Dive Brief:
- Eargo reached an agreement with healthcare investment firm Patient Square Capital to raise up to $125 million through a rights offering. The company will get $100 million in senior convertible notes, and the option to raise an additional $25 million.
- Eargo, which makes hearing aids that can automatically adjust sound levels, plans to use the funds for working capital, to support its growth, and to pay off $15 million in debt.
- Eargo’s stock fell 16% on the news between Friday’s and Monday’s close. The stock was down another 7.4% Wednesday, trading at just below $1. J.P. Morgan analysts wrote in a Monday research note that the deal addresses short-term financing needs, but longer-term questions about insurance coverage remain. “... Whether the company is able to reenter the insurance market remains our main question, which has meaningful implications on both Eargo’s growth outlook and path to profitability,” they wrote.
Dive Insight:
The financing is expected to alleviate short-term concerns about working capital. Eargo had about $36 million in cash pre-transaction, and its management expects a quarterly cash burn rate of $20 million to $25 million, J.P. Morgan analysts wrote.
Questions remain about whether the company will be able to regain insurance coverage with the Federal Employee Health Benefits Program (FEHBP), which covers more than 8 million people.
Last year, the FEHBP dropped Eargo after the U.S. Department of Justice opened an investigation into reimbursement claims the company had submitted to the program for hearing aid devices that contained unsupported hearing loss diagnosis codes. In April, Eargo agreed to a $34.37 million settlement, though it denied the allegations.
The company is working with the Office of Personnel Management (OPM) to be able to resubmit claims, the analysts wrote, adding that “while the OPM has not taken action to exclude Eargo from the program, whether the company is eventually able to reenter this market remains to be determined.”
Under the financing deal, Eargo must pay back Patient Square one year after closing. It must pay back the principal in full at a minimum 150% value, and can do so through a combination of cash and equity, William Blair analysts wrote in a Tuesday research note. With the proceeds, Eargo would have a pro forma cash balance of $121.7 million.
A proposed rule by the Food and Drug Administration that would create a new category of over-the-counter hearing aids could also affect the company's business. Eargo issued a statement in favor of the proposed rule earlier this year, saying it would be easier to scale up retail locations to serve more customers.
“We also believe the FDA’s proposed removal of certain selling restrictions for OTC hearing aids will allow Eargo to expand the way we serve customers,” the company said in a news release.
Congress has asked the FDA to hurry up and finalize the proposed rule, which has been pending since October.
