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Before getting into the free highlight, I wanted to make sure premium members know there is a trade alert. This is a new company to the portfolio that has >60% FCF margins and grew revenue >100% in Q1. It also has a data center element and some interesting optionality. High insider ownership and one of the best business models out there make this an attractive company. Ok, now onto the free stuff.
Free
Last week’s free write-up, Bloom Energy, was up 35% in one week, most of that coming yesterday after they announced a deal with Oracle to provide power to some of their sites. But we’re not here to talk about old news, let’s get into the free update for this week.
RxSight is a premium cataract provider with a razor and blades model. RXSight sells a $130,000 device, dubbed Light Delivery Device (LDD), to ophthalmologists and then the consumable is the actual intraocular lens, called Light Adjustable Lens (LAL), that are sold for $1,000 each. The interesting thing about these lenses is that they can be modified after the initial surgery using a UV light (done with the LDD), vastly reducing the complications associated with cataract surgery.
Before getting too deep, let’s zoom out a little bit. The most common cause of cataracts is when the proteins in the lens of your eye break down, clouding the lens which focuses light into the retina. Because of this clouding, you’re unable to see clearly. There are 5 million cataract surgeries in the US annually and 31 million worldwide. About 50% of individuals over the age of 60 will have cataracts. And there two primary options to fix them – monofocal lenses or premium lenses. With the monofocal, you have to choose whether you want to see near or far, but the good thing is that they’re fully covered by insurance. With a premium lens, you can actually correct both fields of vision but it’s not always guaranteed. The norm is about 50% of premium patients not needing glasses for either near or far. RXSight bumps this number up to 90%. But the downside is that they’re more expensive. There is a dual aspect payment model, meaning that insurance will cover the cost of a monofocal lens and then patients have to pay the rest out of pocket. This typically means that insurance will cover about $1,500 and then the out of pocket cost could be about $3,000 per eye on top of that.
Since premium lenses are so much more expensive, about 1 million of the 5 million cataract patients in the US opt for them. However, that proportion is growing as the technology gets better. The value prop for RXSight is basically paying an extra $6,000 to not have to wear glasses. A normal premium lens gives you a 50/50 shot at not needing glasses but RXSight is only about $2,000 more in total. RXSight enables such good results because the lens is adjustable. After the initial surgery, patients return to have the lens changed with UV light from the LDD if they need it. Ophthalmologists love RXSight since it gives great results and it’s up to 10x more profitable for them compared to monofocal operations. Out of the $1,500 billed to insurance, the doctor doesn’t get the full amount. If they get half in actual cash, then an extra $6,000 is 8x more profitable for them. RXSight management says that doctors who buy a LDD typically get paid back in 6 months. Some doctors are even doing more than 10 operations per month. That means they splurge for the $130,000 LDD and then they buy each lens for $1,000. After a month of 10 operations, that’s roughly a profit of $40,000 ($6k for both eyes - $2k for COGS). That’s a payback of under 4 months! In this light (really bad pun), the economics make a lot of sense for the doctors.
The company has a strong installed base of over 900 LDDs and last year it sold about 100,000 LAL’s. If we say that 100,000 LALs is 50,000 surgeries, that’s still only 1% of annual cataract surgeries in the US and the company hasn’t even really focused on international sales yet. There is plenty of room to run. LDDs (the hardware device) have a gross margin of about 40% and LALs (the lens) have a gross margin of over 80%. LALs make up over 65% of sales and 80% of gross profits. At maturity LDDs would theoretically make up 0% of sales and all revenue would be consumable lenses.
The company is still not profitable on a GAAP or free cash flow basis. The main focus is educating doctors and ramping the installed base. As the installed base grows, that lays the foundation for much more high margin revenue in the future.
Sounds great, so what’s the problem? Well, growth has come to a screeching halt. From 57% revenue growth last year to an estimated decrease of 7% this year. Why? Well, two premium competitors are investing aggressively into the market and it has caught management flat-footed. Alcon and Johnson & Johnson are two giants in the eye care space and they have new premium lenses – the AcrySof IQ Vivity from Alcon and the TECNIS Eyhance from JNJ. They are different from LAL so it’s yet to be seen if RxSight will be displaced. The stock is trading like it will be at 1.2x EV/TTM gross profit. This is for a company that has grown gross profits from $2 million in 2020 to $99 million in 2024. If management can navigate these competitive issues, this stock is likely too cheap.
Now onto the new trade alert and the normal weekly update from the portfolio…