A company that wants to modernize hearing aids nabs an outsized IPO, raising $141M

Eargo, the maker of a “virtually invisible” hearing aid, made its debut on the public market Friday and saw its stock rise 142% above its set price.

Eargo set the pricing of its initial public offering of 7.9 million shares of its common stock at a price of $18 per share, up from the 6.7 million it had planned to sell at $14 to $16. The company's stock rose above $43 per share in early afternoon action.

Buoyed by strong demand for IPOs, Eargo raised $141 million in its debut on the Nasdaq. The company is trading under the symbol "EAR."

JPMorgan and BofA Securities acted as joint bookrunners on the deal.

The company filed Sept. 25 with the U.S. Securities and Exchange Commission (SEC) to raise up to $100 million in an IPO. As a private company, Eargo had raised $207 million in venture capital funding.

The San Jose, California-based company launched in 2012 and developed what it calls a "virtually invisible" hearing aid with a wireless design that rests completely hidden within the ear canal. The FDA-cleared devices are meant for mild to severe high-frequency hearing loss.

Eargo's hearing aids are rechargeable and can be personalized with a smartphone app.

Eargo developed its products to create a hearing aid that consumers actually want to use, company officials said in its S-1 filing with the SEC.

RELATED: Eargo raises $71M for its 'invisible,' direct-to-consumer hearing aid

"Our innovative product and go-to-market approach address the major challenges of traditional hearing aid adoption, including social stigma, accessibility and cost," the company said.

The company has sold over 42,000 hearing aid systems, net of returns, as of June 30, according to the SEC filing.

Eargo is working to make inroads in a large, growing and underserved market of people with hearing loss, estimated to be about 43 million adults in the U.S. in 2019. As only 27% of consumers with hearing loss actually own a hearing aid, Eargo officials estimate it's a $30 billion addressable market, according to the SEC documents.

"There is a lot of stigma around hearing loss,” Eargo President and CEO Christian Gormsen told Fierce Healthcare.

Eargo tackles this problem by designing wireless products that fit comfortably inside the ear and can be bought online with help from a specialist, according to the company. Traditional hearing aids wrap around the ear and typically require several fittings and in-person appointments with audiologists.

Gormsen told Fierce Biotech that the company's business was performing well before COVID-19, and the pandemic only accelerated consumer demand for its hearing loss solution.

"More consumers who are reluctant to purchase their hearing aids through the traditional brick and mortar clinics have recognized the benefits of our solution," he said.

RELATED: GoodRx raises $1.1B in IPO as it sell shares above target

Investor interest in health technology and digital health companies has surged during the COVID-19 pandemic. The past 12 months has been the year of the healthcare IPO with companies including Livongo, Phreesia, Health Catalyst, Change Healthcare, Progyny, One Medical, Accolade, GoHealth, GoodRx and Amwell all testing the public market. It signaled the end of what many market analysts considered a three-year drought of new digital health public offerings.

Other companies have taken an alternative route through so-called blank check deals. Startup Hims & Hers is going public through a merger with a special purpose acquisition company as well as acute care telemedicine company SOC Telemed in a deal with Healthcare Merger Corp. 

Gormsen said the timing was right to bring the direct-to-consumer company public.

"Becoming a public company gives us access to world-class public investors. We’re a well-funded private company and getting this public attention and opportunity is quite unique," he said.

He added, "We want to be an industry innovator and we plan to invest in our technology development and build out our tele-care model. Our model of tele-care is resonating as we have seen strong growth during the pandemic."

The company's net revenue in 2017 was $6.6 million, and that grew to $23 million in 2018 and $33 million in 2019, representing a compound annual growth rate of 123%.

RELATED: Digital health company Hims & Hers goes public in blank check deal

Eargo reported revenue of $29 million for the six months ended June 30, representing a $14 million increase as compared to same period in 2019. For the third quarter of 2020 ended Sept. 30, the company expects to bring in $18 million in revenue for a total of $47 million for 2020 so far.

While Medicare and most commercial payers have not traditionally covered the cost of hearing aids, certain Medicare Advantage and Medicaid programs, as well as certain U.S. federal government programs, do cover the cost or a portion of the cost of hearing aids.

"While we have achieved only limited coverage of Eargo hearing aids by these health plans, the increase in customers with insurance coverage has been a significant driver of our growth in 2020, and we intend to pursue additional coverage in the future," the company said in its S-1 filing.

However, the company is not yet profitable and has had sizable losses. Eargo generated a net loss of $44 million in 2019. For the six months ended June 30, the company generated losses of $18 million, a decrease from $19 million during the same time period in 2019, according to the S-1 filing.

"We have grown very fast and we have been focused on doing the right things. We have been fortunate to be backed by private investors," Gormsen said. "We have a strong focus on, as we bring on new customers, reducing our cash burn. We are focused on efficiency and reducing our operating loss."

The company faces a number of business challenges, such as having a limited operating history and rapid growth in a short period of time, according to the S-1 filing.

Eargo is deploying a new business model in an effort to disrupt a relatively mature industry. To successfully challenge incumbent business models and become profitable, the company will need to continue to refine its product and strategy, the company said.

The company also said that demand for its hearing aids may not increase as rapidly as it anticipates due to a variety of factors, including a weakness in general economic conditions or competitive pressures.