I had a conversation with a financially savvy Geoinvesting Premium Subscriber who’s been pounding the table on a med tech company. He laid out a case for a potential 200% increase in the stock’s price due to the company selling all or some of its assets. So naturally, we are interested in digging further into the story.
The company is telegraphing some potentially very shareholder-friendly moves through its communications about the directions of its product lines.
His reasonable hypotheses include:
- A sale of the entire company at a large premium.
- Selling parts of the business that in their own rights would translate to influxes of cash and a pivot to greater profitability.
- Other strategic moves he lays out in his thesis.
It’s also worth noting that the stock has some reasonably priced call options.
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Geoinvesting Premium Subscriber Mark Gomes likes Iridex Corporation (NASDAQ:IRIX)($3.04; $49.4M market cap), an ophthalmic medical technology company, provides therapeutic based laser systems, delivery devices, and consumable instrumentation to treat sight-threatening eye diseases.
Mark believes the stock has the potential to increase materially from its current price due to the company selling all or some of its assets. He extensively covered his bullish thesis at his blog.
Scott Schuda, another GeoInvesting contributor, also conveyed his bullish view on IRIX on August 29, 2021 when the stock traded at $7.55. The stock went on to hit a high of $9.46 on November 8, 2021, although he’d been bullish on the stock at prices under $3.00.
Today, the company continues to lose money due to investments into its glaucoma business and trades at a P/S ratio of 0.8. At $3.05, the stock is well off its highs, as the market environment has clearly shifted to punishing unprofitable companies.
My conversation with Mark first centered around information arbitrage he is unearthing through his financial analysis. He pointed out that, as of 2014, the company was a growing and profitable business focused on retina treatment. The shares were a strong performer from 2009 through 2016, rising from a low of $0.46 to a peak of $16.50 per share ($185M market cap).
In 2015 the company launched its Glaucoma business. Over the next two years, annual operating expenses ballooned by approximately $10M, flipping the company from profitability to annual losses. Following the successful razor / razor blade model of its Retina business (which has tens of thousands of systems in circulation), Iridex sought to build a similarly large installed base of Glaucoma systems, which would drive significant high-margin consumables revenue.
Glaucoma now generates $15M in annual sales and continues to grow. However, it has not reached the level of revenues or profitability that investors have hoped for. This has sent shares of IRIX back into the lower single-digits.
That being said, Mark believes that the $10 million in annual Glaucoma losses are masking a legacy Retina business that can generate over $6M in annual net income. Meanwhile, in the M&A market, Glaucoma businesses have been fetching 3x sales. Assuming a P/E of 15 for the Retina business and adding back its net assets (cash, etc), Mark derives a sum-of-the-parts valuation of over $145M or $9.00 per share.
Not coincidentally, on August 29, 2023 the company announced that the Board of Directors is undertaking a strategic review in an attempt to unlock shareholder value.
“Iridex’s sales revenue and product offerings today are bigger and stronger than they have ever been, and the Board of Directors believes this is an appropriate time to explore strategic options for the future of each of our product lines.”
Mark believes that the high-interest rate environment, combined with the company’s low valuation has spurred management to either:
- Sell the entire company at a large premium from current prices.
- Sell the Glaucoma business which would make the company (Retina) instantly profitable, resulting in a much higher stock price and a large influx of cash.
- Sell the Retina business, which would result in the company receiving an even larger influx of cash to continue investing in its Glaucoma business until it reaches profitability.
Mark further believes that a potential suitor for the entire company or part of its assets could include a few medical companies he has identified, as well as Topcon Corporation, a Japanese company, which formed a strategic relationship with Iridex two years ago and purchased 10% of the company for $6.18 per share.
Mark also discussed a new piece of information arbitrage due to an 8K filed Wednesday that has led him to conclude that some sort of resolution may be nearing in the IRIX strategic review process.
The 8K filed Wednesday, is an amendment to the original Certificate of Incorporation that came in response to an investor challenging the previous amendment.
“...board of directors shall adopt a resolution setting forth the amendment proposed, declaring its advisability, and either calling a special meeting of the stockholders entitled to vote in respect thereof for the consideration of such amendment or directing that the amendment proposed be considered at the next annual meeting of the stockholders.”
The 8K states, “The Court of Chancery granted the motion to expedite and directed the Company to (1) file this Form 8-K attaching the Petition”
Mark’s position is that the company suddenly found the need to expedite the Certificate of Incorporation issue so that it does not interfere with a strategic review process that he believes may be about to catalyze.
Again, you can read about Mark’s bullish thesis on IRIX at his blog. He’ll also be discussing IRIX during his Friday live session on YouTube, which you can follow here.
