Were Glaukos’ IPO Investors Irrationally or Rightly Exuberant?

OIS Hot Shot Glaukos Corp. (NASDAQ—GKOS) raised over $100 million in an initial public offering (IPO) that highlighted extraordinary demand for ophthalmology’s minimally invasive glaucoma surgery (MIGS) market leader.

In its initial SEC filing, Glaukos had proposed selling 5.4 million shares in the range $13 to $15 per share.

With a positive investor reaction during the roadshow, this range was boosted to $16 to $17 per share. In addition, the offering size was boosted from 5.4 million shares to 6.0 million.

The stock was priced at $18 on June 24. On the first day of trading, it rocketed up over 70%, closing at above $31. (Shares closed at $28 last night.)

Based upon approximately 31 million common shares outstanding after the IPO closed, this created a company with a market capitalization approaching $1 billion literally overnight.

Relative to its trailing 12-month sales of about $51 million, GKOS is being valued at 19 times revenue. Fast growing med-tech companies typically sell at about 5 to 10 times trailing annual revenue.

Seeing this stratospheric valuation, I could not help but think of the comments made by Federal Reserve Bank chairman Alan Greenspan in a speech he gave in December 1996 during the Internet dot com boom.

With the valuations of many dot com companies soaring to seemingly absurd valuations, Greenspan posed the question: “how do we know when irrational exuberance has unduly escalated asset values.” So, in the same vein, I now ask a similar question: Is Glaukos’ market valuation a sign of “irrational exuberance” or is it fully deserved?

To paraphrase a famous expression, “valuation is in the eyes of the investor.” So why are investors so enamored with Glaukos now? I can cite these factors:

1. It has a complete monopoly on the MIGS market, with the only FDA-approved product. Industry pundits project that the MIGS market may be the fastest growing ophthalmic market between now and 2020.
2. Since receiving FDA approval in mid-2012, Glaukos has shown tremendous growth, with revenue in 2013 and 2014 at $21 million and $46 million respectively. Moreover, with no competition likely in the U.S. for about 18 months, Glaukos appears poised for continued robust growth. Analysts from firms involved in the IPO estimated the company’s revenues could hit $65 million in 2015, $86 million in 2016 and $111 million in 2017.
3. Glaukos has an experienced and highly-regarded management team, led by CEO Tom Burns. According to my sources, Burns and his chief commercial officer Chris Calcaterra were very impressive during their IPO roadshow.

So, are Glaukos shares overvalued, fairly valued or maybe even undervalued?  Finance researchers, who have studied the post-market performance of IPO, have concluded that in general the long-run performance of IPOs is poor. Whether this is from investor irrationality (i.e., over-optimism) or other factors is not fully understood. Conversely, it has been found that venture-capital backed IPOs (like Glaukos) or those with prestigious underwriters (Glaukos again) outperform in the long run.

So, the jury is still out on this question. It will take several years for us to know the answer. But, for now, Glaukos is a Wall Street darling.