On March 5, 2013, I wrote my first article about Prolor Biotech (PBTH). Over the course of the next month I wrote two more articles where I discussed PBTH's interesting, and potentially very lucrative product portfolio. Specifically, PBTH had a patent that allowed it to elongate the lives of therapeutic proteins, which could dramatically decrease the number of injections patients need to administer when taking these drugs. They applied this platform to human growth hormone (hGH), and to hemophilia and diabetes drugs. About one month after I began covering PBTH Opko Health (OPK) bought PBTH sending the stock soaring some 20%. I followed the post-buyout events very closely, and specifically, noted where PBTH's management headed after the buyout.
Shai Novick, former CEO of PBTH left to join a new company, Israel based, Glasses Off (OTCQB:GLSO). Considering his previous success at PBTH I decided to take a good hard look at his current work at GLSO. In this article, I will share some of my findings and analysis from this work, and allow you to judge the prospects of Mr. Novick's newest venture.
Glasses Off: An Overview
Glasses Off seeks to use a smartphone app to correct farsightedness. Before we understand how Glasses Off's app works we need to take a step back and understand vision problems in general.
Vision problems can arise for one of two reasons. First, someone might have weak eyes that doesn't allow them to receive light waves, and second someone's brain might not process the lightwaves received in the eyes properly. Glasses Off app seeks to improve the brain functions, specifically those in the visual cortex, which will allow the brain to more properly process the images received by the eyes.
Glasses Off improves the brain functions through an app available (soon) in Apple's app store and in the near future in Google's Play store. These apps present the users with simple games that allow them to improve on their vision in an easy-to-use and convenient manner.
While this all sounds nice in theory, what do the experts in the field say about this technology? Glasses Off's technology has been positively reviewed in: Nature, Science, PNAS, Vision Research, Scientific Reports. These reports show that people who have used Glasses Off's app have demonstrably improved their vision -- on average taking 8.6 years off the age of their eyes.
The company estimates that approximately 1 billion people worldwide (out of a total population of 7 billion) suffer from farsightedness. The company plans to initially target iOS users in the USA, Canada, UK, and Australia. What kind of market can Glasses Off expect in those regions?
Apple announced over the Summer that they had sold 600mm iOS devices to date, since then they have sold another 28mm iPads and 64mm iPhones (not counting iPods because not all use iOS) for a total of 692mm iOS devices sold. Assuming people upgrade their devices every two years, Apple should have 1/3 of all iPhone devices sold currently in use, and 3/4 of all iPads sold in use -- for a total of 140mm iPhones (out of a total of 420mm sold) and 55mm iPads (out of 169mm sold) in active use, or 195mm total.
Where are these devices located? According to studies, Apple (AAPL) has sold 22% of iOS devices in the Americas region, 14% in Europe, and 9.6% in Asia Pacific (not including Japan). Assuming the USA and Canada makes up 19% (out of the 22%) of the Americas, the UK makes up 5% (out of the 14%) of Europe, and Australia makes up (3% out of the total 9.6%) of Asia Pacific, in the regions Glasses Off plans to release their iOS app they will have 52.6mm iOS devices available to market to (see below).
Total On Market (out of 195mm) in millions
Assuming iOS users follow the general population and 1/7th suffer from farsightedness, then Glasses Off has a potential initial market of 7.5mm. Further assuming a low 10% adoption rate, Glasses Off could have a customer base of 750,000. In their S-1 Glasses Off says they can get between $100-200 revenue per user -- assuming the median of $150, Glasses Off could have a revenue of $112mm for this "initial" phase.
Taking this $112mm from the top to the bottom line, we need to deduct 30% for iOS commissions, which brings us down to about $80mm, less SG&A down to $50mm, Israeli Corporate Tax takes off another 25% which should leave shareholders with about $13mm in net income from this initial phase. Assuming a 15x multiple on this share of the earnings, gives a market cap a shade under $200mm. Interestingly, Glasses Off currently trades at only $78mm -- a huge discount to the above model. Importantly, this model leaves out growth from around the world, launching of an Android (GOOG) and Windows Phone (MSFT) apps, and lastly the expansion into new products.
All this assumes that Glasses Off will get their message out, and the relevant parties will know about their product. Luckily, Glasses Off has retained M&C Saatchi, a promoter with an exceptional record and client list, including many Fortune 500 companies, to get their message out to customers.
As someone who covers development stage biotech companies, I constantly look at where the companies I research stand in the FDA/regulatory approval process. Despite the fact that Glasses Off is not a physical device, nonetheless, software, when it provides a therapeutic or diagnostic solution for patients should also fall under the jurisdiction of FDA approval. However, Glasses Off does not believe it needs FDA approval. It gives a terse explanation in its S-1 (p. 10), and as far as I can tell, does not address this issue on their website. If this service gains the traction that Glasses Off hopes, it could come under regulatory scrutiny that could permanently hamper their business.
Lastly, paying Apple a 30% royalty for every app they sell will severely hamper their business in the long run. Apple does not have the reputation of negotiating with their developers, and as such Glasses Off will need to find another avenue to distribute their app. In my opinion, as mobile browsers improve their performance, Glasses Off will start to migrate from a native iOS or Android app to an OS neutral web app, which aside from the obvious monetary benefits, will decrease maintenance costs as Glasses Off will only have to maintain one app.