D), prescribed to correct nearsightedness or farsightedness.  If the number in your prescription is negative, you are nearsighted.  If the number has a plus sign or is not preceded by a plus or minus sign, you are farsighted.  Premium IOLs are designed to also reduce astigmatism and/or presbyopia.  Astigmatism is an imperfection in the curvature of your eye’s cornea or lens.  Normally the cornea and lens are smooth are curved equally in all directions.  If your cornea or lens isn’t smooth and evenly curved, light rays aren’t refracted properly.  Astigmatism affects 70% of cataract surgery patients.  Presbyopia is the gradual loss of your eyes’ ability to focus on nearby objects.  This typically happens in your mid-40s and continues to worsen until age 65.  Presbyopia affects nearly 100% of cataract patients.  So the idea with premium IOLs is that they reduce the need for glasses after surgery.     

A few years ago Alcon released an excellent product called PanOptix.  PanOptix is a tri-focal lens allowing patients to see well at close, medium, and far distances.  Although PanOptix has excellent reviews and is very well-regarded, many patients complain about glare and halo issues, which causes problems while driving at night for example.  RxSight’s product addresses these issues, and also provides superior contrast sensitivity.  RxSight is not a tri-focal lens, but RxSight lenses can be optimized for a specific distance, and the lenses can also be adjusted to allow for blended vision where one eye is used for distance and the other for objects which are up close.  Also, PanOptix refraction cannot be changed post surgery.    

More info on results

Much of the data below is from the LAL SSED (Summary of Safety and Effectiveness Data) which was filed with the FDA.  

Out of 10 cataract patients, 6 achieve their target vision with traditional IOLs.  With the LAL, 92% of eyes achieve results with 0.50 D of their target vision at 6 months.  This is very similar to results achieved by LASIK.  LAL is the first cataract lens option to provide this level of refractive predictability consistent with LASIK outcomes.  

UCVA means uncorrected visual acuity, which is the best possible vision that an eye can achieve without the use of glasses or contact lenses.  70.1% of patients (vs 36.3% for control group) achieved 20/20 vision or better without glasses/contracts at 6 months post-operatively.  You can also see below that at 6 months, only 1.3% of LAL patients were outliers with UCVA worse than 20/32, versus 21.2% for the control group.    

The reduction in outliers is phenomenal as the final refractive error in cataract surgery traditionally has been a meaningful problem.  The LAL also produces superior quality of vision versus the control group in BCVA (best corrected visual acuity - the best possible vision an eye can achieve with glasses/contacts), vision rating, driving vision, dim light conditions, glare, halos, and all measures of contrast sensitivity. 

In my diligence, I spoke to several ophthalmologists, including some very well known ones such as David Chang.  He is one of the world’s top cataract surgeons and he has embedded RXST into his practice.  He focuses exclusively on cataracts and IOL implants.    

In the interviews I did with patients, they enjoy the process of test driving their vision and perfecting it.

One of the practices I interviewed shared with me the marketing pitch they use with patients.  This marketing text is in blue.      

The First and Only Lens That Can Be Customized AFTER Cataract Surgery

 With traditional intraocular lenses (IOLs), your physician performs measurements before your surgery in order to select the best IOL to try to achieve your vision goals. Once your surgery is complete and the IOL has been implanted, your physician has limited options to adjust the lens power. 

 With the RxSight™ Light Adjustable Lens, you and your doctor can now customize your vision after your eye has healed from cataract surgery. This is because the Light Adjustable Lens is made of a special photosensitive material that changes the shape and power of your implanted lens in response to ultraviolet (UV) light. You and your physician will have the unique ability to adjust and preview your vision until it meets your personal desires and lifestyle requirements.

The cataract removal and IOL implantation procedure is the same as if you selected a non-adjustable IOL. Then, in the weeks that follow, your physician will customize your vision through a series of non-invasive light treatments that take only a few minutes each. You may need 2 to 4 total light treatments over a period of 1 to 2 weeks to reach your vision goals. Once your vision is adjusted, a final light treatment is used to lock in the results.

The Light Adjustable Lens delivers superior vision outcomes that non-adjustable IOLs cannot match. In a clinical study, the majority of patients who received the Light Adjustable Lens achieved 20/20 or better vision at 6 months without glasses.

 Light Adjustable Lens Fast Facts

·         The first and only adjustable intraocular lens (IOL) that allows your physician to customize your vision after your cataract surgery

·         Patients who received the Light Adjustable Lens followed by adjustments were twice as likely to achieve 20/20 vision at 6 months without glasses as those who received a standard monofocal IOL

·         The cataract removal and IOL implantation procedure is the same as if you selected a non-adjustable IOL

·         The Light Adjustable Lens is made of a special photosensitive material that changes the shape and power of your implanted lens in response to ultraviolet (UV) light

·         You will have the unique ability to preview and compare possible vision outcomes based on your preferences and lifestyle requirements

·         Light treatments that precisely reshape your implanted lens are delivered in your doctor’s office to adjust your vision to the desired target

·         Light treatments are painless, non-invasive, and last approximately 90 seconds

·         You may need 2 to 4 total light treatments over a period of 1 to 2 weeks to reach your vision goals

·         You will need to wear special UV protective glasses during all waking hours (from time of lens implantation until after the last light treatment is completed) to prevent exposure to indoor and outdoor sources of UV light that can cause uncontrolled changes to the Light Adjustable Lens

UV Protective Glasses 

Exposure to indoor and outdoor sources of UV light can cause uncontrolled changes to the Light Adjustable Lens until all light treatments are completed. To prevent this, patients must wear special UV protective glasses provided by RxSight during all waking hours (from time of lens implantation until 24 hours after the final lock-in light treatment is completed).

The clear pair of protective glasses must be worn indoors, and the tinted pair must be worn in all bright sunlight conditions. The glasses may be removed when sleeping, and may be temporarily removed when showering, washing the face, or applying eye drops as long as the patient is not exposed to direct sunlight. 

Unprotected exposure to UV light during this period can result in unpredictable changes to the Light Adjustable Lens, which might necessitate removal of the lens.

Economics to surgeon

Medicare only pays an amount up to the cost of a conventional lens and the accompanying surgery.  Medicare will pay for the removal of the cataract, but Medicare will not pay for a premium IOL. Medicare reasons that glasses can be used to correct any issues.  The practices I spoke to are charging $7,000 per eye for each RXST lens.  These lenses are being sold by RXST for $1,000.  Remember that the expense of the surgery center, etc., is paid for by Medicare.  So the bulk of this is pure incremental profit to the practice.  This is the most premium lens available, and the payback on the machines (which today cost $125,000) is rapid.  

Risks

The team at RXST is well ahead of everyone else in terms of post-surgery adjustable cataracts.  The first mover advantage is significant here.  None of the large players have adjustable solutions coming out over the next few years.  New technologies need to be monitored, but there is nothing comparable which is close to coming to market. The primary risk is in the execution and marketing of the product, as well as continued development.

Valuation

So this is obviously not a straightforward exercise given where the company is today.  If the company is anywhere near as successful as I think it can be, an investor would make multiples from here. My recommendation is to speak to ophthalmologists who have used the product, to determine your own estimate of potential market share. Practices which do not offer RXST's products will be at a disadvantage because the types of customers who pay for premium IOLs are very demanding, and they plan on keeping their new lenses for life -- so the ability to tailor the result is crucial.       

I estimate that the company will burn $150 million in cash to reach breakeven profitability.  Current net cash is $128 million; let’s assume all the cash is consumed and another $75 million of equity is raised at today's price (though I would imagine it would be at a much higher price).  The revenues from device sales exceed the revenues from lens sales, but as the company matures, the lenses will constitute the majority of the revenue (and the lenses have very high gross margins). I believe that in 10 years, the company can have 10% of the cataract market in the U.S.  My assumptions are based on substantial growth in premium IOL share. That would be 600,000+ surgeries, or $600 million in sales.  That would generate $90 million of net income, and at 30x net income (around where Alcon trades which is much larger) we get $2.7 billion of equity value versus today’s equity value (fully-diluted) of approximately $450 million pro forma for the raise and dilution.  This does not include any contribution from international volumes, which have the potential to be substantial.  Keep in mind that the markets for cataracts and premium lenses are growth markets in the U.S. and abroad given an aging population, a greater emphasis on health and vision, and a rising middle class globally.  

Catalyst

now: Continued launch of ActiveShield which reduces the need for UV glasses post-surgery.  Continued growth in the commercial team.  

2022: Lowering the price of the LDD device

2023/2024: Use for severe presbyopia 

International expansion

Eventually the exit will likely be to someone like Alcon.  Robert Warner, the former president of Alcon’s Vision Care franchise in the U.S. and Canada, is on the board.  Two of the founders of Chiron Vision, a company which was acquired by Bausch & Lomb, are also on the board.