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Introducing Our Newest Tool – The OIS Index

Episode 106

OIS has partnered with Michael Lachman of EyeQ Research to create a vital new stock index of ophthalmology companies. This new tool will enable us to deliver broader insights and stronger analysis of our exciting sector.

Podcast Guest:

Michael-Lachman

Michael Lachman

Michael Lachman is President of EyeQ Research, which provides market research, analytics, and strategic advisory to ophthalmic companies and investors.

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Transcript

Tom Salemi: Hey, everybody, welcome back to the OIS Podcast. Today is the day. It’s OIS@AAO. We’re sending this Podcast out and about on October 13th, which is the day that OIS@AAO is taking place at the Hyatt Regency Hotel in Chicago. We hope you are joining us there. If you did join us there and you’re listening to this a few days after the event, certainly hope you had a great time. And if you though some unfortunate reason were not able to attend, then keep an eye out on OIS.net and of course sign up for our Eye On Innovation Newsletter, and we’ll get you some content from the conference as soon as we get it together. We’re working on that as we speak. One of the things we are introducing and slash have introduced at OIS@AAO is our new member of the OIS family. It’s not an event. It’s a great piece of content and analysis. It’s the OIS Index. We’ve been working to put this together for some time. We’re very happy to have partnered with Michael Lachman of EyeQ Research to help us assemble an index of ophthalmology companies that will give us the ability to sort of track the energy of the sector and to give you even better informed analysis of the ophthalmology industry. So Michael unveiled the index at OIS@AAO, or if you’re listening to this on the morning of OIS@AAO, he is going to do that today, so make sure you’re in the ballroom. And in this Podcast, he sort of goes over the history, the process and the objective of the index. I’m very happy to be working with Michael. He’s done a lot of great writing for us in the past, and this really helps us extend the relationship. So Michael Lachman of IQ Research will give you an overview of the OIS Index. Let’s get onto the Podcast.

TS: Michael Lachman, welcome back to the Podcast.

Michael Lachman: Thank you for inviting me, Tom.

TS: Pleasure to have you. And we’re excited to have you at OIS@AAO next week. We’ve got a new feature that you’re going to introduce at the conference and on this Podcast. We’re going to try to sync up the release of the Podcast with the conference, so it’s just going to be one big day of blam. So it’s going to be all Michael Lachman all the time next Thursday. So get excited about that.

ML: It’ll be overwhelming, Tom.

TS: First, before we get into the news – well, let’s get into the news. What have we had you work on? And what will you be taking about on Thursday? And then we can sort of explain why we know you’re the right guy for the job to lead up this very important project.

ML: Well, thanks, Tom. So what we’re going to be doing on Thursday at the OIS is we’re going to be introducing a new tool called the OIS Index, which is an ophthalmic stock market index. As you know, stock market indices are used to track and analyze performance of the stock market, with the best known market indices probably being the Dow Jones Industrial Average and the S&P 500 which track the largest companies in the US market. There are also indices that track small and midcap stocks, international markets, and specific industry sector, the most visible sector index in healthcare technology probably being the NASDAQ Biotechnology Index. So with that in mind, my firm, IQ Research, has collaborated with your firm, Healthegy, OIS, to create the OIS Index as a tool to track the performance of ophthalmology growth stocks. This would include both biopharma and ophthalmic devices. So we’re going to be introducing the Index at the OIS on October 13th. We officially launched the Index. You always have to pick a day to start, so we launched the Index on October first, and set a base value of 1000. And I think in terms of goals and what we hope for the index, hopefully the index will provide us with a means for evaluating investment performance within our industry, both in absolute terms, and probably more importantly, relatively to the broader biotech in medical device industries, and for that matter, relative to the stock market as a whole. As you know, as the content director for Healthegy, the plan is to provide updates regarding performance of the index on a regular basis on the OIS website, and in OIS Healthegy media in hopes that the index will provide some additional context for our reporting on the industry.

TS: Absolutely. And I’m going to be excited to track it as we see the big news hit. And we had a lot of it this summer. It would have been fun to watch what sort of fluctuations either the lifitegrast approval or even the acquisition of InFocus. There’s just been so much going on that it’s going to be fun to have a barometer to measure the excitement around ophthalmology. Before we get into how we decided what companies to include in the index, and we had a lot of discussions with you, Craig Simak, CEO of Healthegy, and Emmett Cunningham, of course the founder and cochair of OIS, what’s your background? You write for us, you do a great job covering our OIS’s for us, helping out with that. You’ve got IQ, which I’d love to learn a little bit more about. But you’ve also got a background on Wall Street, correct?

ML: That’s right. So for the past 12 years or so, I’ve managed an independent consulting practice, EyeQ Research, which is focused almost entirely on the ophthalmic industry. I do a lot of market research, market analytics, a lot of projects involving market modeling, direct physician feedback on new technologies and clinical needs and that sort of thing, with clients that run the gamut from pre-series A seed stage companies to the big names that we all know and love. As well as occasional due diligence projects for the investment community. Before that, I did spend several years on the investment research side, both on the buy side and the sell side. As a sell side analyst for Hambrecht and Quist and ThinkEquity Partners. Ophthalmology was a big part of my coverage space. So not only did I cover the big 3 US suppliers when they were independent, publicly traded companies, but also got involved with a lot of the emerging names, which at the time were primarily refractive surgery companies and also had some involvement in the retinal therapeutic space.

TS: Your website is EyeQResearch, which is the eye spelled EYEQResearch.com. Were you shocked that that was available? It’s a great name for an ophthalmology research firm.

ML: Yeah, I was fortunate to be able to grab that up.

TS: Yeah, that’s a good one. So how did we decide? What were you looking at when the company – at the companies that should be included in the index? What were some of the qualities that you felt needed to be included in the company to make it to the index?

ML: So we wanted to keep it fairly straightforward, and we wanted to focus on growth companies. So we decided to include midcap and small cap, obviously publicly traded companies, with at least half their value coming from ophthalmic products and technology. In a small number of cases, it can be a little bit subjective, particularly when you’ve got companies that have products that are only in the pipeline and under development. But I don’t think in our current list there were too many companies where we had to rack our brains too hard to decide whether or not they were ophthalmic companies. If you look at our initial list of 29 in the index, the market caps have a pretty broad range. They range from as high as $3 billion on the high end down to as low as $5 million. And if you look at the mix between biotech and device, as of the October first launch date, the index was weighted about 70-30. So about 70% biopharma and 30% ophthalmic device based on both the number of companies and company valuations. I think if you remember one discussion that we did have was whether or not to include some of the larger companies. And might be instructive to just note that there were a couple of companies that we decided not to include, a couple of those being Luxottica and Cooper, which are spectacle and contact lens based companies with much larger market caps in the 10 to 20 billion range, and then Regeneron, which is the company that brings us Eylea in the retinal market, has a much larger market cap at about $40 billion. So we mad the decision to focus on smaller companies that have a bit more of a growth profile.

TS: The acquisition of AMO probably wouldn’t shift much, I would imagine, given those going from one big firm to another. Those aren’t included in the index.

ML: Exactly. So that was I guess the other point I would make is when you look at the large diversified companies like Novartis which owns Alcon, Abbott and soon to be J&J, which own AMO, and then Valeant, which owns B&L, those are large, diversified companies that are so diversified that we decided not to include them. Another one I would put in there is Allergan in its current configuration. If I recall, the eye care business of today’s Allergan accounts for less than 30% of the total business. So we think of Allergan as an ophthalmic company because of its roots and history, but in its current configuration, it’s less than half ophthalmology.

TS: Were there some other challenges that you weren’t anticipating that you ran up against?

ML: Yeah. I don’t know in terms of other challenges. I would note that we had to decide how to weight the index. So the only type of index that really makes sense is to do some sort of a market cap weighting. There are equal weighted indices out there, but I don’t think they make as much sense as a market cap weighted index, which gives more weight to the more valuable companies and less weight to the less valuable companies. But a lot of – like a lot of market indices, including the NASDAQ Biotech index, we’ve capped the values of the largest companies in order to prevent them from taking over and dominating the index. So for example, if you look at the OIS Index, what we’ve decided to do is for any companies that would, on their own, just based on raw market cap, make up 20% or more of total valuation, we’ve capped them at 10%. And then we’ve capped the next group of companies at 8%, and then the next group at 6%. And then you redistribute this excess valuation, if you will, across the rest of the companies. So for example, the largest, most valuable company in our index right now is Carl Zeiss Meditech, which a market cap of about $3 billion. Which on its own would have made up 24% of the index without any adjustment. So we’ve capped that one at 10%. Regarding sort of routine maintenance of the index, if you will, we’ll be updating and rebalancing on a quarterly basis, so we’ll be adding new companies that go public, removing any companies that get acquired, and then adjusting share counts based on things like stock splits, stock issuances and buybacks.

TS: Terrific. It’s going to be exciting to watch. It’s only been a week; you said it went live the beginning of the month. But any findings or conclusions or surprises from what you’re seeing?

ML: Well, I don’t know about any real surprises so far. One of the things that we’ve done, and I’ll be presenting some of this information on Thursday, and I think Emmett Cunningham may be presenting a chart as well that goes back a full year, assuming the index had been started a year ago rather than a few days ago. And if we look back over the last year, the index outperformed the NASDAQ Biotech Index by about 15 percentage points, and underperformed the US Medical Device Index by about 20 percentage points. So the fact that the OIS Index performance over this past year falls right in between the performance of this Medical Device Index and Biotech Index is kind of what you’d expect from an index that’s made up of a mix of biopharma and ophthalmic device companies. And what’s kind of interesting, if you look at the overall shape of the curve, you know, the ups and downs of the chart over the past year, the OIS Index actually looks a lot like the NASDAQ Biotech Index, which is a much larger index that contains not 29 stocks, but like 180 stocks, including a couple with market caps over $100 billion. So it just shows how a lot of times the market moves – there’s an underlying wave, an underlying pattern to movement of the markets. If we look at a shorter time frame, I’ll be showing some shorter 6-month performances, assuming the index had gone back to April first. And over that time period, the OIS Index actually outperformed both the biotechnology and US Medical Device Indices over that time. And if you look at – one of the things that we’re going to be doing with the index is using it as a way to look for which companies drove the upside, or drove the downside in situations where we did outperform or underperform these other indices. And if you look at the drivers over the past 6 months or so, the 4 companies that jump out are Aerie Pharmaceuticals, Glaukos, Spark Therapeutics, and Clear Sight Biomedical.

TS: Great stuff. Well, it’s going to be great to see the presentation on Thursday. We’re recording this on Friday, the seventh, so we’re a week away from OIS@AAO. But we’ll be putting this out next week. And we’ll certainly love to have you back regularly on the Podcast and on the OIS stage to sort of give regular updates and any conclusions or surprises in the future that you come upon.

ML: Well, thank you, Tom, look forward to it.

TS: Great. Well, thanks for joining us on the Podcast, Mike.

ML: All right. Bye.

TS: Well, that is a wrap. Michael Lachman of EyeQ Research, thanks for joining us on the Podcast, and thank you for introducing the OIS Index, both on the Podcast and at OIS@AAO. It’s going to be an important part of our content going forward. Information on these ophthalmology leaders is really going to help us inform you on the state of ophthalmology and innovation. So keep an eye out. We’ll be tapping into the index from time to time. We’ll have Michael back on the Podcast for sure when the news warrants. And you’ll also find the Podcast – excuse me, find the index featured in our Eye on Innovation Newsletter, and I’m sure we’ll have it up on OIS.net as well. So keep an eye out for that. Thanks to our listeners for joining us on this OIS Podcast. Tune in in future episodes. We’ll have some content coming from OIS@AAO, and of course we’ll have new tales of innovation coming to you as well. Hope you’re able to join us in Chicago. If not, keep an eye out on OIS.net and the Eye on Innovation Newsletter as we begin to process the content and the writings and the videos coming from that conference. You’ll get them directly delivered to your inbox. So we’ve got a lot of news coming your way from a very important conference, and very grateful for you to join us both at our events and of course on this Podcast. So tune in next week for many tales of innovation from OIS@AAO. Take care, everyone.

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