San Clemente, Calif.-based Glaukos Corp., an ophthalmic medical technology and pharmaceutical company that focuses on glaucoma, corneal disorders and retinal diseases, has agreed to buy Avedro Inc. in an all-stock transaction. Under the terms of the agreement, for each share of common stock they own, Avedro shareholders will receive an exchange ratio equivalent of 0.365 shares of Glaukos stock. Joanne Wuensch, of BMO Research, said the buy would help Glaukos grow from a micro-invasive glaucoma surgery [MIGS]-focused firm to a "comprehensive ophthalmology company."

The transaction, which is subject to Avedro stockholder approval along with other customary closing conditions and regulatory approvals, has been approved by both boards and is expected to be completed in the fourth quarter.

During a call on Glaukos' second-quarter results that also featured an extensive discussion of the transaction, President and CEO Tom Burns noted that the deal values Waltham, Mass.-based Avedro at about $26.68 per share, for a total value of about $500 million. The deal comes after Avedro initiated an IPO of 5 million shares of common stock in February. Upon the IPO's close, it raised about $65 million net of underwriting discounts and commissions, before expenses.

"This transaction pairs two highly complementary hybrid pharma and device organizations, combining Avedro's disruptive bio-activated pharmaceutical solutions and R&D capabilities with Glaukos' global commercial scale, proven market building and shared reimbursement expertise, robust pharmaceutical and medical device R&D capabilities, and extensive clinical and regulatory infrastructure," Burns added.

He also pointed out that Avedro has secured favorable reimbursement while developing its pipeline. Last November, Avedro reported that the U.S. Centers for Medicare and Medicaid Services issued a product-specific J code, J2787, for Photrexa Viscous (riboflavin 5'-phosphate in 20% dextran ophthalmic solution) and Photrexa (riboflavin 5'-phosphate ophthalmic solution). They are the only drugs approved by the U.S. FDA for use in corneal collagen cross-linking for the treatment of progressive keratoconus and corneal ectasia following refractive surgery. J2787 became effective on Jan. 1, under the Healthcare Common Procedure Coding System.

Burns added that the majority of Avedro's target accounts also are customers of his company. Further, in what now seems like a prescient move, Burns joined the board of Avedro last summer.

Reza Zadno, president and CEO of Avedro, also expressed enthusiasm about the deal during the call, pointing to Glaukos' infrastructure, customer relationships and ability to serve as a pioneer in opthalmic markets to address unmet needs.

Wells Fargo's Larry Biegelsen saw the deal as sensible. He highlighted Photrexa, which treats a condition that affects about 1.1 million eyes in the U.S. "Importantly, GKOS already calls on 700 of the 1,100 U.S. accounts targeted by AVDR – which is expected to drive potential revenue synergies in 2021 and beyond."

Biegelsen asked during the call why Glaukos decided to go ahead with the deal now. Burns explained that the company wanted to strengthen its long-term growth, adding that it and Avedro – like Glaukos – had experienced record second-quarter revenues.

"And I would say that the transaction really plays to our strengths in two major ways. One, we believe we're very good at disrupting and creating new marketplaces, so I would argue that's just what we've done in glaucoma, by setting up this template and this portfolio, that gives us such a sustained quality competitive advantage. It's a challenge and an opportunity for us to do this within cornea as well, and ... we have every intention to do so."

'Grandiose visions'

For his part, William Blair analyst Brian Weinstein viewed the deal as signaling "in the clearest way to date that Glaukos has grandiose visions to become a unique platform company focused across disease states in the eye." He lauded the approach, adding that he thinks "it brings significant opportunity to the company for the second time in as many Augusts[.]"

Regarding last year's August boost, Weinstein is referring to the 2018 withdrawal of glaucoma microstent Cypass by Novartis AG's Alcon. Glaukos' shares soared in the wake of the action.

Those expectations seem to have borne fruit, with the company noting in its breakout session at January's J.P. Morgan Healthcare Conference. Most of the Cypass patients are transitioning to Glaukos' Istent inject.

Relating that to the current buy, BTIG analyst Ryan Zimmerman noted that there were opportunities for revenue synergy. However, he also wondered "whether it could take legacy Glaukos reps away from MIGS and indirectly acknowledges the tough comps (combined with high Street est.) into FY20 as the Cypass benefit is lapped."

With that said, the Avedro buy represents another acquisition for the company in a short period of time. The move comes after Glaukos reported in late June that it had completed the acquisition of Dose Medical Corp., which is developing multiple micro-invasive, bioerodible, sustained-release drug delivery platforms designed to be used in the treatment of various retinal diseases. Dose Medical was previously a wholly owned subsidiary of Glaukos; in 2010, it was spun out as a standalone entity.

Weinstein also pointed out that Glaukos had presented at the William Blair Growth Stock Conference in early June, during which Burns revealed a new interest in diseases affecting the back of the eye.

"At the time, we thought he was maybe referring to the company working on some yet-to-be-announced R&D projects or maybe there was some sort of pharma relationship that was bubbling," Weinstein wrote. However, the Dose buy came soon thereafter, along with the company's deal with Intratus Inc., of San Diego.

Late last month, Glaukos and Intratus reported the inking of a licensing agreement, through which the latter granted Glaukos a global exclusive license to research, develop, manufacture and commercialize Intratus' patented, noninvasive drug delivery platform designed for use in the treatment of dry eye disease, glaucoma and other corneal disorders such as allergy, blepharitis, conjunctivitis and related conditions.

"Following this, we thought the team would call it a day and focus on everything that it had in hand as it had clearly shown everyone its intention on building a broad-based pharmaceutical/device franchise that spanned opportunities across the spectrum of eye disease," explained Weinstein.

Quarterly results

Word of the deal came as both companies reported quarterly results. Burns emphasized his company's second-quarter net sales of $58.6 million, up 36% vs. the year-ago quarter. As a result, the company upped its full-year 2019 revenue guidance to $231 million from $226 million.

He also highlighted progress related to the rollout of the Istent inject trabecular micro-bypass device. "Thanks to our team's solid execution, we have made considerable progress on the initial conversion process, and our U.S. reps are beginning to shift focus back to driving utilization and training new surgeons who have yet to adopt MIGS."

For its part, Avedro saw second-quarter 2019 revenue of $10.3 million, representing an increase of 63% year-over-year The company's call initially had been scheduled for Thursday, but was moved back to have a joint announcement with Glaukos.