Q3 2019 Earnings Call
Good afternoon. My name is Jimmy I'll be your conference operator today at this time I would like to welcome everyone to the Conformis third quarter 2019 earnings Conference call.
All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session.
Before we begin I'd like to remind you that Conformis management will make statements. During this call that include forward looking statements within the meaning of federal Securities law.
Sure I made pursuant to the Safe Harbor provisions the private Securities Litigation Reform Act with 1995.
Any statements contained in this call that are not statements of historical fact should be considered to be forward looking statements. All forward looking statements, including without limitation statements about conformance and strategy future operations future financial position and results gross margin project margin operating trends financial guidance market growth total revenue and revenue mix by product and geography.
The anticipated timing of the limited launch of a hip product offering the potential impact and advantages of using customize implants business initiatives and transitions in our commercial operations are based upon current estimates and various assumptions. These statements involve material risks and uncertainties that could cause actual results or events to materially differ from those anticipated or employ.
Hi by these forward looking statements, including those discussed in the risk factor section of conformance is public filings with the U.S. Securities and Exchange Commission.
Accordingly, you should not place undue reliance on these forward looking statements all Conformis may elect to update these forward looking statements at some point in the future conformance disclaims any obligation except as required by law to update or revise any financial projections and forward looking statements, whether because of new information future events or otherwise this conference call.
Contains time sensitive information as accurate only as the live broadcast today October Thirtyth 2019.
I'll now turn the call over to market Gusty Conformance is president and Chief Executive Officer Mark.
Thank you Jimmy and welcome everyone to Conformis is third quarter 2019 earnings conference call with me on the call today is Paul Weiner enter our previous CFO and now consulting as well as Fred Driscoll our interim CFO .
During the call we will share prepared remarks on a variety of topics, including our third quarter financial and operating performance.
Following the prepared remarks, we look forward to answering your questions.
From a commercial and operating perspective, we had a challenging quarter as we anticipated or you. This business was impacted by it in the coverage denials among our surgeon user base.
Our irrational conform commercial performance continued slow improvement as or overseas investments start to deliver results.
Importantly, our expense reduction plans from Q4 2018 continue to produce results as we had our third straight quarter with the significant reduction in expenses versus prior year quarter.
For Paul goes into further details on the financials I want to highlight a few of the significant events. We had in Q3 that I will be commenting on later in the call.
For our Conformis hips system, we submitted our full commercial launch to us here to the FDA clearance.
This quarter, we successfully launched our identity total knee into limited clinical release.
We executed a significant strategic development and distribution relationship with Stryker Corporation.
We as I mentioned in hired Fred Driscoll season, former public company, CFO as or interim CFO and engage with Paul as a consultant to help us through the transition both bread and Paul will help ensure stability, while we search for a permanent CFO .
And we hired a new senior Vice President sales for our U.S. selling organization.
Let me turn the call over to Paul now for more detailed financial review.
Thank you Mark and thank you all for joining us.
We reported third quarter revenue of $17.3 million, representing a decrease.
Were $11.7 million year over year on reported basis.
Excluding the negative impact of changes in foreign currency exchange rates of $64000 revenue decreased 40% on a constant currency basis revenue in the third quarter 2019 in 2018 includes royalty revenue of $191000 and $10.7 million respectively.
Related to patent license agreements.
This includes the royalty settlement of $10.5 billion in the third quarter 2018 from Smith <unk> nephew.
Third quarter product revenue was $17.1 million, representing a decrease of $1.2 million worth 70% year over year on a reported basis and 6% on a constant currency basis.
Sales of I totally.
Increased $286000 to $6.4 million worth 5% year over year on a reported and constant currency basis.
Sales of I told you are I do a value and declined $1.7 million to $10.3 million or 14% year over year on a reported and constant currency basis.
I told you asked represented approximately 38% of total product revenue in the third quarter 2019, compared to approximately 33% for the same quarter last year.
With a limited launch beginning in the third quarter 2018.
Sales of the conforming hip system increased $171000 to $390000 or 78% year over year, which were all in the United States.
Product revenue decreased $1.1 million to $15.1 billion were 7% year over year.
U.S. product revenue was driven by sales of our I told.
And you increased 5% year over year.
Offset by a 14% year over year increase in sales of the base business product line.
Third quarter U.S. product revenue represented 88% of total product revenue compared to 89% for the same quarter last year.
The rest of World product revenue was $2 million, a decrease of $93000 well, 5% year over year on a reported basis and 1% on a constant currency basis.
Rest of World product revenue continued to be affected by reimbursement challenges in Germany.
Turning to our view of our results across the rest of the piano.
Third quarter gross margin was 44% of revenue compared to 68% of revenue for the same quarter last year in 2400 basis points decrease the decrease in gross margin was driven primarily by the $10.5 million royalty settlement, which contributed one 1800.
Basis points of the decrease and 600 basis points due to lower volumes an increase in unused product leads to be due impart to add and has had no insurance coverage denials, resulting in possible delay and subsequent cancellations and a higher scrap rate related to does.
Nine changes the hip made during the limited launch.
Total operating expenses decreased $11.8 million to $14.5 million, while 45% year over year.
This decrease in expenses $3.2 million was driven primarily by reductions in personnel costs marketing programs and patent litigation expense as part of a plan announced at the end of 2018 to reduce cash burn in 2019.
Personnel costs in sales and marketing we reduced as a result of the reduction in the number of sales managers open position the conversion of direct reps to independent agents and the reduction of certain marketing programs.
Personnel costs in research and development will reduce mainly due to the completion of certain software and product development projects in 2018, and the timing of product development projects in 2019.
The remaining 8.6 million dollar reduction in expense was due to the noncash write off of $1.9 million of unused manufacturing equipment and a noncash write off of $6.7 million related to impairment of goodwill both incurred in the third quarter of 2018.
Net loss was $8.7 million worth 13 cents per share compared to net loss of $7.4 million or 12 cents per share for the same period last year.
Net loss per share calculations assume weighted average shares outstanding of 64.8 million shares for the third quarter of 2019 compared to 16.2 million shares for the same period last year.
Net loss in the third quarter included foreign currency exchange expense of $1.3 million compared to foreign currency exchange expensive.
$2000 in the same period last year.
We had cash and cash equivalents and investments totaling $29.4 million as of September 32019, compared to $23.6 million as of December 31, 2018 to cash balance as of September 32019 includes the $14 million.
Received from the Stryker transaction.
With that let me turn call back over to Mark to add additional fall.
Thank you Paul.
Turning towards further comments on meaningful items in the quarter.
That is not yet updated their policy. However, we still expect to realize policy to be issued prior to year end.
As disclosed previously Fred Driscoll as joint performance as a room CFO . We're very pleased to have Fred on the teams help us through the CFO transition over distinguished career. Fred has 20 plus years of public company Chief Financial Officer experienced enrolls with small cap public health care companies Fred's contributions will allow us to take the time.
We need to recoup best in class talent for a full time CFO position.
We have already initiated search with a leading retained search firm and are actively interviewing candidates.
I'm also pleased to announce that we've hired a new senior Vice President sales for US sales organization, Eric Riggenbach joins us with over 20 years of experience with orthopedic sales and marketing and as well versed in positioning total joint solutions to surgeons and hospital systems and his recent role as a general manager at Stryker, Eric was responsible for a successful.
Branch turnaround overseeing joint reconstruction trauma and extremities, he will take a poor performing branch and develop into one of the highest performing this team was able to achieve significant growth over multiple years.
As we announced in October 1st 2019, we've entered into an innovative and strategic partnership with Stryker. The transaction provides for us to develop manufacturing cell to Stryker patient specific threed printing instruments for their traffic on knee system.
This transaction provides conformance a meaningful amount of non dilutive financing and the potential for incremental revenue beyond our current products.
Sales over the upcoming years. We also believe this demonstrates the strength of our intellectual property portfolio as well as our technical expertise and clinical performance of our patient specific cutting guide capabilities.
There were two significant milestones to report regarding a new product pipeline first we successfully launched or I total identity total knee system. This system represents a significant upgrade to our existing system as it provides new and improve instrumentation extended trivia stem options for surgeon customers as well as more poly insert flex.
Ability.
It also introduces our new titanium to be obliquely, which will be the foundation of our press fit Cementless total me offering.
Second regarding our hip system, we have submitted a comprehensive package to the FDA that includes improvements to the system based on feedback from our limited market release, we still anticipate full market release prior to year end likely late December we remain excited about fully launching into the approximate 4 billion.
In us total hip market.
With that before I close I'd, just like to say a couple of comments.
As mentioned Paul's moving on I want to personally thank him for the services. These brought to conformance over the last five plus years, he joined US as a private company help take the company public and has been a.
Very good.
Member of the executive team here and a good partner for myself personally.
So I want to thank Paul and wish him. The best of luck in his his new endeavors and is a personal pursuits.
That at this time I'm happy to take any any questions operator.
Thank you as a reminder to ask a question you will need to press star one on your telephone to withdraw your question press the pound Keith Please standby will be compiled the Q1 day roster.
Our first question comes from Ryan Zimmerman with BTI G airline is now open.
Hi, This is actually Sam on Ryan. Thanks, Thanks for taking the question.
Just to start actually.
As it gone.
Can you characterize the discussions you're having with Aetna and what gives you confidence that you can see resolution of the policy before year end.
Yes, so as we mentioned last time, they normally update and we had.
You firmer advisors that they had planned and communicated that an update in September we have had a subsequent update from our advisors Ryan in indirect discussion with.
Excuse me I'm, sorry, Sam with.
With that know that that the.
Provision was delayed.
And they are now expecting to target prior to year end.
Hopefully ended November early December . Unlike just do want to emphasize again that we don't know what the policy update will be so we can't obviously make any predictions about that but we do expect to have an update based on discussions with that Matt.
Again, we're through our advisors by by year end Okay.
Thanks, that's helpful.
So then.
On those on the denials that you're getting now how is that impacting your day to day sales with physicians are you seeing that restricting overall usage at all.
Yeah again, it's hard it's hard to justify since we don't have clear line of sight directly into that.
But you know based on you know anecdotal discussions and based on estimates from that that we've given before on it as market share.
It is impacting surgeons usage, because they've had to adopt their prescribing patterns, knowing that there's not going to cover our technology. Many of them. They've indicated you know there looking forward to getting this resolved. So they can go back to their normal usage patterns.
But you know that you know that has been issue.
And I think is.
Paul talked about in some of the faster on the financials, we probably saw some one time hits with careful surgeries and stuff like that that we normally wouldn't see.
From that standpoint, so yeah from a number standpoint as a follow up on what Mark was saying.
[noise], we believe that and it has about 5% of the overall market.
And it could be impacting our business anywhere between five to as much as even 10%.
Moving on with Surgeons are defecting surgeon, even more so.
Within their business.
And we'll we'll see that hopefully of reverse it reversed course and.
And it comes off about positive reversal of their current Paul.
Okay. Thanks, taking the questions.
Thank you and your next question comes from Steven Lichtman with Oppenheimer. Your line is now open.
Thank you hi, guys.
Just.
Following up on the the Stryker agreement can you talk about some of the specific benefits, but I'm wondering.
How else do you think that disagreement could help conformis in the marketplace.
Although I was just a sorry, we're just making sure that we can.
The broadcast here so Steve how hot so the question I think I heard you I just want to rephrase it.
How is this a potentially going to help performance in the marketplace.
Correct.
Well I mean look as I said on on the outset.
First off this is a deal for total knees with Stryker, we're very pleased to partner with.
A large multinational light stryker.
But we hope this you know we can we'll look at other areas and I think as I said, it validates our IP and if that validates our capabilities to get this done and get this done well.
The other thing is is it's based on our jig technology or any in a box and I think it does demonstrates our business model, Steve, especially as.
Total knee arthroplasty.
We're seeing this outpatient increases outpatient trend and this is what this is really designed to do is provide neenah box. So as I said and indicated this provides.
Additional revenue opportunity.
Through the through the deal the nature of transaction as we disclosed.
Five to potentially up to 10 years of supply.
Of patient specific instruments station. So it's very good revenue opportunity for us as well.
Okay, Great and then you talked about some timbar pipeline progress during the quarter.
So can you just lay out for US you know sort of specifically as we think about going into 20.
The the timelines as you think about the full launch of hit identity and then on on Cementless, having what sort of the keen interest we should be take about it next year.
Yes, so I think it hasn't changed from what we said before Steve we really feel pretty good about that so again, we should get in you know here very short order the full market release for US hit so that's going to be the big driver for US certainly early 2020 is getting into that.
And then we'll see our limited release of press fit first half middle of year 2020.
Probably targeting the femur only but we're making actually good progress on until the end patella and then identity that the initial feedback from surgeons has really been excellent. So right now as we said before second half of 2020, we'd be looking for the Debbie release. So you know knock on wood that goes well we'll had.
The for a little bit of an uptick there at the end of 2020. So when I think about 2020, we've kind of got three catalyst going on the hits is clearly the biggest one then we'll follow on in the second half with the full release of its envy, but will also be well given that we're in the company first and just now entering have I think Ari.
Entity limited launch, we're going to see some faster uptake on that then what we you know and then how we kind of tight traded the hit so.
So there's a catalyst there and then you've got a as I said, you've got the press fit Cementless limited launch in the middle to hear so we've got three significant new product things that we'll be launching in 2020.
Great and then and then just lastly.
For Paul and best of luck Paul.
On gross margin did you break out specifically, how much sort of though the charges hit gross margin I know you mentioned it with a combination of that and and volumes then and what your expectations overall for gross margin sort of looking forward here in the near term.
Yes, they charge related to the scrap piece, which is certainly it related to limited launch of the half before going into the full launch was about $200000 worth of Cogs.
The rest is combination again.
Potentially related to at not.
The thing so the cancel cases and lower volumes combination of that too it's hard to put a number specific number around each of those things.
So that that's that's where that is and then as far as.
We expect to be for the year, we do expect to recover from you know the 44% that we ended up in Q3, two more I would say high fortys close to 50% level in the fourth quarter.
Based on our current expectations.
Okay, great. Thanks, guys.
<unk>.
Thank you and our next question comes from Josh Jennings with Cowen. Your line is now open.
Hi, This is Brian here for Josh. Thank you for taking my questions I have two on the strike or deals. So first can you discuss the price you'll receive from Stryker for the P. aside that you will supply and I guess the follow on there as well that price change after year won or after the exclusive period or is it only the unit volume that's likely to very if any.
The thing.
Yes at this point, where I appreciate the questions. Obviously as I said, we're very excited about the deal at this point.
As it's a little early and we're not ready to disclose the price the unit price.
I do expect volume to go up and you know there's expectations around that obviously, we're not ready to talk about that yet either we're still kind of in the early stages of development and all that stuff, but but look I think.
I think if you think about which I know you know people who follow the market do look at the the you know makes some assumptions about the growth of you know the AMC site of care and what can happen and think through the unit volume that can go through there and.
I think the desirability of the need a box.
That both we provide today as well as price Stryker will riding with their travel line.
I think it's going be a very exciting product offerings, so, especially when Medicare.
As anticipated they may not but its anticipated they're going to release it to the outpatient schedule and when that happens I think demand will increase for.
Product proposition such as this so.
We're we're certainly anticipating that over the time does this feel we'll see production units increase.
Okay understood and maybe on the timing side do you have a time estimate for when you can likely fulfilled the requirements relating to the I guess final prototype flash design freeze that will yield the first milestone.
So again, we're you know we're kind of working through all that.
And we you know we kind of aren't ready to disclose anything now on that but we.
We view.
We do preside for you know timing to work and we're working closely with Stryker on kind of anticipated launch dates and whatnot, but I think its little early to commit anything specifically on that but in conjunction with you know with our partner we will give more information on that certainly as as the prior progress and the program.
Dresses and Brian This is a follow up.
We will be filing or do plan on file.
As with our 10-Q.
We anticipate filing hopefully on Friday.
Or you know going next week, but hopefully Friday.
Again in there will be the agreement topline.
Rooms will be redacted.
And then but obviously the unredacted fortunes, you'll be able to get more details.
Okay sounds good thanks.
Thank you and I am showing no further questions in the queue at this time, ladies and gentlemen. This concludes today's conference call. Thank you for participating you may now disconnect.