This deal caught our eye (sorry!) in part because we’re at the age where reading glasses are sometimes helpful – small print, low light. Put simply Presbia (NASDAQ: LENS) makes a small microlens which is then inserted into a small “pocket” added to the eyeball with a conventional laser. The lens is only 3.2mm in diameter with an astonishing edge thickness of just 15 microns. The optics on top of the lens adjust light gathering and focus to aid either near or far vision.

Results have been encouraging and the product is now in a Phase 3 trial. Commercialization is planned on the back of existing laser surgery centers which already have the infrastructure and personnel in place to train and adapt to this new procedure. (This is similar to the strategy used by other new IPO companies like Zeltiq which provides an alternative fat reduction therapy that is going into existing aesthetic treatment centers that administer traditional methods ranging from botox to liposuction.)

The US pivotal trial included 75 patients in the summer of 2014 so that results could be submitted to the FDA. Patients gained an average of 6 lines in reading an eye chart with no impairment of their distance vision. Safety results were good.

Margin potential appears acceptable – customer acquisition costs are around $400 and material costs are $100. Wholesale pricing to distributors and treatment centers is planned to be $700 to $800. The final cost to the consumer will end up being between $1,500 and $3,000 depending on the point of delivery.

The advantages of this procedure is that it is minimally invasive, customizable to the patient and reversible. It also allows for upgrades to be installed over time as patients may need stronger lenses – just like you might start out with 1.5x reading glasses but need 2.0x after some more years go by. Results have been good with patients achieving an average six line improvement in near-vision when reading a standard eye chart.

The company hopes to take advantage of a gap in the market between traditional laser surgery that people tend to get in their 20’s or 30’s and the corneal procedures often needed by those in their 70’s. There are lots of people in their 40’s, 50’s and 60’s that have seen their vision degrade to the point of needing glasses for reading or far vision correction.

Putting numbers on the real market opportunity requires some work beyond what the company presented. There may well be 1.8B people world-wide (113M in the US) with this condition but that’s not the real opportunity. The majority will probably find using a $10 pair of reading glasses acceptable compared to a $2,000 medical procedure. There are some medical factors that shrink the potential population (age, health). Fortunately we can extrapolate from the clinical trial example to get some rough numbers.

For the trial there were 1,166 candidates (if we had a figure on how many people saw the marketing materials it would really help) and of those 487 were qualified. They took 169 of those through the next step and 75 received treatment (94 were disqualified.) So the bottom line is out of 1,166 candidates about 214 patients would be treated or 18%. That makes for 20M in the US and 304M in the rest of the world.

The next major filter we’d add is financial. This is an elective procedure and for many the fee will be out of reach (although we expect financing options to make it more accessible.) In the US and other western economies probably as many as 50% of the prospects would consider the option affordable. We’ll take 10% as a conservative estimate for the portion of the global population that would pay for this although we acknowledge it might be closer to 20%. That brings us to 10M ready patients in the US and 30M in the rest of the world.

Completing the math on 40M “ready patients” world-wide we get to a heady $28B market opportunity over the next five to 10 years. The planned business model has medium gross margins but should be efficient in terms of operating costs once it scales up – mainly because there are existing delivery channels that can be leveraged. We’d love to see customer acquisition costs come down which would provide some powerful upside to the model if it occurs.

The company is offering 4.2M shares and will have 13.3M outstanding post-IPO. The proposed pricing range is $11 to $13 and oddly it’s only Jefferies on the cover. A deal this size could have easily had two or three additional banks on as co-managers to provide much-needed research coverage. Management has done investors a disservice by not getting more return on their expenses of doing this deal which is a bit of a yellow flag.

The next phases of the trial are in process now (more patients, longer-term study results) and these “modules” will continue through 2017. If milestones are met approval would be received in Q4 of 2017 and US sales would commence at the beginning of 2018. There will be interim milestones to inform investors but revenues are still a few years away.

At the mid-point LENS would be capitalized at $160M which is certainly reasonable relative to the market opportunity. Until we are further into commercialization it’s not possible to build a real model and analyze long-term valuation. Investors should read the prospectus and will find the LENS IPO Roadshow Slides good background material.

In summary we like this technology and the company seems to be fairly well put together. It seems like small folly to do this IPO with only one bank on the cover but rather than read to much into it we’ll keep it in mind as we evaluate the company more as a public company. With commercial revenues still far off we’d be cautious about buying the shares too soon and/or at too-high a price. It’s likely that we’ll put a small allocation in the IPO Candy Folio and wait to see how well the future growth of LENS comes into focus. (sorry again!)