Vycor Medical (OTCQB:VYCO) is comprised of two business units which provide innovative and superior neurosurgical and neurotherapeutic healthcare solutions internationally. Both units have developed technologies for specialized medical needs, and currently face limited or no real market competition. VYCO has been up and down over the last year, trading at a low of $1.72 in July 2013 and a high of $3.07 in January 2014. Recently, VYCO has been trading around $2.50, which, given a number of important developments over the coming months that would be game changers for the company, makes the stock undervalued at these levels.
- Market Cap: 27.0 million
- Shares outstanding: 10.7 million
- EPS: -$0.38
- Average 10-day volume: 10.6 K
Vycor's two business units are:
Vycor Medical which designs, develops and markets medical devices for use in neurosurgery; its lead product is the ViewSite Brain Access System, a revolutionary neurosurgical device used to access targets within the brain, such as tumors; and
NovaVision, which develops non-invasive, computer-based light stimulation therapies for those suffering from vision loss resulting from neurological trauma, such as strokes. NovaVision's lead VRT therapy is the only therapy for the restoration of neurologically-induced vision loss with FDA 510(k) clearance.
The ViewSite Brain Access System, which Vycor refers to as VBAS, has great growth potential. VBAS is a cutting-edge medical device that provides tissue retraction and a stable working channel for neurosurgeons operating on specific target sites within the brain, for example, to remove a brain tumor. Vycor's FDA 510(k)-cleared VBAS allows for less invasive brain surgery compared to today's standard retraction devices. Less invasive surgeries inflict less damage to surrounding brain tissue, often referred to as "white matter". VBAS' advantages have been supported by peer-reviewed articles and studies by surgeons from leading institutions, including:
"Since the initial reports of tubular retractors, a commercially available system specifically designed for intracranial surgery with frameless stereotaxis is now available - the ViewSite manufactured by Vycor Inc. This retractor system has several advantages over currently available systems - including its low profile and its transparent walls… Given its minimally invasive profile, it has been found that white matter passage closes quickly after the VBAS is removed which is not typical with traditional retractor systems after longer cases."
"Despite the availability of multiple retractors, the incidence of brain retraction injury remains high and has reported to be 5-10%. A recently developed tubular retractor [VBAS] appears to provide several advantages in surgery for deep intra-axial tumors and intracerebral hematomas… In our experience, the use of the tubular retractor [VBAS] allows one to achieve the safe access to deep intracerebral lesions and decrease the rate of retraction-related complications."
"Obtaining surgical access to deep‐seated, intra‐axial tumors is challenging. In our small series of pediatric patients, the combination of the ViewSite tubular retractor and frameless neuronavigation facilitated the surgical approach… The combination of these technologies adds to the armamentarium to safely approach tumors in deep locations."
These advantages mean that VBAS will, over time, become the standard of care as the preferred tool for brain retraction and access, and greatly improve surgical outcomes. Blade/ribbon retractors are the only incumbent medical device, and are based on technology that has not changed in over 50 years. Surgeons from leading institutions support these claims in peer-reviewed articles and studies:
"The goal of minimally invasive surgery is to reduce surgical morbidity through smaller incisions, tailored craniotomies, and more efficient microsurgical approaches that minimize collateral damage - VBAS plays into this objective"
"ViewSite is a transparent, disposable minimally invasive brain access system which plays directly into the renewed interest in endoscopic techniques in Neurosurgery. The device couples the rich and detailed visualization features of endoscope with the accuracy and safety of modern neuronavigation."
Univ. of Illinois at Chicago:
"The tubular nature of the retractor allowed the rotation and changing the angle of approach without putting extra pressure on the brain tissue, which inevitably occurs when malleable or other ribbon-type retractors are used."
Doctors have further claimed VBAS has revolutionized their abilities in such a way that procedures previously claimed as inoperable are now possible using VBAS, which in turn means that the device is saving lives. Full copies of the peer reviews and studies referred to and linked to in these paragraphs can be read or downloaded from the Vycor VBAS website.
The ViewSite technology is well-protected with 8 granted and 8 pending patents, and as well as FDA 510(k) clearance, VBAS also has CE Marking (Class III) for Europe and approvals in a number of countries internationally. VBAS is currently used in 170 U.S. hospitals and internationally in Canada, Europe, China, Japan, Korea, and Australia. In addition to these markets, Vycor is seeking or has partial regulatory approvals in Brazil, Russia, India, Korea, Vietnam, and Taiwan. Company management and its Advisory Board, including Ezriel Kornell, Konstantin Slavin, and Antonio Bernardo have been focusing on executing a targeted development strategy, which includes U.S. market penetration, increased clinical and scientific data, international expansion, and new product development/acquisition. In addition to its existing distribution networks, Vycor is actively pursuing new distribution agreements both domestically and abroad.
As VBAS continues to gain support, driven by the increasing number of peer-reviewed clinical studies outlining its clinical benefits, management is also pushing the product's broader applicability. A smaller set of VBAS devices already in the works will address a new target audience, the pediatric market, which was developed in collaboration with Dr. Gary Magram of the Children's Hospital, Central California. More importantly, four new devices are being prototyped to be specifically compatible with image-guided systems, which are used in the vast majority of larger hospitals. Management believes that these fully compatible products will have a potentially significant impact on the rate of adoption. These two new developments, coupled with the product gaining market acceptance and increased clinical data mean that we believe the business has significant potential.
Based on AANS statistics, there were 592,443 cranial procedures performed in the U.S. in 2006, equivalent to 707,000 in 2012 (3% growth). Working with neurosurgeons, management estimates that VBAS is currently able to address c.198,000 (28% of total) of these and c.326,000 (46% of total) with product extensions including the products in the pipeline discussed above. This gives a potential U.S. market size for VBAS of approximately $194 million. Working with its distributors in the EU and elsewhere internationally, and with reference to the AANS statistics, management estimates the global market for VBAS is approximately $425 million currently and approximately $700 million with product extensions. With a gross margin over 80%, this product will be highly profitable for Vycor Medical.
Vycor Medical's second business unit, NovaVision, provides vision solutions for a substantial and largely previously unaddressed market of people who have experienced blindness, partial blindness as a result of a stroke, traumatic brain injury, or other neurologically induced brain damage. Vycor acquired NovaVision in 2011, and since has been developing a portfolio of therapies which assist in both restoring lost vision and helping to make the most of a patient's remaining vision by training them to scan more effectively. The therapies have been designed to be complementary, to maximize patient benefit.
NovaVision's Vision Restoration Therapy (VRT), currently the only FDA-cleared therapy aimed at the restoration of vision for neurologically induced vision loss, is protected by 32 granted and 7 pending patents, is underpinned by 15 years of clinical research, and has been clinically supported by 20 studies which can be read in full or downloaded from the NovaVision VRT website. Selected findings of these studies are worth highlighting, as they clearly demonstrate the value of VRT as a much-needed therapy. A study of two trials by Erich Kasten, now of the Medical School Hamburg, determined that:
"Partial blindness after brain injury has been considered non-treatable… VRT has proven to significantly improve visual functions of patients with visual field defects"
A large, 302-patient study carried out in 8 centers in Europe built on a series of earlier studies and concluded:
"The results from this large clinical sample confirm the findings of smaller controlled studies (Julkunen et al., 2003; Kasten & Sabel, 1995; Kasten et al., 1998; Mueller et al., 2003; Muller, Sabel, & Kasten, 2006; Poggel, Kasten, & Sabel, 2004; Sabel et al., 2004) in experimental settings that 6 months of VRT significantly improves visual functions in patients with cerebral-caused visual field defects… Notable improvements were seen in 70.9% of the patients"
Finally, a study by Jose Romano of the Miami School of Medicine concluded that "VRT improves stimulus detection and results in a shift of the position of the border of the blind field".
NovaVision has assembled a world-leading Scientific Advisory Board to aid management in the development of VRT and transition the therapy from a hardware model to an internet-delivered one. NovaVision has also created a complementary eye training therapy called NeuroEyeCoach to add to the NovaVision therapy suite, to provide broader benefits to all patients. This overall transition and development will allow the company to reduce costs and achieve broad affordability, gain greater scalability, and enhance patient benefits. The Scientific Advisory Board is led by Harvard Medical School's Alvaro Pascuale-Leone, who, in conjunction with NovaVision's highly respected chief scientific officer, Professor Arash Sahraie, have developed a clear strategy for making NovaVision the gold standard in neurologically-induced vision rehabilitation. This strategy is centered on making the therapy affordable, scalable, and therefore both attractive and deliverable to the mass market.
The web-delivered VRT is scheduled to be complete in 2014, and management believes that upon completion, it will have the most robust clinically supported, affordable, and scalable set of therapies that are commercially available and capable of addressing this large unmet need.
As well as targeting patients directly, NovaVision will be rolling out its VRT to rehab hospital chains, which will use the diagnostic component of the software to assess patients' visual field deficits; patients with such deficits will then be referred to NovaVision for treatment. As almost all stroke patients at some time touch the rehab center system, as in-patient or out-patient, NovaVision will be building itself an installed base source of patient volume. NovaVision is currently trialing with one of the larger chains.
NeuroEyeCoach, the complementary eye-training therapy, has already been soft-launched in the U.S. The therapy is based on decades of scientific research, and was developed by Josef Zihl of the Max Planc Institute of Psychiatry in Germany, a world leader in the field, along with NovaVision's chief scientific advisor. The scientific research demonstrates clearly that NovaVision's therapies are much needed -
"Visual field disorders are frequent and disabling functional impairments after brain injury… impairment is characterized by considerably increased visual search and exploration times, omissions, as well as, longer and unsystematic oculomotor scanning patterns"
and that NeuroEyeCoach adds great value to the NovaVision therapy suite for patients:
"Home-based compensatory training is an inexpensive accessible rehabilitation option for individuals with HVFDs, which can result in objective benefits in searching and reading, as well as improving quality of life"; "A... group of patients with impaired visual scanning was treated to improve the spatial organization of visual exploration. After training, all patients showed a significant improvement in visual searching"
The market opportunity for NovaVision's therapies is enormous. On average, every 40 seconds, someone in the U.S. has a stroke. There are 8 million stroke survivors, about 795,000 new cases a year in the U.S., and stroke rates as a percentage of the population ("incidence") is forecast to increase by 20% by 2030. About 30% of stroke patients suffer a resultant visual deficit, 16% permanently. Adding 5.3 million TBI suffers makes the U.S. market's potential for NovaVision's therapies to be $2 billion. In Europe, where the company has two offices, one in Germany and one in the U.K., there are 7.6 million stroke survivors and 1.1 million new patients a year, translating into a potential further market of $2 billion. With 15 million strokes a year worldwide, the global potential market for NovaVision is $13 billion.
Market penetration and valuation potential
Based on the market sizes for each business unit, the company has tremendous revenue-generation potential. Taking VBAS first: gaining 30% market share in brain retraction/access of the applicable procedures (which is less than half of all procedures) in the U.S. alone would generate VBAS revenues of $58 million. Gross margin in 2013 was 87% (F-13 of Prospectus), and applying industry standard sales commissions of 30% would result in a contribution of over $30 million just from the U.S. For the NovaVision business, gaining just 2%-3% market share in the U.S. would generate revenues of $42-60 million; applying the 2013 gross margin of 84% (F-13 of Prospectus) would give a contribution of $35-50 million. So from the U.S. alone, the company is capable of generating revenues in excess of $100 million and gross contribution (after sales commissions) in excess of $70 million. When compared to the current market cap of $27 million, the company is clearly undervalued and there is huge upside for this stock.
As always, there are a number of risks associated with investment in early-stage medical device and therapy companies. Vycor's products are at different stages of development, with VBAS already in a good number of U.S. hospitals and a selection of international markets, and with NovaVision's therapies also being partly commercialized. However, both require further product development, and whilst the company is on track to deliver this, there is no guarantee that development will be successfully completed, or completed on time. A further risk, particularly in NovaVision, is that the company is not able to penetrate the market fast enough, and that therefore, revenue growth is slower.
The company has recently completed a $5 million equity offering, and at the end of March 2014 and taking into account the offering final close in April, Vycor had cash of $3.5 million on its balance sheet. Its Non-GAAP Operating Loss (essentially its Cash Burn) for Q1 2014 was $320,778, suggesting 10 quarters of cash at the same burn rate. However, this cash will also be used to complete its development projects, and in order to fully execute on its plan and put the marketing dollars behind getting its products to its customers, the company may need to raise more capital in time.
The company has 10.7m shares outstanding and a float of 6.3m, which exposes Vycor investors to volatility. Additionally, there around 5.5m warrants outstanding, 2.7m of which are in-the-money at these levels, which exposes investors to dilution.
Vycor Medical is an outstanding buy for the following reasons: The recent financing and availability of several million dollars should allow the company to implement management's strategy.
1. NovaVision's pending launch of the online version of its Vision Restoration Therapy program, together with the complementary NeuroEyeCoach program, making the therapies scalable, affordable, and available to the millions of needy potential patients. NovaVision's rollout of its installed base model to rehab hospital chains will provide a steady and growing flow of patients. The neurosurgical product pipeline in the form of the pediatric and IGS-compatible VBAS products will accelerate adoption and could be game changers.
2. Management is highly motivated to drive equity value, having invested more than $4 million over the past few years: management has 40% of the equity (p15 of Prospectus), including the conversion of $1,426,542 of accrued fees into the recent offering; and has $2,247,037 of debt invested (p15 of Prospectus).
3. The low valuation of $27 million for the company with two FDA-cleared products and the potential to generate high-margin revenues of over $100 million is, in our opinion, not justified. Similar medical device companies sell for valuations more than 10 times the valuation of Vycor.
4. These products are patent-protected and face little or no real market competition, making VYCO a very attractive long-term investment.
Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.
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