Eye sciences (NASDAQ: SGHT) only recently made its public debut. Since the company’s initial public offering last summer, shares have fallen nearly 50%. Today, it is not uncommon for newly public companies to see their stocks fall, even after strong market entry. Is this company, which markets medical devices to treat eye diseases, a company investors should be putting on their watch list now? In this segment of Backstage Pass, registered on December 13, Fool contributors Asit Sharma, Jason Hall and Rachel Warren discuss.
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Asit Sharma: Let’s take a look at the balance sheet first. Just to know that because of their public offering, they have a lot of money on their books. They have $ 32 million in long term debt. But if you subtract those numbers, as you know I’m still looking at working capital, so let’s call it $ 287 million when we take that $ 10 million out and then $ 32 million more. There’s a lot of money on the books, but they’re going to need it because they have this wasting rate. I will first go to the statement of cash flows.
You can see that this isn’t one of those software as a service companies where you start with negative margin and add positive cash flow, at least not yet. The company spent $ 42 million in cash in the first nine months of this year.
However, with that $ 240 million in cash on the books, they have a long trail. I think we’ll see the finances improve a bit. We should look at the nine month income statement. You can see here is that high gross profit that I talked about on sales of $ 34 million in the nine months ended September 30, 2021.
They had a gross profit of about $ 28 million. Right now, selling costs are the biggest expense they have on their books as they build that direct sales force. And they even have a small global team that is growing primarily in the United States at the moment.
But over time, if this pattern continues to move in the right direction, we’ll see those numbers start to normalize. And at some point, we should be able to see positive cash flow or the way forward.
Again, follow for me about four quarters. But if the story gets more interesting, I would be back on this show next year to talk more about the stock.
Jason Hall: So, Asit, I am looking at a business like this and two things come to mind. Do you think of the benefit, what’s the name of the robotic surgery company?
Asit Sharma: Yeah, Intuitive surgery.
Jason Hall: Intuitive. Being a mini Intuitive Surgical, getting into this industry that doesn’t necessarily have a lot of these advanced tools at this stage.
Because it is a very high margin industry when it is developing. But that’s the challenge: scaling up and the things we’ve learned like DermTech for example, has a disruptive product.
They really have a hard time getting the doctors in their industry – dermatologists in this case – to adopt their products.
The challenge here is for them to get their sales staff to do the same, to get the doctors to change, to try the product. Then the growth can take off. Once it starts to become an industry standard.
Asit Sharma: Totally, Jason. I think that’s the magic and that’s what we don’t know. It’s a relatively young company and we haven’t seen them do as much as a public company, make promises, fulfill those promises? How will this sales force perform? What is the competence of the management?
They have a great board of directors with many experts from the vision industry. But the proof is in the pudding, so we need to watch this and see if it looks like they are gaining traction. And there are ways to drive a few layers deeper into the onion as you go. Then it becomes a more interesting story.
But why don’t I bring that in like I could usually bring up a business, like a software company, and say, “Hey guys, I like that, I’m an owner. Look at those margins, look at this growth? , look at that cash flow. ” Because in this industry, they must be built over time, and you have to be patient.
Of course, you can always take a little peanut stance to keep your interest in a business like this. I don’t have a job yet. I could in the next few quarters.
Jason Hall: Rachel, you cover the healthcare industry. Software companies: They try things all the time. They’re going to sign up for software as a service, they’re going to try it out, test it in a department, that sort of thing. Doctors are much less likely to adopt new products and take risks with their patients.
Rachel Warren: This is true and I’m actually very happy that Asit brought this company to the table because like you said I cover a lot of healthcare companies and haven’t heard of this one- this.
One of my all-time favorite stocks I’ve talked about too often to take a stand [laughs] is Intuitive Surgical. I just haven’t seen many other companies in the larger medical device space that have piqued my interest.
Just looking at this one and how new it is to the publicly traded space and still what a great job it does to increase its income, increase those margins, I think it’s definitely one to watch out for. And that’s the one I’m putting on my radar now.
Asit Sharma owns DermTech, Inc. and Intuitive Surgical. Jason hall owns Intuitive Surgical. Rachel Warren has no position in any of the stocks mentioned. The Motley Fool owns and recommends DermTech, Inc. and Intuitive Surgical. The Motley Fool recommends the following options: January 2022 long calls for $ 193.33 on Intuitive Surgical and January 2022 short calls for $ 200 on Intuitive Surgical. The Motley Fool has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.