– EYPT, SONVY cater to
the increasing vision, hearing needs of seniors, a growing cohort
– EYPT in wide open, fast
growing mkts, offers advanced post-cataract surgery products
– SONVY: the big kahuna in hearing aids, boasts
advanced sound filtering technology
If you’re one of those investors who watches the news 24/7,
hoping to stay ahead of the next Trump tweet, stop here. Read further if you’re
interested in a couple of stocks that have the potential to rise independently
of what President Trump tweets, a trade deal, or even the direction of interest
rates. We’re going to talk fundamentals here, no national emotions or global
themes are a good place to start looking for stocks, and one that’s been
written about in these pages before is how to play the Millennial generation.
Let’s go to the other end of the population curve: seniors. They too have lots
of needs, and it’s a growing population cohort globally.
According to a 2019 UN
Population Division report, the number of persons aged 65 years or older is
projected to double to 1.5 billion by 2050 from 703 million now. The share of
seniors globally rose to 9% today from 6% in 1990. That’s projected to rise to
16% by 2050, or 1/6 from 1/11. Virtually all countries will participate in this
Supplying seniors is a
trend of the same quality as cyber security, a relentless need, argues Peter
Andersen, the founder of Andersen Capital Management. As folks around the world
live longer, this will create demand for more medical devices, particularly
vision and hearing aids. These are products and services that are relatively
inelastic and not dependent on economic conditions. From a health care
perspective, eyesight and hearing are low lying fruit, he says.
Let’s consider vision.
Unfortunately, many of you reading this will develop cataracts. Some 50% of
folks over 80 will develop this vision problem, and surgery is the only way to
remove them. Annually, roughly 5 million Americans undergo this surgery, making
it the most common in the U.S. Worldwide, there are about 10 million performed.
Eyepoint (EYPT) is a
small cap company specializing in sustained-release drug delivery to treat
various eye diseases and chronic conditions, and has 6 FDA approvals for such
treatments, such as post cataract surgery care (DEXYCU, dexamethasone
intraocular suspension 9%), among others.
For example, EYPT’s
products replace the patients’ need for 100 eye drops to a single, tiny
time-release implant administered during the surgery, to prevent post-surgical
inflammation and other complications.
This same technology is used to administer therapies for various
sight-threatening eye diseases. EYPT’s patents don’t expire until 2034, giving
the company plenty of time to capture a large market share. Shares of mega-cap
pharma healthcare companies continually move on “patent cliff” worries.
Andersen estimates that every 1% market share in U.S. cataract
surgery market bolsters annual revenue $30 million and every 1% capture in the
eye disease market adds another $8 million to the EYPT top line. Given its
latest 12-month revenue was $12 million, a 1% market gain in both segments
would triple revenue. And, trade wars and impeachment have little or no impact
on EYPT’s fundamentals. Strong growth is possible, says Andersen.
Let’s consider hearing:
More than 50% of people over 75 years old—now 16 million people in the
U.S.—will develop disabling hearing loss. The
hearing aids market is an obvious opportunity.
Sonova Holding (ADR:
SONVY, $45) “is a pure play on hearing in the age of Alexa,” and
technologically it’s way ahead, Andersen says. One of the largest manufacturers
and distributors of hearing aids, the Swiss-based firm distributes its product
in more than 90 countries and also sells cochlear implants. The other big
competitor is Demant (ADR: WILYY), a Danish company whose shares are controlled
by a charitable trust. Each has roughly 20% of the world hearing aid market.
SONVY focuses on higher
end devices, with strong sales and distribution channels. It trades at a price/earnings (P/E) of about 26
times 2020 estimated EPS, a fair valuation given the potential long term. It’s
not apples to apples, but when Hershey’s
trades at 27 P/E for about 2% sales growth, the choice seems stark. Demant,
which grows similarly but isn’t a pure play, is smaller and majority controlled
by a trust, trades at 20 times.
In the financial year
ended March 31, 2019, Sonova’s second-half results showed material sequential
improvement, largely due to a successful launch of its Marvel platform,
according to a Morningstar report. Sonova benefits from an aging population,
increasing noise pollution, fairly low penetration rates for hearing aids in
the developed world, and “virtually untapped” patient populations in emerging
markets, the report said. Its broad product offerings should allow the company
to capitalize on these trends, while its strong brand and superior
technological know-how should yield market share gains, Morningstar wrote.
Where could I be
wrong: EYPT is a small ($235 million
market cap) and still unprofitable company that isn’t widely followed on Wall
Street and faces bigger competition in some product areas. It has a limited history and relatively new
products. As a $2.44 stock, many institutions can’t own it and it can be
volatile. The much bigger Sonova, $14.5
billion market cap, faces lots of well-armed rivals and has to spend
significantly on R&D to keep up. The
competition is heating up at the bottom end of the device market.
Bottom Line: Both EYPT and SONVY offer strong long-term growth potential thanks to favorable demographic tailwinds. I believe the shares, much less affected by the volatile macro concerns that seem to dominate equity markets in 2019, could give significantly better than market returns over the next few years.
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