BioLight Life Sciences — Update 19 October 2016

Incorporated and based in Israel in 2005, BioLight is advancing IOPtiMate, a laser treatment device for glaucoma. It is also developing Eye-D VS-101 and TeaRx through consolidated subsidiaries in which it owns controlling positions, for glaucoma treatment and DES detection and monitoring, respectively. IOPtiMate was launched in the EU and China in late 2014 (sales to date of NIS2.3m through H116), and a US regulatory strategy will be determined in H216. VS-101, an extended-dose implant delivering sustained release of generic glaucoma drug, latanoprost, is in Phase I/IIa studies. TeaRx, a semi-quantitative multi-parameter in-office test for DES, could be launched in the US and EU in 2017. BioLight also holds a 48% stake in cancer diagnostics company, Micromedic Technologies, and consolidates this stake in its financial statements. A comprehensive analysis of Micromedic is beyond the scope of this report, but a more detailed review will follow in an update report. As of 30 June 2016, BioLight had an accumulated deficit since inception of NIS221.5m.

Our pipeline rNPV of NIS90.5-97.6m applies a 12.5% cost of capital and assumes probability-weighted assumptions for the company’s IOPtiMate, VS-101 and TeaRX assets. IOPtiMate contributes about 52% to our valuation, with VS-101 contributing approximately 35%.

On 30 June 2016, BioLight held NIS36.7m in net cash (NIS36.3m cash and equivalents and NIS0.4m in short-term deposits) and its annualised operating cash burn rate has been NIS25-26m over the past 24 months (including NIS8-10m in Micromedic). While we expect IOPtiMate’s revenue to increase in coming quarters, we believe R&D and other operating costs to exceed such sales growth near term and we forecast the operating cash burn rate to increase to NIS31.7m in 2017 and NIS32.8m in 2018. We model that the company will need to raise NIS30.0m in both 2017 and 2018 to sustain its operations and R&D projects. For modelling purposes, we assign these financings to long-term debt.

In addition to development and regulatory risk, a key challenge will be convincing stakeholders of the benefits of its products vs competitors. Competing products are being developed for glaucoma and BioLight’s success will depend on the relative performance of its products. As the firm will seek partnerships for the distribution and/or marketing of its products, it is also reliant on securing timely relationships with third parties at favourable terms, and on the commercial execution capabilities of these collaborators. We expect BioLight will need to raise funds to sustain its operations and will be reliant on obtaining favourable terms. While our model accounts for these financings as long-term debt, the firm may need to issue equity instead, which could lead to significant dilution. The success of BioLight’s commercial products will depend on the company’s ability to defend the IP assets surrounding them. Since 2013 BioLight has invested NIS15.4m in Micromedic Technologies and has a 48% stake. While not contractually obliged to do so, it may continue to invest its resources into the company; however, our cash requirement forecasts do not include any such future funding.

BioLight Life Sciences is advancing several products and technologies in the ophthalmic sector. IOPtiMate and Eye-D VS-101 aim to improve treatment options for glaucoma and TeaRx is a diagnostic product targeting DES. IOPtiMate is already being commercialized in Europe and China, and a US market regulatory trajectory is being planned for potential launch in 2018 or 2019. The company also has a 48% ownership position in an Israel-based cancer diagnostics company, Micromedic Technologies, but has no active involvement in its day-to-day operations. BioLight is focused on the activity of its wholly owned subsidiary, XL Vision, which owns large (often majority) equity stakes in subsidiaries covering most of the separate ophthalmic technologies and products advanced by the company, as shown below. BioLight has full control of the operations of ViSci, IOPtima, DiagnosTear and LipiCare subsidiaries, which hold its core ophthalmic programmes. BioLight is effectively entitled to 70% of the returns from the IOPtima subsidiary advancing IOPtiMate, and 97% of those from the ViSci subsidiary developing VS-101.

BioLight’s IOPtima subsidiary is advancing IOPtiMate, a surgical device intended for moderate to advanced glaucoma cases. Glaucoma is a series of ocular disorders characterized by optic nerve damage that results in a progressive and irreversible visual field loss. Glaucoma is often, but not always, caused by an elevated level in intraocular pressure (IOP)1, and persistent elevated IOP (ocular hypertension) can damage the ganglion cells2 travelling through the optic nerve either through mechanical (direct compression of the axonal fibres) or ischemic means (diminishing the vascular perfusion of the nerve). Progressive damage of the ganglion leads to progressive irreversible vision loss. IOP results from the dynamic between the production and outflow of fluid (aqueous humor, AH) in the anterior chamber (AC) of the eye. The primary drainage path for AH is through trabecular meshwork (TM) and into the Schlemm’s canal (SC).The predominant treatment approach for glaucoma is to lower IOP.

The US National Eye Institute (NIH) estimates the US glaucoma prevalence is 2.7 million people. Over 120,000 Americans go blind each year from glaucoma, reflecting 9% to 12% of all blindness cases.

The first-line treatment for glaucoma, particularly open-angle glaucoma (OAG)3, involves the chronic (often lifelong) usage of topical eye-drop medications to lower IOP. We estimate that up to 80% of OAG patients use topical eye-drop therapy as their only treatment. While many active drug molecules used in glaucoma therapy are now generic, GlobalData estimated the topical glaucoma drug market at $2.4bn in 2013 across seven major markets (including the US and Japan).

Combination drugs (often combining a β-blocker with a CAI or PGA) can provide further therapeutic efficacy. While topical medications may be enough for many patients, disease progression occurs in many others despite treatment, which may be due to insufficient IOP reduction by medications alone, or poor treatment compliance. These cases, reflecting up to 20% of glaucoma patients per year, typically require more complex medical procedures to better control IOP, which fall into either noninvasive glaucoma procedures (NIGPs), or for more advanced cases, invasive glaucoma surgeries. NIGPs do not penetrate into the eye and include laser procedures such as laser trabeculoplasty (LT), which direct lasers to the TM enabling it to drain fluid more effectively, and can reduce IOP by 20-30%. LT is a common second-line treatment for cases not adequately controlled with topical drugs, but can cause sometimes thermal burns that raise IOP (less of a concern with newer procedures like micropulse LT), and may require retreatment within two to five years.

Surgery is indicated when topical or NIGP treatment is not adequate, or for about 5-10% of patients. Traditionally, this involved filtration surgery (trabeculectomy), which creates a new drainage site to collect fluid from the AC. Trabeculectomy can reduce IOP by about 50%, but carries a fair risk of severe complications (retinal breaks, infection, etc.), and requires lengthy post-op recovery. Glaucoma drainage implants (GDIs), also called tube shunts, are increasingly displacing trabeculectomies, despite their own set of post-operative risks (including double vision). GDIs include a tube that shunts AH from the AC to an implanted plate. GDI examples include Alcon’s Ex-Press shunt, the Ahmed valve (New World Medical), and the Baerveldt Implant (Advanced Medical Optics). The Tube vs Trabeculectomy study (TVT), comparing tube shunt surgery to trabeculectomy4, found that the five-year success rate was higher in the tube group. The numbers of trabeculecotomies performed have decreased significantly over recent decades. In eyes without prior scarring, they decreased 52% from 54,224 between 1994 and 2003, and a further 52% (to 12 279) in 2012; in eyes with scarring, it decreased 48% (to 5,728) between 2003 and 2012.5

Minimally invasive glaucoma surgery (MIGS) devices are small (<1mm) devices inserted through incisions at or near the cornea to gain access to the AC and improve AH outflow. MIGS intend to provide durable IOP reduction with shorter surgical and recovery times, and are less traumatic to ocular tissue than trabeculectomy or GDIs. The market-leading MIGS at present is the iStent Trabecular Micro-Bypass, by Glaukos (GKOS, NYSE), FDA-cleared in 2012, which recorded $71.7m in 2015 sales (+57% y-o-y). The i-Stent is implanted into SC during a cataract surgery6 procedure, which creates a permanent conduit to the TM. Other MIGS products may also enter the MIGS market shortly. MIGS devices generally provide IOP reductions of up to about 20%. More advanced glaucoma cases, requiring higher IOP reductions, still require more invasive surgery.

IOPtiMate uses a carbon-dioxide (CO2) laser-assisted sclerectomy (CLASS) to reduce IOP. BioLight believes CLASS provides a safer and more precise alternative to trabeculectomies and GDIs, with a lower risk of complications, shorter recovery times and fewer post-op office visits. Unlike GDIs and MIGS, IOPtiMate does not implant any foreign bodies, which can themselves promote inflammation. IOPtiMate (see provided video) aims to thin the sclera (sclerectomy) and reduce IOP without penetrating the eyeball, in an automated, uncomplicated up to ~30-minute outpatient procedure. After a section (flap) of sclera is temporarily lifted, the CO2 laser is applied beneath to thin the scleral wall underneath, and a surge is also applied at the SC area, providing a flow pathway for AH to percolate (into the region of ablated sclera) from the intact TM/SC. The infrared CO2 laser radiation is absorbed and blocked by aqueous solutions, which prevents the procedure from penetrating into the anterior chamber like other lasers used in eye care (eg. Argon, Nd-YAG, etc). We view the potential target market as the approximately 7% of glaucoma patients not adequately treated by topical drugs or NIGPs, or about 0.19 million people in the US.

BioLight aggregated the results of prospective and retrospective clinical IOPtiMate studies in Italy, Spain, Switzerland, Russia, Mexico, India, and Israel. In these trials, subjects were monitored for IOP and adverse events for up to five years. While these open-label studies did not have direct trabeculectomy comparator arms, the aggregated results can be compared with trabeculectomy outcomes from the recent TVT study, although there are limitations to this comparison given the possible variances in methodology and approaches used by the investigators.

Despite the limitations in analyses between different studies, the results suggest IOPtiMate provides a comparable reduction in IOP to trabeculectomy; in the above study, IOPtiMate showed a 45% IOP reduction at five years and 48% reduction after 12 months. The frequency and type of side effects was also lower with IOPtiMate, notably in patients having reduction of visual acuity.

IOPtiMate commercialisation began in late 2014 or early 2015, after CE mark clearance and approval from the China Food and Drug Administration (CFDA) were obtained. It has been marketed primarily to eye surgeons and medical centers using third party distributors, and in strategic territories (including France and China), through a direct salesforce. Sales have occurred in China, Hong Kong, Poland, Hungary, Romania, Portugal, Peru, and Canada. Most sales to date originated from Asia and Eastern Europe, as the company believes these areas have higher unmet need for glaucoma surgeries than in Western Europe, where patients generally have easier access to treatment. Altogether, 2015 sales were NIS1.4m (US$0.36m) and H116 sales were NIS0.8m (US$0.21m). Gaining penetration for medical device makers, particularly those with minimal brand recognition, in emerging markets is challenging, given the need to educate stakeholders about the device and its applicability, the limited medical infrastructure outside of urban settings, and affordability issues. BioLight indicates it is still in the early stages of IOPtiMate commercialisation, and expects continued growth along the product cycle.

BioLight anticipates sales in Western Europe to ramp up in 2017, and is focusing on France, Germany and Italy. In these and other countries, BioLight expects that IOPtiMate procedures will apply existing reimbursement codes used for filtration surgeries. The company and its distributors market the device through two revenue models, where customers either:

We assume that 7% of the total glaucoma populations in China (11.5 million) and Europe (4.2 million) reflect the annual group of patients being considered for advanced surgery and 80% of these, or about 0.88 million people, could be the target ex-US market for IOPtiMate. We assume IOPtiMate could achieve peak 20% share in Europe and 4% in China (assuming higher market fragmentation and more challenging access to care vs Europe); this drives our peak ex-US sales forecast of $21.4m in 2023. We note that BioLight sees massive potential for IOPtiMate in China, including its potential adoption for earlier glaucoma stages than would normally be considered for surgery in Western markets (where only 5-10% of patients undergo surgery). We use more conservative assumptions and will revisit them should China sales approach the firm’s targets.

The firm intends to seek FDA review for a specific regulatory path for the IOPtiMate in H216. This would require either a premarket approval (PMA) application or a Class II (de novo) application. The de novo review process can apply for devices for which there is no existing FDA-cleared product that could be classified as a predicate device for establishing “substantial equivalency”. Depending on the FDA’s review of the risk profile of IOPtiMate, it could allow it to be reviewed as a Class II device (potentially allowing for a relatively less onerous 510(k) process for clearance), or as a Class III device, which would require the more rigorous requirements of the PMA process.

Once the regulatory pathway is determined, the company plans to proceed with the US studies required for clearance. We assume that the FDA will require a Class III PMA pathway, which would expand the scale of clinical studies required (vs a Class II pathway) and increase associated costs. US pivotal PMA study sizes of around 500 patients or more are common for glaucoma surgical devices. We assume that a 500-pt PMA-enabling study will start in H117, costing about $8m, and could lead to US clearance and launch in early 2020. If the FDA will accept the Class II approach instead, we would revise our estimate and potentially move up our US launch timeline. Our model assumes that 7% of the c 2.7 million US glaucoma patients could represent the target market. We assume that 80% could be IOPtiMate candidates, with IOPtiMate realising a peak 30% market share (assuming more focused targeting for US vs the comparably more fragmented European market), with $250 average per-procedure revenue; we forecast peak US sales of $21.9m in 2025.

BioLight’s ViSci subsidiary is developing Eye-D, an in-office non-biodegradable insertable platform that provides for the controlled release of ophthalmic medications over time. The Eye-D is inserted into the outer quadrant of the lower lid conjunctiva to deliver a controlled amount of drug over three to 12 months. The initial Eye-D product, VS-101, is intended for glaucoma and elutes precise constant quantities of latanoprost, a widely used PGA glaucoma medication. There is a strong unmet need for continuous-dosage glaucoma medication delivery systems, given that many patients are elderly and may have difficulties applying topical eye drops properly each day. Okeke et al.7 determined that 50% of glaucoma patients do not adhere to their regimen 75% of the time, and other studies have found estimates of non-compliance are 23-60%.8 Poor treatment compliance is associated with worsening glaucoma progression. To date, we are not aware of a viable approved continuous-dosage glaucoma drug delivery system.

We estimate a continuous glaucoma drug delivery system such as Eye-D VS-101 could target up to 30% of the glaucoma population, or up to 0.83 million people in the US, reflecting those patients poorly compliant with topical medication. Eye-D VS-101 is intended to elute latanoprost free acid at a rate of 0.007 to 0.072 μg/day. When the amount of drug is depleted, the insert can be replaced with a new one. The company does not believe that the product would cause corneal irritation or dry eye (based on animal data), but this needs to be confirmed in human studies.

VS-101 is being developed under the 505(b)(2) regulatory pathway, so as a therapeutic drug rather than a medical device. Following successful preclinical data in rabbits, the company started a 70-pt Phase I/IIa study in 2014. Patients with OAG or ocular hypertension are divided into four groups, with three receiving VS-101 insert (at differing dose levels per group) in one eye and the control group receiving latanoprost eye drops once daily. The study will evaluate the safety and efficacy of three dose levels of sustained-release VS-101 after three months of treatment, compared to latanoprost 0.005% eye drops. Results are expected in H117 and, if positive, the company plans to complete a larger scale Phase IIb trial and then a pivotal Phase III. The ongoing Phase I/IIa study is taking longer than we would have anticipated, and we believe that recruitment for future VS-101 studies must be quicker to meet our 2020 commercial launch forecast in the US and EU.

BioLight intends to partner VS-101 with a major ophthalmic biopharma firm prior to starting pivotal studies. Under 505(b)(2), the applicant may rely on much of the existing data already established on latanoprost, and hence the pivotal study would likely be shorter and less costly than what would be required for an NDA or PMA. Our model assumes a 505(b)(2) pathway, with BioLight spending c $8m on VS-101 R&D across 2017 and 2018, before partnering the product prior to starting a Phase III study (funded by the partner) in late 2018. We expect BioLight to obtain a net 25% royalty on sales, and we assume the target market is 0.83m in the US. As we expect that competitors will also reach the extended-dose glaucoma market, we forecast 7% peak US penetration among this subgroup, with an average per-implant treatment price of $1,000 per eye (replaced annually9). This leads to peak global VS-101 revenues of $279m in 2026, or $69.8m in royalties to BioLight.

Existing data shows that IOPtiMate can provide trabeculectomy-like IOP reductions and likely with fewer side effects, making it a potentially competitive alternative if marketed effectively and/or if future studies show similar data. However, GDIs are already displacing trabeculectomy and Exhibit 7 shows some emerging new treatments and MIGS and even NIGPs such as ultrasound (EyeOP1). These can broaden the scope of therapeutic modalities available to potentially compete with IOPtiMate. IOPtiMate’s success will depend on its competitive profile (IOP lowering capacity, ease of use, cost, side effect profile, duration of recovery, etc) vs alternative emerging treatments.

There are also emerging competitive products under development for extended-dose glaucoma treatment. Many extended-dose PGA-drug eluting platforms are in development, and several are at more advanced stages than Eye-D VS-101 and may reach the market more quickly. Allergan’s bimatoprost sr is in Phase III studies but requires a more invasive injection into the ocular globe (and not simply into conjunctiva, like VS-101); Envisia’s ENV515 and Glaukos’s iDose similarly use ocular injections. Some competing platforms use more recent approved PGA drugs like travoprost or bitamoprost. A less invasive extended-dose treatment alternative is the Helios insert (Forsight Vision5, acquired by Allergan in August 2016 for $95m plus milestones), which is a ring that rests on the ocular surface and elutes bitmatoprost. It is scheduled to enter Phase III trials in H216. Products inserted into the punctum (also relatively non-invasive) are Mati’s L-PPDs and Ocular Therapeutix’s OTX-TP. Ultimately, the success of VS-101 will depend on its competitive profile in terms of IOP-lowering and ease of application, patient comfort, compared to alternatives.

BioLight’s DiagnosTear subsidiary is advancing TeaRx, a rapid, semi-quantitative, point-of-care (POC) diagnostic providing a multi-assay analysis of tear film constituents to identify and monitor patients with DES. DES is a multifactorial, chronic and potentially progressive condition affecting up to 20 million people in the US10 where the eye produces insufficient tears or tears with unbalanced composition.11 DES was traditionally identified with staining dyes (showing diseased corneal epithelial cells), tear break-up time (evaporation time for the aqueous tear film layer) or through disposable test-strip markers (which measure tear volumes). However, these approaches have limitations, as they are subjective and test results do not correlate well with DES symptoms (eg. eye burning/irritation, light sensitivity, unstable vision, tearing, etc.) in many patients.

Recent diagnostic tools include TearLab’s (TEAR, NASDAQ) Osmolarity System, which measures tear osmolarity. The TearLab system, launched in the US in 2009, consists of a core analysis device costing about $9,500 and per-use detection cards that cost about $10-15 each. TearLab recorded $25.2m in sales in 2015 (+28% y-o-y). However, its high cost limits its penetration among eye care clinics, and challenges have arisen with regard to reproducibility and interpretation.12 Other DES tear biomarkers have emerged, such as inflammatory marker matrix metallopeptidase 9 (MMP-9). InflammaDry (RPS) is marketed as a rapid, low-cost ($15 per use) disposable in-office device that screens the tear film for elevated MMP-9. Low lactoferrin levels are also correlated with DES.

TeaRx is differentiated from the above DES diagnostic tools in that it provides a semi-quantitative objective measure (ie a scale of up to eight different ranges) of three separate biomarkers using a single 2μL patient sample of tear film. The system is relatively low cost as it does not require a dedicated core analysis system (unlike the TearLab or the TearScan systems, for instance).

TeaRx consists of a reusable tear collector (likely costing under $100), with single-use consumables being disposable sterile cartridges and multichannel test cassettes (MTCs); the company estimates that the combined cost of the provider of the per-use consumables (disposable cartridge and MTC), would be $10-20. After collecting 2μL of tears and performing test procedures (diluting, applying reagent, etc) and waiting about 10 minutes, a scaled score results for each of the three biomarkers. TeaRx also combines the score of the three biomarkers into a single DES severity composite score. The company has not publicized which specific biomarkers are used, since it is still obtaining patents to them. The semi-quantitative approach could be used to compare results at different time periods to monitor the efficacy of a chosen treatment regimen,13 and in measuring multiple biomarkers, TeaRx can potentially better differentiate the differing possible causes for DES in a given patient. The product may offer more specific diagnostic information than existing DES tests and BioLight believes that it can engage drug development firms to utilise TeaRx as a companion diagnostic test for emerging DES treatment candidates. However, the TeaRx procedure involves multiple steps and requires about 10 minutes. We do not expect TeaRx to substantially displace most existing DES diagnostic measures (including osmolarity), but it can serve as an additional POC tool for practitioners to use to detect or monitor DES and/or treatment efficacy.

The company conducted two US clinical studies comparing TeaRx’s composite DES diagnostic measure with a composite of four established legacy DES assessment tests. The first study assessed about 200 US patients and results reported in 2015 indicated a strong positive correlation between TeaRx and the four applied tools. A second prospective study of 74 patients comparing TeaRx to a similar composite was completed in Q116 and showed a sensitivity of 86%, specificity of 87% and a positive predictive value of 87% for the TeaRx multi-assay test. These values appear favorable as they exceed the data obtained by TearLab as part of its 510(k) submission (64% sensitivity, 71% specificity). However, we believe TeaRx’s commercial appeal will depend on which specific biomarkers it measures.

BioLight met with FDA in July 2016 and provided a pre-IDE submission, which it believes can lead to FDA 510(k) regulatory clearance in 2017. The company believes that even if an additional clinical study is required, it could launch TeaRx in US and EU in 2017 or early 2018. For optimal US market reach, we believe the test would also need to obtain a CLIA (Clinical Laboratory Improvement Amendments) waiver, as any person performing laboratory tests on human specimens for diagnosis is required to have a CLIA certificate. Obtaining a CLIA waiver would make it easier for clinicians to fulfil this requirement to use TeaRx. Our model assumes that of the 140 million US annual eye care provider patient visits,14 10% will involve DES screenings with 25% of those involving more involved testing than staining dyes or test-strip markers; of these, TeaRx will obtain a maximum market share of 15% and, with $15 in average revenue per eye per test, lead to peak sales (2024) of $19.8m. We believe there is the possibility for higher peak penetration if reimbursement coverage through public or private insurers can be secured for TeaRx testing.

In 2015, BioLight invested $0.5m in OphRx (and now owns 40%), which is developing topical drops based on a non-invasive drug delivery technology that uses lyotropic liquid crystals (LLC). LLCs are believed to encapsulate active drug molecules and allow for controlled release to desired sites, potentially including to the back of the eye. OphRx is in the preclinical stage of development of OPH-101, a topical treatment for wet macular degeneration, and OPH-100, for DES. We await further advancement before including prospects in our model.

In 2016, BioLight obtained worldwide rights (excluding Italy and Israel) from Fischer Pharmaceuticals and RAMOT (Tel Aviv University) to a topical lubricant eye drop (Lipitear) for DES. BioLight’s Lipicare subsidiary holds a license to develop additional potential products based on Lipitear's core technology. Lipitear has CE mark approval in Europe and BioLight is seeking clearance of the product as an OTC (over-the-counter) lubricant in the US, and potentially as a medical device or drug in China. Lipitear is comprised of microemulsions of tiny beads of aqueous solution enveloped by a lipidic surface, which can help protect the aqueous component from evaporation, potentially allowing for more sustained contact time and retention. However, several existing artificial tear products combine both aqueous and lipid or hydrophobic components to delay evaporation (including Novartis’s Systane Balance, Allergan’s Refresh Optive and Ocusoft’s Regaine MGD). Global Industry Analytics estimates the global artificial tear market would be worth $2.2bn by 2020 and the market is highly competitive, as MaxVal estimated there were over 25 OTC products available in the US in 2009. We believe strong marketing activities are needed to obtain commercial success and await further advancements on commercial or partnership strategy before incorporating the product in our forecasts.

Our BioLight valuation includes the prospects for IOPtiMate, VS-101 and TeaRx. We apply a risk-adjusted net present value (nNPV) model with a 12.5% cost of capital. For each of these projects, we provide a weighted rNPV based on BioLight’s ownership in the associated parent company. For IOPtiMate, we apply a lower probability of success for our US forecasts than our ex-US market forecasts, as the product has yet to receive US regulatory clearance, while it is already cleared for sale in Europe and China. While our US peak sales forecasts are higher (vs ex-US), the lower probability and the longer time to market (discounting) explain why the US IOPtiMate rNPV contribution is lower. Our 70% probability adjustment factor for our ex-US IOPtiMate valuation reflects the commercial risk factors (market acceptance, execution) embedded within our ex-US forecasts. Eye-D VS-101 is the largest potential source of revenue for the company and our 20% probability of success estimate reflects its early clinical development stage.

BioLight’s current market capitalization is very close to its current net cash position (NIS36.7m on 30 June 2016), reflecting a near-zero market enterprise value. Our NIS90.5-97.6m pipeline rNPV assumption represents upside to BioLight’s current EV. The company believes that its key products (IOPtiMate, Eye-D VS-101, and TeaRx) have strong market opportunities in China. As per our usual policy on healthcare firms with early-stage operations or with plans to grow in China, we are cautious in our forecasts for this market in the absence of definitive newsflow or of commercial execution. If the firm can generate robust sales or form strategic partnerships in China, these could add significant value to our assumptions.

Development and regulatory risk. BioLight’s leading pipeline products have not received regulatory clearance in the US and its strongest potential revenue contributor (Eye-D VS-101) has not yet reached late-stage clinical development.

Commercial and competition risk. The treatment landscape is evolving as competing products are being advanced for glaucoma, DES diagnostics and DES, and BioLight’s success will depend largely on relative performance.

Partnership risk. We expect that BioLight will seek a commercial partnership for Eye-D VS-101 and distributor relationships for IOPtiMate and TeaRx in targeted markets. Challenges to securing timely relationships, unfavorable partnership terms or sub-optimal commercial or marketing performance from collaborators or partners could adversely affect our forecasts.

Financing risk. While the company is generating revenue from IOPtiMate in ex-US markets, we forecast its R&D and operating costs to exceed total revenues, until Eye-D VS-101 is launched in 2020. We expect the company will need to raise NIS37.5m in 2017 and in 2018 to sustain operations and its R&D programs. While our model accounts for these financings as long-term debt, the company may need to issue equity instead, at a pricing that may not be favourable for current shareholders and could lead to significant dilution.

Intellectual property risk. The success of BioLight’s products will depend on its ability to defend the IP assets surrounding them. The patents surrounding VS-101 and IOPtiMate last through 2030 or 2031 and our forecasts assume market exclusivity through 2030 for both programs.

Ownership risk. The four largest shareholders (including company chairman) own 55% of shares outstanding, although based on BioLight’s public filings and sources, they are not considered as related parties. The company has a low free-float, which can impact trading liquidity.

Ownership of Micromedic. Since 2013, BioLight has invested NIS15.4m in Micromedic equity, increasing its stake over this period. It now owns 48% of the 10.95m outstanding Micromedic shares and, under its accounting guidance, has controlling ownership and consolidates Micromedic’s financial results. While BioLight has no contractual obligation to invest in Micromedic, based on past experience, it may continue to do so. BioLight’s CFO is also the CFO at Micromedic and the companies share certain office and administrative resources.

On 30 June 2016, BioLight held NIS36.7m in net cash (NIS36.3m cash and equivalents and NIS0.4m in short-term deposits) and its annualised operating cash burn rate (including the consolidation of Micromedic’s financials) has been NIS25-26m over the past 24 months; we estimate approximately NIS8-10m of the reported annual burn rate reflects Micromedic’s operations. Our forecasts (for H216 and beyond) do not include projections or considerations for Micromedic. We forecast IOPtiMate sales of NIS5.7m in 2017 and NIS11.7m in 2018 (with NIS0.9m and NIS5.7m in 2017 and 2018 TeaRx sales, respectively). SG&A costs are projected to rise from NIS8.2m in 2017 to NIS10.6m in 2018. We expect R&D costs over this period will be driven by Eye-D VS-101 and IOPtiMate US clinical studies, with R&D costs projected to rise to NIS27.6m in 2017 and NIS25.2m in 2018 (from NIS13.0m in 2015).

Hence, while we expect IOPtiMate revenue to increase in coming quarters, we believe R&D spending and other operating costs to exceed such sales growth near term and we forecast the operating cash burn rate to increase to NIS31.7m in 2017 and NIS32.8m in 2018. We model that BioLight will need to raise NIS30.0m in both 2017 and 2018 to sustain its operations and R&D projects. For modeling purposes, we assign these financings to long-term debt.

BioLight’s reported financials consolidate the results from Micromedic, although BioLight has no direct liability or obligation to it. Micromedic has near-zero revenue (under NIS0.05m per year) and had a 2015 segment loss of NIS8.3m. Our model does not include forecasts for Micromedic.