Safeguard Scientifics, Inc. (NYSE:SFE)
Investor Day 2012 Conference Transcript
October 9, 2012 8:30 AM ET
John Shave - Vice President, Business Development and Corporate Communications
Peter Boni - President and CEO
Jim Datin - Executive Vice President and Managing Director, Life Sciences Group
Steve Zarrilli - Senior Vice President and CFO
Brian Sisko - Senior Vice President, General Counsel
Gregg Bienstock - Co-Founder and CEO, Lumesis
David Langsam - President and CEO, AdvantEdge Healthcare Solutions
Joe Zawadzki - Chief Executive Officer, MediaMath
Brett Craig - Chief Executive Officer, PixelOptics,
Don Hardison - Chief Executive Officer, Good Start Genetics
Armando Anido - Chief Executive Officer, NuPathe
Good day, audience. I’m John Shave with Safeguard. And I think we have a pretty exciting day lined up for you today. We have eight Safeguard partner companies that we plan on highlighting. So I want thank these CEOs that are here spending their time to speak to this audience. You all have a good story to share so everybody should be excited to hear it.
Safe Harbor, I request all of you make yourself familiar with our Safe Harbor statements, and all of the inherent risks are disclosed in our SEC filings, so I encourage you to read those and become familiar with them.
And then secondly, we made a, took an initiative this year to go green, so we don’t have the big bound books to handout. As you can see from the screen and the handouts we gave upfront, the all the presentations are available to you on your PCs, tablets, iPads. So you could look at them in front of you and also the presentations will be available on our website, if you would searches to print them out following the event.
Today’s meeting will also be webcast and that webcast will be available on our website for 30 days post event and it will all be nice and cataloged for you very easily. So you could go in and pick and choose what you are most interested in hearing.
And then, finally, following the event, we’ve commissioned Corbin Perception to contact people in the audience today. You should expect to be contacted by them shortly. We strongly encourage you to participate, because quite frankly the findings that come across in the report, they are going to really help us identify any misperceptions within the investment community and frankly, it does help management in developing our corporate strategies that will ultimately grow shareholder value. So, again, it won’t take up much of your time. So your participation is greatly appreciated.
And with that, we have a very busy morning schedule for you. Try to get a lot information into three-hour period. So I’m going to turn it over to Peter Boni, Safeguard’s President and CEO.
Thanks John. Good morning. I see many familiar faces and some new faces. So, good morning to everybody. Well, it’s the 60th year now for Safeguard Scientifics and this company with rich and colorful history started as a industrial products holding company in 1953.
And there’s been many iterations of Safeguard over the years. It’s been somewhat of a chameleon. It’s been able to move as the world has moved, starting out an industrial products in the ‘50s going to data processing services in the ’70s and then in the ‘80s technology, hardware, communications and software.
Very innovative company, the first one of its kind, listed on the New York Stock Exchange, and actually the first one to do a subscription rights offerings of a high-tech company. Novel, Cambridge Technology Partners, Kanbay, DocuCorp, actually a couple dozen companies got a public face as a result of that subscription rights offering.
In the 90s as the world moved, it positioned itself first into client/server software and then as an Internet incubator and when life was good, it was a very good until that bubble burst.
This management team came into this firm in 2005, basically regrouping the company from the burst of the bubble. The firm took a variety of majority positions in some stable services businesses thinking that stability would be a good thing and the aftermath of the burst of the bubble, and they took on a good deal of that in order to take those majority positions in those services businesses.
While the valuation that plummeted fell even further because there was no sex and violence associated with low growth, low valuation metric businesses with large CapEx requirements.
What this team did is fundamentally reposition the business. We build value in those legacy businesses, realized that value with well-timed exits and we took the capital and we did two things.
We transformed the holdings to be high growth, high valuation metric, low CapEx requirements in the science and technology arena and we transform the balance sheet that was one time little with debt-to-equity at the ratio of 1:1.
So here it is now, several years later, we have strong cash-on-cash returns for new businesses we put on our books since 2006. Actually top quartile if you look at Cambridge Associates and some of their comparisons to the venture capital and private equity industry.
And we have a very strong balance sheet, rich with some cash and debt-to-equity ratio that’s been in the 1:7, 1:8 arena. But with that, while our valuation has grown, we still have terrific, terrific valuation opportunities for new shareholders.
So why own Safeguard? Full value of our businesses has yet to be realized, while we have ownership stakes in some exciting partner companies and you’ll see some of those companies today top performance of a proven team, financial strength, flexibility and liquidity, and a strong alignment of interests between our management team and shareholder interests.
Our team have background and experience as C level executives in the science and technology arena, in addition to investment banking, venture capital, private equity and alike.
My own background as a CEO for half a dozen technology firms in varying stages of growth, maturity, trouble, renewal, prior to going into the private equity and venture capital world as an operating partner with Advent International, and then got attracted to the Safeguard Scientifics branded footprint and the opportunity there.
Jim Datin’s background, diagnostics, devices, drug delivery and information technology applied to healthcare, both as a C level executive at Corporate Development Exec and at the same time an entrepreneur really understanding the venture process.
His team of people have MD’s and PhD’s, and they have run businesses. So the Safeguard Scientifics talent base is operationally savvy in addition to being on the deal side financially savvy. Steve, Brian, John, same things, strong domain expertise at the C level and terrific experience in the deal side as well, so the team with his name.
And I never like to be alone ranger, my mother taught me a long time ago that you judge by the company that you keep. We have great syndication, partnerships and alliances with industry leaders.
We have put together a technology and life sciences advisory board of about 20 different people now with domain expertise in the areas that are strategic to our interest, they help us, call through and qualify our deal flow, actually serve some of our companies or may sit on their board alongside of us and they bring us opportunities as well. And our Board of Directors, equally experienced, technology, life sciences, finance, private equity, venture capital and alike, so the team with his name.
Safeguard today, our business model is very simple. We are taking our capital. We are deploying it in new and interesting science and technology situations. We could do a growth equity financing, an early stage financing. We could do a buyout financing. We might selectively also do some debt financing. We’ll partner with the management teams as of those businesses and then build value and realize that value with a well-timed exit.
Now that’s an important thing because we are not an operating company. Revenue and EBITDA is not the way to measure our success. We build value in a business. We realize the value with a well-timed exit like a farmer in the field, nurturing a crop, bringing it to being ripe and then taking it to harvest.
Now many listen to that and say well, Safeguard is a public venture capital vehicle, right, isn’t that what you are or Safeguard, you are a public private equity vehicle that must be what you are.
Well, there is more dissimilarity than similarity. We do deploy capital. We do build value. We do realize that value with a well-timed exit. This is our capital. This is not L.P. capital.
Now, a management will say that, there is a lot more patience built into our model. We always take a Broad representation. We provide operational support services to help a business grow, not fishing for it forever but teaching it how to fish. But we are not forced to do a premature exit on the company to return capital to L.P., so we can raise a new fund every few years, little bit more patience built into the model.
Our business model is different than a venture capital or private equity business model. When we have a gain from an exit, the money is sheltered from taxes by our NOLs and that’s evergreen on our balance sheet and therefore, we are a self-funding entity.
For a shareholder, there is plenty of differences as well. If, one, we are a limited partner in our venture fund. They may do -- they maybe doing some very early A Round kinds of things. We don’t play quite as early as the venture capital community nor do we play quite as late as the private equity community, somewhat of an in between there.
We ran early enough that we have a chance for a 10 bagger, but we are not in so early that we’re likely to see 40% of everything we do being a goose egg, which is the A Round venture capital model.
But here Safeguard shareholders can take a position that is a little over lot. If you were in L.P. in a venture fund, you have two choices, a lot or a lot more here. There is plenty of liquidity. You can get in or out at anytime as opposed to waiting several years for a distribution, or in out and back in again at anytime.
And this is New York Stock Exchange governance, so all of the transparency that comes with that, we will give to you. So plenty of differences in what we do versus the venture capital or private equity businesses.
Our go-to market strategy has a couple of components. One is geography. We are principally looking on the east actively, proactively. However, things will come to us inbound yield sourcing as oppose to outbound sourcing and if it meets our criteria, we will take a pretty hard look at it. So we are doing growth financing up to $25 million or so for the company, that’s a guideline as opposed to a hardline.
We are generally the primary shareholder, enough to have significant influence on a company without necessarily owning control. And we always ask ourselves, what is our exit strategy before we deploy this capital, recognizing that that is how we realize value, grow and then realize it.
There are five strategic growth drivers that we have found in the science and technology arena and we look for those. Science and technology, why science and technology, why Life Sciences and Technology? Well, they tend to be counter cyclical. And if the driver of our economic engine is build value, realize that value with a well-timed exit. Why be tilted in anyone area if we can have some balance.
Maturity, migration, convergence, compliance, cost containment, five growth drivers that are equally found in the Life Sciences, as well as the Technology vehicles. And our five Ms of criteria; is the market strong and large enough to build a business; is the management strong or doesn’t need to be augmented, are there genuine momentum indicator showing that a company has its back to the wind versus back to the wall; does the business model enable value creation and value growth, and by most, I mean, how defensible is a company’s competitive positioning? So M-squared, C-cubed, the five Ms meets our criteria.
Technology and Life Sciences, let’s get a little bit more granular. In the Life Sciences arena, what we have specifically been looking for are lesser degrees of technological and regulatory risk. Therefore there is no new medications, biotherapeutics is somebody else’s game. It takes 10 years and a $1 billion to put a new med on the market, go have a good time, Pfizer. That is somebody else’s game.
Ours are the four Ds, diagnostics, devices, drug delivery or a specialty pharma. Plenty of opportunities for home runs in those fields, far less own risk, FDA approval processes, less capital intensive, less time consuming and great opportunities for home runs.
And in the Technology arena, we are looking specifically for transaction enabling applications that come with a recurring revenue stream. Software as a service technology enabled services, subscription licensing, the valuation metric of recurring revenue businesses is much larger as well.
And we also have three segments, IT, healthcare, financial technology and then Internet/new media. And you can see by virtue where our businesses are positioned. That the risk we take is pretty well dispersed among those segments.
Now, we’ve had same recent exits that were some terrific success stories that gave us an aggregate, about our two times cash-on-cash return for the businesses all in, all netted in with somethings that didn't work out and the things that did.
From bottom to top, Clarient was actually a business ChromaVision Medical Systems public that we repositioned and rebranded to be a Clarient, cancer diagnostics services. And build that business over a five-year period of time from about $10 million to $120 million in size, rapid growth nicely profitable.
Now, GE really decided that this was something strategic to their interest and also they paid a valuation that was I believe the highest valuation paid for a diagnostics company in 12 years, just under $600 million for that $120 million company.
We netted $208 million of proceeds from that that was actually the largest cash return in Safeguard’s event 58-year history. And while it was a five times increment in valuation from the time that this business was repositioned until the time that we had liquidity, it was about a three times cash-on-cash return overall for Safeguard.
Eli Lilly acquired Avid Radiopharmaceuticals, a zero revenue stage company just going through the FDA approval process for diagnostics for neurodegenerative diseases starting with Alzheimer and Dementia.
They paid a $300 million price upfront with another $500 million earnout on the back-end. While this was the three times cash-on-cash return initially, we are in the earnout phases right now as Eli Lilly is taking this product to market. So we have some hopes and dreams to realize much more than that original $300 million as we go through that earnout process.
Advanced BioHealing was acquired by Shire for a 13 times cash-on-cash return, actually $750 million and that acquisition was announced the eve of ABH pricing their IPO. Shire found this to a too strategically interesting to them as a cellular-based artificial skin used for burn and diabetic foot ulcer patients. ABH went to the marketplace with zero revenue and build that to a $200 million run rate before Shire found that they really needed to own that.
And then shortly thereafter McKesson acquired IT healthcare firm of ours Portico Systems, were a four times cash-on-cash return. So in aggregate we have some pretty interesting success stories for Safeguard not only in the Technology arena but also in the Life Sciences arena.
Our businesses today, we’ll categorize in four different segments. We have a developmental stage company, no revenue, just going through the latter pieces of the FDA approval process. You will be seeing new path a little later today. We have a variety of initial revenue stage companies just gaining penetration and up to $5 million in revenue validating their technology getting testimonial customers and alike.
We have some expansion stage companies up to $20 million in revenue, full infrastructure, full management team, rapid growth and really gaining recognition in their space.
And then a handful of high traction companies, $20 million on up to approaching a $100, making money are on the edge of returning profitable and recognize as the leader in their particular segment.
We can enter a business at any segment and we can exit at any segment. We don’t need to enter far on to the left and build but all the way to the right before we had an exit. Avid Radiopharmaceuticals was a developmental stage company. Clarient was an expansion stage company that moved into high traction. ABH was an initial revenue stage company that moved into high traction and Portico was an initial revenue stage company that moved to the expansion stage. So we can enter and exit at any stage.
In aggregate, those 16 businesses have grown from about $30 million in revenue a few years to approaching to $100 million today. We recently put out new guidance for about $185 million to $190 million of aggregate revenue in those 16 partner companies.
Now, I think you’ll agree that those are the few tough years to get that kind of rapid growth. How did that happen? Remember those five strategic growth drivers we were serious about that.
We have 26 Board seats across these 16 companies, 15 of these business are generating revenue and we have about $176 million of capital deployed in those businesses as of the 30th of June, I think was over the last quarter we actually reported and we have realized some $643 million since January of 2006.
So, what’s our strategy to continue to build value for Safeguard real simple? We’re building value in our current holdings. We will realized some valuable exits given the history of our firms where they are position today, how long they have been under the Safeguard umbrella, we believe that several of our position for some nice exits on a going forward basis. We will continually replenish our holdings with new winners and we’re looking to expand our platform as well. We are company builders.
And on that note, I’ll pass this to my partner, Steve Zarrilli, Chief Financial Officer who will give you a detail account. Go ahead, Steve.
Thank you, Peter, and I’ve just got a few slides here that I’ll take you through and then we’ll move on to having Jim begin the process of sharing with you some of the company stories that we are going to present today.
Key financial fundamentals just to reacquaint you with some of the key attributes of our financials and for those of you new to the story we can talk about some of these in more detail during Q&A.
Cash and equivalents and marketable securities $241 million, realized $643 million of proceeds, excluding escrow amount since 2006 as Peter’s pointed out. We’ve deployed $327 million of capital during this period of time and today we have tax NOLs of $150 million none of which are at risk of near-term expirations, so they -- we believe we’ll be able to use all of those NOLs on a go-forward basis.
We’re still trying to manage our operating expenses to the lowest amount possible but to allow us to have the opportunity to continue to make sure we have the right resources to support our partner companies. Right now operating expenses on a per share basis equal $0.85 per share and we don't expect that number to increase.
And we’ve also begun to see the fruits of our labor with regard to platform expansion as you recall back in 2011 we launched our initiative with Penn Mezzanine. This year we expect that we will have interest income on a cash basis somewhere between $1.4 million and $1.6 million that is then use as a -- to serve as an offset to our operating expenses that number will continue to grow as we continue to deploy more capital into Penn Mezzanine up to the $30 million that we’ve committed.
Cash used, we expect to be below the originally communicated range of $100 million to $150 million of cash used in 2012. Through $630 million 2012 we used approximately $31 million of cash. We expect there will be some deployments in the fourth quarter but we do realize that we were behind our expectations with the deployment of certain of these -- of certain amount of cash during the course of the year and expect that pace to improve as we go forward.
The current holdings in the -- from our partner company perspective, you can see here we provided not only the year in which we’ve made the original deployment, our percentage of ownership, the carrying value on our books and records and the original cost basis.
Keep in mind, we account for our interest in our partner companies either on the equity or cost method of accounting other than and we would account for them on a consolidated basis if our ownership got beyond 50%.
As I mentioned, Penn Mezzanine was launched in 2011, principal purpose here for us was asset diversification, the expansion of assets under management to leverage our infrastructure and to produce revenue and fee income.
We have a 36% ownership stake, as I mentioned, we are producing income. We have an 8% preferred return on our ownership. We will deploy up to $30 million of capital and we will rollover our commitment of this capital into future funds if we believe that there is opportunity and the right mix of opportunity exist for us going forward.
Equity incentive compensation as we pointed out in the past, we believe that we are aligned with our shareholders interest, the vast majority of our long-term incentives that’s based upon performance, generally with regard to both increases in per share value, as well as the production of certain targeted cash-on-cash returns with regard to capital deployed, those cash-on-cash return thresholds provide for full vesting of these long-term incentives once we achieve three times cash-on-cash return, inclusive of a hurdle rate, which includes some operating expense overhead in that return analysis.
And with that, I'm going to turn it over to Jim Datin, oh, Peter, sorry.
Before start-up I think Steve and I will take any questions you have before we turn it over to Jim. Steve and I will turn it over to Jim. Go ahead, Jim.
Thanks, Peter and Steve. I’m going to have the opportunity to share a little bit about Bridgevine, some of our high traction growth companies. As you know Bridgevine is a leading digital-based performance marketing company, a true leader in the pay-for-performance marketing space.
Major brands such as Comcast, Time Warner Cable, Constellation Energy and DIRECTV turn to Bridgevine for there to acquire new customers along with the ability to up-sell or convert existing customers as well.
Over 75 marquee advertisers, we’ll advance the slide? Thank you. Over 75 marquee advertisers are integrated into the Bridgevine platform. Bridgevine has tremendous success with these companies as they have generated over $2.5 billion of online revenue for their customers. So for every dollar invested or spent with Bridgevine, Bridgevine will return $20 in new customer revenues for that advertiser.
Bridgevine is headquartered in Vero Beach, Florida, with major operations in Atlanta, Georgia and was founded in 2003.
As you’ll hear later today, there is a, from MediaMath, there is a major paradigm shift underway right now in the advertising space where it’s migrating from offline to online. Bridgevine has been able to use its online platform and insights across the digital marketing, landscape of search engine marketing, search engine optimization along with mobile, social and display media.
Bridgevine acquire customers for Internet, phone, TV, wireless and other service providers and advertisers. It’s a very large and fast growing marketplace with unlimited potential. In fact, Bridgevine has been able to deliver 110,000 customers to their clients per month.
Bridgevine has rolled out three new products in the enterprise space and continues to have great success. So success has led to significant revenue growth, revenues almost doubling over the last two years.
Bridgevine announced that in 2011 its revenues were approximately $40 million. Company has also EBITDA and cash flow positive. Because of these achievements and recognition of them, Bridgevine was named as to the INC. 500 list, 5000 list, as one of the fastest growing company six years in a row.
Safeguard classifies Bridgevine as a high traction company to capitalize on this tremendous growth and success they had recently, company is quickly expanding its solution offering and hired a new CEO, J. Patrick Bewley.
JP formally came from Acxiom where he was a executive and built up the marketing strategy practice from zero to over $100 million in the short time period. JP has moved quickly at Bridgevine to bring on a season team of online marketing executives along with expanding a service offering.
Bridgevine has been the Safeguard partner company since 2007 when we put $10 million of capital to work and have a 23% primary ownership in it.
And with that, I’ll take any questions you may have on Bridgevine. Yeah, please.
So the question was what are the major competitors or challenge that the Bridgevine faces? While we have the good fortune, because of the success of Bridgevine head, they are clearly in the competitive space the most successful company in this area to have online revenues doubling over the last couple years.
We’ve seen the marketplace grow, clearly there is a, as we talked about, there is a shift newspapers are an old, media, we’ve seen the online industry have almost the tenfold increase over the last four years that’s expected to increase as well.
We really believe the Bridgevine will become the preeminent leader here. There is a lot of interest from other companies wanting to partner with Bridgevine, the rapid success they’ve had and the win ratio has been near or at the best at this point. Yeah, please.
So the question was many times the new management is brought in, is there a concern that something is wrong? No, that couldn’t be far from the truth. I think the company when they reach $40 million and saw the revenues continued to grow, nearly it was time to transition the team to focus who had built up businesses. The former CEO did a great job getting it to $40 million. So we are not going to be satisfied with that. We want to see this company grow well north of $100 million.
JP at Acxiom, a multi-billion dollar marketing strategic company had great success to take a company from zero to $100 million in a short period of time. So we have confidence that JP is going to replicate that and then some to take this company well beyond it. But the company is performing very well, EBITDA and cash flow positive and continues to grow nicely. Yeah, sir?
So the question was, any ideas on the timeframe for an exit, are we going to stick with it to it gets to $100 million or look for that? Well, first of all, we are big believers that companies are bought and not sold. We have high confidence that JP will do at Bridgevine what he did at Acxiom to deliver great growth.
There is strong strategic interest with many of our companies and you can see with this marketplace growing as quickly as it is that it would be logical for someone to want a partner or potentially acquire that business in the future.
So we are going to be continue to be patience, company will not need further capital in the short-term, because they EBITDA and cash flow positive, and we’ll be pleased with that growth and opportunistic if the right offer comes along. Yeah, sir?
So the question was, as you heard earlier, the Bridgevine gets, as they able to generate $20 in incremental revenue for advertiser, ultimately for enterprise customers for every dollar spent with Bridgevine, is that ratio going to come down?
No, we don’t anticipate it coming down, if anything Bridgevine is able to utilize from synergies because of scale, now that they have that they didn’t have in the past. So when you got a $40 business, you are starting to get enough scale that you can leverage not only searching, marketing, the optimization of different media, but we really think there is going to be opportunities for incremental growth.
JP having come on board just a little while ago has put in many new programs. It’s going to be expanding the platform into different markets, new product offerings. We think that growth has a lot of potential for upside moving forward. As I mentioned, Bridgevine is a high attraction company for us, significant growth potential and we are thrilled with the new leadership team there.
John, I’ll turn it back over to you.
Yeah. Go ahead.
So next up we have one of our newer partner companies. It’s a Lumesis and we are happy to have Gregg their CEO with us today.
Thank you. Good morning, everyone. Gregg Bienstock, I’m the CEO of Lumesis, one of the newer portfolio companies to the Safeguard’s family. A little bit about our company, a little bit about our history. We were founded a couple of years ago 2010 and we are located up in Stamford, Connecticut, nearby.
I’m one of the co-founders along with Tim Stevens and we’ve both spent significant amount of time at one of the financial generating tour. So have a broad similarity with the marketplace in which we serve.
Our Board is comprised of myself and Tim; Jim Ashton who was the former CEO of one of the SunGard division; Robin Wiessmann, who recently joined us, she is on the Municipal Securities Regulatory Board and also the Ex-Treasurer of the State of Pennsylvania; and then Philip Moyer, who is one of the MD’s at Safeguard, but also was the CEO of EDGAR Online.
From a funding standpoint, we started out with about $850,000 that Tim and I invested in the company. We've then did a friends and family, which was -- which is another $250,000 and then, most recently as was mentioned, we had capital come in from Safeguard, as well as a few others.
A little about the municipal market to the extent you don't know about it. It's about a $4 trillion market and there are about 54,000 issuers in the municipal market and they've issued over 1.5 million CUSIPS.
The way that the money is -- or the bonds are kind of distributed if you will, about 30% of that $4 trillion is in the hands of institutional investors and from our standpoint our target market there really focused around portfolio and risk managers, credit analysts, research analyst and we estimated that target market for us is roughly 6,000 professionals.
The other 70% of the money is going to the retail market and either that’s directly in the individual bonds or through bond funds, and from our standpoint the perspective there, there are 275,000 registered reps, financial advisors, private wealth managers and roughly 63,000 of those are focusing on municipal market, so we view those as targets as well.
What’s going on in the muni market these days, it really is what you read about in the papers. You have problems going on, lot of scrutiny all of a sudden in the marketplace, you have lots of regulation that exist in the marketplace all of the sudden.
So you have the stress that you see and you read about almost on the daily basis, go back a few years ago, it wasn’t much written about the stress in the municipal market that exist today.
You read about unfunded liabilities, in the trillions of dollars, $2 trillion to $3 trillion of pension and OPEB liabilities that exist, some say if you normalize the discount rate you are going to get up to $4 trillion in liabilities -- unfunded liabilities.
We have stale financials. We did a study. We look at the 50 states and the 50 largest cities, arguably those with the greatest ability to report information, they on average are 190 days late or 190 days from the close of the calendar year or fiscal year for them before their reporting results, so with the look back 190 days after the close of the fiscal year.
And then you the reality that insurance which was a predominant factor about 55% of that market was insured bonds that is now less than 10%, you're down to two insurers and you have decrease reliance on ratings as a result of what happened in fiscal crisis that we went through a few years ago and then also the reality of the regulation that’s come since that time.
And you speak of increased regulation, you have Dodd Frank, which everyone in this room I’m sure has heard plenty about, with regard to the muni market, there is a need for banks and other institutions to find alternatives to ratings.
You have rules from the MSRB and FINRA, you’ve got increase regulatory enforcement and the idea that there is a duty to disclose information that’s reasonably available and then also the reporting of timely event.
And then lastly in this environment you have investors who are chasing yield. So all of that leads to the need for better analytical tools and what we saw on the marketplace with were limited analytical tools.
Therefore we created what we call the diver platform and the diver platform started with the idea that you have 1.5 bonds in the marketplace and we’ve gone ahead and geo-located every one of those bonds to state, county, city and school district level.
We then went ahead and we continue to build a massive cloud-based data store. We have over 200 -- actually we are just about over 200, I think in the next week we’ll be hitting that, private and public data sets that we bring in. This is everything from housing, employment, commerce to recent current relevant events.
So for example if you think about the drought condition in the Midwest, we started about two and a half months ago reporting to our clients on a weekly basis, what's going on with drought conditions, giving them that data and information, so that they can better prepare for what that’s going and it means when it comes to revenues for municipality.
And then we allow our, excuse me, our users to securely import their portfolios into our platform. We then bring to our clients sophisticated analytical and visualization tools and then lastly, we have four patents pending with regard to our technology.
The diver platform yields currently two products, our analytics product, which focuses on, as I mentioned before credit analyst and analytical tools, and also portfolio and risk managers, essentially our target market is any institution that’s holding municipal debt, that simple.
Diver Advisors our second product and I’m going to spend a little bit more time talking about each of them in a moment. But our target market there, are the financial advisors or registered reps serving those individual retail investors. It’s a legal and compliance community as we address the regulatory requirements and it’s also credit analysts in terms of providing them a tool to disseminate information.
Analytics is our product that we released two years ago, September 2010 and it is from our perspective scalable, very scalable and its analytical and visualization tools that focus on risk and portfolio management. And here is a bit of a visual depiction of what we do, glad to walk through these at a later time with each of you.
But really what we are providing our clients the ability to do is to analyze their entire portfolio, multiple portfolios or single CUSIPs at any point in time. We are going to highlight and manage both risks as well as opportunities.
We are providing them with a different in terms of credit research capabilities tools that they haven’t had before in this market and we allow them to compare their portfolios and positions to the various benchmarks.
We are saving their time and money. We’ve gone through and we continue to go through the process of aggregating, cleansing, and making available to them over 200 or almost 200 data sets. We track drivers of municipal revenues and expenditures. We provide alerts to our clients when certain events happen with regard to their portfolio positions.
We are pinpointing issuer’s positions that maybe of concern to them and we’ll allow them to shape their portfolios. And then we’re also integrating with one of leading portfolio management tools in the marketplace so that our clients can very simply bring their positions in.
From a business model standpoint, the way we approach the market is on an annual subscription basis for this product and it's something that we’ve been pretty successful so far.
Our second product that we brought to market is our Advisor product and it a stake we released in October, a week ago Friday we released this product into the marketplace. And this is our product and tool that focusses really on a couple of things; one, its Compliance and Information Delivery Solution, so what we are dealing is, we are addressing the regulatory requirement that exist and again, we have to think of the FINRA compliance, mechanism that’s in the marketplace, the rules of the Municipal Securities Regulatory Board and then what’s required on the Securities Exchange Act. We are addressing all of those requirements and assessing basic reports that can be generate in a matter of seconds.
We are also as a result of what’s come out of Dodd Frank and the OCC Guideline that were recently issued. We also provide a mechanism to help support compliance with those OCC guidelines and those come into effect January 1st. So we are excited about the opportunity there.
As I mentioned, we are generating a client ready report that identifies risks and characteristics of every CUSIPs, so there are 54,000 CUSIPs. And what we have done is we've taken a process that -- process that taken a financial advisor to meet these compliance obligations. Generally speaking about 30 minutes and we can generate that report for them in 3 seconds.
We are also providing communication efficiency, research analyst, credit analyst, they have a big problem within larger institutions, the inability to effectively disseminate their credit notes and information to the marketplace i.e. those people serving the retail market. We’ve built into the platform a tool so they can very easily do that, shows up expiration points and things of that nature.
We are also serving the financial advisor and private wealth management network. Again it is basic, simple and easy-to-use and generate report, and importantly for them and the organizations, we are protecting them from reputational risk, that’s by virtue of these compliance obligations.
And lastly our business model, here is again on a subscription basis we’re looking at being able to provide this on a subscription basis to individuals roughly between a $1,000 and $2,500 on an annual basis and this gives a little bit of a visual depiction of what we do.
In terms of our product pipeline, we haven’t stopped, its pretty active, the first diver MBR is what we categorized as the easy button and its essentially the report that we have created for our advisor platform, it’s the ability to use aspects of that and then our database that we have created and bring the two together and allow our clients to entire CUSIP and generate a very quick and simple report that’s going to highlight information about the bond, as well as sector-based demographic and economic information, which is critical.
Diver API is really just the ability for us to deliver to those clients that want it, parts of our data that they don't want to use the analytical tool or they want to use their own analytical tool, so we’ve gone ahead, we've done the dirty work in terms of the data, its simply delivery of that.
And then the third item is the issuer, approach diver issuer and this is really just to assist issuers as we move forward in terms of their analysis and their reporting capabilities as their requirements are increased, we want to be there to help them.
Our growth strategies and also our use of funds have really revolved around four different items. Number one, we've been building out our team and that’s been our sales and marketing team, so we’ve hired a Head of Sales. We’ve hired a part time Chief Marketing Officer. We are in the process of adding dedicated customer service something that we had done across the platform before and then we’ve undertaken a significant branding effort and also enhanced our web presence.
We are expanding both our development team and our data team for reasons that are important to our continued growth and then we will also expanding our strategic alliances, we have one significant, one with an established muni market player and we are in talk with several others about expanding that platforms, so we are very excited about that as we move forward.
Some basic financial metrics, in terms of revenue growth, over 2011 we are seeing greater than 75% and hopefully we are going to see actually closer to 100%. Our cumulative annual growth rate on the client side is over 75%, renewal rate 88% and our target for 2014 is $15 million and hope we are going to exceed that.
So, in summary, we’re serving the municipal fixed income market, traditionally when it comes to technology underserved, they are changed, massively changed dynamics in the marketplace and it's one that's been subject to increased regulation and we don't see that changing anytime soon.
We are part of the Safeguard portfolio. We are early stage company. We have patent pending cloud-based platform that really focuses on analytics, visualization and information delivery, and we’re serving kind of a wide range of folks within that -- within the universe where we focus portfolio, risk managers, analyst, financial advisors, issuers and legal and compliance communities within those organizations that we serve.
So, with that, I’ll open up to any questions you may have.
Yeah. What percentage of municipal (inaudible)?
So the question was what percentage of the municipal market is rated versus not rated? I don’t know and I’m -- not answer the question in terms of the percentages and not a 100% certain. But what you do see is that the larger more frequent issuers are rated and then the small issuers genuinely are not partly because the cost associated with acquiring a rating. So that is what we are generally seeing, you are going to see the big stage, you are going to see the large cities and more frequent issuers out in the marketplace have a rating.
Actually the use of our product, interestingly, the question was, the uses, what the uses of our product therefore we’d be focused on the smaller issuers? And the answer to that is, is generally, no.
The -- what we found in the marketplace is that a result, as a result of what transpired the financial crisis where the rating agencies really took a swing in this, where you have the fact that there are -- there is information coming out daily and weekly and monthly that the rating agencies, unless there is a new issue coming out, they are not updating their ratings, so people need more information, they need better, quicker with analytical tools, so that they can stay essentially step ahead.
So we actually see, one of our clients in fact has $24 billion portfolio. They have 137 credits. That’s it. So when you think of the universe. So they are focused on large issuers and they are one of our clients, they are using our product.
So the question was, how are we position with regard to the Meredith Whitney prediction of, I guess, it’s about a year and half, almost two years ago now. So, first of all, every conference I usually go to Meredith Whitney is a bad word, when we talk to credit and research analyst for host of reasons.
We actually think that, putting aside, what we think of her predictions, our product is actually been beneficial to our client, so using it for the idea not necessarily its going to predict the bankruptcy, but what we are tracking our data and information that's going to be predictive of revenues and expenses for municipality. And therefore its going to help our users to understand what's going on in the marketplace be able to catch conditions and trends before they become obvious in the financial statement that are dated.
So the question was, if we sell -- one selling into the issuer market is our opportunity expanding or contracting? We think its expanding. We think as long as you have a $4 trillion outstanding debt in the marketplace that the opportunity for our product continues to go on. So you're looking at bonds that are not sure dated. These are long dated bonds and the need to conduct analysis continues to go.
The need to comply with the regulations does not end, in fact Dodd Frank and the OCC Guideline makes very clear that the obligation doesn't end at the time of bond is purchased for either a retail investor or foreign institution but that it continues over the life of the bond.
As you roll out the advisor (inaudible)?
Sure. So the question was as we roll out advisor to the larger wire houses already have a muni analytical product and how do we stack up against them? So the answer is that, the advisor platform is satisfying really three constituents with an organization.
So number one, we are helping them meet the regulatory requirements that the FA who is interfacing with the retail market today. For he or she will be able to do that, that’s taking roughly 30 minutes per trade. We’re offering a solution that’s going to allow them to answer that question within 3 seconds with the back-end tracking system.
Number two from the analytics perspective, the advisor product is what is, I’ll say relatively light on the analytics platform. We are going to allow through our credit delivery piece, which is dictated by the organization for them to put in their own analytics and their own research. What we are delivering in that report, our credit attribute information, news information and then sector-based demographic and economic information.
So we are not supplanting what’s going on internally in terms of their credit and research group. What we are doing is we are providing them additional information to help them meet their compliance obligation that they can turn around simply click at a button and e-mail to their clients. It’s a big different than our analytics platform, which is really geared more towards the research platform.
What is the overlapping (inaudible) the core products, (inaudible) were…
The question was where is the overlap between our product and T1 Thomson One or a Bloomberg or a CreditScope and the overlap is very minimal. In fact, we partnered with one of those organizations where they are actually were able to launch into our product from another platform and the reason for that is because the overlap is so limited.
We focus on demographic and economic data, that’s the primary focus of what we do. This is data that’s going to be a driver of what’s going on in the municipality in terms of revenues and expenses. The reason we focus on that is because it comes out, a heck of a lot more frequently, weekly, monthly, quarterly municipality [additional] financial statements once a year and it’s usually on average 190 days after the close of the calendar year. So what we are trying to do is to bring this kind of unique perspective to the marketplace and that was really the premise upon, which we founded ourselves and kind of the acceptance has been - are being available now on one of this other platform as well.
So myself and Tim, we were both at Ambac Financial Group, one of the financial guarantors. And we are the two co-founders in the organization. Our Head of Sales, who just joined the organization, was a seasoned executive, sales executive with SunGard. You have questions?
Great. Thank you, everyone. And just for everyone, I will be around for about another hour and then I actually have to hit back up to Stamford for a client meeting. So anyone wants to chat let me know. Thanks.
Thanks, Gregg. So now you’ve seen two of our technology partner companies. We have two more that are up today. Next company is going to be AHS and we are happy to have their CEO, David Langsam with us. This is a really exciting story.
Today, AHS is one of Safeguard’s high traction companies. When we put our money to work in AHS about, just over five years ago they had $4 million in revenues. So think about that when David walks through the presentations, so you have some context around the type of progress he’s been making. Thanks, David.
Thank you, John. Could everybody hear me, okay? Well, as John mentioned, I’m David Langsam, President and CEO of AdvantEdge Healthcare Solutions and as many of you know, AdvantEdge uses its own, leverages it own proprietary technology to deliver best-in-class revenue cycle management solutions. So physician billing services is an example of that.
Information and business intelligence tools and consulting and other knowledge-based services that enable healthcare providers to maximize their financial performance and minimize their compliance risk. There is a couple of thousand companies in our industry, so it’s highly fragmented. We will talk little more about that later.
But we’re recognized as one of the top 10 companies in the space today. And our 675 employees are recovering in excess of $1.25 billion for healthcare providers currently and we do that from nine offices, eight in the United States and one of which is in Bangalore, India. So, we’ve got a global workforce that we leverage to provide us, both the labor arbitrage as well as 24-hour work day in an economically rational manner.
Some of our clients are America’s leading healthcare institutions, so we work with very, very predominant physician practices and institutions. And the clients typically have characteristics that make outsourcing a very attractive alternative, such as high administrative costs, limited patient interaction, complex regulatory environments or pending technology investments.
Our clients enter into multi-year contracts with us, so this are multi-year contracts on an exclusive basis, which combined with the high quality of our service offerings and the high risk or cost of switching creates a great, a very high customer retention rate and a great recurring revenue stream. And one of the core deliverables, we have is our operating technology.
Our operating technology which is the proprietary solution that we’ve developed and continued developing, allows us to greatly improve performance and productivity. So when we bring on new clients or new acquired companies, we experienced a dramatic improvement in productivity, in claims accuracy, in throughput and in workflow management and that creates a very accretive environment. We enjoy great economies of scale as we bring those new businesses or new clients on board. And for that reason, our management team is equally focused on growth as they are on integrating that growth into the enterprise.
As John mentioned, the company when Safeguard and founders equity are two institutional investors look at the business, was about a $3.5 million, $4 million company. They made their investment in late 2006 and in early 2007 the company completed its first acquisition, making it about a $7 million company.
Since then we've grown the business very substantially, completing six acquisitions since June of 2009, bringing revenue from $7 million, roughly in 2007 to $47 million, which will be our exit rate in 2012, assuming we don't complete any of the pending acquisitions that were under our ally with now. So we expect, as along as we get those deals closed, we’ll blow through these numbers pretty quick.
We’ve taken the business from a company that’s spending money to build infrastructure to a level of profitability that we are all very proud of. We have migrated the company and its technology to be able to provide services across multiple specialties, and create a common platform philosophy within the company, which is a big difference from most of our competitors and hopefully, we’ll have a chance to talk about that a little later. And we’ve expanded our service offerings, which has also increased our value proposition to the marketplace and increased your visibility.
We built the company on some very simple fundamentals. We aspire for nothing less than to be the leader in our field, so we are in the top 10 today as I mentioned earlier. We want to be in the top one, and we believe there are five things we've got to do well in order to achieve that.
The first is, grow the business, right? And that’s organic and inquisitive and the reason organic is important to us, is because in order to look in the mirror and say you are a leader, the markets got to agree with that by buying your stuff, buying your goods and services. And in order to consider ourselves a leader, the competitors need to believe that by agreeing that you are the right company for them to partner with, if they are going to be exiting their business or looking for a strategic partner. So growth is number one.
Continuing to expand, not just our bottom line but the percentage margins that we are generating, so margin expansion is number two. Zero client attrition or client first business philosophy is our third philosophy. Leveraging technology not just to do things better, smarter, faster internally, which helps improve our bottom line but also to create a competitive advantage and strategic differentiation in the marketplace, so that we can use technology to improve our top line as well.
And create a common company, common brand, common vision, common culture in a single platform of enterprise and that’s a relentless focus on integration. Again it separates us from many of our competitors, particularly those that are also looking at opportunities to consolidate the highly fragmented market.
We’ve got great market share in and around our core operating centers and lots of clients in other parts of the United States, and we’ve got a phenomenal diversification of specialty mix. So when I say specialty mix, I’m talking about the different medical specialties - radiology, pathology, anesthesiology, emergency medicine, hospitalist OB/GYN and several others.
And the reason that that's so important, is number one, it's a great hedge against reimbursement pressures. So at different times, the government and third-party payers are putting downward pressure or increasing reimbursement for different types of specialties. So being well diversified really helps with that to hedge those risks and help us take advantage of those opportunities. But where it’s really helpful, especially now is as healthcare is becoming more highly integrated and institutions are becoming more highly integrated.
We are much better positioned than our single specialty competitors. So we compete with some companies that have single specialty expertise that will only do billing and practice management or revenues cycle management solutions or a single clinical specialty. And they talk about that as a great niche and that delivers great expertise to the client. But in a highly integrated environment, it’s going to mean that the clients going to have to be selecting best-of-breed providers instead of a provider like AHS that can give the highest value of service across those multiple specialties.
The value proposition also pretty simple, the problems we solve were the forefront of national debate, write-down were pressure on physician reimbursement and healthcare reimbursement in general. A continuing need to invest in technology to manage the administrative part of the business, more and more difficult to find, retain and keep higher trained people that are experts in this field, that are focused on managing the administrative process of the physician practice.
And believe it or not, the legislative environment doesn’t get simpler as time goes on. But it continues to get more complex and when a hospital or a physician practice partners with AHS, we’re solving those problems. We become responsible for making sure they are maximizing their practice financial performance and getting more money faster.
The compliance burden and large part is shifted from the clients to AHS. We become responsible for all of the technology investments and deliver the clients to control through anytime, anywhere access to data and information, so that they can manage their business and measure our performance.
So it’s a very transparent environment, and we do all this with a client first service philosophy and client first doesn’t mean that the customer is always right, to their dismay. What it does mean is that we are a service business, and the customer’s vote is the only vote that counts because they get to vote with their feet. So we are very thoughtful about that.
Huge market and highly fragmented, so it's estimated at about an $8 billion market today. The $4 billion that we talk about here in the AHS box is really the hospital-based specialists. But with the advent of companies like athenahealth and the EHR subsidies, the government is helping to create a much more viable market in the visit-based specialties, meaning the physician practices that have private offices and we are very, very excited about continuing to expand our presence in those markets as that opportunity continues to increase. But it’s estimated to be better than an $8 billion market just on the physician billing side and notwithstanding the size of the market, it's really highly fragmented.
The largest company in the space which is McKesson Corporation, has under 5% or just about 5% market share, making it a very, very attractive business for us to continue consolidating in, especially because that fragmentation allows small players in the market. As the healthcare environment gets more and more complex, the smaller companies are less and less able to invest in the business and deliver a level of sophistication that the market requires. So the markets making decisions now that are more in favor of larger, more sophisticated companies as opposed to the decision they used to make that were more relationship and locality-based. So we are really benefiting from those trends as well.
One of the beauties of our technology, combined with the fragmentation of the market is, of course that consolidation opportunity. And what we’ve demonstrated over the past few years is our ability to create acquisition activity and make it very, very accretive, very, very quickly. And this is a typical example of an acquisition scenario. The general - the typical business in our space is going to operate with revenue per FTE in about the $67,000 range. So for every employee they have, they will generate about $67,000 in revenue.
We operated the revenue per employee much higher than that, and we believe we’ve got the best cost structure and the business. But a $10 million company that we target for acquisition will have about 150 people. When we acquired that company and migrated to our platform, we are going to be able to redeploy or trip at least 25 of those 150 employees. And we are going to be able to manage that $10 million in revenue and operationalize that $10 million in revenue and produce better results for our clients around that $10 million in revenue with about 125 employees. And that will - that combined with the other synergies we will create through eliminating other redundancies is going to unlock about $1 in EBITDA.
So we are going to take a $10 million company that had about 150 employees, that was generating 10% margins or $1 million in EBITDA and we are going to transition that business unit to a company that’s got $10 million in revenue or maybe a little more we will dial our performance. But $10 million in revenue, 125 employees, $2 million or 20% in EBITDA and we’ve demonstrated the ability to do that. As you can see from these slides, we’ve experienced pretty significant revenue and EBITDA growth once we've achieved scale and really begun deploying the act we were executing on our acquisition strategy.
Of the 2000, the pro forma at the end of 2011 is of course, actual. But the last slide to the right is our 2012 pro forma and that assumes that we get some of the acquisitions that we currently have in [ROI], closed by the end of 2012. So very proud of what we've accomplished, very proud of what we’ve contributed to Safeguard as a partner and to their investors and very proud of what we delivered to our other investor founders equity. But as much as we’re proud of what we've accomplished so far, what really juice us and gets us jazz and keeps us focused is what we believe that we are going to accomplish in the very near future. And we’ve established some specific peculiar audacious goals for the company to achieve before the end of 2013.
So these were filed up in January issue of 2012. We are now - we went from being a 24-month objective to what now looks like a 14-15 month objective. And the first is really about our stakeholders and the prosperity of the business in general. So it’s all about growth, topline and bottom-line revenue achieving a $100 million run rate and approaching or exceeding 20% margins by the end of 2013.
The second is all about our clients, outperforming the industry on behalf of our clients and we measure this in three chunks. The first is client retention rate, clear measurement of performance for your clients. Second is client satisfaction and we do those surveys today twice a year and report on that information. And the third is just how we perform relative to the standard metrics used in the industry that are visible and accessible.
The third big area audacious goal is the recognition that we're not doing this alone. We are not accomplishing these things without help, and it's really all the people that I’ve got the privilege of working with, that allow us to achieve these objectives. And providing them with a great workplace and tremendous opportunities for personal and professional opportunity and reward is what the third objective is about or the third big area audacious goal is about and that’s achieving recognition by the end of 2013, is one of the nation’s premiere employers within our space.
So we are again very excited about what we’ve accomplished, but even more juiced about what we know the future has the whole for us and thanks all for your interest. With that, Jim, do we still have time for some questions? Great. Yeah, sir.
So the question is what's the size of our integration team and how many acquisitions have we done? We've done six acquisitions since June or July of 2009. Some describe it as six, some describe it as seven or eight and one is the large hospital system that we purchased the billing from - the business from with zero cash. So it looked like an acquisition, but we really consider it to be organic growth but that's one.
The second is a deal that we actually closed this year. It’s under MSA for a 12-month period because of restrictions that they have. So we operate a business under an MSA, but we are not considering an acquisition. So, I’d call it eight or nine true acquisitions. So one we were fortunate enough to do with zero cash.
In terms of the integration team and this is a really, really important question. We begin the integration process during the diligence process, and we are engaging the sellers’ management team. It’s not a consolidation to be active participants in that integration. So the people that integrate the business are the people that are going to be responsible for owning that business and the success of that business, and the financial performance of that business on an ongoing basis.
That would include our Chief Operating Officer, our Chief Sales Executive and whoever is going to run that business on a go-forward basis is not being consolidated, or the business unit executive that the business is going to be consolidated into. So we don't have a specific integration team, but there is a team of people that get involved in each integration that we embark upon.
The question was, what kind of organic growth rate are we experiencing and how is that impacted by hospitals buying our physician groups? Two very distinct answers, so as we grow, one of the things that we are very diligent about is not spending money where we couldn’t develop a strong ROI.
So as a $4 million or $5 million business bringing in a highly compensated senior sales executive that can drive organic growth, when we couldn’t maximize our ability to capitalize on that person's skill, didn’t make sense.
We were very deliberate at building our organic growth machine as the company could achieve some level of scale, and benefit from the caliber of the people that we are bringing in. We, our 2000 - we’ll blow through our 2012 sales objective, which I think was targeted about 13%, 14% organic growth and we’ll blow through that from a bookings standpoint.
And if I go back in time, there were probably years were it looked like we were growing at 40%, 50%, but when you have a $5 million business and you sell $2 million in new business, you get 40% rate off but it's doesn’t really move the needle a whole, a lot of what we were trying to accomplish.
In terms of the hospitals buying physician practices, one of the great things about the market and the dynamics in the market is while that’s creating a different decision maker than we've historically sold. So we’ve historically sold to the physician practice. About 70% of our business was physician driven as opposed to institutionally driven. More and more that decision-making process was being institutionally driven, which the beautiful thing for our company is those institutions can't make decisions the way the physician practices made them. They’ve got to be concerned about balance sheet. They’ve got to be concerned about scale of the company they are partnering with, and hospitals are as likely to outsource the physician billing of the physician practices were.
So in most cases, we are the winner in that environment. And it gives us access to more billing within that hospital environment that might purchase the client that we were doing the work for. But certainly in some cases we are at risk if a hospital has got another mechanism in place, buys a bit of client of ours that we will lose that billing over a period of time. But we’ve - that’s been much more. We’ve been much more the winner than the loser of that decision. Yeah.
Yeah. I can. So when I started with the company shortly after the first acquisition, Peter and Brian and Jim and the folks at Safeguard and folks and founders were very much saying, what's this athenahealth thing, what’s this athenahealth thing? Looks like, they've got a lot of momentum, lot of progress. That marketplace, the visit-based market was very immature. Small businesses under five physicians per practice under three in most cases, not a lot of opportunity to leverage economies of scale and therefore was not the best avenue for outsourcing and athena knew that.
athenahealth really didn't go in there as an outsourcing company as much as they went in there as a physician desktop company. So we recognized that as a company like athenahealth who is going to make progress, we will be able to watch wait and follow their coattails at some period of time. But we weren't a big enough company to spend our capital to drive that market and to create momentum in that market. It without outrun us, and we surely will die before we could capitalize on it.
So we focused on the hospital-based market, which because of the characteristics of those practices, no need for administrative instructor, high administrative costs, lot of regulatory complexities. It was a much lower hurdle from an organic growth standpoint and much more mature in terms of its adoption of outsourcing.
So, athenahealth is really a physician desktop company that provides a component of outsourcing as part of their deliverable. So they don’t do practice management, they do some claims submission. But they don't do in most cases, payment posting for their clients, rebilling of patients for their clients and the full spectrum of revenue cycle management from the moment the clinical procedure is performed until that financial encounter is resolved in its entirety. They do a piece of it.
We are often asked whether we are going to deliver an EMR, an EHR product and we today continued to believe that we are better positioned system agnostically than having to win a desktop battle, meaning that we can provide the best physician desktop and therefore win the outsourcing battle when we would rather say, we can help you select the physician desktop like you operate with the desktop that you're most comfortable with, from a scheduling and practice workflow standpoint, integrate and port our back end and essentially win the outsourcing battle that way.
But keep in mind that visit-based product that athenahealth, that visit based market that athenahealth focuses on is only about 22% of our revenue today. 78% of our revenue is in a market that athenahealth really has not penetrated in a meaningful way, which is the hospital-based specialties. Is that helpful? Yeah.
Sure. So ICD-9 is a method of diagnostic coding that suggest that if I fall here and I don't break a toe and go to the hospital and I say my toe hurts, the diagnosis that they’ll give me is injured toe fell. And then they do whatever procedure and they will give CPT or clinical procedure code on that claim as well.
ICD-10 says, if I fall here, trip fell at an Investor Conference at the Yale Club in New York City where it went from something like 4,000 codes to 48,000 codes. Being cut in a part used to be a code. Now it’s bite by a dog that was over X years old while fishing. I mean, it’s obscene and these codes are used internationally and we've adopted them because they are used internationally. The difference is internationally, they have zero bearing on reimbursement.
So it’s only for informational purposes. In the United States, it has bearing on reimbursement and it’s got to be contemplated in the claim submission process. And with that creating is, in hindsight the company is very, very lucky that it has its own technology and did not adopt the commercially available technology because many of those commercially available technologies were not keeping pace with ICD-10 or not going to be able to keep pace with ICD-10.
So it’s creating a rush to market to some extent of practices and hospitals to make sure that the partners they choose have in fact met the ICD-10 standards and are in fact going to be able build in the ICD-10 standard and we meet that criterion. We are ahead of that curve. However, there is still some danger because the players aren’t ahead of curve. So it’s going to create, potentially if they don’t get there some additional costs and administrative hassle that we’re going to have in feeling two ways both in the old ICD-9 model and the new ICD-10 model concurrently, so. Other questions. Yeah, sir.
So the question was really an observation of the vast but fragmentation of the market and the underlying question is, hey, if there was more capital available to deploy, could we accelerate our consolidation efforts without increasing the risk of doing that, is that right? Its funny, I get ask that almost everyday by our private equity partners that haven’t deployed enough capital yet in 2012, all right.
The challenge with acquiring businesses that are, so if you’ve got 2,000 businesses in our field, the vast majority of them are under $3 million in revenue. So, its sounds like a great opportunity and the landing place. But it doesn’t move the needle if you are not doing them in large chunks. So we’ve chosen to do to attack that market is to create what we consider to be a risk free or very, very low risk acquisition model and we’re in the middle of two transactions that look like that right now.
And that’s where the owner says, I’m going to lose my clients. I’ve got $3 million worth of revenue, its maybe four clients that makeup $2 million in revenue and then 20 clients that makeup the other million in revenue that’s not an A typical model. And we -- and they know that their big clients are not going to be able to keep doing business with them because they can’t invest and they can’t meet the needs of that client base.
So we’ve said to those companies is tell you what, we have a great home for your clients and we’ve got a great way for you to capitalize on brining those clients to us and we are going to pay you a percentage of the revenue those clients generate each year for the next three years based on those clients achieving certain revenue threshold. And we’ve succeeded in structuring three transactions like that, that we are very excited about the results.
So there and these I didn’t talked about kind of this acquisition before but these are really it does looks a lot like organic growth, we’re seller of the business, what would typically be a seller is migrating their client to AHS and then getting paid, looks like a very economically efficient acquisition model from a payment standpoint with little risk to the company. And from an absorption standpoint, it’s just like selling, why we are bringing on new client.
So, we are, its all -- in some cases it doesn’t involve an APA or an asset purchase agreement or stock purchase agreement. But at the very most it’s just going to be an asset purchase agreement, very simple and clean. So does that answer your question? Any other questions before I get again the stage for John. Okay. Thank you all for your interest in the company. Thank you.
So that was AHS next up we have Joe Zawadzki for MediaMath. I’m not going to give much of a background on MediaMath except they are high traction company. Their results and their performance speak for themselves. So I’m going to make sure that everyone has ample time to get a lot of questions with Joe. So here is Joe.
Hi, everybody. How is it going? Excellent. I can promise only one think that I will have among the most colorful slides. We are the marketing industry. So brief overview of the company. We talk about the new marketing OS. It’s a Bloomberg Terminal for marketing, so idea being that marketing whether it’s traditional or digital historically has looked the same from a buyer’s perspective.
So the, probably over 24-year old media planer buyer representing an advertiser would pickup the phone, would call their most obvious 15 or 20 newspaper or three or four televisions stations, or 15 or 20 online websites, negotiate a deal, would send over the assets the creative or the ad techs and things what happen.
And what happened in probably the last seven or eight years, it was the emerging technology driven selling of media without a corresponding technology to buy media. And so five years ago MediaMath had the insight of creating this category called the demand side platform, so the Bloomberg Terminal for marketing.
Where we put technology on the desktop of the buyer within the advertiser or the agency that really automated the process by which people could identify the things that they wanted to buy, could click a button and by the media, could click a button by audiences, we are ultimately click a button and use very sophisticated machine-based the mass part of MediaMath algorithmic learning to figure out what to buy and how much to pay for it.
So that ultimately is the business and we used this term empowering the new marketing professional. We really are in the midst of this paradigm shift to over use and over used term, in terms of how marketing is done. It is now being done with technology and with math as opposed to with intuition and with art. It’s a very exciting place to be.
So, we, again, there is operating system for digital marketers. We’ve got over I think at per count 12,000 advertisers that are running through the system either directly or through their agencies are represent about 55% of the Fortune 500. So it is geared toward the enterprise class or about 176 employees across seven offices.
So headquartered here in New York with about 125 folks, we’ve got a West Coast presence of about 15 on in San Francisco. We’ve got a small Chicago office, the Boston office and then EMEA is now 18. We’ve got a couple of joint ventures in that regions one office in Berlin in conjunction with company the [Total] Group. We’ve got presence in Sydney with another group called Connected and just opened up Japan offices with Maxifier. We’re looking at Canada and Latin America either late this year or early next. And then servers distributed globally as well.
So, a lot of the requirements on the technology side, make sure that our servers, because all this is the sellers and the buyers are talking via computer as opposed to a phone and that requires globally distributed technology and we’ve done that, made a significant investment.
Business growing very quickly, doubling sort of year-over-year, just got acknowledged by INC. 500 as one of the fastest growing and then the technology that we built as I mentioned is world class. So we, a lot of times when we are meeting our suppliers, so that is the Google’s or the Yahoo’s or the PubMatic’s or the Rubicon’s, a lot of the folks that are enabling this stuff from the supply side.
They’ve do first rank us in terms of our competitive set and we are top of leader boards in terms of queries per second, ability to handle the volume of impression that they are delivering.
And just to scale the size of the business or that the market overall, we’re looking right now at about 80 billion impression a day of supplies, so that is 80 billion individual impressions are available through these real-time systems and that’s a huge amount observe the overall web, now sort of wired up for technology based buying. Is that all make sense. We can make this interactive too so if I ever don’t just let me know, okay.
The problem is a cute one, I think sort of people understand this, marketing has to move out of the period which is -- its hard to attribute, it’s hard to figure out what you put in, in terms of what you took out and where that’s moving is CMOs and their partners on the each side within their organizations are really focusing on installing systems, installing technology in order to make sense of all of this stuff.
And this, the piece of change, I think is dramatic. I’ve been in the industry for about 14 years now. And the rate at which people are adopting technology at which they are changing their business process and practices in order to adapt to the new landscape is tremendous. So you are seeing tons of interest from lots of folks in terms of bringing technology into their organizations.
The spend is going up, I mean, its going up for lots of reasons. One is, more people are spending time online. No surprise, there is a tourism and marketing that dollars eventually follow the eye-balls that is the case.
So increasingly marketers are becoming more fluent and investing more dollars in digital and more channels are becoming digital right, which is another interesting trend, right, things that we’re very analog, linear TV with the advent of things like Apple TV and Google TV are becoming digital ended up their own rights, right. Mobile which used to be a WAP-based really hard to develop on problematic environment, suddenly with the smartphone, would be in iOS or be in Android is fully digital.
And so all the techniques that you used in digital will increase will become part of everything else, right. As people start moving to Kindle and start look at EA, it start looking much more like a digital platforms than it does look like a newspaper.
So, again, those are two trends that are sort of moving into right direction in terms of the digitization of marketing and willingness by marketers to spend on digital, because they are started to figure it out, representing a bigger and bigger percentage of the overall marketing mix.
And so, right now in terms of the media types we touched. Four years ago, we were very much focused on the banner inventory largely because of supply/demand imbalance. There was lots of supply of this stuff and very few sophisticated buyers.
Our platform TerminalOne has come to encompass over the past about 18 to 24 months, display inventory video, online video inventory, mobile inventory and most recently social inventory, so really now everything digital with the exception of search. We are bidding and buying on at scale.
Interesting that I think the RTB market you start to see a series of sort of contemporary circles here in terms of $160 billion U.S. advertising obviously online somewhere between 26 and 35 depending on the U.S.
These automated exchangers about 2, 2.5 at this point and then this RTB inventory, where servers on both buy side and sell side are communicating. So I think of this as the algo trading or quant trading or the flash trading without all the bad stuff in the online media market that’s they went from no markets four years ago zero to a $1 billion market now and it is the fastest growing.
I will say, what’s become very interesting is the way that buyers historically thought about what we were doing this the algo trading for media was it would be one part of the plan. So they were traditionally media plan and buy most of their inventory, right.
So, if I’m American Express and I’m working with Digitas, Digitas would do most of their planning as they always did and then one of the line items, so one portion of the budget would go through a technology driven system and a quantitative driven system, today we allocate 10% to 20% a media to that.
What’s happen in just the past year, is you are starting to see marketers and agencies really focused as this being the core and the rest of media planning buying being the spoke, right or haven’t spoke.
Where they really basically saying, look I’m getting all these incredible benefits of seamless execution, real-time delivery of analytics and information, ability to deploy algorithmic decisioning to 80 billion impressions today. Why is that not the core of my plan and then anything that’s not in the platform I’m going to augment with my traditional approaches of negotiating with publishers and bring it in.
And we are seeing that in real life. We’ve got lot of advertisers are basically saying, this is the way that I buy. You are saying agencies are saying, very quickly is become 25% of our spend and its looking to become a 100% of our spend in 2013 and that’s sort of the enterprise model of licensing technology into these organizations and really being the way that they buy media that’s a exciting trend.
And I talk about the international expansion, fairly recently just a combination of our server locations, which are worldwide, Hong Kong, Zurich, Paris, Palo Alto, Chicago and North Bergen, New Jersey and then physical offices with folk’s feet on the street and it’s growing very quickly.
International has been great for us, really from a standing start about 18 months ago, it’s become about 35% of overall revenue. The international market very adapting and adopting of technology based solutions. So they haven’t become as a custom to the high-touch hand sold model that has sort of prevailed in the U.S.
And as a result when you come out and shop with the technology, you basically say, hey, this will drive efficiencies for your organization, it would deliver better results to your clients being an advertisers, are you interested, the answer is a pretty resounding yeah fairly quickly. So we are very excited about the international growth and the opportunities there over the course of 2013.
Had a great Forrester, which is the consumer reports for business-to-business technologies came out with very exhaustive study, really late, at the end of last year, where they ahead us some to the number one demand side platform and sort of gave us high scores with really happened in the past 12 months I think as you’re starting to see some open water being created between the competitive set.
So we are on the top three or four as people are thinking, hey, I need a demand side platform and these are the three or four that I need to talk to and avoiding the conversation we sort of win more than our fair share, we retain far more than our fair share. So it’s a good thought to be in going into -- going to next year.
Worked with a lot of clients across the board, obviously, a lot of brand directly and obviously holding companies, agencies, as well as trading desk, so specialized groups that are really focused on bringing technology-based media and marketing solutions to the markets, and those are sometimes within the holding companies and sometimes are independent entities from without. And so we very much focus on the demand side, but we are seeing lots of innovation happened across lots of this so to categories on the demand side.
I’m stuck on this slide, so enjoy the logo role. Very pretty. And I really like the Forrester slides and go back to that one. I made it in the blanket at home and wearied all the time, okay, great.
So the interface looks like this. So, obviously, there is a lot of sophistication that’s layered into that. We’ve worked very hard making it sort of wizard based. Making easier for now this people that come in, so we are at a point now where most people can get up and running within four hours, so we’ll come in and get them trained and get them confident pretty quickly.
I think we’ve got right now north of 1000 external users using the technologies to this multi-tenant software as a service application. And they obviously vary in terms of their sophistication, generally after month people are feeling very comfortable, very passive with the tool and that’s sort of how we do things.
People talk a lot about in online marketing, the complexity of the problem that there are lots of logos and lots of different things you need to do in order to make a work well. We view one of our jobs is sort of being their technical general contractors so the one have done, if you can work with MediaMath, we’ve done the integrations with all of the best-in-class providers. Such as that when you log into our dashboard, when you log into our front-end, we have access to all the things that you ultimately need in order to be successful, right.
And so there is over 150 partners in our supply chain. So the people that we’ve connected to on the media side, on the data side, on the analytics side in order to make the process very seamless for marketers and a much less sort of scary place to dive into. So a combination of making it easy and the combination of extracting the most amount of value out of those partners through the algorithmic optimization.
The impact is pretty transformative and this is a busy slide, I do provide lots of colors. But if you think about the traditional planning and buying process, generally speaking you’ll have three people that are working on a given advertiser going through the manual process of negotiating, trafficking tags or trafficking creative, negotiating make goods, when things go bump in the night.
Generally speaking given how manual the process is, you’ll tap out 25 or so properties that you're buying on on a consistent basis. And you’ll remove your bottom, couple when you’ll add few more, but if you think about the analogy in the financial services market, right. If you are pay and managing your portfolio, you probably can't manage that many, right. You can’t keep an eye on that that many positions in your head at once.
And as a result of that, you are looking at making changes once a week, because making changes is very hard, is a high tax to doing that. And generally speaking if you're doing that you need to find the simplest thing to optimize for, right, so you are optimizing for click rate or you are optimizing for, hey, did I reach my audience.
In a technology-based world, right, where literally you’ve got one trader and they sit in front of a terminal, user interface made access to real-time information across 80 billion impressions a day, right.
They can buy sites, even a click, they can buy specialized audiences, they can use machine-based learning to score every one of those individual impressions to decide how likely is this impression to deliver result for my brand you just changes the nature of the game, right.
So we have one trader, the folks in our offices generally will do 60 to 80 advertisers at once, for external user that’s sort of new learning curve and they may manage 10 to 20 advertisers at once. But you are seeing at least in order of magnitude improvement just in the efficiency, just the process.
And then again, because you are doing at across 80 billion impressions a day, you can’t do 80 billion impressions a day by hand, no matter what, right. No matter how big your team is, if you are scoring each impression individually every 15 minutes, you tap out pretty quickly, right.
If you are using machine-based learning, you can do something pretty transformative and as a result people are doing amazing things with their marketing now, right. They are connecting that system directly to their outcomes.
So, they’re not optimizing for impressions. They’re not hoping that click through deliver results, they are using just get a learning to figure out exactly who should I buy and how much are they purchasing and what’s actually going into the basket. And so the result is 10x better results in almost all cases and more than that and lot as people begin to use the system to it at most.
10x ROI is what leads the business transpiration, right. If you can get 2x ROI people poke around that it seems pretty interesting. If you can get 10 times return on investment from doing this, people will change how they do business in order to accommodate that and that’s the reason for the breathless change that’s happening both in the market and fairly in my presentation. Okay, people are listening, awesome.
So, some of the things that we have been working on this year, this is almost our [be hags] and we’ve accomplished the vast majority. So we are seeing the business moved to an enterprise sales model where more and more people are looking at the technology, quant technology and evaluating -- what it looks like.
I introduced the lot of new products both in terms of product called OPEN, which is really bringing our partners to the four, so bringing that supply chain and basically saying to our partners, hey, through MediaMath and through TerminalOne we can give you access to the 1200 advertisers and the 300 agencies and whatnot that we work with.
We are seeing emerging channels as I mentioned video, mobile, social, all big areas of growth, right, increasingly around the goal of bring all this. Now, historically silo media channels together to really provide one view of the customer for one view of marketing spend and how it’s working. Geographic expansion, we’re doing that at a very good clip and then we are looking this year at sort of inorganic growth.
I’ve got to close on a couple of acquisitions. I think we’ll likely close one by end of year and if not by Q1 of next. But we are seeing the opportunity to bring sort of smaller companies into the folks.
The folks that are struggling on the future, the product, the company, the enterprise, evolution, I think a lot of folks are seeing us as a vehicle to enterprisehood and coming, enjoying the team and sort of fast growing and doing some interesting stuff.
So, that’s what I’ve got. Questions.
Kolos. Yeah. So, I’m sorry. We build the home servers using Kolos or Amazon, the answer is, we -- Kolos created our own data centers worldwide.
Well, so, Amazon’s lower cost, is it a higher cost Amazon? The answer is Amazon is lower cost during the growth phase because you don’t have to make the upfront investment. At some point the lines cross and you actually need to reduce cost, you actually put your own facilities in place, we are well pass that stage and then, yeah, there is an element of wanting to own our own infrastructure.
And last question, what (inaudible)?
Yeah. To what extent is artificial intelligence or other forms of machine learning used? A lot is the answer. So the company is MediaMath. We do have the brain which is our algorithmic learning sort of optimization suite.
And I would say, we support a range of used cases, so we do have plenty of clients that just used the platform and I would say just to automate the execution of buying beside that they otherwise would and so using our workflow efficiency standpoint.
Best practice is to use the optimization. It is fall into a lot of folks to buy media this way but that is basically where you are telling the system what outcomes you would like to achieve, right. I would like to achieve orders at $60 or less from high value customers.
And what ultimately happens is the algorithmic optimization the brain starts testing, start sampling a process called watermarking, starts evaluating, which impressions are delivering those types of results and over period of -- short period of time, two or three day starts buying, paying more and buying more of the inventory that looks like its delivering that result and paying less and therefore buying less of the stuff that isn’t.
And that’s happening across all of our clients in fact all of our each -- at the creative level for each of our client. So different offers, different persona, different calls to action, all of them received their individual model and that’s where you get sort of the greatest result. And I would say, half of the clients are sort of move their business regardless where they started from to taking advantage of this machine-based learning. Yeah.
45% I would say are in the product engineering, sorry, question was, 175 employees, how many are engineers? Close to half on that the product engineering side of things, probably a third on the sales and account side of things and the balance really around media operations, ad-hoc analytics and also G&A. Yeah.
Clear that you are growing very rapidly, how is that related to (inaudible)?
Yeah. So clear that we are growing rapidly, very extremely, so thank you for saying that, no I added that, add a little bit. And what is that translate to in terms of profitability and EBITDA margins?
So we have brief rotations with profitability over the course of this year. We are continued to invest in the business. So I think we added probably 65 people and several thousand servers. So we are leading into the market.
But we’re seeing margin expansion over the course of this year. So we’re seeing as people sort of move to the algorithmic optimization their pricing, their willingness to pay has been going up and so we see that sort of continuing to into next year as well. Yeah.
Excellent question. If this were not webcast, we would have that, right after this. You can view probably can back into it given the staffing and given what I talked about in terms of profitability so.
Okay. You mentioned that (inaudible)
So I think it’s all of it. I think it’s 80% of the market goes algo, which is, I think right now algo is 70% of financial services, right. It’s a, in terms of trading volume if not dollar volume.
And marketing has exactly the same set of dynamics, right. There is enough liquidity now in order to make that happen. There is, the fact that technology underpins all of it, allows but as well and in fact, you can bring a model and get better results. This even more interesting actually in marketing then it is in finance in the sense that the intrinsic value of an impression is actually different for all the buyers, right. This are not everybody’s equally in market for BMW as a, did they still sell printer.
But anyway, right, you just, you have different demand curves for each product and so, as a result its, there is a greater opportunity in this area. So I think the market very quickly shifts from these being the spice to this being the meal, right, and we are seeing it. So we are saying whole organization that we’ve got a couple agency partners, for example that when they sort of decided where they wanted to take the business, basically looked and said it’s a little bit of the CDMA versus GSM model.
If you have a big CDMA network that is if you have a big traditional hand button sold media planning a buying process, making to jump 3G or 4G is psychologically costly, right.
If you wake up in the morning you don't have an established process and you got to make a choice, right, do you install CDMA or do you install 4G, the answer almost in variably as you install 4G, like why wouldn’t you use the latest technology.
So what we are seeing now is the emergence of a lot of folks that are just contrast, right. They are just programmatic buyers and I think as they start seeing the success that’s possible here then it even more quickly drag along the folks that are sort of making organizational sort of change management thing happen. So a long answer to it, straightforward question. Yeah.
Who are your (inaudible)?
So we have some of the competitors on that Forrester list. But I would say, few primary competitors that turn is West Coast based demand side platform. Invite Media which was acquired by Google around two years and a company AppNexus based here in New York that was originally on sale side, on the exchange side has been some inroads on the demand side.
In terms of differentiation, I think, you’ve got two primary ways you can think about getting into the market. One is as a like largely workflow tool that’s designed around sort of reducing transaction cost and making it easier for people to do the stuff that they use to do using technology and most of the competitors that actually took that approach very traditional Google model for, Google Analytics for example is a simple easy entry point product, very quickly people are looking at upgrading into a richer analytic suite but look at the CoreMetrics or look at Omniture, they apply the same strategy here, so it’s simple, easy, cheap is sort of that watchword.
We are very focused on the algorithm optimization side of things. So we are about extracting results out of your marketing and that requires more sophistication, comes at higher price in terms of but a much higher return as well. So we sort of lead that more sophisticated part of the market.
Our belief is one that that’s what enterprise marketers need, the Fortune -- the Fortune 5000 as suppose to the SMBs 1 and 2 we think the sophistication is generally one directional, right.
So people are going to get less sophisticated in their marketing as digital gets a bigger percentage of the overall and as these techniques sort of get more distributed in the world, so I should say increased adoption of clients that are at their starting very sophisticated or have started basic and are now migrating and saying, okay, what else is possible now that I have sort of gone down this road, so. Anyone else. Okay. Thanks everyone.
So, thanks to Joe. We have on the agenda scheduled a brief break but we are few minutes behind the schedule. So I thought anyone that needed to use the facilities or step out could do so. The intention now is to step right into the Life Sciences companies and we are going to kick-off the Life Sciences presentations with the CEO of PixelOptics, Brett Craig is with us today, another very exciting story and I’ll let Brett take it from here.
Thanks John. Well, great time to come on when it is informal break, half the audience is leaving. But we have an exciting story. Joe did actually may claim in fact he had all the most colorful slides of the day, I’m going to actually challenge him, even though we are in our company we’re not a marketing media company. We actually have put up some colorful slides as well.
So a little bit about the story PixelOptics and really its one thing that I think is exciting that’s why I’m here. And it -- let me get into it really basically. One is, it’s a very large and profitable market. Large in the sense that, one thing nice about PixelOptics and what we do relative to other traditional company and most of you actually out there wearing glasses I see and you know the prescription behavior you are in and there are typically in your frame and your lenses are combine and at the same time that becomes the product.
In our case because we are combining electronics into the frames, as well as lenses, we are actually looking at the market a little bit more holistically frame and lens. So roughly for us it’s about a $60 billion opportunity and it’s also profitable.
I don’t know if you guys actually had a chance to view 60 Minutes last night, sorry, Sunday evening. Lesley Stahl actually interviewed the CEO of Luxottica. Luxottica being the largest retailer and actually sunglass and frame company in the world and they were talking about frankly Luxottica’s position in the marketplace and it's a very strong position, and they’ve done a great job in creating value with while driving a trough. So, hey, that’s Luxottica, so as Johnson & Johnson contact lenses. So the point it is, it’s the large and profitable market and the big guys kept it that way.
For us because looking at this directly for frames and lenses for every 1% of market share to $450 million opportunity for PixelOptics, so very significant. So, again, for picking up a percent, we are looking at a $450 million opportunity, you’ll see here right now that our goal is to be at equal or greater than 5% of the market. We think that’s actually quite feasible given the disruptive nature of the technology, which I’ll get into here in a minute.
So literally it’s a disruption in a sea of change, the incremental change. We all know that what’s going on in various categories that digital is actually disrupting the categories. We know the cell phone issue situation. We know what happened with Kodak. I love to cycle in this case new model is bringing in electronic into the, was mechanical gearing aspect of Viking.
So point it is digital actually is disrupting, what is -- what it call an analog type of industry. We are no different. We’ll get into that here in a minute, but there is really a problem actually aging eyes, most of you are probably in that 40 to 50 range or somebody under then that that most of you understand the presbyopic stage of natural aging of the eyes.
It’s a very common phenomenon. It happens to everybody at some point in your life. And what happens basically you have a loss of accommodation, there is tear quality, as I said before it begins in your -- typically in your 40s.
The presbyopic options today is a traditional progressive lens wear has basically a trifocal blended into the lens, that if you taken a trifocal without the statics of lines or the lack of statics of the lines and you blended that into what we call a progressive lens or progressive addition lens.
In this sense you have a distance build at the top or ground at the top, intermediate in the middle and near at the bottom. This lens is always, on another word its ground permanently and to some degree actually is a limitation depending on lifestyle. But, nonetheless, it’s really the standard the industry today and has been since really the 1960s.
However, we are taking a much different approach with that and to show you, I’ll give you, yeah, a few different aspects of the limitation of progressive lens. Those who wear have understands these limitations on peripheral.
So if you are actually looking out, you are getting when we call peripheral blur because of the way the intermediate is actually built into the lens itself. The same is actually viewing down, so you can imagine its in fact you have your near zone and this case your reading zone constantly on to a progressive, when looking down, because its constantly on, you are watching front of you actually its blurry, and that’s just the nature of the physical of the lens and you cant’ actually change that, okay.
However, we are looking at this as a brand new opportunity really create a category and see if incremental change in a very large industry. So there was at one time the not so smartphone and now there is this smartphone. We know what that’s doing and Apple knows that very well and creating basically a $1 trillion opportunity just in the smartphone category alone with their iPhone.
So what are we doing? We are taking what is a static lens today and driving it to be a dynamic lens, a lens with the switch. So to give you a demonstration I have a pair on, you would expect that right.
Basically what you do is if you actually touch the lens as I just did, it actually is activated the near zone, so now I can actually read my watch and actually see my watch or book in front whatever and again, I can turn it off right now, the reading is on and off and now can see through my intermediate zone as well as my distance zone.
You can also actually had taken on automatic, so there is a basically an accelerome that are actually in the lens just like the phone, so when you tell the phone you understand, the same thing with this lens, so that if you turn it on in the automatic mode as you touch your head it turns on and off automatically.
This is advantages in lifestyle conditions like again a hairstylist or somebody actually on pulp it reading and/or teaching, so there are some applications that comes in handy. But again we are taking what is a static but yet a very profitable product and moving it into a much more disruptive product and through electronics.
So what does a power do, it does three basic things, it offers you through the in this case the progressive addition lens in the back which is actually a partial at progressive in the back and gives you the widest distance intermediate viewing of any progressive lens out there today and we’ll show you here why in a minute.
Number two, near zone is activated when in fact you want it, so it vision on demand, so when you went activate your near zone in fact you can’t. Indications are about 70% of your day is usually viewing to the distance and intermediate zone, if you are looking out beyond, in this case you are, 30% is actually in near zone, depending again on lifestyle, if you retire actually little bit more than 30%.
But nonetheless what we are saying is we want to optimize those viewing zones in those particular parts of the day depending on again lifestyle and again electronics are hidden inside the frame, integrated into the frame.
So in essence what you have here, you have the distance that actually is ground both on the top and the bottom, if you don’t get the blur as I talked about before, you have a much wider intermediate zone actually in the center right, actually the focal point of basically the retina and in the near zone it can be turned on and off when needed, which is little bit larger, so in essence you are putting the near zone right in front again of the pupil and then you are able to actually see that again through the power that’s actually generated through the lens itself.
So what is the result? The results are vastly improved peripheral vision and this actually come from the partial progressive on the back, so in the essences that really come in from the interactive electronic zone, its coming from a much better progressive design because you can actually optimize the EA zone.
And as well when you in fact you have the EA zone turned off, as I said before because your distance is right at the bottom, you actually do not have any ground blur unlike a traditional progressive.
One thing nice about the platform as well one can imagine if you are building and embedding electronics into the frame which you could do with that. So we are moving not just in the aspect of really trying to see better which is actually a big part of who we are and it controlling the optical zone with the Left Temple as we move into new technology, we are going to be able to take electronic into the Left Temple and do other things with them.
I’m sure most of you read about what Google is doing today and their heads-up display glasses right in frame, they are actually very active right now in communicating. They want to take that interface from the phone in front of your eyes and Apple is doing the same thing as Nokia and few others.
Well, we’ve been thinking about this percent many years not just about heads up to displays but we are bringing other value adds into the actual eyewear platform beyond that of site that actually adds value to your lifestyle.
And so we are working on that, one can imagine what that would be because we are in a public webcast, we can’t actually articulate all of that technology but it is exciting and it is something be actually coming out in the near future here on behalf of the company.
We also have an incredible platform 300 plus patent or patent pending applications in the U.S. and Europe, primarily also in Asia and Latin America to a lesser degree. So well protected and again primarily this country and Europe and at the same time we’ve been recognized early on. We are actually in early revenue, pre-revenue company, because of the technology we’ve actually recognized by both the Edison Awards and the R&D 100 Awards and those actually came both in 2012.
We had about $100 million invested. Safeguard is big part of that. We thank Safeguard for their participation and the leadership as well, they are not only bringing a capital and deploying capital into the company, they are actually bringing operating leadership so we help the current reporting over the 12 months and there is more to come.
This is a kind of we are in the D Round right now and through bridge process, Safeguard Scientifics is majority investor as Longitude, Delphi and Stark Investments or Brian Stark in particular, he actually is investing his personal money into the company that actually just actually transpired here about mid 2012, they’ve got actually Carlyle stake in the company.
And we have a strategic investor, Panasonic Healthcare, who by the way Panasonic Electronic is one of our largest partners and actually supplying right now the s semi-finished blank for the eyewear product.
So learning’s, I’m sure most of you know we had a few mishaps in 2012. We actually went to market in early 2012 as I was coming on Board and recognized early on and reported back to the Board. We had some concerns both from a business models, as well as technology because as we trench a little bit.
There are some favorable things has come out really the last year. Number one is, the global industry is really anticipating this change. They really believe that there is a need for electronic interactive eyewear and they see the opportunity to really promote and exploit that in a very significant way that they believe it’s going to bring visual acuity, improve visual acuity to the wear base.
At the same time we can actually enhance the value chain, I mean through what we are doing. And lastly, we can optimize the vision on demand, which I talked about earlier which is really the consumer controlling with their eyewear. Now that also has cost us a little concern because right now lens is sitting statically on your face, if you put them on and you get use to them and basically you don't interact.
However, more and more devices are moving interaction, obviously your cell phone, who doesn’t, we looked around most people in this room have testing the last couple of hours. So we are interacting with our, with devices including our cell phone, so interacting with your eyewear is not interminable because devices are going that way we think that is to be create action, commercial traction (inaudible) bizarre that sound with your glasses if it does for other devices in your life today.
There are some unfavorable things are too, and to be very transparent and we had what we had to retrench and we’re actually reengineering basically the company right now. One of which were the frames, they were statically not pleasing and I say, historically not pleasing by primary international standards including the U.S. but also Europe.
And also the electronics in the frame themselves were unreliable. We were getting some, we call connectivity issues. They were shorting and so we’ve actually had to go back and actually reengineer those.
Also the optics range is limited, especially by European and Asian standards. The Europeans are hyperoptic which means, that they typically much you know the light of the, is focusing behind the retina because of the configuration of your eyes. So you have that a lot of plus power to the Europeans where in the Asian they are myopic by nature, so it’s the opposite. You’ve got a lot of minus powers and so we have to have the range applicable for both Europe, as well as Asia.
And we have to make sure also as well we are optimizing the coatings. Those who know the optical market know that if you have some, you have then reflective coating typically on your lens that reduces the glare.
And at the same time, if you want to suntan you want to suntan throughout that or exposure last time. We need to optimize that we are doing that through a very sophisticated technology. And we had a very complex business model, which we’ve simplified in the business.
So the improvements, number one, in generation two, we are announcing generation two I guess publicly. It will be coming out in early 2013. We are going to have new electronics, as well as new frames, so a whole new frame platform portfolio that has been tested both in Europe as well as the U.S., internationally. And we are actually right now running in our alpha phase of a product reliabilities testing into our electronics.
We are going to improve our optics range, and then we are also going to enhance the range as well. We are going to optimize our coatings, I mentioned that earlier. And we are going to centralize that through our de-risk business model, which is the fourth point we are moving into, becoming our own labs.
We are going to have a lab in the U.S. and one in Asia, servicing the European market. They will be actually PixelOptics lab that will do the work for us, both traditional lab work and also the assembly of the product.
So basically, we are moving from and Joe talked about this earlier in his business, moving from an analog industry to a digital industry. So the optical industry is moving from what was, again a sea of incremental change, that being analog to something that’s much more digitalized and we actually going to enable that through the technology I spoke to earlier.
So in summary, we are the first to really pioneer electronic interactive eyewear. Again, as I mentioned before, you're seeing a lot of interactivity right now and communication around this through, again more of the panel heads up display. And I think the Google announcements and frankly in future launch is a good thing for PixelOptics, is bringing actually interest to the category.
We are creating superior vision in a very large profitable market I mentioned before. We’ve got a lot of issued patients and ones that are pending. And as you saw before, on a revenue basis we are easily a $1 billion plus opportunity given the landscape that I mentioned earlier.
So that’s a little bit about PixelOptics, a little bit about emPower and the product lines that are mentioned before and little bit about the future as well, because of the electronics embedded into the frames. And with that, I will take any questions. Yeah, sir.
Obviously it’s a very sophisticated technology.
So how are you going to manage the quality control (inaudible)?
Okay. Good question. So the question was, it’s a very sophisticated technology. How is PixelOptics going to manage the quality control moving forward? It’s a very good question and one of the reasons we changed the business model. In the old business model actually, we were actually deploying that activity to operating labs, independent labs in the U.S. as well as Europe. And for that because of the varied sophistication, we didn’t want to control the QA, as well as just the integration electronics. So that’s why we’ve actually pulled this in house.
And in that, we are actually going to be setting up, actually mini labs and large lab that will be earning the product reliability and testing for the various components. So for example in the electronics, we are going to actually have a small electronics lab within our lab that will be responsible for, frankly the integration electronics into the frames and we actually mean subcontract, subcontract that to a third-party who is sophisticated in electronics and assembly of electronics.
So we take it then very seriously, because of the issues that I mentioned earlier. And as I said before, we are actually in the alpha phase of a generation two products that we are running product reliability test write down and it’s safe to say that we are getting very good results and more to come. So we are taking that very seriously. Yeah, sir.
Good question. So the question is really, what’s your channel and how you are influencing those channels and what is your selling opportunity? So we look at this is more of a - so it’s a traditional channel in the sense that there is a consumer or a patient, obviously who is buying through a retailer. In this case, it could be a LensCrafters/ Luxottica or an eye doctor and eye care professional. And then they are serviced by lab within the service by a lens company that’s our traditional milestone. So we supply lab. In this case, we are a lab lens supply eye care professional and it supplies the patient themselves.
We want to continue to supply to that channel. But our strategy is when we influence the patient in a much more direct ways, we are going to be actually much more prolific in our direct consumer communication and patient communication via various channel and media opportunities. But nonetheless, we’ll still be supporting the eye-care professional in the traditional channel because it’s a very sophisticated product and I think in a very appropriate way. Yeah, sir.
Sure. Sure. Yeah. Very good question. The question was Luxottica and their market power in the U.S., as well as Europe and can you expound upon that and how they got there?
So they are a very large player. They participate basically in three major areas, sunwear, frames and retail, retail primarily in the U.S. and primarily it’s through three major brands, which I mentioned in the last slide and of course, LensCrafters target and Pearle Visions, Sears Optical as well but we never won.
So they have a fair amount of influence in the retail channel. They have done that through acquisitions. They started off actually very humbly back in Italy as a frame company, which I’m sure your saw last night and they’ve grown through acquisitions.
So now to your question about Oakley? They have a lot of premium brands in their portfolio. The two primary brands are sunwear’s Oakley and Ray-Ban. And Oakley was a competitor and even though they were a retailer, they were also a competitor.
So, Luxottica actually was threatening to, in essence stop buying opting for some price points and a long story. Sure, what happened is they negotiated a more innovated solution and in this case, Luxottica bought Oakley’s position and now owns Oakley and has for the last couple of years.
So there is no doubt that Luxottica is a market power as is Essilor on the lens side, as is Johnson & Johnson on the contact lens side. There is three dominant that -- three primarily strong players that have kept the industry I think vibrant and I don’t think Luxottica is, they are adding a lot of value to the marketplace. But nonetheless, they do have a strong position in those three areas. Yeah, sir.
I think the plan you now have your own lab (inaudible) how is that going to impact both the operating market and can you handle (inaudible) volume?
Another good question. So what I said is the change in business model as we’ve actually backward integrated in our own labs. What’s that doing for capital deployment? In this case, it owns a more expensive and also is enhancing our margin and can you handle the capacity?
Number one, yeah, it is little more capital intensive. Now in fairness in the U.S., we are actually going to be owning our own lab. In Asia, we are going to be actually partnering with another company in Korea and so they don’t sell the capital.
However, conversely there is lot more margin enhancement because we are backward integrating and so the value chain has allowed us to increase the revenue opportunity as well as our margins. So we are seeing dramatically enhancing margin improvements and also stepped up revenue opportunities about $200 to $300 a pair, because of the added value we are bringing into the business.
In terms of the capacity, you just have to plan for that. We are becoming a full lab. We’ve got expertise, we’ve hired expertise both in the U.S. and we’ve leveraged that, as well as in Asia. So we've got that plan. We are going to be going to board actually in the 17th. We are in expansion already even though we are still in a pre-revenue stage, anticipating a pretty rapid growth in 2013. So we are pretty comfortable there. Yeah, ma’am?
Okay. So the question was owning the sunwear market, 5% we are not quite there yet. We like to be because it would be a much difference situation right now if we were. I’m sorry, what’s the third part of the question?
Competitors. Okay. So we are moving into the sunwear market. So in generation two, we will actually be offering suntans. We do not have that currently and our capability of ranges, but we will have that in 2013. In addition, I mentioned before because electronic is actually in the frames themselves, we are looking at other alternative technologies also give us in the sunwear market that allows you to apply current. More to come on that but pretty exciting technology.
And in terms of, we like to own, we like to actually enjoy 5% share of that business. Obviously it would be a multi-billion dollar company at this point. That’s our goal, we are not there yet. Again, we are in early revenue but our goal is, because of disruptive nature, we think that 5% we call the standard power market or 20% of the premium power market, which is anything about $750. We think is quite achievable.
In terms of our competitors, we do not have a direct competitor. In the electronic interactive eyewear space, that’s the unique anything about this business. And when we press upon the investors of Safeguard is that, we do not have a direct competitor.
And that we don’t see anything in the IP landscape, that warns or concern at this point as I said before we are pretty well protected in the U.S. So that’s a very big cue or plus for our position. So our competitors are more standard competitors, which were the static lens as I mentioned earlier. Am I done Jim. Yeah, sir, in the back.
Yeah. Our investors asked those questions a lot of times. The question was, can we monetize the patents, what values are we getting from the 300 plus patents or applications that have been filed?
I don’t want in the fairness that question is a very valid question. And it’s one that’s been asked most of our investors. And yeah, there is obviously a fair amount of value in that because of the uniqueness we have in the technology.
I don’t want to arbitrage or draw a number at this point. It would not be appropriate, but surely it's a big part of why Safeguard and others have invested in the company. It's pretty significant. Yeah, ma’am.
One would be IP because of protection that actually is a barrier. Two is actually just experience curve. It’s not easy to integrate a supply chain as complicated this is and actually you start fabricating at any rapid rate, we’ve learned that through experience. It's a very difficult process.
Just to get Panosonic align who actually is a key supplier for PixelOptics has themselves $10 million invested in capital and a lot of experience under very strict Japanese guidelines, that’s taken them years to get to where they are to be able to supply PixelOptics at the rate they are. So it’s a very difficult experience curve to accelerate and that would be another inhibitor to an entrant in the near future.
Okay. Thank you very much. Thank you. Thank you.
Thanks, Bret. I’m going to have an opportunity to share with you some highlights about Putney. Putney is a -- it became a Safeguard partner company in September 2011. They are developing a line of branded generics for pets, to offer pet owners significant discount over branded pharmaceuticals.
In addition to the obvious benefits of having generics and the low-costs, Putney is building a very impressive brand recognition in the industry. The corporate brand is important for to be had a shape influence and have a lot of direct impact on the veterinary practice, on consumers, pet owners and on the distribution channels.
This is a large marketplace worldwide. I’m starting with the U.S., there is a $165 million companion animals, companion animals are cats and dogs, and they are in 73 million households. And in spite of the recession, this marketplace continues to grow. So pet owners are spending more on their pets and they are looking for better solutions for their pets.
The worldwide marketplace for this is $5.7 billion. So it’s a significant growth market for branded pharmaceutical products for the pet industry. In the United States that number is close to $3 billion, about half of the worldwide marketplace. What’s amazing is that pet owner or humans get 78% of their prescriptions from generics. Although in the pet industry less than 10% are available products have a generic equivalent for the pets.
So 78% are found in the human industry by generics and less than 10% today have a generic equivalent in the pet industry. So you can see it’s a very significant market and Putney has great timing here.
Putney today has seven medicines on the marketplace with well over a dozen in various stages of product development and in submission to the FDA now. As I mentioned earlier, their marketing strategies is to partner with vet practices.
The vet industry is consolidating today, just as we saw in the pharmacy industry and in the past we saw the companies like CVS and Walgreens consolidate pharmacy practices. We are seeing that the vet industry today where a lot of the small practices are being acquired by large practices.
They are putting business people and to run those practices, there is going to be a lot of those practices dispensed and prescribed products. So there should be an immediate opportunity for Putney to have impact with generics with those companies.
Putney’s revenue exceeded $10 million last year and it’s on a rapid growth pace this year. We classify them as an expansion stage company. As I mentioned, Safeguard put $10 million of capital to work in Putney in September of last year and has a 28% primary ownership. It’s a very exciting company with enormous growth opportunities for next couple of years.
With that, I’ll take a couple of questions on Putney. Yeah, sir.
So what are the names in the generic business? Let me back up, maybe just from the macro perspective. Generics today in the pet industry when you have less 6% or 7% of the products that are in generic equivalent, there aren’t many.
And believe or not, it’s fractionating. You’ve got the large animal house with the branded products and then worldwide you have several players, particularly in Europe that have generic presences. But in U.S., there is no major generic player. You have some of the human generic companies like Teva an example that has a small animal health business that a lot of these folks do not have a presence in the animals sector.
I spent many years at Big Pharma. At Big Pharma, we look for $1 billion opportunities and having the $20 million, $30 million, $40 million product didn’t excite us. In fact, at my time in Glaxo anything under $250 million in revenue got lumped to a manager who had a lot of all other products, it wasn’t strategic.
The vet industry you don't have $1 billion products but there is a lot of products out there that can add up pretty quickly, a $40 million here, $60 million here, $20 million there, pretty soon you have some real numbers. And that’s why I think Putney is going to have a unique niche with minimal competition in the U.S. to expand their.
Ultimately, I do see a lot of interest from strategics, particularly international companies who want to have a foothold in the U.S. or who want to have a footprint in the generics business or footprint in animal health that they are going to use it as a base to build upon. Yeah, sir.
So, well over 90% of PetMeds today are distributed via veterinary practices. There is a company called PetMeds and there is two or three Internet pharmacy ones that are trying to make a foray into this marketplace and we heard about some business model earlier where they were making impact.
However, in the vet industry, vets make over a third of their total income comes from pharmaceuticals, dispensing, prescribing products like that. I can say from personal experiences and having talked to lot of vets when we put this transaction together. A lot of vets want to make that income stream there. They don’t want to write a script and then have some of these facts out to an Internet provider where they can get and maybe save a couple percent. So by and large, we believe that that trend will stay that majority of products and today is over 90% will be continue to be dispense via vet’s.
You will see some pharmacies, in some states where pharmacies will prescribe that products, there is a crossover at times between human generics, although that number smaller less than 20% of vet products can be applicable for, probably, 20 -- less than 20% of human products will be applicable for the generic market for the vet space. So, the answer your question, we see that continuing it’s going to be vet as a primary channel.
So the question was, are there vet in senate to work with us is that the margin good for them. We see this is a win, win for this industry for couple reasons. One, generics vets are typically going to knock off, it depends but on average 10% to 30% of the price of the branded product. So, there profit margin percentage will be much greater with the generic, although the actual gross margin dollars may not be higher.
But I will tell you haven’t talks so lot of that’s they are getting enormous pressure from their constituencies, the pet owners who want to script comes up its $80, it’s a $100, a lot of pet owners are having to make that decision did they go ahead and feel it and if they can offer a cost affective alternative that can be lower price, they look good, because they can say the brand is going to cost you $100, generic is $70, nine times of Putney pet owners going to say I’ll take the generic, so it makes them look good. So we see the -- it would be win for the consumer and win for the vet practice as well.
So, the question was what’s propensity for like a PetSmart to get into this business, where you can take a lot of what have been traditionally our X products and convert them to OTC. I’ve seen that in my days in pharma, we’ve seen it with some of the recent and SMA where products have been prescription it’s going to migrate over to OTC.
We saw that initially was front-line and other therapeutic products, where they were prescription only are now there will be migrated to OTC. Right now there is a separate regulatory body for the vet industry, it goes through the FDA but it’s a separate division for PetMeds for medicines specific to pet.
There is a process where you can take that OTC similar to humans and I think Putney will consider that because they have there could be opportunities where you could take a product like that find an OTC partner and then make that product available OTC.
From our experience is the vet’s do not support that and in lot of cases in the past particularly with humans with the SMA pharmaceutical company saw the opportunity to take those products OTC, the AMA did not appose it, in fact welcome that at times. I can say that vet industry is going to very protective of that because a third of their revenue coming from pharmaceutical products they want to maintain that practice. Yeah, sir.
So there are the questions is, there is an opportunity to expand beyond companion animals. So today, Putney focuses on companion animals, which is cats and dogs. And the answer is, yeah. They’re actively looking for opportunities of products to expand that into the farm animals as well another applications, which would broaden that marketplace well beyond $3 billion, that’s the firm marketplaces is almost half for at least prescription products have what the $3 billion is for companion animal. So I think you will see that take place in the future.
And you are going to be hearing about Putney for must for awhile hopefully, because they are going to enjoy significant growth, although there is a lot of interest people that do on a partner with them and there could be other channels created as well. Yeah, sir.
So, the questions, good questions was, is the approval process to get a pet pharmaceutical product in the marketplace similar or is cumbersome it is for the FDA? The answer is its comparable not quite as cumbersome but comparable its still can take six to 10 years to get a pet product in the marketplace.
The good news for Putney by and large and there maybe some exceptions they are developing generics, branded generics. So they are own corporate brand of products, Putney brand of generics. And that is a much more expeditious process to go to the FDA for generic products for pets.
Typically that process will take about a year. So you think about it 78% of scripts for us generics and vet industry less than 10%. Putney has a very extensive pipeline where they prioritize the size of products, the markets, the opportunity which ones they are going to go after now.
And one of our co-investors that we brought into this deal is the gentlemen name Bruce Downey. Bruce was the former CEO of Barr Pharmaceuticals for many years. He sold the company to Teva. Bruce Downey was famous for paragraph Forbes that he initiated, which he had multitude of those at Barr.
Bruce and the management team and the Board have a long list of pipeline of opportunities, where we can go after and create get new products to the marketplace in a very quick period of time.
So, the question was, Putney have been seven therapies on the market today. How much -- how many was that a year ago and what does look like in the near future for in terms of launch?
There were six beginning of last year, six products in the market. This year there are seven. Putney has enjoying very strong growth this year versus last year. It’s their expectation with the dozen plus, plus products in the pipeline in various stages today in front of the FDA that many of those will launch next year and the majority of them will launch in the next two years. So you are going to see very strong growth coming from Putney over the next couple years, it promises to be an exciting story.
In part of the company’s growth space, Jean Hoffman as the CEO there and she is done super job to pull a talented team together. She is broad on gentlemen name TJ Dupree. TJ was formerly an executive with IDEXX, one of the largest animal health companies in the world based in Portland, Maine where Putney is as well.
TJ have been responsible for $800 million business at IDEXX and Putney was able to launch them to bring was able to attract and get him over to their side. He has very extensive relationships in these industry great insights as to what products can be out there.
Great ideas on product line extensions and what they can do, and so he is made immediate impact not only for this year, but as they start to launch a dozen plus products in the future, near future there will be tremendous to help get those in quickly. Other questions?
Thank you. With that, I’m going to have an opportunity to invite our next speaker Don Hardison to come up. Don is a CEO of Good Start Genetics and one of the very exciting Life Science companies, its also going to be enjoying a lot of growth over the next couple years. Don?
We’ve got this, okay. Good morning. Thank you to Peter and to Jim and to Gary Kurtzman, all of people at Safeguard for allowing me to be part of this and thank you for great investment in our company. Let me tell you a story.
So coupling a very large northern city has been trying to get pregnant for a while. The 35 years old. The women think she is running out of time. So she is talking to OB/GYN and OB/GYN says there are -- you do have other options and one of those options will be to a visit to fertility clinic and see for reproductive endocrinologist can help you.
So here we first here to one a very prominent one in the U.S. and by the way people shopies fertility clinics pretty closely they have actually published their fertility rates and it’s a way of competing against someone else.
Couple goes to the fertility clinic as part of the workout the doctor orders a number of test to try to figure out why they can’t get pregnant. But they also order carrier testing, because the last thing the doctor wants to do is engineer pregnancy the result in the child being born with the disease that is fetal.
So sure enough they go through the process. The woman is tested for Cystic Fibrosis among other things. She test positive, really permanent lab, that looks at about 100 mutations on that gene, by the way there about 1900 mutations on that gene they can cause disease allegedly.
So her husband has tested, he test negative, so the doctor is happy, the couple is happy. They pursue to get pregnant and about its nine months later a child is born with Cystic Fibrosis. So what happen?
Well, first of all, the guy was obviously positive. He was -- he had a varying on that gene that was picked up by that other lab. So when they did get pregnant they had one in four chance of having the child born with that disease and unfortunately in this case that’s what happened.
Another case, so a couples about again 37 years old, woman know she is a carrier for Cystic Fibrosis a delta 508 variant on that gene. Her husband just so happens to be a carrier for the same variant on the gene.
They go to a fertility clinic. The doctor extracts 12 embryos from the woman. They test all 12 of them, eight of them were position for the delta 508 variant, so they are discarded and the other four are negative. They take this the strong if you will embryo in transplant that back into a woman nine months later very healthy child was born. That’s the business we are in. We are doing carrier testing and I will describe how this works.
So, generic testing is a big, big market, it’s growing pretty fast. We think it’s over a $1 billion now. It has a chance to be even larger than that. A lot of states don’t cover fertility treatment themselves. We happen to be in Massachusetts where it is cover a lot of people avail themselves to the service, the test that we offer typically are covered by insurance company, so we are unfortunately that way.
We also think that platform I’ll describe it has other intrinsic value, whether its in oncology, whether it’s in cardiovascular medicine, whether it’s in organ rejection. There is lots of things that you’ll hear about with this platform called next-generation sequencing, which I’ll describe shortly.
So this cutting edge stuff. You’ll hear by next generation sequencing by companies all over the place. Now in medicine it is the biggest platform out there right now. The Human Genome project was done by 10 years ago with a very antiquated now sequencing technology.
Next-gen sequencing as it implies with the sequencing technology it took the place of that, its very fast relative to vet, it s a less expensive and for company like ours that offers tremendous opportunity, which I’ll describe.
Our initial focus is these fertility clinics around U.S. there about 460 clinics around the country. The reason I like this company because when you have 460 clinics you can go after them with your own sales organization.
I have had problems in the past when you licensing that for diagnostic applications to other companies, who have lots of products to sell you don’t get their full attention. In this case, we’ve got 10, 12 people out in the field selling all over the country we launched in April we are ramping very rapidly right now.
Now, there is a bigger market, most company start with the biggest market first and then kind of come down. We’ve started with the smallest market, just above fertility clinic is something called maternal fetal medicine, lots of couples have a tough time getting pregnant and they’ve had risk pregnancies before a lot of them refer to the 800 to a 1000 maternal fetal medicine sub specialist got the OB/GYN market around the U.S. that’s the market we want to go after.
The biggest market OB/GYN in general, but there happens to be 40,000 of those. So it sound good if we say that Safeguard when they made their initial investment these guys are too smart, just we would say, we are going after all OB/GYNs, billions of dollars.
A good questions I would ask, how do you plan to do that, how can you possibly get the 40,000 OB/GYN. So it’s really hard to do, so we chosen to start with the market that we know we can go after ourselves, we can control the go-to-market strategy and expand upwards with probably a partner.
The test we offered are in guidelines, you may say why is that important, most things that are in guidelines, in this case and the American College of Obstetrics and Gynecology, the American College of Medical Genetics various (inaudible) society, it gives a doctor standing to order the test and a payor standing to pay for the test. Its not a guidelines you have pretty bad experience is in healthcare where they these test are rejected, they are not paid for, in our case, we’re getting them paid for.
We do have a direct sales force. They are better than our competition. They are very much like pharmaceutical sales organization kind of a missionary sales force if you will and they do a fantastic job of going after new accounts.
And we have a great high-tech service. One of the problems in diagnostic medicine you almost never hear a doctor or the staff rave about their lab they use. If you go out and ask people, who used us what they think of Good Start Genetics service you will get accolades that you’ve never heard before in healthcare.
So what are we do this different. Well, the competition typically uses the Genotyping platform that’s because that’s all there was there, you build a computer chip if you will, you learned the things on there that you want to test for, so in Cystic Fibrosis, I will use that as example to set the most common ones of these disorders.
You will test for maybe a hundred variants of that gene, so if you test the blood sample and one of those variants is there it will pick it up. But if it not there by definition I can’t pick it up, sequencing platforms very adaptable, we look at the entity of that gene, we look at every variant on the gene and we report on the once that we think our disease cost.
Clinical sensitivity on the competition side is limited by kind of cost benefit trade off. If you want to add the hundred first variant to the panel you have to build a new chip. If you want to do where in our world all you do is cut on the software to report on one we are variant. It’s a very, very dynamic process, a very dynamic platform.
The real story here is that the technologies way ahead of the medical knowledge, so as the medical knowledge catches up in sequencing and these disease is genetics will be able to be at the cutting edge of that.
And finally, there are not many things in medicine you can walk into a clinic, to a doctor, to a payor and say, we’re going to give you the absolute best test you can order and it’s not going to cost anymore that what you are paying for today. Almost nothing in healthcare comes that way.
So what’s the power of this sequencing platform? Well, in general we are able to analyze all the DNA payors of gene and you can’t do that with the chip but you can do with the sequencing technology.
So, we are testing for all the non-variants. But we are also looking for novel mutations things called frameshift and other things that we know are in a protein coding region of a gene that would lead to disease when we report them.
So you are going to get a higher detection rate and you going to get a higher detection rate across all ethnicity. If you look at the guidelines, the guidelines have been promulgated for a long-time and again, I’ll use Cystic Fibrosis as an example.
The guidelines will suggest you should look for 23 mutations, because those 23 mutations have really high sensitivity if you are Caucasian or if you are Ashkenazi Jewish. But if you are any other ethnicity, it’s going to miss things and the beauty of a sequencing platform is because you can pickup everything theoretically. You are going to increase, it’s going to be more of a Pan-ethnic screen, its going to have the same sensitivity in general across almost any ethnicity you test for.
The guidelines by the way are recommended by ethnicity. So if you are Caucasian, you would normally get a Cystic Fibrosis test, you get an SMA, Spinal Muscular Atrophy and maybe Fragile X. If you are an African-American you might get those same tests which we also make a sickle cell test.
If you are from Mediterranean area, we probably get a thalassemia test, if you are Ashkenazi Jewish, there is a whole series of tests that I’ll show in a second that Ashkenazi Jewish big population get tested for. So you get a really high degree of confidence here and you get the absolute best screening result you can get.
Now when I joined the company, we’re going to test for about 75 disorders, primarily because we could, we got these platforms very powerful, throw a bunch of diseases out there and see what happens.
And I have two questions when I did that. So the doctors really want all 75 of these disorders turns out they did not and we’re also going to report on very deep into these genes, these things call variants of unknown significance.
So imagine, you are about 35-year old couple, you are in front of the physician, you can’t get pregnant, the woman typically is really upset about this, you can’t figure out, why her, her sisters already had three kids, why can’t she have kid and you tell her, you’re positive or something, we don’t what it means.
Not a good story, you want to report all things that really are pathogenic and that’s’ what we do, we try to balance out only the recommended diseases and disorders. There recommended by the various societies that I mentioned and the only, I want to report on disease causing mutations.
So here is our menu, so a doctor can order anywhere they want to order, they can order one tests, they can order all 23 disorders, we just expanded this to 23 disorders actually last week, we had 14 prior to this. And we’re getting doctors in some cases or everything on everybody, primarily because they don’t know what their ethnicity most people are, past by the generation or too, a lot us don’t know.
I’m adopted, I would check of a box, they would say, Caucasian, but I know from tracking down my birth parents that my mother had some Middle Eastern and Italian in her, so really rather then just getting Cystic Fibrosis SMA Fragile X which is what I would probably get, I should be getting thalassemia tests in also because of my Middle Eastern and Italian heritage also. So, most of us just don’t know that. So a lot of doctors test for everything just to be safe.
So let me give you an idea of what happens. The CFTR gene is the gene associated with cystic fibrosis. This is what the guidelines recommend, 23 mutations, the 23 of that simply because the technology was not available to go further than that. Our competition typically would test for about a 100 variance, while we’ll test for about 544 to 550 and we’ll report on Novel mutations.
So if we go to a doctor and talk to the doctor even if they don’t understand sequencing and lot of them don’t, we’ll say we’re going to report on 544 mutations versus the 100 you are testing for today, which one do you want, same price. Most doctors go for the 544, is that sample.
Now while we taken up things that would have been missed by other technologies. The answer is, yeah, so we look at our first 1000 patients and we found that there were four that we found pathogenic mutations that were interesting to us, three of them would not have been found by any other lab that these doctors typically used.
Imagine the couple who found out about this is very happy that something has been found that would have been missed. One of those pathogens would not have been picked up by any other lab that existed today other than us.
So it’s really, really powerful stuff we start publish in this kind of information soon. We are up to several thousands patients now, we see a continuing trend of things that are Novel and things that we would have been missed by other platforms. You tell a physician that, they’ve ever had a child born with one of these diseases. This is the compelling story of them. You tell a parent this it’s a really compelling story.
So what have we done? So we’ve got a great leadership team, present company excluded, most of our people have been around the business for a long time and these businesses most of them fail because you don’t get pay, we get pay, we have a great reimbursement customer service arm, great financial arm, great laboratory staff, we are up to about 60 people now and bioinformatics, all these things, we’ve had to built from scratch, all of the underline systems were built from scratch by our people.
We’ve got a great clinical advisory board, these are not the thought leaders who sit at Howard, where lot of our technology came from, these are 12 physicians who run major institutions around the country. So they are using us for the most part and these are guys who are really practicing Reproductive Endocrinology and they are not writing articles about it, these are seeing 100s and 1000s of patients a year. By the way 400,000 couples go to these clinics a year, 400,000.
So we also have a Genetic Counselor Advisory Board and I think a stellar, one of things we did when I first came to the company. I said look, I want a see what our reports going to look like first, very simple, our report really haven’t test yet, you start with the report, because that’s what the physician is going to look for as it happens to be in some of the larger lab companies, our reports are really hard to read, genetic is hard even for physician, so you want to make the report very informative, very simple, so they can move through their practice.
We recruited some genetic counselors to help us with that because genetic counselors are typically who the doctor will go to if there is a positive result and they want to talk to somebody about it. By the way, we, a genetic counsel and our staff calls every physician with every positive report, talks to the physician, offers to talk to the genetic counsel and the physician site offers to talk to the patient. No other labs that I know often do that.
And we have the state-of-the-art CLIA facility, CLIA approved facility in Cambridge. We are anxiously waiting our New York State license that is the big deal. So our numbers are ramping very well that’s exclusive of having New York, which is about 20% to 30% of the market. We hope to have that license some time by early next year. We passed out -- we think we passed all their criteria but for all of those who leave in New York they are very strict about who gets the license in New York.
So we had very rapid progress. We’ve launched this technology. Everybody is talking about doing next-gen sequencing. We have a clinical grade tests, it works, it picks up things, we are suppose to pick up, it find things that other people are not picking up.
We went through a rigorous technical validations 100s and 100s and 100s of sample, I don’t know, any test have ever been involve this had more rigor around then we done here.
We’ve done all the clinical validation using a DNA & blood. We’ve augmented this, sort of moving out to 23 tests, I’m going to because that’s what the market said they want it. We got our Massachusetts license. We’ve got our CLIA license. We’ve launched nationally in April, across the entire country. We have 50 clients are using us out of that denominator I told you earlier, probably a 120, 130 doctors have ordered from us already, this is since April, since we went out to the market.
So what’s our growth strategy? Well, first of all, we have an opportunity to, let me explain a sequencing platform, imagine this, a piece of equipment about this week, it’s a very, very fancy microscope happen to cost about $0.75 million, but it is a very fancy microscope, it snaps a lot of pictures.
And what you want to do, since it cost about $10,000 to cut one of this things on, you want to run more than one sample at a time. Even I can figure out the one sample $10,000 cost is probably not a good business to be, when you typically would get reimburse anywhere from $300 to a couple thousand bucks, you are not going to make money that way.
But if you could load 100s of samples into that instrument at one time and do multiple diseases per patient, which is what we can do, your cost per result is extremely low, I don’t know, any other cost of testing that would be lower than this, and our reimbursement typically is pretty high. So it’s a very, very high margin business. We think our gross margins can get up above 75%, maybe even above 80% to 85%, somewhere in the not too distant future.
One way to do that is continue to increase the capacity that you need to run big, big runs on the sequencing machines, which is what we are trying to do. I mentioned the New York State license, that’s a big deal for us. We want to get into New York State. That would open up 20%, 30% more of the market to us. We’d like to in-license additional products.
We like, we have a great call point with physicians. We want to make sure we are utilizing that call point and bringing more products to the market. We probably will have to develop commercial relationships with other companies to going into OB/GYN market and we think we can achieve profitability this time next year. We’ve raised our first money from Safeguard and others in September 2010. We think three years later we could be profitable.
So, I think that’s the story. I would be glad to answer any questions any of you might have. Yeah.
The question is, did the launch constrain at all by reimbursement trends? Ours has not and one of the reasons I have joined the company was I had an experience in another start-up company where because our test was not in the screening guidelines, it was having a tough time get reimbursed. All these tests are in the guidelines and we’ve had almost no rejection from any payor right now.
We are actually getting paid higher than I thought we get paid, which is a good story. We can't promise that’s going to continue. The coding structure changes next year. 14 of our tests will have a single CPT code or order code. We think that we will be okay with that because our costs are low. But we don’t know the answer to that yet. But we feel pretty good about our reimbursement so far. Yeah.
Okay. The typical turnaround time in the competitive arena, one of the good things about this is that most people are, you’re kind of the women’s kind of doing her different tests based on her cycles. So 14 days or less suffices the turnaround time, which is great. So you don’t have to kill yourself to get results out so fast. Frankly, it takes about four days to run a sequencing run right now. So we could do it much faster than what we were doing.
We typically get about 10 days. The competition is tough. You’ve got the big lab companies where I used work last LabCorp, Genzyme. They get a lot of business outside the fertility clinic -- outside the carrier testing in the fertility clinic.
They do all the hormonal tests, the infectious disease tests. Very tough competition but we are doing very well against them. There are some start-up companies around the country that are mostly West Coast-based. How would I say this?
Currently, they are doing some things. They are trying to be crazy, frankly. They are pricing games and other things they are doing, which I can only chalk up to their reaction to us.
We came on the market. We are taking business from them. The first thing they go in, is they start lowering price or you order 10 of these, you get one of these free and all these kind of things that you just don't have to do in healthcare if you’ve got a really good technology.
But there is a lot of competition, but we are doing quite well against them. In all of these accounts we’ve gotten, we’ve taken them away from a competitor and you usually, it’s black and white, you either get it or you don't get it. Yeah.
Let me restate that, what I think you said. So we have got, we have a potential for really high gross margin. We are not there yet. We are just in the start-up phase. We have that potential. Better test, why don’t you? But your pricing is pretty much the same, why don’t you raise the price. When we build for our test, hope you all appreciate. The list price of a diagnostic test is a fiction. It’s like an airplane seat, nobody is paying less price.
So we -- when our bill goes in, it looks just like, I will say it was five tests. Those five tests would totaled up to be pretty much what a payor would expect to see from Genzyme, from LabCorp, from Quest or anybody else. And they pay whatever they want to pay. It’s typically about half of what you bill.
Now, one thing we could do is go into the payor and say look, we’ve got a better test, we want to be paid more and they would say, this is what we would like you to do and I will be a little precocious here.
We’d like you to go out and do about a 100 million patients, and when you finished doing that come back and we'll see how good you really are. That’s not a good -- we don’t think it’s a good thing to do that.
Will we ever to do that? We might, because if the coding structure changes, we want to be able to claim that we do have a better test. We want to have compelling clinical data. We want to make that case to pay us, but we are not ready to do that yet. Right now, when we get paid, we get paid in such a good way we are doing very well financially. Anything else? Yeah, sir.
We are using the Illumina sequencing platform and our intellectual properties on the front-end of that with this kind of the way we capture gene selectively and on the bioinformatics on the back-end of it.
But we picked Illumina because we could do the front-end and in automated way, they could save us lot of money. We talked to Lifetech and others. We wished there is more competition in that market, because there was only one or two players. You don't that kind of hedge over a barrel. But we are doing --- we like Illumina right now. Anything else? Yeah, ma’am.
The technology, you are talking about the platform itself in the next-gen sequencing. Yeah and Safeguard has been unusual, they pushed this pretty hard to think about new applications for it. I came out of an oncology world. I'm always fascinated by that. It’s a different kind of company. We probably have to finance it differently. Safeguard willing, we would love to do something in oncology.
Cardiovascular medicine, their application is there. In fact, in general across medicine, there are applications that could be used for the next-gen sequencing platform. The reason, we like this is just efficient. We are to -- we get to the market quickly. We are going to grow. We think we can be a $100 million sort of company in a few years with pretty high margins. It doesn't mean that we should be looking at other things and we do plan to present to our Board other options over the next year or so. Yeah.
So the question is around the two companies, companies who are doing whole genome sequencing, now as the price that comes down, how will it affect us?
Yeah. So right now, we don't sequence the entire gene. Our genome, our technology captures genes of interest and then we sequence those genes because it is cheaper to do that way. Obviously, it will be just as cheap to sequence the entire genome. Right now, it’s about few thousand bucks. That’s way too much for us. Our costs are way below that.
But eventually when that cost does come down, what we do is take a whole genome and report, the software would report only on what the doctor had ordered. And at that time, the bioinformatics and the information of the back-end is probably the real value to what you're doing, not the front-end where we are doing this fancy gene capture right now. Yeah. That’s it. Thank you.
Thanks, Don. Nice job. Thank you, Don. And with that, we’ll bring it up for our final partner company CEO, Armando Anido. Armando and I had the pleasure to work together at Glaxo. Welcome and we were able to recruit them to be the new CEO of NuPathe. It’s going to be a very exciting year for NuPathe next year.
Thank you, Jim. Thank you all very much and hopefully over the next 10 or 15 minutes, I will give you a chance to understand who NuPathe is, what we are all about and hopefully, what the value creation opportunities are going to be.
I think we are the only publicly traded company that is presenting today. So the forward-looking statements, I would highly recommend that you go on our website, www.nupathe.com under Investor Relations and take a look at all the risk inherent in our business, and after you have a chance to read that, hopefully you will have a chance to invest.
Let’s talk about NuPathe and who we are? Innovation in neuroscience solutions, we have a product that’s in late stages with the FDA that is called ZECUITY and it really does represent a near-term commercial opportunity for us.
It is the first migraine patch into this space. It delivers sumatriptan, the world’s number one prescribed treatment for migraine and it is uniquely designed to do something that no other product that’s out there today can do and that’s actually to bypass GI tract and really help to give a very tolerable migraine relief.
Nausea and vomiting impact about half of all migraine sufferers, so the current medications actually are probably not as effective, because they are administered during those nausea and vomiting.
We do have a PDUFA date. The FDA is to respond to us by January 17th. So we resubmitted a package back in July and now have a PDUFA date of January 17th where we are hoping that we have a pretty good potential for an approval at that point.
Our company is really focused on three main things right now. We are focused on actually gaining that FDA approval. Secondly, we are looking for a partner. This is a market opportunity that goes beyond, just what we think we can do, not only here in the United States but throughout the world and we are currently engaging in some pre-launch activities as you would anticipate.
We have recently been out raising capital for the company. We should be closing, hopefully over the next 30 days or so, where we’ve raised about $28 million with some help from Safeguard.
And we’ve also implemented as I came into the company about two months ago, I realize that there some things the company was doing that really didn't need to happen, that we really needed to focus on getting us to that next inflection point and we did take some cost containment measures that we de linear a little bit about. But our cash now will take us out through and into the fourth quarter of 2013.
This is the new logo for ZECUITY, the first and only migraine patch. It is applied during a migraine attack. It rapidly starts delivering sumatriptan. It uses iontophoresis in order to actually get sumatriptan in through the skin and into the bloodstream. It bypasses the GI tract, very important for those that are suffering through nausea and vomiting during their attack.
Very simple to use. You put the patch on. You press a button. It starts to activate and starts to deliver the sumatriptan into skin. You wait for a period of four hours and then you can take it off and throw it away. You can either apply it to the upper arm or you can apply it to the thigh and the delivery of sumatriptan is the same regardless of where you apply it.
And we do have very strong intellectual property around the technology and in combination with the formulation that we’ve used in order to deliver the product. And it does provide us protection now through April of 2027 with some continuations that are in place that may provide even further protection downstream.
Now this product was originally submitted to the FDA in October of 2010. In August of 2011, the FDA responded with what is known as a complete response letter. And in that complete response letter, they outlined five key issues that the company had to address on a subsequent submission.
The first one is around skin events of concern. The second one was around packaging the usability of it, uniformity and containment. Third was about repeating a bioequivalence study. Fourth was an in vitro method that needed to be designed for product release. And finally, further justification on a waiver for carcinogenicity study.
In the time from August of 2011 until July of 2012, the company did a number of different things in order to address each and every one of the concerns that the FDA had. Probably one of the most significant which really addresses the top two issues, it is the redesign of the actual patch and how it is actually is.
And it really will help to address the skin events of concern because now there is a pad detection system in place. But once you press the button, before it starts to actually deliver sumatriptan. It will test to make sure that the pad that carries sumatriptan is actually appropriately aligned on the patch. If it is not and there is exposure, it will turn itself off and will not deliver any sumatriptan at all.
In terms of usability, the FDA was asking us to do it during a migraine attack and test to make sure that the patient who had not been trained on how to apply the patch could actually do it. And we went through it and in 100% of the cases patients were able to administer it while they were having a moderate to severe attack.
There were some other issues on content uniform, excuse me, on uniformity and containment, that with the redesign we actually addressed quite well and that we feel very comfortable that we now have a system that the FDA will approve. We had to repeat a bioequivalence study. It really was done very quickly and show that the current design is equivalent to the previous design.
We had to develop an in vitro test methodology in order to release the product for manufacturing and that took some time. It actually is not something that's ever been done with this patch technology. So we had to develop it. Now have concurrents with the FDA that is the right thing.
And then we actually had to do a couple of lab studies on the final piece of waiver for carcinogenicity studies and two lab studies that were done where you actually will apply sumatriptan to the skin without passive delivery, excuse me, without active delivery and show that sumatriptan doesn't penetrate the skin at all. And therefore the FDA should be very fine with those responses.
So we feel very good about the responses that were made. We are in active review at this point with the FDA and getting questions from them and responding to them and we anticipate some action from the FDA by January of 2013.
Let me talk a little bit broader about the overall market because I think it helps to put in perspective where the value creation for this company really is. 31 million migraine stoppers in the United States, about half of them are currently being treated or diagnosed.
The triptans of which sumatriptan is the lead one are really the dominant player in this category. They are five or six of them that are currently available. They are in an oral form and injectable form and internasale form and as you can see they dominate the overall market.
One of the key things in this category that is different is that, patients won’t just stick with one product. We know that 80% of patients will go to a second product. We know that half the patients will go to three or four or more products throughout their cycles. They will look for what is going to give them the best relief overtime.
One of biggest issues that none of the current products that are on the market today actually address is that of the GI tract and being able to circumvent it, and that’s where the patch really does present an ideal position that it actually delivers the drug into the bloodstream and regardless of whether you're having nausea or vomiting you are actually going to get the delivery of the product in your system and it’s going to affect whether or not you take it.
Out of the 15 million or 16 million people that are actually diagnosed and treated today, about 8 million or so, about half of them have nausea on about half of their attacks. So fairly substantial, and even if you go down to the smallest denominator, those that actually vomit on every single attack, there are 1.5 million patients who currently are vomiting with every attack that they have and these patients on average are having about four attacks a month or about 48 attacks throughout the year.
Migraine related nausea really does have a significant impact on disease burden. We know that from studies that have been done, mega studies that have been done really show frequent nausea patients are always less satisfied with their medication.
They also are across to society and insurance companies, because they do carry 5.4 times the rate of emergency room visits and eight times the rate of overnight hospital stay cost. So a fairly substantial real argument that with a patch technology you should be able to overcome with managed care.
And one of the key things that we’ve shown in two huge databases that were done by Pfizer and my former company, Glaxo, had show that nausea predicts poor response to oral meds and so a patient right after bath, if there are going to take an oral med more than likely there are not going have a very good response when they actually start using it.
We had discussions with managed care companies already. And we believe that it will get broad coverage, broad coverage probably in a Tier 3 category, where patient has to have a co-pay of about $50 for a box of six patches, so relatively modest investment for the patient when they have to go to -- when they go to Zecuity.
We do know that the managed care plans actually do believe that migraine-related nausea is a big issue form. And they recognize that many of these patients are not very well controlled.
We’ve talked to managed care about pricing and there’s currently a branded injectable in the market that cost about $90 per injection. And they feel comfortable that something in that range with the patch is where we would be positioned well.
Now, we’ve done extensive quantitative research with both physicians, as well as patients at this point. When you ask physicians about Zecuity and compare to what they currently used, they rate Zecuity superior to the oral meds to the injectables and to the nasals for that patient with migraine-related nausea.
They can use it early in their attack. It really overcomes many of the triptan sensations, which is something that’s inherent injectable particularly. And it does eliminate nausea at one hour and about 70% of patients and two hours 84% of patients have no nausea.
Physician, excuse me, patients we’ve done some quantitative research with and about three quarters of them actually will go to and asked their physician about Zecuity. And we feel good very good about that, because they know that they have migraine-related nausea and vomiting. They know that they are currently not being satisfied with the current treatments and they would like a patch.
Now to give you a perspective on how big of a market opportunity this could be. How big the product could potentially be. If you remember that I mentioned, there's 1.5 million patients that vomit on every single attack.
If you just go to that smaller segment, not saying that's the only one that we would commercialized too, but if we just go to that segment and you assume the branded injection pricing of $90 per attack and then you say that they are going to use the patch two times a month which is half the number that actually have per month.
You can see that it doesn’t require you to get heroic market shares in that small segment in order to get up over $100 million, probably 3% and if you get to 10% of that market you're looking at over $300 million product opportunity just in going after that particular segment.
So we believe that there is significant opportunity here. Its not we shouldn’t be talking about this product in the tens of millions in annual revenue. We should be talking about this product in the hundreds of millions in annual revenue.
Now, our strategy is really about commercialization is one securing commercial partnerships, as I mentioned earlier, we believe we can actually get to a small segment of have a clinics and alike on our own or we can do with partners. The broader segment is actually the primary care segment, which we would not even entertain doing on our own. We would seek a partner to help us get there.
And at the end of the day, we believe that this product can be a very good asset in the hands of anybody that has a broad range of products, because migraine is come more than with sleep disorders, with gastroesophageal reflux disease, with depression arthritis, so it's fits very well in a portfolio, a company doesn’t have to have a specific migraine focus.
Small number of doctors and 10,000 doctors represent a third of all the prescriptions than the balance is covered by primary care. We also believe that there is a significant opportunity outside the United States that we would hope to be able to monetize.
We have two other compounds that are in early-stage development, they are in preclinical development. They are both biodegradable implants and they are both in the areas of neuroscience.
One is a product for schizophrenia and bipolar disorder. Another one is for Parkinson's disease they are extended release, which offers advantages for the patient, as well as for the physician and at the end of the day, we are looking for partners in order to help us develop those compounds, because those are things that probably are pretty expensive and we’ll take some time to get there it. So we are looking to monetize those through partnerships.
As I mentioned earlier, we just are in the close of raising $28 million, hopefully closing over the next 30 days or so. We believe that that money will help to get us through and into the fourth quarter of 2013.
We also have restructured are $7.5 million debt reducing some of the principal and interest payments upfront over the next nine months and then, that also generate some extra cash for us to use.
But we also did as I mentioned earlier, did reduce some headcount, as well as really paid down our spending on the pipeline at this point to really focus on getting the approval during some select pre-launch activities, as well as seeking a partnership.
So, hopefully over the last 10 minutes, 15 minutes or so, I’ve given you a good sense of who NuPathe is, Zecuity has a near-term commercial opportunity. First migraine, first and only migraine patch that will come to market really uniquely designed for that patient that has migraine attack and suffers through nausea and vomiting during their attack.
FDA response should happen in January of this year and our focus is really on, how do we get the product to approval, find the right commercial partners and commercialize and get into this significant $100 million plus category.
So, hopefully, that’s given you a good perspective. And I’m more than happy to take a few questions.
Right now there is no other patch in development. So somebody is to go down that pathway. I think they would on couple of things, it would, one, they have to go around our patents, which are pretty secure and pretty broad.
And two, they would have to start the development process. This company was founded in 2005. So it's going on seven years and we still don’t have an approval. So if you wanted just use that as the basis, the minimum is seven years and probably accounting from there. Yeah, ma’am.
Yeah. The question is about partnerships for the biodegradable implant and alike? We have ongoing discussions. I can’t tell you at this point that we have a deal set up. I think we have interest from people that are interested in the technology and interested in the two formats.
Yeah. Exactly. It is the technology. It’s a biodegradable implant. It is the patent protection around that technology with the drugs that we are putting in there. So it is something that we’ll be seen as valuable for them. But it is early stage, it is early stage. Yeah. Thank you. Yeah.
Yeah. That’s a great question. The question is to what extent should the company have anticipated the FDA's questions and should they or did they just come out of the blue? I think there is a little bit of both, I think the FDA is particularly this division, the neuro division is actually one that consistently will deliver complete response letter on almost every first pass, right.
So this is not a new phenomenon for this particular division. I think the questions that we’re provided to the company. I think are things that the company believes that they had good answers for but the FDA dug their heels on a few of them.
And I think that you can sit here and say, with hindsight, we should have known this, I think at the end of the day sometimes the FDA examine areas that you don’t really believe that’s are going to go down the path.
I think at this point, we do have not only have we had the complete response letter. We've had two meetings that went on with the FDA from the time that’s a complete response letter was given to us until we resubmitted.
So if they are familiar and no what we are coming back to them with. We believe we have hit on every single one of the points that the FDA had. We also as you can imagine went to outside consultants that had experienced at the FDA, understood the division that we are talking to, understood the questions that we’re asking and we were able to really get their support and help as we were responding to the question.
So, we feel pretty good that we've answered everything appropriately. Now, what I can’t tell you is because the FDA come up with something else between now and January 17th that maybe different than what I thought before. Yeah. Sure.
Yeah. The question is around the branded injectable which is eugenics compound. That was introduced a couple of years ago. It has not performed very well in the market. And I think there is one key thing on that, it’s penetrated about 10% of the injectable market and is currently generating around $40 million in annual revenue based on our most recent projections.
I think one of the key things on that product is that it is a product that is needle free, but not pain free. And it has significant bruising and bleeding that occurs with every injection.
And when you're thinking about a needle free device the last thing you're thinking about is that’s going to cause you more pain than the injection did and it does. So, I think that one other thing is it is a promise that was never delivered upon.
A patch is different. We believe that the patch. We know what the safety as we've done the research with physicians, as well as patients about the patch, about the efficacy and safety that we have with the patch. And they believe that there are going to be able to use, again it should help us and being able to penetrate the market substantially. Yeah. Great.
Yeah. There is two points on, actually three points. One is the preferreds can actually convert whenever they want to. The second piece is that if greater than 50% of the preferred convert everybody gets automatically converted. And then the third one and probably one of the more likely one is upon approval and then an additional raise of capital of $22 million, they automatically convert back to common at that point. Yeah. Yeah.
Yeah. That’s a great question. The intranasals that currently available on the market today, which is Imitrex nasal, as well as Zomig nasal, actually have a significant aftertaste. So what ends up happening is, you spray it up into the nose and a significant amount of the formulation comes into the back of the throat and causes, I think it’s probably 25 % to 30% of the patients have a really bad taste. It is -- it’s almost like the taste of it is almost like rotten eggs.
So I think a patient that has nausea and vomiting trying to use it and they use it, they may try at the first time, but my guess is, they are not going to be trying it to often. As Jim mentioned, Jim and I first got know each other when I was at Glaxo, and I was running the migraine business and I was the gentlemen that was responsible for the launch of Imitrex nasal back in ‘98 or so.
And I can tell you it took off like a rocket and about three or four months into it. They flattened and then started to coming down and it was because the taste aberrations were causing the physicians to say, we’re not going to write this anymore and the patients were not going to take this anymore. So today the nasals only represent 2.2% of that of the whole migraines space. Yeah.
I joined the company seven days after the submission had been sent in. So, I joined the company seven days after the resubmission that happened in July.
I’m because I actually when under confidentiality agreement before I join the company had the opportunity to see what was being submitted, saw everything that was there and at the end of the day felt very comfortable that the company have done a great job of responding, right, with the help of a outside consultants and at the end of the day had addressed every issue.
So, I think that, I think the company did a good job and I felt comfortable when I came in, because I had the ability to review it before it actually got submitted. Great. Thank you all. Thanks John.
Well, within 15 minutes of our schedule that’s the good news. You saw about half of our holdings today. Why own Safeguard stock? Full value, not yet to be realized, we have ownership stake, some very [audio gap] you saw about half.
We have another half view another very exciting. Safeguard is top performance with the terrific team of people, you have seen financial strength, flexibility, liquidity and you all know that this management team is strongly aligned in their financial interest with the financial interest of their shareholder and we are all working hard to increase shareholder value.
On that note, there are some box lunches back here. Let me invite you to pick up a box and enjoy it with your leisure and I believe some of you are scheduled for some one on ones with the variant CEOs that were here today. I’ll be happy to take a closing question and if there are none. Thanks so much for your time and interest and we will continue to build value for you.