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Expert Financial Analysis and Reporting

Alimera : Changing from A Buy to Hold (ALIM, $1.20, Hold)

After four years of following Alimera and never having a Buy on the Company, I upgraded to a Buy in a report published on June 21, 2017: Iluvien Sales Seem to Have Caught Traction; It Is Time to Buy! (ALIM, Buy, $1.35). The basis for my upgrade was two-fold. Very importantly US unit growth for Iluvien was 34% in 1Q, 2017 and international unit growth was 32%. During the conference call discussing 1Q, 2017 operating results, management stated that they were expecting this type of growth for the remainder of 2017 and expected that ALIM would become cash flow positive in late 2017.

I believed that this guidance was achievable. Since beginning coverage of Alimera, I have consistently felt (and still do) that Iluvien has the potential to play a very important role in the treatment of DME as the treatment of choice for patients no longer achieving satisfactory results from the VEGF drugs, Lucentis and Eylea. The issue holding Iluvien back was a physician fear about potential side effects that might result from long term patient exposure to corticosteroids. However, both the phase 3 study and real world experience (as reported by Alimera) has strongly indicated that the benefit to risk ratio is quite acceptible for Iluvien.

I still believe in Iluvien's ultimate potential, but I am concerned about its current unit growth. In contrast to the 30% unit growth that I was expecting in 2017,growth is sharply lower. In the 3Q, US unit growth for Iluvien was 6% and foreign was 15%. A significant reason for slowing in growth in the US was a decision to significantly cut costs in an effort to reach positive cash flow. This led to cutbacks in the US sales force which certainly contributed to the slowing in unit demand but still. My estimates as shown in the June 21, 2017 report do not appear to be achievable. I was estimating 2017 revenues of $43.7 million and my new estimate is $37.4 million. Similarly, my 2018 revenue estimate was $56.6 million and my new estimate (in which I have little conviction) is $47.3 million. With these numbers, I can’t see the Company becoming cash flow positive in 2017 or 2018.

I am going back to a Hold on the stock until I can see the potential for much stronger unit demand for Iluvien. It seems to me that the product should be growing much faster and I can’t understand the tepid growth in 2Q and 3Q. Management is doing the right thing in sponsoring real world studies that show that the benefit to risk ratio of Iluvien is acceptible. Another positive is that internationally it has built an impressive distribution system using a combination of direct sales and distributors. I also think that obtaining international rights from pSivida to market Iluvien for the new indication of posterior uveitis could be a big positive as sales begin in 2019. These things push me to be positive, but the slowing in unit demand is very troubling and unless this improves substantially, I can’t continue with my Buy.

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