TearLab: Blind Faith in a Risky Highflier with Forgotten Tear Stains

by Melissa Davis, 8/1/2013 11:05:44 AM

TearLab (Nasdaq:  TEAR ) might feel like crying if it contacted some of the  doctors listed on its own website as providers of its diagnostic test for dry eye disease and listened to the feedback  from those who no longer use its glorified machine .

Take  Dr. Seaborn Hunt , for example. A Florida ophthalmologist, Dr. Hunt practices medicine in a  popular retirement town crowded with seniors who qualify for coverage of t he $50 TearLab test under the government-funded Medicare program . While TearLab specifically  identifies his clinic as one of three local practices that utilize its device –  generally provided by the company, free of charge, in exchange for a commitment to purchase a steady supply of the disposable cards that its system requires – Dr. Hunt has already returned his own machine and gladly resumed his use of an old-fashioned diagnostic test for DED instead.

“It was just a pain,” one of his employees bluntly explained. “We sent it back because we found it to be inaccurate.

“I know that a lot of people are advertising it. But if you have (DED), you have it. You don’t need a machine to tell you that.”

In neighboring Alabama, yet another ophthalmologist on that list must have reached a similar conclusion.  Identified by TearLab as one of only four eye doctors who offer its test in the city of Birmingham,  the largest metropolitan area in the entire state ,  Dr. Michael A. Callahan recently pulled the plug on that medical device – portrayed as an outright “lemon” by a member of his staff – and shipped the machine back to the company, too.

“I saw them boxing up this machine yesterday,” the receptionist volunteered when contacted by  TheStreetSweeper a couple of weeks ago. “And sure enough, that was it! They sent it back; they found that it was not all that it was supposed to be.”

For its part, TearLab  promotes its namesake device as a tremendous breakthrough so revolutionary that eye doctors will likely adopt the test as a new “standard of care” by screening their patients for DED as a matter of routine. While TearLab acknowledged that it has fielded a “small number of device returns” from doctors who effectively bailed on their multi-year contracts, when specifically questioned by  TheStreetSweeper ahead of this story, the company pointed to low reimbursement from private insurers in certain areas – never hinting at any dissatisfaction with the machine itself – as the primary reason.

Regardless, TearLab has definitely  sold Wall Street on its sexy story . After all,  based on virtually any normal measurement tool , TearLab arguably should remain stuck ( where it languished for years ) deep in single-digit territory. All told, TearLab mustered  less than $4 million in revenue last year -- easily dwarfed by the  $12 million operating loss that it endured while pursuing that business – and recently closed the books on  a “blockbuster” quarter by generating a modest  $3.5 million in sales ( likely eclipsed by yet another sizable loss ) even after a  powerful growth spurt .

A neglected $3 stock  just one year ago , TearLab has nevertheless  rocketed all the way past $14 a share since that time to achieve a lofty market valuation of $410 million –  a staggering 70 times its prior-year sales – with the help of  bullish calls from conflicted analysts who keep on urging investors to buy the pricey stock in spite of its  nosebleed multiples .