Q2 2020 Conformis Inc Earnings Call
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Ladies and gentlemen, todays conference is scheduled to begin shortly.
In today's Congress is scheduled to begin shortly please could you be standby. Thank you for your patience.
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At this time I would like to welcome everyone to the Conformis Inc. second quarter 2020 earnings Conference call.
All lines have been placed on mute to prevent any background noise.
The speakers remarks, there will be a question and answer session.
Before we begin I would like to remind you that Conformis is management will make statements. During this call that includes forward looking statements within the meaning of federal Securities Law, which are made pursuant to the safe Harbor provisions of the private Securities Litigation Reform Act of 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.
Treatments about Conformis is strategy future expectations plans and prospects future operations future financial position numbers on gross margin product margin operating trends financial guidance market growth total revenue in revenue mix by product and geography, the anticipated time of product launches, including the.
New knee replacement.
Offering targeting <unk> hospital outpatient ambulatory surgery centers.
Expectations about the impact of the novel Corona virus pandemic when restrictions on like too.
Surgeries will be relaxed and demand for procedures as.
He will increase.
Potential impact and they've been she's abusing customized implants businesses initiatives interest 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 bench to materially differ from those anticipated or implied by those forward looking statements.
Including those discussed in the respect your sections of Conformis is public filings with the U.S. Securities and Exchange Commission.
Accordingly, you should not place undue reliance on these forward looking steep.
Conformis may elect to update these forward looking statements at some point in the future.
Conformis 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 is accurate only as of the live broadcast today August <unk> 2020.
I'd now like turn the call over to Mark Gusty Conformis is president and Chief Executive Officer Mark.
Thank you, Chris and welcome everyone to Conformis, the second quarter 2020 earnings Conference call.
With me on the call today is our CFO Bob.
During the call we will share prepared remarks on a variety of topics, including our second quarter financial and operating performance as well as comments related to the cobot 19, pandemics impact on our operations.
Following our prepared remarks, we look forward to answering your questions.
On March 23rd 2021 through our full year growth targets and noted that it was due to the pandemic and its impact on orthopedic scheduled surgeries.
July 620, 20, we pre released our second quarter revenue and those numbers are consistent with what we are reporting today.
As expected the second quarter was impacted by the pandemic, but we're pleased to see a fairly quick resumption of scheduled orthopedic procedures in the core going from the low in April when we were down 94% to being down 39% May then down 9% in June.
Please recall that Conformis does not have any revision in college your travel orthopedic products that are considered a central surgery. Therefore, we are heavily weighted towards pure primary elective total joint replacement.
But we expect Q3 in Q4 product revenue results to improve relative to Q2 results, we anticipate volumes to remain under pressure for the remainder of the year.
Well the resumption of scheduled surgeries has continued in many parts of the country, we will not people, providing any new guidance for 2020 due to ongoing uncertainty as a result of differing state County, and city policies and of course concerned about a possible resurgence of covered 19 infections that could lead to renewed surgical interruption.
Yes.
Despite challenging just related to the pandemic conformis team of professionals has adapted and work hard to keep employee safe from production on track for this reason, we feel well prepared to respond to increased orders at the number of elective surgeries continues to improve the normalized.
Moving on I would like to point out some other notable items from the past quarter. We're pleased to reach a settlement with Zimmer Biomet biomet regarding our patient specific instrumentation, otherwise known as P. aside.
Right Medical Microport Smith, <unk>, Nephew's, Zimmer Biomet, and Stryker URL now licensees of our technology.
We think this and the strategic development a manufacturer agreement, we reach with Stryker validates the expertise and clinical performance of our peer type products and services.
I'm also pleased to report the successful amendment of our credit facility within about us in recognition of the economic impact covered Nineteena Conformis is business. The company has successfully amended the quarterly financial covenants contained in the loan and security agreement dated June 20 to 2019, the impact to cover the 19 on business operations.
As a dally made it difficult for many companies to satisfy some or all of their financial covenants. The fact that we're able to come to agreement that better reflects current economic reality is an indication of the getting co-operative partnership we have today within about us.
Finally, we believe and think as most injury participants would acknowledge that new product introductions are critical to growth in the medical device industry, just look or hip growth this past quarter and arguably the worst quarter ever for medical device procedures demand for hip growth clocked in a 12%.
Why we strive to maintain or new product programs drop and pandemic. Despite obvious financial challenges that is why we are pleased to announce a future product expansion targeted for knee replacements at hospital outpatient and ambulatory surgical centers, our newly replacement system wide standardize polyethylene insert which will allow for it.
Creased inter operative flexibility something surgeons have consistently requested from Conformis importantly, surgeons using this new knee replacement will have the benefit of our highly accurate I view pre planning system and our P. S I instrumentation.
Unlike our existing system, the new knee replacement system will be efficient eliminating the need for massive capital build instrument sets typically require with competitors standards systems, our newly offering will allow us to deliver a complete and efficiently replacement package profitably at a lower selling price than are fully personalized knee system.
We will also expect real provide this product in three weeks versus the five to six weeks. He currently takes her personalized me.
Before I provide further comment on our planned future product expansions, let me now turn the call over to Bob for more detailed financial review.
Thank you Mark and thank you everyone for joining us.
We reported second quarter revenue of 19.5 million, representing a decrease of 1% or 0.1 million year over year on a reported basis.
Excluding the negative impact of changes in foreign currency exchange rates of $17000 revenue decreased 1% on a constant currency basis.
Revenue in the second quarter of 2020, and 2019 included royalty and licensing revenue of 9.7 million in 0.3 million respectively related the patent license agreements.
The second quarter 2020 voyage P. licensing revenue includes the previously disclosed 9.6 million settlement and licensing agreement with Zimmer Biomet.
Second quarter product revenue was 9.7 million, representing a decrease of 9.6 million or 50% year over year on a reported and constant currency basis.
Sales at our new products increased 9.7 million and 9.2 million or 51% year over year on a reported and current constant currency basis.
Sales of our Conformis hip system, where zero point, Sixmillion and an increase of 12% year over year on both reported and constant currency basis.
Your west product revenue decreased 8.9 million.
To 8.3 million or 52% year over year U.S. sales of our knee products decreased 8.9 million to 7.8 million for 53% year over year.
Second quarter U.S. product revenue represented 86% of total product revenue compared to 89% for the same quarter last year.
Rest of World product revenue was 1.4 million a decrease of zero point, sevenmillion with 34% year over year under 40 basis, and 33% on a constant currency basis.
Ill now move on to review our results across the piano.
Second quarter gross margin was 57% of revenue compared to 49% of revenue for the same quarter last year, an increase of 750 basis points.
This increase in gross margin was driven by the 9.6 million of royalty and license revenue recognized as a result of the Zimmer Biomet settlement agreement.
Product gross margin, which excludes royalty and licensing revenue as well as related patent litigation settlement cost recorded in cost of goods was 30% in the second quarter compared to 48% for the same quarter last year.
1800 basis point decline.
The decrease in product gross margin was driven primarily by the significantly lower volumes.
Well as an increase in inventory reserves and use product the increase in reserves factors in the higher than normal delayed surgeries as a result of the cold in 19 pandemic.
Total operating expenses decreased 2.2 million to 13.3 million or 14% year over year.
Steve This decrease in expenses was driven by lower selling expenses, primarily as a result of lower variable costs due to the decrease in revenue.
Additional year over year operating expense reductions of approximately 750000 were realized due to lower travel meeting and other discretionary expenses.
Partially offsetting these declines.
Overall operating expenses, our general administrative expenses increased 1.2 million to 6.5 million or 22% year over year.
This was primarily due to increases in general legal in litigation expenses as well as higher personnel severance and other administrative expenses.
Net loss was 2.1 million or three cents per share compared to net loss of 6.8 million for 11 cents per share, but the same period last year.
Net loss per share calculations assume weighted average shares outstanding of 68.2 million shares for the second quarter 2020, compared to 63.3 million shares for the same period last year.
Net loss in the second quarter included foreign currency exchange income of $694000 compared to foreign currency income exchange income of 30 398000 in the same period last year.
We had cash and cash equivalents totaling 18.2 million as of June 32020, compared to 21.5 million.
As of March 30, Onest, 2020, and 26.4 million as of December 31st 2019.
Lastly, I want to close in a few comments on liquidity and highlight some of the progress we get made.
Towards our continuing effort for financing the company.
First as Mark mentioned, we're pleased to have amended the quarterly financial revenue covenants contained in the loan security agreement with Novartis with this amendment were successfully moving the revenue covenants for the remainder from 2020, which provide the company additional time for revenue to normalize as elective procedures recover.
From the impact of Cobot 19.
Second as we discussed during our last earnings call.
We were able to secure a 4.7 million dollar paycheck protection program long in the second quarter. These funds allowed the company to bring back the majority of employees. We had furloughed. So that we could continue to produce patient orders, allowing the company to respond quickly as procedure volumes recover.
Third we were able to settle our patent dispute with Zimmer Biomet for 9.6 million during the quarter, which will provide additional non dilutive financing over the next three quarters.
Fourth we continue to make great progress with respect to our development efforts relating Stryker as a reminder, that remaining during two milestones, which we expect to complete for mid 2021 will provide an additional 40 million of non dilutive financing.
Lastly, today, we disclosed in our 10-Q that we've replaced our existing aftermarket or ATM equity distribution agreement and entered into a new ATM sales agreement with Cowen and company.
This new agreement allows the company to sell shares if it's common stock up to an aggregate value of 25 million.
This represents a 25 million reduction in aggregate value from our previous ATM agreement and reflects our belief that our long range plan in combination with other available sources of financing supports this and do lower ATM value.
With that let me turn the call back over to Mark to add additional color.
Thanks, Bob.
Well the fix it depends on a continued to be challenging as mentioned in prior releases and commentary Conformis is endeavored to maintain its development activities. As a result, we've continued to progress or new product development programs. This includes activities related to our Stryker partnership as Bob just mentioned as well as work on the planned muni offering that we're announcing today.
There are significant shifts and the total knee arthroplasty market to lower cost site of care facilities, such as hospital outpatient centers and I'm, just trying to care centers and both of these projects seem to provide best in class solutions in response to this trend.
800000, or some primary needs perform in the United States. Some reports indicate that more than 40% might be performed on an outpatient basis in the next three to five years.
We continue to believe the code that 19 pandemic will only serve to accelerate the shifting I see.
In order to capitalize on this trend Conformis is developing a new me system that we based on the experience in data. We've collected the result of designing more than 100000 personalize knee replacement from this in conjunction with researchers and utilizing advanced software techniques. We were developing a set of standard means that we believe will provide better coverage for better.
Then any existing standards on the market today importantly, because the system will have a defined number of standard sizes will be able to manufacture this knee system more quickly and efficiently then a fully personalize me and we'll be able to provide a full range of polyethylene in search drill give surgeons more interrupt the flexibility your hands.
Soft tissue balancing it's typically needed when implementing a standardized me.
Granger sizes in inserts, we expect to provide will be comparable to existing systems, and what is deemed customary and medically necessary in the industry.
We expect this newly system will be available in the second half of 2021, well. This is an aggressive lunch time line. We believe is achievable because as we noted before this system is based off of and within our current range of approval for a personalized I total knee system.
As previously reported Stryker and performance of entered into a strategic collaboration whereby conformis is designing and supplying PS I guides for strikers market, leading travel on total knee system, we're making good progress in our development program and expect to achieve each of the milestones on time. In addition to developing a P. S I system for Stryker.
We will also be supplying the Pos I system. So stryker the actual commercial availability of the combined offering of strikers crap on me and Conformis is manufactured P. aside will be up to Stryker. However, given the expected increase in AOCI knee replacement surgery, we think that within three years revenue from this supply agreement could.
Represent 10% to 20% of our overall corporate sales clearly this is exciting invaluable opportunity for the company ended shareholders.
Long today's announcement, we've released a new investor presentation that explains our overall thinking.
This presentation, we lay out our anticipated new product launch cadence and updated 2024 financial targets for the company. This presentation can be found on the Investor Relations page of Conformis is website.
Once again I would like to acknowledge and thank all the conformance employees consultants and advisors and customers that continued to filter on with us through this challenging time, all your efforts and goodwill or greatly appreciate it. Thank you very much with that I'll turn the call back over the operator, and we'll take any questions.
Thank you.
As a reminder, ladies and gentlemen to ask a question we need to press star one of your telephone.
Two of Joe Your question. Please press the pound key.
Please standby, we can pop acuity roster.
Our first question comes from a lot of Josh Jennings with Cowen. Your line is now open.
Hi, good afternoon, Thanks, Mark and Bob for taking the questions.
I wanted to start off on the U.S.C. offering that you are announcing here today and just so so I'm clear.
This is going to be a standard me and not a custom need is that from a high level. Just one makes from I'm understanding that's what patients will not need to get image or with the C.T. scan.
It's going to be more just differential sizes to to optimize the particular implants for the patients.
Yes, Josh Great question appreciate it yes, it will be a standard me in the sense they'll be standard sizes, but.
The answer your question about the CP scheme of the image I will still need to get image because what we're going to do and where we think were there's value is we're going to be able to size and do the surgical plan and do PXI instrumentation offer that put in the standard me and so you'll still have you know that knee replacement in a kit.
In one kits, so it'll still be our Fisher model, we won't have to put out a bunch of instrument sets, we won't have to be putting out a bunch of inventory with each case, because well have the preplanning capability of the C.T. scan to actually determined the sizing and the surgical technique and we think that's a big deal of the offering.
Understood understood appreciate that and just any any commentary on where that need could be price would be a premium priced offering.
Similar to where you are I told me sit today and then also just to piggyback on that any thoughts on just for the industry as procedures moving to ambulatory surgical centers, whether there you're expecting.
'cause a perennial.
Incremental I should say pricing headwinds just the reimbursement delta between outpatient and inpatient procedures.
Right. So I don't think it's any secret everybody knows there's a different price points.
From commercial payers as well as Medicare patients and [noise] and the codes related to that and so that's always been sort of a question for the industry. You know watchers is the price pressure. It's there we've actually done a really good job conformance with our fully customizing and getting price premium challenges is there's always been well.
Call the price conscious segment or people that are looking for the ability to have you know more flexible pricing and the trend and you see we recognize is only going to exacerbate that to certain et cetera. So our agency offerings will be will be definitely standard.
The personalized offerings will continue to be a premium price offering and I think this is gonna help us a couple ways, Josh it's going to open up a new segment to us that's frankly close off because we can't get to that price point as well as it's going to continue to help us maintain the price premium for those actually.
Fully personalized simply because we will have more than one need offering to compete but they're sort of a family because again. The you know this what I'll call. The base me or standard me will be a subset of our current clearance and well have very similar to feel in design and surgical technique to ours.
Dan If you are current custom me, so it'd be very easy for surgeons to you know choose between the two to the extent they they wafi. So I think this is.
Very very exciting news for us because it lets us gets a different price life. It creates inter operative flexibility for surgeons, which has been something there's always been a headwind for us in surgeon adoption and competitive conversions as well is it gives us a three week lead time. So we can you know people have said five to six weeks isn't.
Bad, but what we really want to three and that's always been the number that everybody says is reasonable because you can't even really consent some of them into surgery any quicker than three weeks anyway. So if we can deliver in three weeks.
The target we'd be going after we just could not get there with a fully customize offering but we absolutely can be there within standardized offering and that's the plan. So we're very excited about that.
It is exciting that makes sense. Thanks for all those incremental details and you mentioned on the Stryker supply side.
Supply agreement, you'll be supplying needs you mentioned, 10% to 20% of overall corporate sales could come from those instruments that you'd supply to strike or.
We just want to back into some math I mean, you guys had been running at a run rate close to 200 million. So you're suggesting that you could see tend to 20 million in revenue coming from this agreement overtime.
Absolutely and frankly, we don't achieve that personally my opinion I'd be disappointed, but absolutely we I think there.
There's at least that amount of revenue potential and that's a key announcement, we wanted to make today because I don't think people are really put the math. So that's an understanding and as I've indicated you know, while we don't control launch schedule, we would hope that it will launch sometime.
You know next year, but we feel very good about you know the progress we've made with yesterday, it's up the Stryker we've got to.
My opinion.
Hi, good collaboration with them and you know and we're excited about the revenue potential for conforming Cheryl.
Actually in last question, just I'm not sure I may have missed it but any update on just the cementless knee offering and a total offering and development efforts there right. So the total agenda depot CR P.S. flavors is launched and we're continuing to roll out Seth I'm as I've mentioned in previous quarters stuff.
We.
We are going to have probably a quarter to quarter delay and cementless as lean as we gear and pitted activities towards the see me because as you can imagine with the second half launch next year. They see need that's pretty aggressive having said that we actually have you know.
Progressed the project well, we've you know weve.
You know work in the lab and on cadavers with our cement list, but we now have to sort of.
Make sure that we're able to do cementless on both.
Project. So we don't want to have our and see how to situation where it goes for a while without a smell. This offering so we've taken a tough decision to sort of prioritizing see over over some outlets that really if you look at our name Investor presentation job, that's really the only significant sort of change.
Beyond. The addition of years, so you need in the launch cadence.
Great. Thanks, Thanks for those details as well and Oh.
Oh, well both step out of Q follow up offline. Thank you. Thank you Josh.
Thank you.
And this does conclude today's question and answer session I would now let's turn the call back to more for closing remarks.
No. We're fine operator. Thank you appreciate your attendance on the call and well look forward to next quarter. Thank you.
Thank you ladies and gentlemen. This concludes today's conference call. Thank you for participation you may now disconnect.
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