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- ear reached an agreement with healthcare investment firm Patient Square Capital to raise up to $125 million through a rights offering. The company will receive $100 million in convertible senior notes and the ability 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, support its growth and pay off $15 million in debt.
- Eargo’s stock fell 16% on the news between Friday’s close and Monday’s close. The stock fell another 7.4% on Wednesday, trading just below $1. JP Morgan analysts wrote in a Monday research note that the deal addresses near-term funding needs, but longer-term questions about insurance coverage remain. “…Whether the company is capable of re-entering the insurance market remains our primary question, which has significant implications for both Eargo’s growth prospects and its path to profitability,” they wrote.
Overview of the dive:
The financing should ease short-term concerns about working capital. Eargo had approximately $36 million in cash before the transaction, and its management expects a quarterly cash burn rate of $20 million to $25 million, JP Morgan analysts wrote.
Questions remain about whether the company will be able to regain insurance coverage with the Federal Employee Health Insurance Program (FEHBP), which covers more than 8 million people.
Last year, the FEHBP abandoned Eargo after the US Department of Justice opened an investigation in claims the company had submitted to the program for hearing aids that contained unsupported hearing loss diagnostic codes. In April, Eargo agreed to a $34.37 million settlement, although he denied the allegations.
The company works with the Office of Personnel Management (OPM) to be able to resubmit claims, the analysts wrote, adding that “although the OPM has taken no action to exclude Eargo from the program, it remains to be determined whether the company is ultimately able to re-enter this market. “.
As part of the funding agreement, Eargo must repay Patient Square one year after closing. It must repay principal in full at a minimum value of 150%, and can do so through a combination of cash and equity, William Blair analysts wrote in a research note Tuesday. With the proceeds, Eargo would have a pro forma cash balance of $121.7 million.
A proposed rule by the Food and Drug Administration creating a new category of over-the-counter hearing aids could also affect the company’s business. ear released a statement in favor of the rule proposed earlier this year, saying it would be easier to expand retail outlets to serve more customers.
“We also believe that the FDA’s proposed removal of certain sales restrictions for over-the-counter hearing aids will allow Eargo to expand how we serve customers,” the company said in a press release.
Congress has asked the FDA to hurry and finalize the proposed rule, which has been pending since October.