A Closer Look at Glaukos’ Bid for Avedro

Early market reaction to Glaukos Corp.’s all-stock acquisition of Avedro Inc. was mixed; a decrease in stock price for Glaukos and an increase for Avedro. Despite that lukewarm reaction, the acquisition has the potential to bring together companies with complementary platforms and improve Glaukos’ scale for R&D.

Glaukos, based in San Clemente, CA, is focused on novel therapies for glaucoma, corneal disorders, and retinal diseases. Avedro, headquartered in Waltham, MA, is a hybrid ophthalmic pharmaceutical and medical technology company focused on treating corneal disease and disorders. Here’s a look at market reaction and how both companies are positioned to benefit from the transaction.

A Definitive Agreement Amid Jumpy Markets
Upon announcement of the agreement, Avedro shares jumped 36% to close at $23.20 last Thursday, while Glaukos dropped 15%, from 73.15 to 62.30. On Monday Glaukos closed at $60.64, down another 2.7%, and Avedro dropped from $23.07 to $21.81, down 5.46%.

The transaction, which is subject to Avedro stockholder and regulatory approvals, has been approved by the board of directors of both companies and is expected to be completed in the fourth quarter.

Respective Executives Respond
In a press release, Thomas Burns, Glaukos president and chief executive officer, said “Avedro is an ideal fit for Glaukos’ core strengths in creating and disrupting ophthalmic markets with novel therapies that address important unmet clinical needs of practitioners and patients.”

“Avedro is extremely pleased with the potential to become part of Glaukos, a highly respected ophthalmic organization with a successful track record forging new markets with disruptive technologies like our keratoconus pharmaceutical therapies,” said Reza Zadno, Avedro president and chief executive officer, in the press release.

Complementary Platforms
Avedro fits well with Glaukos’ commercial organization: Roughly 700 of Avedro target accounts are comprehensive ophthalmic practices where Glaukos maintains deep relationships. In addition, the Avedro platform can benefit from a fivefold increase in the size of its current 17-person US field sales organization.

Avedro can accelerate Glaukos’ growth trajectory. Avedro generated 66% year-over-year revenue growth in the first half of 2019. Once combined, the addition of Avedro’s fast-growing product portfolio is expected to accelerate revenue growth for Glaukos beginning in 2020 and potential revenue synergies beginning in 2021.

Avedro’s platform uses its proprietary, bio-activated, single-use Photrexa drug formulations to strengthen corneal tissue and halt progression of keratoconus, a degenerative corneal disease that affects approximately 1.1 million eyes in the US. Conventional treatments address symptoms; the Avedro platform is the first and only Food and Drug Administration-approved therapy that can stop disease progression. Avedro estimates the total US opportunity for its keratoconus therapy to be approximately $3 billion.

Avedro has also developed a pipeline of novel single-application bio-activated topical ophthalmic pharmaceuticals for common refractive conditions, including presbyopia, low myopia, and post-cataract refractive error, which are estimated to have a combined US addressable opportunity of approximately $23 billion.

R&D Advantages
The acquisition furthers Glaukos’ hybrid strategy. Avedro and Glaukos have similar hybrid pharmaceutical and device profiles that can combine to create a unique set of R&D, clinical, regulatory, and commercial capabilities.

The combined R&D and clinical organization can provide Glaukos with scale and a unique blend of integrated expertise across ophthalmic pharmaceuticals, drug delivery, micro-scale engineering, and hardware and software development. In addition, an expanded pipeline can provide new opportunities to extend leadership positions in high-growth ophthalmic markets.

Transaction Terms and Approvals
Under the terms of the merger agreement, for each share of Avedro common stock they own, Avedro shareholders will receive an exchange ratio equivalent of 0.365 shares of Glaukos stock.

Based on the parties’ volume-weighted average prices (VWAPs) for the 60 trading days prior to August 6, the transaction represents a 42% premium for Avedro shareholders. Upon closing, Glaukos shareholders are expected to own approximately 85% of the combined company, with Avedro shareholders expected to own the remaining 15%.

The transaction is subject to customary closing conditions and regulatory approvals, including approval of the merger by stockholders of Avedro. Certain shareholders of Avedro, including OrbiMed, HealthQuest, and LAV Agile, which collectively own approximately 41% of the outstanding shares of Avedro common stock, have entered into agreements to vote in favor of the transaction.

Busy News Day for Both Companies
According to Streetwise Reports, it was a busy news day for both Avedro and Glaukos. In addition to the acquisition news, both companies also announced second-quarter earnings and operational results.

For Q2 2019, Avedro reported revenue of $10.3 million, a 63% increase over Q2 2018. Gross margin increased to 73% for Q2 2019 compared with 56.4% in Q2 2018. Operating loss was $6.9 million in Q2 2019 versus $5.7 million in Q2 2018, and the company posted a net loss of $7.4 million in Q2 2019 compared with $6.5 million in Q2 2018.

Glaukos reported that in Q2 2019, net sales rose 36% to $58.6 million, compared with $43.2 million in Q2 2018; the growth primarily reflected unit volume increases worldwide.

Glaukos reported a loss from operations in Q2 2019 of $6.2 million compared with a loss of $4.2 million in Q2 2018, and a net loss in Q2 2019 of $6.3 million compared with a net loss of $5.4 million in Q2 2018. The company ended Q2 2019 with $159.2 million in cash and cash equivalents, short-term investments, and restricted cash. The company updated its 2019 net sales guidance to $226 million to $231 million, compared with $225 million to 231 million previously.

The companies advised that the updated guidance does not include the impact of the pending acquisition of Avedro.

For questions about this article, contact Keith Croes at kjcroes@gmail.com