Traditional methods for brain access and retraction have not changed in about 50 years. The standard of care for deep incision neurosurgery uses an archaic blade retractor which puts pressure on the brain tissue and causes damage. Vycor (VYCO, Financial) has developed and now commercialized two FDA-approved medical devices that address a $700M and $2B+ unmet need, respectively. I believe that 2015 will prove to be an inflection point for the company as two prospective partnerships will accelerate product adoption thus resulting to top line expansion.
ViewSite Brain Access System (VBAS)
Vycor’s VBAS is a FDA-cleared tubular retractor device that allows neurosurgeons to target deep seeded tumors in the brain that were once considered too challenging (picture below). The current blade retractor tears brain tissue to help neurosurgeon get to the tumor, often causing further damage. The VBAS device enables previously inoperable brain surgeries by mobilizing tissue separation rather than the destruction caused by blade retractors.
To be brief, VBAS has been clinically proven to reduce operating time (the most expensive part of a procedure), brain tissue damage and patient recovery time. These benefits result in higher chances of surgical success and reduced neurosurgery costs for the healthcare system.
Current market situation
VBAS is approved in more than 170 U.S. hospitals, notables including John Hopkins, Stanford Hospital/Clinic and NYU Langone Medical Center. Adoption is accelerating due to clinical data (Source: Investor Presentation P.7) from leading institutions that has influenced neurosurgeons to utilize the medical device. As a result, revenues have seen a 41% increase thus far in 2014. This figure is comparable to the 53% annual growth rate from the last five years.
However, I expect a pickup in FY2015 due to new data from several clinical studies and a potential partnership with an image guided surgery (IGS) platform manufacturer.
New IGS-Compatible Device Indicating 2015 Partnership
In Q1 2015, Vycor is commercializing a new set of VBAS devices that will be targeted at being completely compatible with selected Image Guided Surgery (IGS) systems, an increasingly popular trend amongst neurosurgeons. The U.S. market for IGS products is projected to reach an estimated $1.7B in 2016. Partnering with a manufacturer of these large surgical systems would give Vycor access to place their surgical device in 1000+ hospitals in the U.S. alone. That’s more than double current distribution.
Market research suggests that 85% of the IGS market is controlled by Brainlab’s Curve and Medtronic’s (MDT, Financial) Fusion. Additionally, clinical research from leading institutions John Hopkins and Ohio University indicates that VBAS, along with image guidance, has several advantages over previous designs. Less damage on brain tissue, lower operating times and higher operating success are three of many reasons why integrating VBAS into the wider surgical application is in the pipeline. With the impending IGS-compatible VBAS device and 85% of the IGS market being controlled by Brainlab and Medtronic, I expect Vycor to announce a partnership by Q1 2015.
NovaVision
NovaVision is Vycor’s second business unit which targets people who have suffered visual deficits as a result of Stroke or Traumatic Brain Injury (TBI). According to the CDC, there are 8M stroke survivors in the U.S. and 480,000 new survivors every year. 28% of these survivors suffer from visual disorders and 20% experience permanent visual field deficits. This roughly presents a $2B addressable market where there is a huge unmet need.
Vycor’s Vision Restoration Therapy (VRT), a light-based software simulation, is the only FDA cleared therapy for restoration of vision loss from neurological damage. The product efficacy has been demonstrated across 20 clinical studies where it proved to benefit 70% of patients. VRT’s vision improvement results have demonstrated to be permanent and not dependent on factors like victim age or gender.
To add benefit to the 30% of patients that VRT cannot help, Prof. Josef Zihl, member of Vycor’s scientific advisory board, has developed NeuroEyeCoach. This computer-based compensation therapy increases the efficiency of a patient’s eye movement to scan the environment and re-trains the patient to make the most of the remaining vision. Vycor’s Cloud-based software will be competing with archaic physical wall displays that are only available in rehab centers. Having vision recovery products to benefit all patients of stroke and TBI will prove beneficial for Vycor when the company seeks to gain widespread adoption during 2015.
HealthSouth Collaboration Set to Boost Commercialization in 2015
Vycor announced a deal with the biggest rehab hospital chain in the U.S., HealthSouth (HLS, Financial), for Vision Restoration Therapy (VRT). As a result, VRT will be used as a diagnostic tool across rehabilitation centers nationwide to identify the damaged area of a patient’s visual field. Vycor gets paid every time a patient takes this test, which could add incremental revenues of $2M in 2015. More importantly, however, HealthSouth will prove to be a large referrer of patients for VRT therapy, which is priced ~$900/treatment.
With the revenue figures above, keep in mind this was with minimal marketing and no hospital network to distribute the product. Inking a deal with one of the major rehabilitation centers will be a great adoption tool for VRT. Vycor will receive patient referrals from HealthSouth centers who diagnose that further VRT therapy would be beneficial.
Financial Standing
Vycor had a cash balance of $2.4$M at the end of September 2014. The company’s quarterly burn rate is approximately 400k. Therefore the current cash balance should be ~$2M. The cash balance should be able to fund Vycor at least until the end of FY 2015, by which time I expect the company to become profitable (as outlined below).
Ownership interests aligned with shareholders
Vycor has 10.7M shares outstanding. Out of those, approximately 8.5M shares are held by Fountainhead Capital and other shareholders who have not registered shares. Fountainhead is the investment vehicle of David Cantor, Vycor president, and Adrian Liddell, Vycor chairman and CFO. Thus, Vycor has a trading float of just over 2M shares.
Vycor management has invested $4M+ of personal funds in the company. This, along with the substantial ownership (50%+) suggest strong alignment with shareholder interests. The majority of management’s investments have been in the form of debt. However, management has converted all outstanding debt and accrued interest into shares of Vycro.
In August 2014, the company and Fountainhead, the largest shareholder, entered into an agreement preventing the sale of any currently held share below $4.50 (double current price). The only scenario under which management realizes a return on their investment and/or receives back their principal investment is in the event of a highly-successful financing round at double current prices or acquisition.
Projecting the partnership effects
VBAS Assumptions
- Vycor announces partnership with one of the IGS market leaders and penetrates 0.5% of its $700M addressable market. This would result in FY 2015 revenues of $3.5M, 280% growth over TTM revenues
- 85% gross margins
- Operating expenses account for 70% of revenues, of which 30% is commission paid to IGS partner (in line with historic average according to SEC filings)
NovaVision Assumptions
- FY2015 sales of $2M
- 85% gross margins
- Operating expenses account for 80% of revenue, of which 30% is commission paid to rehabilitation centers for referrals
- Slightly profitable for FY 2015 due to the high overhead
My FY 2015 projections show a 320% top-line increase from current TTM figure, which would be warranted assuming Vycor is able to partner with an IGS distributor and a rehab center for its two products.
“Other Overhead,” the highest expense as a percentage of revenue, is primarily due to the marketing costs associated with commercial initiation and compensation. Despite the high operating costs, I expect Vycor to be slightly profitable next year, primarily because of the adoption of its high margined products. Once health professionals are aware of Vycor’s products (by FY 2016), I expect this expense to drop off to about 30% of revenues.
2016 is the year I expect Vycor to see the profits of its scalable business. Market adoption of VBAS & VRT should continue with FY 2016 revenues of $10-$12M. Assuming gross margins and commissions stay the same and overhead expenses settle to 30% of revenue, Vycor could realize operating margins of ~25%. Applying earnings multiple of 25 would indicate that Vycor has upside of 200% current levels.
Risks
Though Vycor is de-risked from a regulatory standpoint due to having received FDA approval, the company must execute on its commercialization plan in order to realize the potential upside. Execution risk is most crucial in determining success. Vycor management has set out targets in early 2015. If no progress is made on the commercialization front (ex., announcing collaborations with IGS manufacturers), it will be extremely difficult for Vycor’s products to see the expected mass market adoption. With regards to the HealthSouth collaboration, the time to rollout VRT product to the different rehabilitation centers will be a risk investors are exposed to.
Vycor is a thinly traded small cap stock. These characteristics generally indicate risk, and that is no different with Vycor. The company has a three-month average volume of less than 3,000 shares. Additionally, having a float of over 2M shares will make trading very volatile as huge swings can occur due to any material news.
Conclusion
Vycor’s story isn’t quite as sexy as other medical device companies like Abiomed (ABMD, Financial) and Accuray (ARAY, Financial); however, the low awareness is what has caused the misconception in the valuation. Vycor is completely de-risked from a regulatory standpoint, as the company prepares to scale its high margined products to the mass markets. Management’s interests are aligned with shareholders as the earliest they can “cash out” would be if VYCO stock rose an additional 100%. I expect 2015 to be an inflection point as Vycor’s two business units will be subject to several possible collaborations expected to springboard sales.
