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Eyes Wide Open: Second Sight Medical Products Becomes Another MDB Capital Special

by Sonya Colberg, Senior Investigative Reporter - 3/2/2015 10:09:09 AM

Second Sight Medical Products (EYES) creates a bionic eye for blind people.

It seems a cool business opportunity, at first glance, to implant electrodes in the eye to ultimately create images that the blind see as shapes or patterns.

The market, indeed, considers Second Sight worth about $559 million. This stunning valuation exists despite the fact that the Sylmar, Calif. company made only $1.5 million in sales in all of 2013 – and it costs Second Sight close to $3 for every $1 the company makes.  

So we took a critical look at Second Sight, the market and business plan. And we got quite an eye-full.

Here are some top reasons we believe Second Sight is fantastically overvalued and headed for a crushing reality check:

*Big investment firms yawn. So debt-riddled company grabs MDB by arm, hits Wall Street.

*Patient acceptance issues and FDA adverse event reports arise over Second Sight’s retinal prosthesis.

*Market tiny. Scale problems enormous. Next target minimum four years out.

*Stock lockup expiring; CEO gets break on stock bought with Second Sight cash.

*Look out ahead: Unless Second Sight plans nothing, more cash needed.

Second Sight’s key retinal prosthesis has three parts: an electronic device implanted and around the eye, a tiny video camera attached to eyeglasses, and a video processing unit the patient carries or wears.

While investors may find other viewpoints here, let’s look at the eye-popping details surrounding this company now trading at well over 100 times sales.  

*Big Investors Avoid Money-Starved Second Sight

Second Sight stock began selling on the stock market in November 2014 with heavy financial burdens strung around its neck:

*Over $422,000 worth of forgiven loans and interest handed the CEO so he could buy Second Sight stock.

*$29.5 million in convertible notes at 7.5 percent interest.

*Less than $1 million in cash and more than $25 million in debt.

*Accountants’ warnings regarding substantial doubt about Second Sights “ability to continue as a going concern without this offering which will raise operating capital and convert the debt to equity.”

No big institutional investors cared about Second Sight technology or potential at that time but the company obviously needed money. So Second Sight had to depend on MDB Capital to take the company public. 

MDB may have a heart of gold but it’s become known for a portfolio of losers.

From this sampling of companies that used MDB as underwriter, note that the stock of Energous (WATT), Clear Sign (CLIR) and Resonant (RESN) rocketed. But then plummeted:

 

Those stocks took a teeth-chattering ride down by -33% to -47%: (WATT was ~$15, now ~$10) (RESN was ~$19, now ~$10), (CLIR was ~$12, now ~$7).

MDB uses its Uni-Pixel (UNXL) experience as a case study. In its presentation, MDB refers to Uni-Pixel’s  “Valley of Doubt” followed by “Validation”:

 

Since MDB forgot to tell investors the rest of the story, we’ll share it with you. We call it the “Valley of Reality,” followed by “Misery.”

Investors can see that after the Uni-Pixel stock ran to ~$39, it collapsed to ~$6. For a decline – yikes! - of 85%.

So, MDB tends to be the go-to underwriter for these shot-in-the-dark companies with low institutional interest – and a tendency to fall apart.

*Patient Acceptance Questions

A woman whose husband William has macular degeneration, indicated a hesitancy to TheStreetSweeper about the bionic eye, implantation surgery and device training.

“We’ve been hearing a little bit about it. But we hadn’t heard about all these side effects,” she said.

She added that, if the device is ever approved for macular degeneration, it’s unlikely her 90-year-old husband would be willing to go through the training required for patients to correctly interpret the images captured by the tiny video camera attached to eyeglasses.

Scary in itself - the FDA training manual for Argus II patients is 99 pages long. It notes the device is only for blind patients with retinitis pigmentosa and little or no ability to see light in both eyes. It also notes:

“The effectiveness of this device for this use has not been demonstrated.”

 The FDA manual warns of numerous possible side effects ranging from detached retina to electric shock; to a “cascade of complications” with complications spurring additional, even worse complications; to additional repositioning surgery to “removal of the eye, if serious complications cannot be adequately treated.”

“I wouldn’t want to go for it,” another macular degeneration patient told TheStreetSweeper.

She said she would prefer very, very limited sight over the risk of losing an eye. Indeed, the manual clearly states the improvement is so slight that patients can expect to continue to need a walking cane or seeing-eye dog.

*Adverse Event Reports to FDA

The Food and Drug Administration received 21 adverse event reports, including two deemed Argus II malfunctions and the remaining believed associated with the implant surgery.

 Endophthalmitis, an extremely severe infection throughout the eye; erosion of the membrane covering the eye; inflammation; and detached retina were among the patient injuries noted. Several patients opted to have the implant removed.

*Competing Treatments Rock

Though Argus II is the first approved prosthetic for the rare genetic eye disease, it does not cure blindness.

Companies across the world are working on solutions expected to be an improvement. Retina Implant AG announced study results indicating patients’ ability to recognize faces and read, as opposed to Argus II’s results limited to the ability to make out shapes and patterns.

Israel’s Nano Retina has created a prototype of a camera-less device that gives blind people 20/20 vision, MIT Technology Review reports. And University of California, San Diego, researchers are using nanotechnology to mimic the eye’s cells, designed to restore vision without cameras or photosensors.

The FDA states the Argus II device does not slow or reverse progression of the target disease retinitis pigmentosa.

However, the FDA website shows researchers are working on hitting the disease itself through gene technology and have launched nine gene therapy studies on retinitis pigmentosa.

Reasonably-priced treatments available include everything ranging from various supplements, to encapsulated cells surgically placed into the eye, to stem cell transplantation, to vascularization of the eye, in use for over two decades.

*Limited Opportunities – A Scale Nightmare

The FDA approved limited use of the Argus II under a “humanitarian use exemption,” in 2013. Only about 100 devices have been surgically placed, making it impossible for Second Sight to expect a break from suppliers due to lack of economies of scale.

In the FDA’s letter, it becomes obvious that the market is limited. The approval pathway is “limited to those devices that treat or diagnose fewer than 4,000 people in the United States each year.”

Patients with other eye diseases or trauma are not candidates and doctors must be trained to perform the tricky surgery .

Sure, Second Sight hopes to eventually get FDA approval to also use the product for age-related macular degeneration, but even the company believes getting marketing approval would take at least until 2019.

But it’s hard to imagine how Second Sight could scale up enough at this point to be worthy of a cautious investor’s portfolio. 

*Lockup Expiration – CEO Can Sell Now

Second Sight employees and consultants agreed to hang onto over 1.17 million shares and options for a six-month lockup period ending May 18. In fact, a company filing explains that the underwriter may “consent to an early release from the applicable lock-up period …”

But the CEO doesn’t have to wait until the May date to dump stock. Dr. Robert Greenberg, who owns about 363,000 shares and received $398,605 in total compensation as CEO in 2013, can act early.

Even though Second Sight didn’t have the money to operate for any length of time, directors actually took the irresponsible, promotional step of giving the CEO two loans – totaling $419,000 – to buy stock.

As if that weren’t enough, the company forgave both loans and interest.

On top of that, Dr. Greenberg is allowed to sell up to 100,000 shares of Second Sight from Feb. 15 through April 15 to pay tax obligations linked to those forgiven loans.  That’s a stunning $422,000 worth of forgiven loans and interest to buy company stock.

Altogether, more than 1.2 million shares could be put up on the auction block in coming weeks.  And, in another six months, an eye-opening 22 million locked-up shares will become available for release.

*Look Out Ahead: Cash Raise Likely

Unless Second Sight intends to sit still, and though it has received federal funding over the years, it may still need to raise more cash.  

While the IPO gave the company around $30 million, Second Sight has listed about $20 million worth of expenses required to move ahead. And in the three quarters ended September 2013, the company burned through nearly $22 million. All while accumulating a deficit of $139 million. 

An analyst told TheStreetSweeper that he expects Second Sight will need to raise money in the second or third quarter.

A company filing suggests this could happen at some point and may dilute current shareholders’ shares: “No assurances can be given that our development activities or clinical trials will result in a marketable product or that we will be successful in raising adequate funds to support our future development and marketing activities. To the extent we are able to raise funds, it may be on terms that will result in unfavorable dilution to our shareholders.”

Conclusion: We’ve told investors about companies with similar issues, such as TKMR Tekmira Pharmaceutical (TKMR) (then ~$26, now ~$18), TearLab (TEAR) (then ~$14, now ~$2.60) and PhotoMedex (PHMD) (then ~$15, now ~$2). Primarily due to hype aimed at retail investors, stock in these companies momentarily flew to ridiculous levels. Then plummeted to reality.

Likewise, the red flags unique to Second Sight indicate this stock is severely overvalued and poised for a downturn. Along with its unbelievable half-billion dollar market valuation on about $2 million in sales, we are not willing to take a second look at Second Sight.

* Important Disclosure: The owners of TheStreetSweeper hold a short position in EYES and stand to profit on any future declines in the stock price. 

Editor's Note: As a matter of policy, TheStreetSweeper prohibits members of its editorial team from taking financial positions in the companies that they cover. To contact Sonya Colberg, the author of this story, please send an email to  scolberg@thestreetsweeper.org.

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