Here's What Investors Need to Know About Sight Sciences Stock

If you're interested in expanding your portfolio into healthcare stocks, there's certainly an abundance of options available. In this segment of Backstage Pass, recorded on Dec. 13, 2021, Fool contributor Asit Sharma discusses a newly public healthcare stock that long-term investors may want to put on their radar right now. 

Asit Sharma: What is Sight Sciences (SGHT -2.10%)? This is a company founded in 2011 by two brothers, David and Paul Badawi. One of them is basically a physician. It's a small-cap company. It's a $96 million market cap. As you can see from this chart, it had a bigger market cap after it went public and has steadily declined.

This is a medical-device company with two products that are already commercialized: a micro-invasive glaucoma surgery device (MIGS). Glaucoma is the leading cause of blindness in the United States. And a wearable eyelids patch that treats dry eye disease. This company has really high gross margins and negative net margins because it is very early in its commercialization stage [and] showing a lot of growth, which we'll look at in a moment.

The insiders, which include not just the two brothers but also the CFO as another major shareholder, own about 19% of this company. It is a four-quarter radar stock for me -- I'm going to watch this for four quarters. I'm going to pretend I haven't seen the stock chart because what is this stock chart people? Is this telling me, "Asit, you don't need to do your homework? Look at the chart and look away? Look away young man?"

No. This stock chart is telling me, "OK, investors don't believe the story." We could be very early here. I think that might be applicable of a stock that Jason's going to talk about a little later which I'm a shareholder of.

So, having said that, let's escape out of this so I can get quickly to the investor presentation and just show you a little bit about what exactly this company does. They have these two major products that I just described. This is what the micro-invasive glaucoma surgery device they have, the MIGS looks like. As you can see, it's meant to be handheld. This is not a robotic-surgery-assisted device.

Here is the TearCare device, which is also used by qualified technicians. This is sold via a direct service, direct sales model to physicians. So it's going to take a while to commercialize. We've seen this story play out a lot across a lot of medical-device companies.

I'm not here to say today that this is the next greatest thing in medical devices. But what I'm saying is that it has caught my interest because the market is very big as you can see for each of these technologies. And the run rate is very fast for companies that offer solutions within this. I'll show you a few more slides from here, we'll look at some financials, I know the clock is ticking for me to win this challenge today, I'm going to win it. 

Primary open-angle glaucoma that's the abbreviation we just saw, POAGs, this is the world's leading cause of irreversible blindness, not just in the U.S. It's a progressive disease and the patient base, I think this is a little bit mercenary to put in an investor presentation. "Hey it's a steadily growing patient base." The market's just getting bigger because of aging populations and demographic shifts. You can see how many sufferers there are in the U.S. and worldwide. This is what really attracts my attention.

The progressive treatment, the MIGS, the surgical device, is about 95% of total revenue. That's going to be the lion's share of their revenue for a long time to come. This is a really fast-growing treatment segment. So it's got a run rate, a compound annual growth rate of about 25% to 37%. If you've ever heard me on any from on Live before, I love fast-growing markets because if you can grow as fast as the market, then you're often a step ahead of many other companies.

And if the market is growing at this rate, as I mentioned, Sight Sciences has a 51% growth rate at current. So there's a lot of white space for them to be able to capture. Really quickly here, I just wanted to show you how that addressable market works.

In 2020, U.S. surgical glaucoma device manufacturer revenues, all of them, were only about $350 million. And as we saw, it's a market of about $6 billion. And here they just show the math of how they get there. So if this is a company that can even take a small slice of that market, then it is well on its way.

Now, what I like about Sight Sciences is that it has a lot of patent protection already under both devices. And now it's going to the FDA for more approvals to use it for slightly different therapies. It's also building out its very small direct sales force to try to hit more surgeons. It really is a boots-on-the-ground type of sales model.

Finishing up here, you can see, this was the stock chart we looked at, I wanted to put that in context of these high gross margins and this negative net margin meaning that losses are at least a dollar of each revenue dollar are 100% of that. So this is a company that's losing money. It's very small. It is in growth the phase, and it's building out a sales force.

Having said that, we look at this latest report for the third quarter of 2021 report. As you can see just in the last quarter the gross margin expanded to 84%. We're at 79% on a trailing basis. Revenue is still very small, $13 million in the quarter. And you can see here, they're receiving, bit by bit, some clearances from the FDA. They're also working to get new reimbursement codes approved. They had one approved by the Centers for Medicare and Medicaid Services, that they talked about here. These are all building blocks for a small company in an industry. 

I've seen this in the surgical space. I know Jason has as well when Intuitive Surgical was a very young company, it was undergoing the same type of progression. So, this is not a stock that's going to be an overnight success if you're interested. For me, I'm going to follow it for four quarters. I may not even take a position, if I do, until then.