Jeffrey,
Decided to start with KERA.
KERA missed numbers because it decided to spend money and time training 3x the expected number of docs in the procedure. The implication of this is that there is strong acceptance of the INTACs procedure among the eye docs. A brief sentence on the subject with my eye doctor friend confirmed this (while she and her surgeon employers pan STAA's toric IOLs), but I'd like to chat with her a little more on this subject. She does say that reversibility is one of the biggest concerns of patients with any vision correction procedure. The Street chose to see the glass half empty. This increased training would delay rollout by a quarter. Push back revenues and earnings. Some analysts cut their revenue estimates in half. They don't seem to notice that this also means that once the training and proctoring (the next & current step: a company rep sits in on the docs' first few cases) are done, the revenues are going to ramp up much faster with a base of docs 3x what was expected. Analysts' figures I've read show no adjustment for this. Makes me think they're deliberately low-balling to keep the price down. They can revise their figures upward and upgrade when their clients are good and ready, of course, likely after new conversion terms are negotiated. But I'm getting ahead of myself.
The other thing the Street seems fixated on is competition from LASIK. LASIK is not for mild myopia, so the two are not really competing now, and won't be for a while. KERA is doing trials for moderate myopia and other indications that intrude more on the LASIK market, but no analyst is yet projecting revenues from these, so I don't know why they keep harping on this. Maybe they figure that from the perspective of a doctor trying to maximize his earnings, LASIK might make him richer than INTACs, therefore he will go with LASIK and not take mild myopia cases at all. This probably is true for some docs.
But the docs who have lots of LASIK experience keep on getting the business, while those that don't, don't. That and the cost of LASIK equipment & training makes for a high barrier to entry for these other docs. Since they are not one of the select few on the LASIK gravy train, they will be ready for an alternative. This logic is borne out by the above mentioned response to the training. Management says that indeed, they are having their best luck in clinics that offer a range of vision correction options, that are not just LASIK mills.
A poster on the thread maintains a well done KERA info page.
In it, he makes his case for KERA partly on what the doctors earn from each procedure.
geocities.com
Click on the "INTACS Proposition"
It looks good, except for one thing. A doc can do almost three times as many LASIK procedures as INTAC implantings in the same amount of time. But again, so what? The high-volume LASIK docs will corner the severe myopia market and likely ignore KERA. But plenty of other docs are left that are eager to treat mild myopia with INTACS.
So, IMO, the market is there, but some on the Street choose to be extremely cautious in evaluating it. Some even claim the LASIK price war will erode KERA's margins, because KERA would have to lower prices, too, to compete. Again, they're not in the same market now.
Now then, cash from the August common offering may run low in the second half of this year. Much depends on how well the launch is going when their cash position gets serious. The converts are held by Sprout. They may convert them in June for 4 shares at $8 each per preferred share. Sprout paid $32 and got 7% dividends, payable in more shares of preferred, and a seat on the board as long as they keep more than 300K shares of the preferred. Each preferred share comes with 4 voting rights. If the stock is above $16 after June 12, KERA may call the preferred. If it is below $8 after June 12, the conversion terms get revised, presumably downwards. Said terms are contained in a "Certificate of Designation," but I can't find that. If all were converted, it would amount to dilution to the tune of 2.6 million shares. Shares of common were eligible to come out of lock-up from last summer's follow-on last November. Since then, there has been one small sale by an insider.
In the CC, management has said there will be news in March. They'll make a major announcement concerning a new Internet marketing strategy mid year (their market research indicates their end-users are heavy netaholics). A transcript is available at the above-mentioned website.
So that's the picture. What does it all mean? I'd say that Sprout, being associated with DLJ, has motive and opportunity to keep the price down to force better conversion terms. And that we'd see the stock remain weak until then, possible earnings spike excepted. Wish I knew what those new terms might be, how they'd calculate the new price. Between now and then, we have hints of mysterious news, and the big web marketing campaign gets under way roughly at the conversion date. My guess is the news would have to do with either sales metrics or clinical news. Unless they are big positive surprises -- and here only the sales metrics have much potential for that -- they won't move the price much. 1Q earnings, which should come out in a little over a month, could be another matter.
And it wouldn't take but a $2 move to change the whole picture.
So it seems to me we put KERA on the watch list. Could be dead money until summer. It seems to me Sprout negotiated the time to conversion with some prescience. The conversion is timed to go just when KERA's market will either begin proving itself or not. Sprout gets terms changed to $6, say, then KERA's marketing preparations take hold and the stock takes off. If some back-door shorting has gone on, covering begins here. Speaking of shorting, there is indeed a bit of a short position in this stock. Might some of it be associated with the principals in this conversion? If so, might we now expect to see the short ratio decreasing as long as the stock trades near what might be the new conversion price? Might be a clue.
Anyhow, I'm keeping an eye on this one. It may be a while, but I think it may go further than current price targets indicate, once the conversion is behind it.
What do you think?
Next: UROG.
Cheers, Tuck |
