The Intacs™ Proposition
Intacs™ intra-corneal ring segments (ICRSs), developed and
manufactured by KeraVision, Inc., were approved for sale by the
FDA in April, 1999. As approved, they can treat patients with -1.0 to -3.0 diopters of myopia (nearsightedness)
who have less than 1.0 diopter of astigmatism, a population which the company estimates at
about 20 million Americans. KeraVision is currently in the final phase of trials
to treat a larger population, including people with -0.75 to -4.5 diopters of myopia.
This would encompass about 90% of the 70 million Americans who are nearsighted (1).
Laser refractive surgery has become very popular in the United States. Industry
estimates are that over one million LASIK and PRK procedures will be performed in this country in
1999 alone. LASIK and PRK both involve the use of a laser to permanently alter the shape of the
central area of the cornea, thinning it so that light entering the eye is focused accurately on
the retina. The long-term effects of this thinning of the cornea are unknown; furthermore, there
is an incidence of side-effects from the surgery - halos, glare, and poor night vision, for example -
which may be permanent, since the central area of the cornea has been permanently altered.
Currently, 90% of refractive surgeries are done on patients with myopia greater than
-5.0 diopters; these severely nearsighted people are very motivated to be treated, since their
condition is such a handicap. While the proportion of refractive surgery candidates with mild to
moderate myopia - that is, less
than -5.0 diopters - is increasing rapidly, it is evident that these individuals perceive the
risk/benefit equation differently. Although they may be classified as having moderate myopia, they
still can't see the "big E" on the old eye charts; nonetheless, they are able to function well with
the use of eye-glasses and contact lenses. This is clearly an important market for refractive
surgeons, however, as the population of Americans with severe myopia is being treated so rapidly.
Remember, there are approximately 10 million people who fall into this category, and perhaps a half-million
of them will be treated in 1999. Refractive surgeons need to attract the broader population;
Intacs will play a role in doing so.
Intacs change the slope of the cornea in order to focus light properly on
the retina, but they do so without touching its center. Small arcs made of a material that has
been implanted safely in the eye for fifty years are placed outside of the area of the cornea through which
light passes. The extra material in the eye causes the cornea to be reshaped, and the patient is no
longer myopic. Although complications are infrequent, Intacs can be removed; when they are, the
eye reverts to its former condition. A patient can choose to have their Intacs removed
if a better treatment comes along. These are not options for those who have had laser surgery.
Many people who have reservations about having laser surgery may be
interested in Intacs because of these important differences. But what about the refractive surgeons?
What's in it for them?
What's in it for the Doctors?
Please note: I am not an opthalmologist. I have seen reliable citations of the following costs
utilized in this scenario: The costs of Intacs; the cost of KeraVision's training and "starter
kit"; the royalty fee paid per procedure to VISX; and the approximate cost for a refractive
surgeon to rent an excimer laser per use. I am using a reasonable figure for the amount a patient
might be charged for Intacs implantation. I am using a "guesstimate" of the general costs an opthalmologist
would incur to perform the procedure. My reasoning for the figure I chose is that I
pay my opthalmologist $110 for a fifteen-minute examination, and he's making a good living off
of that. Allowing thirty minutes total time to implant Intacs in one eye, and for a consultation
and several follow-up visits, my estimate of the general costs ($500) seems fair.
Doctor pays approximately $45,000 for training, instruments, and 18 Intacs.
Doctor charges $2000/procedure. Nine patients use the Intacs from the starter set (9 patients X 2 eyes).
Estimate $500/patient for G&A (general and administrative
expenses).
$2000 - $500 G&A = $1500 profit/procedure.
$1500 profit/procedure X 18 procedures (9 patients X 2 eyes) = $27,000
Next patients require Intacs purchased from KERA for $500/eye.
$2000 - $500/Intacs - $500 G&A = $1000 profit/procedure.
$1000 profit/procedure X 18 procedures (9 patients X 2 eyes) = $18,000
$27,000 + $18,000 = $45,000
18 patients reimburse the doctor for his training and equipment.
Compare this to the costs involved in offering laser refractive surgery. An excimer laser costs
approximately $500,000 (2). There are considerable costs to maintain it. New generations of
"safer, better" lasers come out every couple of years, and those are the ones which doctors
like to advertise that they have: What patient is not going to choose a doctor with the latest
generation of machine? Each time a patient
is treated, VISX, Inc. - a manufacturer of excimer lasers which controls important patents - must
be paid a royalty of $250 (3)(Note: on February 22, 2000, VISX and other laser manufacturers cut their royalty fees to $100). If the doctor does not own a laser (or share ownership of one), he
has to rent one. The cost per procedure to rent is currently between $800 and $1100. Then
add on the general expenses of maintaining a practice as well. And don't forget - the doctor
had to pay for his training to
perform LASIK and PRK.
How many procedures will it take to pay off the laser? Isn't that laser
going to be yesterday's technology in a few years anyway? Now, clearly, LASIK and PRK are profitable
procedures for doctors and clinics, but remember: the surgeon has paid off
his initial costs for Intacs with his first eighteen patients. At that point, the only cost a doctor
has outside of his fixed expenses is the cost of the Intacs - $500 per procedure - and he is
offering what an FDA advisory committee panel member
called the "next step in refractive surgery technology.".
A Few Words To Investors
Today (9/21/99) KeraVision shares closed at about $11 dollars per share.
Current estimates from brokerages Advest and DLJ are for earnings per share for FY2001 of, respectively,
$0.83 and $0.71. Splitting the difference and using today's share price, the stock is trading at
a P/E of about 14.5 X 2001 earnings. Medical instrument stocks with good growth rates can easily warrant
a P/E of 35 X earnings. 35 X earning of $0.77/share would equate to a price two years out of $27/share,
or about 150% higher than current levels. If the company's guidance and the estimates of the
brokerages are conservative - that is, if consumer acceptance of Intacs is good and there are more
procedures done than current guidance suggests - a justifiable stock price could be considerably higher.
Conversely, any one-product company like KeraVision may suffer from negligible sales growth, and the
stock may stagnate or decline. Currently, analysts expect Intacs could be used in 10% of refractive
surgery procedures in the next several years.
I first purchased shares of KeraVision in August, 1996. I was intrigued by
their product. I myself am quite nearsighted, outside the range which even the current trials of Intacs
are
treating, so I don't expect to be able to take advantage of them. Laser refractive surgery could treat
my myopia, but I will not choose to have it done. Personally, I am petrified of having the central
area of my eyes altered; I could not bear to suffer the side-effects which afflict a small
percentage of LASIK patients. If I could, however, I would definitely consider having Intacs implanted.
Besides having a low risk profile, the fact that they could be removed if I was displeased with them
in any way is very comforting. I suspect that many people who wear glasses
share my fears, and that they would likewise be more comfortable with the option that Intacs provide.
As an investor, I am hopeful that my logic is correct. As an individual - I'm jealous of the people
who can enjoy the benefits of KeraVision Intacs!