COVID-19's Timing Could Not Have Been Worse For EyePoint Pharmaceuticals
Summary
- Before COVID-19, EYPT's revenues were surging quarter over quarter since its Q12019 launch and consensus FY2020 and FY2021 revenue estimates were, per Seeking Alpha, $51MM and $153MM, respectively.
- COVID-19 stopped elective surgeries which dramatically slowed/stopped ~65% of EYPT's customer operations and, like numerous peers just launching new products, put an enormous strain on EYPT's business plan and liquidity.
- At $0.88/share, EYPT's market cap is $110MM ($135MM enterprise valuation) versus a 10/2019 $300MM market cap and less than consensus FY2021 revenue estimates of $153MM just 4 months ago.
- EYPT's loan agreement (12.5% $50MM outstanding) includes a $45MM FY2020 revenue covenant that now appears at great risk of default. Simply put, COVID-19's timing could not have been worse.
- With $23.2MM net cash at 3/31/2020 and 4/2020 re-organization, EYPT says it has enough cash to last "into FY2021." Our analysis concludes EYPT's liquidity will be "on-fumes" at year-end.
EyePoint Pharmaceuticals, Inc. (NASDAQ:EYPT) was not consulted in the preparation of this article.
Our net analysis concludes EyePoint Pharmaceuticals was building a high-growth company that would have created enormous value for shareholders. COVID-19, through no fault of EYPT, literally shut down elective surgeries and temporarily slowed essential surgeries which we believe, net net, will set EYPT back one entire year. Simply put, our analysis concludes EYPT will more or less end FY2020 at the same place it ended FY2019, except EYPT's products will likely have 1 year less of a runway remaining on its products "pass-through" status (Pass through is a competitive advantage because it means EYPT customers take less financial risk incorporating EYPT's products into their business). EYPT is one of a number of companies that had a very successful commercial launch, then ran straight into COVID-19 at the worst possible time.
Our analysis also concludes EYPT needs to raise at least ~$20 million to stay responsibly capitalized through the end of FY2020 and at least another ~$30 million to get the business to break-even in mid-2022 versus a market cap today of $110 million at $0.88/share. Our analysis concludes ex-US partnerships may raise $2 million so, with $45MM in long-term debt due 12/31/2023, EYPT either needs to raise additional debt (i.e., a royalty-based loan), dilute shareholders or sell the company.
That being said, with a market capitalization of $110 million and enterprise valuation of $135 million at $0.88/share, our analysis also concludes EYPT is materially undervalued because:
1. EYPT trades at ~10% less than its pre-COVID-19 FY2021 consensus revenue estimate of approximately $153 million. The long-term outlook and competitive advantages of EYPT's products, and hence EYPT's valuation, are essentially unchanged (with the exception of losing one year of pass-through) and;
2. EYPT trades at only ~6 times its launch year revenues (which was slightly less than a full year launch at that) and;
3. EYPT estimated peak annual revenues for 1 of its 2 FDA approved products is $150 million (per EYPT). Our analysis concludes peak revenue potential for EYPT's second product is materially higher than its first product. Hence should it come to an acquisition scenario, it is likely EYPT would be acquired at a multiple of estimated peak revenues assuming it can find a willing buyer and is not forced into a distressed sale.
4. EYPT's 2 products are "long-lasting" eye treatments versus other peer therapies that, by limiting the number of visits for treatment, should provide competitive advantages in a post-pandemic world as customers continue to re-open and patients seek to lower doctor visits.
Our analysis comes to a simple conclusion: Should EYPT be able to find a willing buyer willing to pay market value and buy EYPT, or if EYPT can raise enough cash via non-dilutive loan (i.e., a royalty backed loan), which appears very possible given the strength of its products, investors should be generously rewarded. However, if EYPT is unable to raise non-dilutive financing then investors will be diluted at dramatically unfavorable pricing. Our analysis concludes it is practically a certainty it is one or the other.
Investors should also understand EYPT has 125 million shares outstanding and additional material dilution via stock options/warrants once EYPT's share price begins to exceed ~$2.50/share. Our analysis concludes EYPT's enterprise valuation exceeds $400 million at $3/share and ~$670 million at $5/share. Hence while EYPT appears a solid investment at $0.88, assuming the company can work out its liquidity challenges, investors should be cautious about expecting a "multi-bagger" like a run-up to $4-5/share in the near term unless the company is sold.
By way of background, EyePoint Pharmaceuticals is an ~84 employee (pre-COVID), specialty biopharmaceutical company that develops and commercializes ophthalmic products for the treatment of eye diseases in the United States and Europe. Before COVID-19's impact in mid-March 2020, in addition to ~84 full-time employees, EYPT had engaged a contract sales organization ("CSO") employing 33 people to sell, on a full-time basis, one of EYPT's 2 FDA approved products (totaling 117 full-time equivalent employees). EYPT initiated a cost-cutting re-organization in April 2020 that included trimming its internal sales force from 12 to 10 and cutting leased reps via its CSO from 33 to 12.
As noted, after reporting torrid revenue growth since its products were first launched in Q1 2019, EYPT's business has been materially adversely affected by the COVID-19 phenomenon. EYPT's current liquidity outlook is uncertain. EYPT's FY2019 audit report dated March 13, 2020, from Deloitte & Touche includes a "going concern" provision which means Deloitte & Touche does not believe EYPT has enough liquidity to last through the end of FY2020. Our analysis also concludes EYPT will not be compliant with its FY2020 minimum revenue covenant of $45MM in its long-term debt agreement.
EYPT sells 2 FDA approved products to treat various eye diseases. The first product is called Dexycu, approved in February 2018, to treat post-operative inflammation using EYPT's Verisome delivery technology. Simply put, Dexycu is a single shot eye therapy to replace patients manually adding prescription eye drops (that include steroids) after cataract surgery. EYPT's second product is called Yutiq, which was approved in October 2018 as a three-year treatment for chronic non-infectious "uveitis" affecting the posterior segment using EYPT's Derasert drug delivery technology. There are numerous clinical advantages of Yutiq versus alternate short-term therapies. Investors are encouraged to visit EYPT's website to learn more (and watch some great videos). To summarize EYPT's 2 products (and the staffing pre and post COVID-19):
To demonstrate its commercial value, it should be noted Durasert, EYPT's short-term drug delivery system, is licensed to Bausch & Lomb and Alimera for use in their respective eye therapies. Royalties from these licenses and other collaborations approximates $2 million/year. These non-product revenues are not material nor strategic to EYPT's long-term success and will not be reviewed in any detail. EYPT did record $2 million in Q1 2020 revenues from an upfront payment from a distributor in China to sell EYPT's FDA approved products in China and a handful of other Far East geographies. We will otherwise note $2 million/year in such "other" revenues in our models and forecasts.
EYPT's commercial success or failure will come from product revenue success or failure and, longer term, like any cutting-edge biotechnology company, from its R&D pipeline. Our analysis, like most of our analysis, will focus on product revenues and not assign any value to its pipeline. It should be noted EYPT is particularly excited about a product in its pipeline to treat wetAMD that will go into a Phase I trial in FY2021 (assuming it can be financed).
Below we will analyze EYPT's capital structure. EYPT has a $50MM term loan to a third party lender due in full on 12/31/2023 that accrues and requires monthly interest payments at 12.5% or $6.25 million/year or $1.56 million per quarter. The loan requires EYPT to maintain at least $5 million cash at any one time and minimum annual revenue covenants including a $45 million minimum revenue covenant for FY2020. Incidentally, this means EYPT would have provided the lender a forecast that estimated FY2020 revenues would be at least $45 million (and incidentally $80 million for FY2021). EYPT was able to secure a $2.0 million CARES Act loan from the SBA in April 2020. Later in our analysis when we forecast cash, we will "net out" this $5 million minimum and add in the $2.0 million loan for forecasting (in other words, we will assume EYPT starts Q2 2020 with $23.3 million net in the bank).
The following includes EYPT's income statements going back the last 5 quarters:
Investors should note EYPT does not record revenues based on prescription volumes. EYPT's products are stocked at distributors and customers generally buy for their physician offices in a lumpy manner. There was an obvious drop off in revenues in Q3 2019 while a permanent J code was established 10/1/2019. This is the primary reason why Q3 2019 product revenues were so low. This is a phenomenon consistent to most new FDA approved products getting insurance coverage. Both products are also now on "pass-through" status, which is a competitive advantage, as it removes certain financial risks to the EYPT end user customer. Furthermore, as is consistent to a number of commercial biotechs and pharmaceutical entities, there is usually a drop-off in elective surgeries in the first quarter of any year as health insurance deductibles are reset.
EYPT noted Q1 2020 revenues were meeting expectations pre-COVID-19. As noted, EYPT's loan covenant includes a $45 million FY2020 revenue covenant suggesting EYPT more or less forecast $45 million in 2020 revenues at the time the loan originated in February 2019. EYPT consensus FY2020 revenues were ~$48 million for most of Q42019 and Q12020. This suggests EYPT was more or less on its way to a $45 to $50 million dollar year. When COVID-19 hit in March 2020, EYPT's Dexycu customers (cataract surgeons) completely shut down (as a non-essential service) and only recently began to re-open in early May. EYPT's Yutiq customers never fully shut down as uveitis surgery is not elective. Uveitis, if untreated, can cause blindness. On EYPT's Q1 2020 earnings conference call (41 minutes and 35 seconds), EYPT noted Uveitis centers were, more or less, seeing 50-75% of their normal patient volumes.
On EYPT's Q1 2020 earnings conference call (17 minutes 25 seconds), EYPT noted EYPT secured a $2.0 million CARES Act loan from the SBA and implemented a re-organization to manage cash. The restructuring plan included $17 million in annual savings from all over the organization but a majority from marketing and sales, noting the restructuring gives EYPT a cash runway "into FY2021." This included $10 million in one-time cuts or deferrals and $7 million in permanent cuts (SOURCE: Q1 2020 earnings conference call (39 minutes and 10 seconds). EYPT's CFO goes on to say that EYPT will seek non-dilutive financings and ex-US partnerships to extend its cash runway. Because EYPT was paid $2 million upfront from a Far East distributor for the right to sell EYPT products in China (and a few other regions), we will assume EYPT can only raise another $2 million from a potential licensing of its products in the EU. Our analysis concludes $2 million is immaterial to EYPT's liquidity challenges.
Our analysis concludes EYPT's "recovery" is directly and proportionally tied to the United States re-opening and getting back to some resemblance of normal.
To model EYPT's cash runway to test that it makes sense that EYPT has enough cash to last until 2021, and get an idea around EYPT's revenue expectations in the COVID-19 world, we performed the following analysis:
The above forecast is not perfect because it does not consider working capital opportunities to manage cash but notes that to incur $12.5 million in expenses per quarter (that were trending to $16/$17 million per quarter before the $17 million annual cuts or ~$ million/quarter), keep the manufacturing facility open and staffed at $1.0 million/quarter (equal to the last 2 quarters COS) and pay $1.6 million debt service per quarter, our analysis concludes EYPT would go into FY2021 "on fumes" from a cash perspective. That being said, it does appear a reasonable conclusion that EYPT has enough cash to last until 12/31/2021. Of course, EYPT needs to be well-capitalized until it can get its operations to breakeven.
We reviewed prior EYPT Form 10Qs and noted EYPT's accounts receivables ("A/R") generally approximated the prior 2 quarters' sales. This is a positive data point from a cash flow perspective because it means EYPT will collect Q4 2019 and Q1 2020 revenues in Q2 2020 and Q3 2020, respectively. EYPT does not have an A/R line of credit. EYPT will, most likely, report disappointing sales in Q2 2020 but won't truly feel the effect from a liquidity perspective until it comes time to collect such sales in Q4 2020. Hence from a net cash flow perspective Q4 2020 will be a particularly difficult quarter.
If we assume EYPT's gross margin is 85% and its quarterly cash requirements are:
- $13 million for OPEX
- $1 million to keep the plant running and adequately staffed
- $1.6 million for interest expense/debt service
it is simple to determine quarterly sales needed for EYPT to break even as follows:
From these analyses (prior quarter sales, cash needed to take EYPT into FY2021 and breakeven), we can more or less calculate the cash EYPT needs (from whatever source) to last until the company is cash-flow-positive. It should be noted, under a previous CFO, the expectation was that EYPT would break even in FY2021 (on ~$150MM in revenues). Since EYPT implemented massive changes via the April 2020 restructuring, we will assume EYPT can get to breakeven on a lower revenue run rate as suggested by EYPT's prior CFO.
Our net analysis concludes EYPT, from a sales and business development perspective, will start FY2021 from the same place it started FY2020. As noted, EYPT's stock price was as high as $2.05 on January 28, 2020, and $2.68 on October 21, 2019. At the time EYPT had roughly 110 million shares outstanding, yielding market caps of $230 million in late January 2020 and just under $300 million in October 2019. Investors need to be aware of EYPT's liquidity, but absent losing one year of pass-through, there has been no dramatic change in EYPT's opportunities.
We are able to quantify the approximate, again approximate, amount of cash EYPT needs to last until it is operating at breakeven. We will assume this is by Q3 2022. Again this is not a perfect analysis but provides broad guidelines to understand the scope of dilution possible:
Our model is obviously high level, assuming ~$50MM in FY2021 revenues (which equals consensus FY2020 revenues as of 4 months ago). Our analysis concludes should EYPT keep expenses more or less as guided with minor increases in 2021, EYPT will show a $32 million cash deficit. Hence EYPT will need to raise a collective $50 million per our model to more or less get to break even in mid-2022 and to stay responsibly capitalized. EYPT's CFO did note FY2020's cash runway included amounts for EYPT's R&D pipeline. Our FY2021 model probably underestimates the R&D investment to move its pipeline forward. However, EYPT hinted it would be a small ~25 patient Phase I trial for less than $10 million. Hence $50 million appears more or less reasonable. It could be $40 million and it could be $70 million. It certainly does not appear more than that.
Capital Structure
The following is an overview of EYPT's capital structure and how we calculate fully diluted shares outstanding and market cap to enterprise valuation adjustments:
For those of you who prefer a simpler explanation, the following is a simple overview of EYPT's dilutive securities:
Should EYPT raise $20 million by diluting at a fraction of $0.88 per share, shares outstanding would surge by roughly another 30 million (to include likely warrants). Recall our analysis concludes EYPT will need to raise a collective $50 million to stay responsibly capitalized until it is able to get to breakeven (assuming it can do so as well).
Valuation
It is certainly unfortunate COVID-19 hit EYPT hard and just when its business was beginning to show considerable growth. However, EYPT must react to survive like any company. Here are a couple of ways we could "value" EYPT if it was sold to a willing buyer (and not via a distressed sale):
Please note our analysis is at a very high level. It is quite possible, for example, Yutiq's peak annual revenues of $200 million noted above could be materially under or overstated. However, it more or less appears with 125 million shares outstanding, EYPT might be able to fetch shareholders $3.50 per share if it was able to sell to a large pharmaceutical in an "arm's length" transaction. However, with the COVID-19 uncertainty, it is likely multiples used in prior years (we like to point out OSIR, which was more mature a company than EYPT at a 75% gross margin, was acquired for 5 times forward-looking revenues or 4 times trailing 12-month sales). Our analysis concludes it is highly unlikely EYPT will be worth $4 or $5/share in the near term.
It should also be noted EYPT's products are on "pass-through" status which is valid for 3 years from the first commercial shipment per EYPT's CEO (SOURCE: Page 9). Hence "pass through" should end at 12/31/2022. Pass-through is a competitive advantage when introducing a novel new product like EYPT's 2 products. Common sense suggests when pass-through ends, the inherent value is lower without pass-through. This is one reason to believe it might be an opportune time to sell EYPT so an acquirer can leverage that advantage. EYPT, like many companies with products on pass-through, is trying to get pass-through extended. If EYPT's products' pass-through status is extended an additional year, this would be a materially positive change and should create considerable value.
Conclusion
If EYPT is able to secure a material non-dilutive financing like a royalty backed loan like CHMA was recently able to procure (CHMA was able to do so even before its product was approved), EYPT shareholders should be generously rewarded. EYPT's products are extremely well respected. It is also quite possible EYPT executives are shopping the company to a large ophthalmology company (like Bausch & Lomb) in which case shareholders should also do well at $0.88/share.
If the company is unable to secure non-dilutive financing or sell the company, shareholders could be subject to material dilution to keep EYPT afloat.
The good news is our analysis concludes a financing is not a certainty in the near term. Because EYPT is collecting Q42019 and Q1 2020 sales now and operating a leaner company post the 4/2020 restructuring, EYPT's liquidity should not become dire this quarter. EYPT might wait for business to pick up. Hence it is possible investors will see share gains should EYPT report a strong rebound in the last 5 or 6 weeks of Q2 2020.
Should EYPT be able to grow its business to revenues $150 million per year as originally forecast and keep expenses more or less in line with Q1 2020's run rate, EYPT will have a great business model and profitable company. Until then, we recommend waiting to see what happens next before investing in EYPT.
This article was written by
Analyst’s Disclosure: I am/we are long EYPT. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
We have a small position in EYPT because we do believe management, with such clinically competitive assets, will be able to build significant shareholder value.
Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.
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Comments (12)
I don't think they can make it out on their own.I wouldn't recommend a long possition.