Cabot Small-Cap Confidential Issue: March 7, 2024

The Big Idea

Half of the population gets cataracts by the age of 60. The probability only goes up after that.

A cataract is the loss of transparency in the eye’s natural lens. The result is blurry or hazy vision. Left untreated, it can lead to blindness.

The fix is cataract surgery. This means removing the cloudy natural lens and replacing it with a clear, implanted intraocular lens (IOL).

Sounds simple enough.

But prior to surgery, patients need to decide what type of IOL they want, go over the tradeoffs, costs, etc.

The basic version is a spherical monofocal IOL. This will give patients better vision but requires glasses for the best vision.

The upgraded option is a premium IOL. This version also corrects for astigmatism and/or presbyopia (hard to see close objects due to aging). And it greatly reduces the need for glasses after surgery.

Naturally, most people want the premium IOL.

But there’s a catch. It costs more.

In the U.S., Medicare and private insurers will usually cover the full cost of a spherical IOL procedure. But a premium IOL often costs patients an extra $1,000 to $4,000, per eye.

Still, you’d think that anybody that can afford it would get a premium IOL. Who wants to wear glasses if they don’t have to?

But the reality is the premium IOL offerings from the Big 3 MedTech companies have their own shortcomings.

Even with a premium IOL a person’s vision across the near-medium-far spectrum isn’t always perfect. There are sometimes halos, glares and other side effects too.

Also, with both a basic and a premium IOL the prescription is set prior to the implant surgery. This means patients need to make some choices about where they want to see “less good,” then live with the decision afterward, even if they realize they made the wrong choice – or if the prescription didn’t come out quite right.

This is not a contact that patients can just pop in and out. Changing it requires another surgery.

Because of the various tradeoffs, uncertainties and costs involved, it can be tough for patients to really know what’s best for them. In fact, the data show it’s not unusual for a patient who did pay for a premium IOL to not be entirely satisfied afterward. There are plenty who still need glasses.

This is where today’s company comes into the picture.

It’s made a better IOL. Not only that, it has developed a better process and equipment for putting the IOL in. AND it can change the prescription after it’s in the eye.

That’s pretty amazing.

In 2023, premium IOL procedures made up just over 20% of all cataract procedures. That’s almost $800 million in revenue per year, and the market is growing by about 10% annually.

Capturing its fair share of that market is just the beginning for this company.

Its technology should be good enough that more patients and doctors forget about basic IOLs altogether as this tech becomes the standard of care for all cataract surgeries.

The Company

RxSight (RXST) is a young ophthalmic MedTech company disrupting the cataract surgery market. It has a market cap of just under $2 billion.

The company’s system is the first, and only, FDA-approved intraocular lens (IOL) technology that lets doctors customize a patient’s vision after cataract surgery.

This customizable approach addresses the many shortcomings of traditional premium IOL technologies that require potentially significant tradeoffs – such as deciding where to have the “worst” vision and relying on a doctor’s prediction of appropriate lens power, which isn’t always accurate.

To get started with RxSight’s system, doctors complete a standard cataract procedure, during which RxSight’s Light Adjustable Lens (LAL) is implanted.

After the eye heals the doctor completes an eye exam to determine the right prescription, then uses RxSight’s Light Delivery Device (LDD) to reshape the previously implanted LAL to match the patient’s desired vision.

The LAL is made from a special photosensitive silicone material that changes shape (and therefore the patient’s vision) when hit with a specific pattern of ultraviolet (UV) light, delivered from the LDD. It can be altered up to three times.

The company’s system, which hit the market in 2019, is geared toward the premium end of the IOL market.

Target patients for this tech – about 770,00 a year in the U.S. – don’t need to be talked into getting cataract surgery, as they already need it. But they do need to be educated, as do their surgeons, about the benefits of the RxSight system versus options from the Big 3.

At a high level, these are:

• Fully customizable after implantation.
• Better vision: 70% of LAL patients get 20/20 vision versus ~40% with other premium IOLs.
• Patients can test-drive up to three vision options prior to final lock-in.
• Doctors have another premium option to offer patients, helping them grow their practices.

While the benefits of RxSight’s system are clear, it’s not available everywhere.

To keep growing (revenue was up over 80% in 2023), RxSight must expand the base of installed LDDs, then push higher sales of LALs (i.e. grow utilization).

The company is prioritizing the roughly 4,000 U.S. surgeons in the U.S. that perform 70% to 80% of all premium IOL procedures.

As of the end of 2023 the company had an installed base of 666 LDDs (+67% versus the end of 2022) in ophthalmology practices and had completed a total of 96,000 surgeries.

Management thinks the premium end of the IOL market is growing by about 10% a year, and that its market share is growing every quarter. But it’s still in the mid-single digits.

That just means a lot of opportunity remains.

Let’s dive a little deeper into the RxSight technology.

The RxSight Platform

At a high level, the first part of a patient’s experience with RxSight is similar to that of getting a standard IOL. A surgeon completes a fairly typical IOL implant procedure to implant the LAL.

The difference is what happens afterward.

A couple weeks later the patient returns to the doctor’s office and, using standard tools, has their vision checked and gets a prescription.

This information is fed into the RxSight’s Light Delivery Device (LDD). The patient’s eye is dilated, a contact lens is put in, and the patient sits in front of the LDD for UV light treatment to customize the LAL to match their prescription. Customization takes less than five minutes.

Two parts of the RxSight system make this possible.

Light Adjustable Lens (LAL)

The LAL is RxSight’s proprietary IOL. This customizable lens is made of a mix of silicone polymers that are thermally cured at low temperature in a lens mold. Partial polymerization creates a solid but soft silicone lens that’s clear, with macromers and photo-active molecules moving freely within it.

Once it’s been implanted and the patient heals, a short burst of UV light delivered from the company’s Light Delivery Device (LAL) adjusts the refractive properties of the lens.

The science behind this part is impressive.

When the macromers in the part of the lens that’s hit with the UV light are activated they are polymerized and become stationary. The remaining free (unpolymerized) macromers in the unexposed part of the lens begin to redistribute to less concentrated areas of the lens. Over a couple of days these macromers are evenly distributed and cause the unexposed portion of the lens to swell (relative to the UV exposed part).

This process creates a predicable curve in the lens and is how the desirable vision adjustment is achieved. The LAL can be adjusted multiple times over the course of a few weeks before a final “lock-in” light treatment is applied, after which no adjustment is possible.

Light Delivery Device (LDD)

This is the company’s proprietary light treatment device that allows for post-operative LAL adjustment. Based on software and algorithms, the LDD delivers a precise pattern of UV light that changes the shape and refractive properties of the LAL to match the correction the patient needs after cataract surgery.

The LDD is a combination of a standard slit lamp, which allows the doctor to see inside the patient’s eye and align the light beam with the LAL, and a digital light projector, which projects an image onto the LAL.

Once customization begins UV light painlessly and non-invasively reshapes the implanted LAL. It takes about 100 seconds. Patients need to wear UV protective glasses for about four weeks after surgery.

Examples of the LOL and LDD in Action

How To Correct For Hyperopia: Hyperopia (farsightedness) is when items close to a person look blurry. RxSight fixes this by hitting the center of the LAL with light from the LDD so unpolymerized macromers from the periphery of the lens move to the center to make it swell.

How To Correct For Myopia: Myopia (nearsightedness) is when items far away look blurry. RxSight fixes this by hitting the periphery of the LAL with light from the LDD so unpolymerized macromers from the center of the lens move outward and make that part swell.

How To Correct for Astigmatism: RxSight can also make custom, cylinder adjustments across any axis of the lens. This is typically done to correct for astigmatism (blurred vision from all distances).

Growth Initiatives

Grow Installed Base of LDDs: RxSight is focused on the high-volume premium cataract surgeons doing the bulk of premium IOL procedures. Both patient and doctor hesitations are less frequent, according to management, indicating progress is being made.

Grow Procedure Volume: Once doctors have LDDs it’s a matter of growing procedure volume (i.e. sales of LALs) within those practices.

Grow Margin On LDD: RxSight introduced a new and improved LDD in the third quarter of 2023. It’s smaller, more mobile, has better software and hardware, is less expensive to make and carries a higher price point. This machine could drive upside to 2024 guidance.

Disrupt Established Players & Grab Market Share: RxSight’s pivotal study showed it was better than options from the Big 3, and Alcon’s comment (early September) that RXST is taking premium IOL share shows the company poses a threat to the established players.

International Expansion: RxSight began in Canada in late 2022 and has had its CE Mark for some time (i.e. can go into Europe). The new LDD is in the regulatory process for Europe, and Asia (large market) seems like a clear opportunity. Management is not talking timelines, but international expansion seems an eventuality given that 75% of premium IOL procedures happen outside of the U.S.

The Business Model

RxSight has a razor and razor blade business model. This means they sell the LDD system first (grow the installed base), then sell volumes of LALs (and other accessories) for the LDD system (drive higher utilization).

The Bottom Line

RxSight’s system just hit the market in 2019 so the pace of growth has been extremely fast, but the revenue base has been relatively small. That’s beginning to change (all things are relative) as the company will surpass $100 million in revenue for the first time in 2024.

In 2022, revenue grew by 117% to $49 million and EPS was -$2.41.

In 2023, revenue growth moderated to “just” 82% ($89.1 million) and EPS loss improved to -$1.41. In 2023, the company sold 266 LDDs (+36%) and 54,873 LALs (+117%). It ended the year with an installed base of 666 LDDs (+67% versus the end of 2022). Gross profit margin in 2023 was 60%, up from 44% in 2022 due to a higher mix of LAL sales and introduction of the new, lower cost and higher priced LDD in Q3.

Current consensus is for 2024 revenue to grow by 48% to $132 million (company guidance is $128 - $135 million) and for EPS loss to improve to -$0.98. Gross margin guidance is 65% to 67% (+5% to +7% versus 2023). I expect the company to beat expectations.

Risk

• Competition from the Big 3 established MedTech players in the IOL market.
• If doctors hesitate to commit to LDD capital equipment, the trend of LAL implants might not match expectations.
• A soft economy could cause fewer patients to select a premium IOL.
• RXST stock is not well known, and the company is not profitable and won’t be for several more years.

Competition

Johnson & Johnson (JNJ), Bausch + Lomb (BLCO) and Alcon (ALC), which collectively hold around 77% share in the premium cataract surgery market.

The Stock

Trading Volume: RXST is fairly liquid given its market cap of around $2 billion. It trades an average of 520,000 shares a day.

Historical Price: RXST came public at 16 on in July 2021 (bull market). Shares didn’t perform well afterward and it wasn’t until March of 2023 that RXST moved back above its IPO price. That rally lasted until August, when shares found a top near 34. A few months of weakness followed then RXST landed at 20.7 on October 30. The stock has been grinding higher since. It crossed above the 50 level on February 9. For the last two weeks RXST has been consolidating in the 53 – 59 range.

Valuation: RXST trades with an EV/Forward Revenue multiple of about 13.6. It is not a cheap stock in terms of valuation.

Buy Range: Expect to buy the first half of your RXST position in the 50 to 60 range in the next couple of weeks. We’ll see how it goes before we think about buying the second half. BUY HALF

The Next Event: Oppenheimer Conference on March 13.

Current Recommendations

Please email me at tyler@cabotwealth.com with any questions or comments about any of our stocks, or anything else on your mind.

Glossary

Buy means accumulate shares at or around the current price.
Hold means just that; hold what you have. Don’t buy, or sell, shares.
Sell means the original reasons for buying the stock no longer apply, and I recommend exiting the position.
Sell a Half means it’s time to take partial profits. Sell half (or whatever portion feels right to you) to lock in a gain, and hold on to the rest until another ratings change is issued.

Disclosure: Tyler Laundon owns shares in one or more of the stocks mentioned. He will only buy shares after he has shared his recommendation with Cabot Small-Cap Confidential members and will follow his rating guidelines.

The next Cabot Small-Cap Confidential issue is scheduled for

April 4, 2024.

Copyright © 2024. All rights reserved. Copying or electronic transmission of this information without permission is a violation of copyright law. For the protection of our subscribers, copyright violations will result in immediate termination of all subscriptions without refund. Disclosures: Cabot Wealth Network exists to serve you, our readers. We derive 100% of our revenue, or close to it, from selling subscriptions to our publications. Neither Cabot Wealth Network nor our employees are compensated in any way by the companies whose stocks we recommend or providers of associated financial services. Employees of Cabot Wealth Network may own some of the stocks recommended by our advisory services. Disclaimer: Sources of information are believed to be reliable but they are not guaranteed to be complete or error-free. Recommendations, opinions or suggestions are given with the understanding that subscribers acting on information assume all risks involved. Buy/Sell Recommendations: are made in regular issues, updates, or alerts by email and on the private subscriber website. Subscribers agree to adhere to all terms and conditions which can be found on CabotWealth.com and are subject to change. Violations will result in termination of all subscriptions without refund in addition to any civil and criminal penalties available under the law.