(This article was originally published on SeekingAlpha on November 8th, 2021)
Summary
Eyenovia is an under-the-radar ophthalmic company with a large addressable market and big opportunities ahead just received a Complete Response Letter (CRL) from the FDA for its leading drug candidate.
However, the CRL is not a rejection but rather a result of an unrelated lawsuit against the FDA that forces them to reclassify the drug.
The stock has sold off, but while this delays approval, it offers investors a chance to buy shares at significantly discounted prices.
The goalposts moved at the eleventh hour, but the investment thesis is intact, so investors should play on
Introduction
Eyenovia, Inc. (NASDAQ: EYEN), a clinical-stage ophthalmic company is developing a pipeline of advanced therapeutics based on its proprietary microdose array print (MAP™) platform technology. The solutions have the potential to replace conventional eyedropper delivery and improve safety, tolerability, patient compliance, and topical delivery success for all kinds of eye treatments. The company has two drugs in late-stage trials and one NDA already submitted with the FDA.
This week, the FDA provided Eyenovia a Complete Response Letter (CRL), a rejection of the
application, for their MydCombi™ drug, causing the stock to sell off by more than 40%.
MydCombi™ is the company's smallest market opportunity, but investors are worried that the rejection could be symptomatic of the company's broader approach and affect their chances for their other drugs in the pipeline. At first glance, a Complete Response Letter from the FDA is never good. However, the devil is in the details, and this is not as bad as a traditional rejection and in fact, presents investors with a big opportunity to add shares at lower prices or establish initial positions in the stock.
The rejection has nothing to do with the drug or Eyenovia's application but is due to an
unrelated lawsuit the FDA lost which is forcing them to change their approval process for
companies like Eyenovia that have both a drug and a dispensing device. The FDA had originally told Eyenovia they would only evaluate the drug and not the device, but because of their own internal change, the FDA is going to evaluate any device dispensing the drug. This means Eyenovia must also apply for their microdose array print device. The FDA effectively moved the goal line two days before the scheduled PDUFA date. While this is frustrating, there is a big silver lining for investors.
Nothing has changed for the company, except for an additional application that the FDA will
now evaluate in parallel to the application for MydCombi. While this does likely add up to nine months before possible approval, the company has more than enough cash to get through this period, and investors have an opportunity to now buy shares at much lower prices not seen since 2020.
Company Overview
Eyenovia is a seven-year-old company with a mission to develop and commercialize treatments for front and back-of-the-eye diseases. All three drugs are designed to be delivered via the company's Optejet® dispenser, a small handheld device that very precisely administers a thin layer of mist to the eye containing about 8 microliters. This is in contrast to traditional eye drops which deliver over five times larger volume (around 40-50 micro-liters) than the human eye can hold, wasting medication while at the same time overdosing the eye with medication and preservatives that are known to cause ocular and systemic side effects, which are not only health concerns but can reduce patient adherence. Since the human eye can only absorb about 8 micro-liters, the smaller dose is still as effective as eye drops but it reduces unnecessary exposure of the eye to drugs and preservatives by 75-80% while also creating a more user friendly experience.
We believe the efficacy to the patients -- as well as the cost savings and efficiency it provides
doctors -- position the company's pipeline favorably for future adoption in multiple billiondollar
markets.
Three Late-Stage Products
Eyenovia is developing three products, MicroPine, MicroLine, and MydCombi, that respectively target Myopia (nearsightedness), Presbyopia (farsightedness), and Mydriasis (dilation).
MydCombi™ - The drug that is furthest along in the pipeline is MydCombi™, which is used to dilate patients' pupils. More or less every eye exam performed uses dilation to increase the size of the pupils so that the eye doctor can better examine the optic nerve and retina. Doctors today generally use three eye drops, each containing a different solution that combined dilate the eye. MydCombi combines these three solutions into one small 8 microliter dose. For doctors, this means the dilation process prior to an eye exam is quicker and more accurate, potentially increasing patient throughput. For patients, it means a more pleasant experience with no extra solution running out of the eye and down the face, and obviously no excessive exposure to the dilation solution. The company had originally planned for approval on October 28th, 2021 followed by a commercial launch in early 2022. However, the FDA rejected the application and is now asking the company to re-apply due to a change in the way the FDA must now divide applications for devices and drugs.
MicroPine™ - The biggest market opportunity for Eyenovia is MicroPine which addresses
Myopia, or nearsightedness. Myopia is a common vision condition in which you can see objects near to you clearly, but objects farther away are blurry. It typically starts in early childhood when the eye develops and affects up to 25 million children in the US alone with up to 3 million considered to be at risk for high myopia. Usually, Myopia is a nuisance that reduces the quality of life slightly, but high myopia, a progressive type also known as degenerative myopia, can be very serious and is a leading cause of legal blindness. There is no real cure for nearsightedness but doctors control the worsening with myopia control glasses, contact lenses, and atropine eye drops. MicroPine is a replacement for the latter. Because nearsightedness starts in childhood, it's important that treatment starts as early as possible. MicroPine is delivered through the Optejet® dispenser which makes it easy for children to administer the daily medication themselves. The Optejet® also has Bluetooth capability which allows parents and doctors to receive daily notifications and monitor whether the child/patient is actually taking the drug as prescribed. MicroPine is currently in Phase III trial, with expected results in the second half of 2022.
MicroLine™ - The opposite of myopia is presbyopia, or farsightedness, which is the gradual loss of your eyes' ability to focus on nearby objects. It's a natural, often annoying part of aging. The drug is delivered through Optejet® and has the same benefit as MicroPine and MydCombi. As of early November, the first patient has been enrolled in the company's second Phase 3 clinical trial of MicroLine.
Genus v. FDA decision - a New Curveball
In a recent legal decision by the U.S. Court of Appeals for the District of Columbia Circuit, Genus Medical Technologies v. FDA (Genus), the FDA was ordered by the court to change its practice of how it classified drugs that come with a delivery device. This decision resulted in an agency wide reclassification by the FDA of certain drugs to devices or to drug-device combination products.
Per the FDA's initial guidance, Eyenovia applied for approval for MydCombi as a drug only,
which meant the Microdose Array Print did not need approval. The rationale was that only the drug dispensed, not the dispenser itself, would come into contact with a patient, and therefore only the drug needed approval.
This agency-wide review of all drugs that are in delivery systems, including eye dropper bottles, led the FDA to reclassify MydCombi as a drug-device combination, and as a result, told Eyenovia they would have to re-apply for MydCombi with additional requests and documentation requirements around the device. There were no issues raised in the FDA's response related to the phase III clinical program for MydCombi and the drug itself. This is really an issue of the FDA changing the goal line in the middle of the process. The company expects to resubmit its NDA in early 2022. Furthermore, the company believes that the information they will submit for the device used in MydCombi will pave the way for future submissions (MicroLine and MicroPine) because the device dispensing those drugs will be the same. The FDA moved the goalposts, and as frustrating as that may be, the opportunity and investment thesis is still intact so we will continue to play.
Large Commercial Opportunity
Eyenovia is still a small company, but the market opportunity is big and even if they only
capture a small fraction of the market, it will have a material positive affect on the business and the market capitalization. The company's lead candidate, MydCombi, is applicable to nearly 100 million comprehensive eye exams conducted each year in the US and is estimated to be a $250 million opportunity for Eyenovia. While Eyenovia could see substantial adoption and market share, the opportunity is still small relative to the company's other drugs. In the US alone, there are about 18 million people of 40-55 years of age who never previously needed glasses who suffer from presbyopia which equates to a total addressable market for MicroLine of about $7.7 billion. In the US alone, there are approximately 25 million children with myopia, which gives MicroPine a market opportunity of about $5 billion.
This gives the current portfolio of products and devices a total opportunity of about $12.5
billion. Anti-Infectives would add about $650 million. Anti-Inflammatories would add about $1.4 billion. Prescription Dry Eye would add about $1.6 billion. And Glaucoma could add a whopping $3 billion. Altogether, there is a lot of runway for Eyenovia here.
However, longer-term, there is additional optionality in the business. What doesn't get much attention is the possibility of expanding the use of the Optejet® device for any drug that can be delivered through an aerosol mist. We would consider additional eye medications and ear, nose, and throat medications for a variety of indications as being possible candidates, should the company decide to branch out or should a larger company partner or acquire them.
While all eyes are currently on the approval of MydCombi, investors shouldn't lose sight of the potential from Phase III MicroPine with trial results expected in the 1H 2022.
Currently, Bausch, a leader in eye care, has the marketing rights for the United States and
Canada. Eyenovia has received an upfront payment of $10 million from Bausch and expects
Development and Commercialization Milestone payments of $50 million. In addition, Bausch
may likely pay royalties in the mid-single-digit to the mid-teen range, based on gross profits.
Artic Vision in China has secured the marketing rights for Mainland China, Hong Kong, Macau, Taiwan, and South Korea with an upfront payment of $4 million. Future milestone and development payments could reach $41.75 million. Royalty payments are expected to be in the mid-single-digit range. Eyenovia can also be expected to pursue payments for additional territories that are not covered by the Bausch and Arctic Vision contracts.
Significant Insider Purchases
As outside investors, we obviously don't know all the details of the company, so we often take our cues from management and directors who may be buying or selling their shares in the open market to assess the confidence in the company's progress. In Eyenovia's case, Stuart Grant, who is an original investor, has made several insider purchases since 2019. Most recently Stuart bought 50,000 units of EYEN stock worth $199,000 on 19 August 2021. In total Mr. Grant now holds 4,339,876 shares at around $3.96-$398/share. While Mr. Grant is an early investor in Eyenovia, about half his shares, 2,163,912, have been bought since October 2019. The largest trade Stuart's ever made was buying 903,240 shares on 23 March 2020 worth over $1,860,674.
CEO Sean Ianchulev is also a significant shareholder. Mr. Ianchulev directly owns 538,679 shares, and most recently bought 30,000 shares in the open market after the FDA rejection of MydCombi. Mr. Ianchulev also indirectly owns or controls 1,066,000 shares at an average price of $2.27.
Additional insider purchases have been made in 2021 by COO Michael Rowe, and Director
Kenneth Lee. Insider transactions are just one of many metrics to evaluate a company, but we do like to see insiders buying more shares than they are selling.
Source: simplywall.st
Valuation
With a market capitalization of just $100 million, even a small share of these three markets will have a material positive effect on Eyenovia's business and share price. We assume MydCombi will get approval in Q3, 2022 while MicroLine and MicroPine will get approved in mid-2023 and late-2023, respectively. These assumptions allow us to look at a reasonable revenue progression across the three product lines and assign a value to the cash flows.
We can also create additional scenarios where only one or two of the drugs get approval, which will obviously lower the value of the equity. Using modest market share assumptions and a 7.5% discount rate we get an equity value of $860 million if all three drugs are approved, $575 million if two drugs are approved, and $325 million if only one is approved. Assuming the company issues no more shares, that gives us a range between $12.50/share to $33/share, depending on the scenario.
Source: Crystal Waters Capital analysis, 2021; SoFi Technologies' SEC filings
Risks
For investors, the phrase Time Is Money is especially profound in cases like this where the
company will continue to burn through cash while they work on resubmission and wait on the
FDA.
Eyenovia is burning about $5 million per quarter, so if they squeeze hard, they can milk another 5 quarters out of their $27.18 million. However, we would expect the company to do a cash raise after four quarters. We would expect a cash raise to take place in October 2022.
Eyenovia currently has worldwide patents on the dispenser, drop size, the velocity of delivery, and data capture through 2031. Additional provisional patents have been filed for the Gen 2 dispenser that would extend protection through 2040.
Eyenovia's biggest competitor appears to be Allergan which is developing a competitor to Eyen via's MicroLine (Pilocarpine) for Late-Stage Presbyopia. Allergan was bought by AbbVie in May 2020 and now has deep pockets and extensive marketing and sales resources to make it a formidable competitor that must be respected. However, we feel that Eyenovia's dispenser is a significant differentiator that will be well received by patients' doctors and clinicians.
Typical launch costs for large pharma companies in the ophthalmic drug space are roughly $32 million. Eyenovia believes they have a streamlined approach that can attain 50% reach for 1/8th the cost, or roughly $4.2 million (according to the August 2021 presentation). Major cost reductions include a smaller sales staff calling only on large group practices, no need for contracts with group-managed care providers, and complete elimination of printed marketing materials, interactive programs, convention booths, advertising, and other events to garner customers. If the company is right, this is a massive saving. However, if they are wrong, the cash requirements and full-time salespeople required have been miscalculated to a much larger degree. The sales staff may need to be 10 times larger. Missing conventions means a 1-year delay in being able to make a meaningful presence in the market.
The elimination of glossy marketing pieces and skipping the wine and dine circuit appeals to investors, but if this is a miscalculation, the company may be significantly delaying the development of important relationships that will be required to achieve 50% reach.
Conclusion
On October 22, 2021, EYEN stock closed at $6.58, just shy of the $7.72 YTD high reached in
February. On October 23rd the stock began to decline in response to news of the Complete
Response Letter from the FDA and now sits below $3.90 as we enter November, an almost 50% decline from the 52-week high, and a 40% decline from its October 22nd close. Investors have carved off $68.517 million in market cap over a delay that is likely to be over in 9 months or less, or the equivalent of 13 quarters of cash. While Eyenovia trades at a remarkable 27 times Price/Sales, we think the right way to value this business is on future earnings and revenue growth, 44% and 69% respectively. Analysts' price targets range from a low of $12.00, an average of $15.67, and a high of $19.00.
From a price standpoint, this is an asymmetrical trade with little downside risk and over 200% upside to the low estimate. Investors should note that the most recent analyst call was made back in April 2021 by H.C Wainwright who maintained their BUY rating. There are no analyst notes that are more recent.
Eyenovia still faces numerous risks to approval, marketing, and distribution, but we believe the company's stock has been significantly derisked by the FDA response and subsequent sell-off that investors with patience and an appetite for a bit of volatility have an opportunity to pick up shares at about a 40% discount.
Comments