Q2 2020 SI-BONE Inc Earnings Call

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Good afternoon, and welcome to side, then second quarter earnings Conference call.

At this time all participants are in listen only mode. We will be facilitating a question and answer session towards the end of today's call.

As a reminder, this call is being recorded for replay purposes, I would now like turn the call over to Matt back So from the Gilmartin group closer you introductory comment.

Thank you for participating in today's call joining me from Esa gone or Jeff done President and Chief Executive Officer, and more Francis Chief Financial Officer in Chief Operating Officer earlier today as I go on released financial results for the quarter ended June Thirtyth 2020, a copy of the press releases available on the company's website before we begin I'd like to remind you.

Management will be making statements. During this call that include 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 nearly 95 any statements contained in this call that relate to expectations or predictions of future events results or performance are forward looking statements.

These forward looking statements are based on the company's current expectation and inherently involve significant risks and uncertainties. These risks include the impact of the 19 will have on the ability and desire of patients and physicians to undergo procedures using the ice use implant system. The duration of the coated 19 pandemic and whether it be coded 19 pandemic will recur in the future.

Other forward looking statements, including without limitation Rx, our examination of operating trends and our future financial expectations, which includes expectations for hiring surgeon training and adoption active surgeons new products clinical trial enrollment and reimbursement decisions are based upon our current estimates and variances.

Assumptions. These statements involve material risks and uncertainties that could cause actual results or events to materially differ from those anticipated or implied by these forward looking statements. Accordingly, you should not place undue reliance on these statements are listed descriptions of the risks and uncertainties associated with our business. Please refer to the risk.

Dr Section of our most recent quarterly report on form 10-Q filed with Securities and Exchange Commission on May five 2020, as I've been disclaims any intention or obligation except as required by law to update or revise any financial projections or forward looking statements, whether because of new information future events or otherwise this conference call can.

Time sensitive information and it's accurate only as of the live broadcast today August Threerd 2020, and with that I'll turn the call over to Jeff.

Thanks, Matt Good afternoon, and thank you for joining us I hope you and your loved ones are safe and healthy as our communities continue to be affected by the Corona virus before we get into the details of the quarter I want to take a moment to thank members of the healthcare community all of whom are making extraordinary efforts to care for both covered.

And non covered patients in these difficult tires.

Revenue for the second quarter was $14 million with $13.2 million of revenue in the United States down, 14% and 12% respectively compared to the second quarter of 2019.

The quarter started off as expected with April revenues being materially impacted by the Cobot 90 gene Pandemics and the halting of elective procedures throughout the United States in much of Europe.

Specifically due to these unprecedented measures taken by state and National governments revenues at April declined 85% compared to the prior years period in 2019.

However may revenues, which we believe included a large number of rescheduled chasers from late March and April increased 6% compared to the prior years period in 2019 as hospitals and medical centers across the United States and Europe resume performance of elective procedures.

In June total revenues increased 42% as we saw nice recovery to new cases, but we believe also materially benefited.

But rescheduled procedures when excluding our estimate of rescheduled cases in May and June, which we believe to be the best metric recovered impact in those combined month, we estimate revenues would have declined over 10% compared to the combined may and June period in 2000.

The 19.

We attribute this resilient performance in the quarter to the significant investments made in 2019, including Salesforce expansion surgeon training and education.

Product introductions and improved reimbursement.

While this recoveries exceeded our initial expectations following our first quarter earnings call. We're keenly aware of the risks we face related to the potential for further shutdowns in elective procedures in high volume States, like California, Texas and Florida.

Given this uncertainty we do not view may and June growth as an indicator indicator of our unlikely performance in the third to fourth quarter as both months materially benefit benefited from rescheduled procedures.

For the remainder of 2020, we will continue to operate the business under a heightened level of macro uncertainty, but are working diligently to accomplish many of the goals, we set out to achieve for the full year.

While we feel we are navigating the challenges of the current environment right well, we are continuing to drive our commercial priorities to strengthen our long term growth opportunity.

Driving ifyou procedure volumes is the focus of our commercial strategy. The three ongoing initiatives. We are implementing to help us expand the use of Ifyou include training new providers reactivating inactive surgeons and continuing to grow payer well support for IPH use as mentioned on that.

Previous call, we we continue to make progress and ramping up our virtual education for both our fiber on Salesforce and surgeon customers. Our virtual education series has been very well received program over the course of this pandemic. We have completed 12 programs to date and have an additional four.

Programs plan through the end of August the most recent webinars titled novel Fi Joint fusion applications for adult spinal deformity was attended by approximately 100 healthcare professionals and led by Dr., David Poly of the University of Minnesota.

Given our rapid deployment of this virtual platform and accelerating adoption. The number of active surgeon users unique users was 455 in the second quarter, despite the dramatic reduction and elective procedures in the quarter.

We continue our portion of the many academic medical centers and we are seeing the results of this initiative as you may recall, our strategy was to use bedrock adult deformity initiative to spearhead this goal and theorize that the effort would lead to multiple surgeons doing not only bedrock adult deformity cases.

But also said really act joint fusion cases, our push into teaching hospitals. During the 2019 2020 academic year included ESI joint fusion and bedrock training over 200 residents and fellows at approximately 50 academic centers.

Which over 20 programs were first time trainings by fiber all at these institutions. For example, following a major training program last October 2019 at the Mayo clinic, numerous Mayo surgeons performed I views and bedrock cases in the second quarter. In addition to the.

Male clinic bedrock is now being used in over 20 academic teaching hospitals.

During the quarter. We also continued to build on the significant reimbursement progress made throughout 2019 and into 2020.

Specifically in late May we obtained a positive coverage policy from.

Adding approximately 22 million new covered lives. Additionally, we received a positive coverage policy from care source, which covers approximately 1.1 million people on Medicaid primarily in the Midwest and southeast.

Lastly, we added a timely new purchasing agreement with surgical care affiliates also known as FCTA, a large ambulatory surgery Center network accounting for more than a may in procedures annually. Sta has 210 am seasoned 35 states at approximately half have spa.

Fine neurosurgical and orthopedic capabilities. The agreement with FCTA offers individual centers a choice to obtain preferred pricing by using AI fuse exclusively.

We believe the agreement with surgical care affiliates. In addition to the surgery partners agreement signed in November of 2019 enhances our efforts to sell to FCS and further streamlining our strategic initiative with this segment of the market.

On the clinical side on May Twentyth, Dr. east lack of the scripts Health Center in San Diego enrolled the first patient in our Sylvia study Sylvia is a prospective multi center randomized control trial for pelvic fixation using the I fuse bedrock technique versus standard surgery.

And patients undergoing multi level spine fusion surgery to date for subjects enrolled in undergone surgery. We expect over 25 subjects to be enrolled by the end of the year study outcome data will not be available on two 2022 that said we are encouraged by the time.

The option of the bedrock procedure in the anecdotal clinical results and feedback from Surgeons were also happy to announce that one year findings from Sally were recently published on June 15th.

Shelly is a prospective multi center single arm trial of I've used three D for chronic ESI joint pain. The publication showed equivalent improvements in paying patient function and quality of life compared to prior Ifyou studies. Moreover, the study showed improved physical function test.

Market opioid cessation and high rate of radiographic fusion on Cts scans at six and 12 months lastly, although NASS will be a virtual conference in 2020, we will once again be hosting our virtual surgeon panel. The morning of October eight we.

We will provide additional details in the weeks default to conclude I would like to say, we remain constant contact with our customers community representatives employees and suppliers during this period.

While the depth and duration of the current challenges are difficult to predict I believe our mid and long term opportunity is substantial and our business is well positioned financially and organizationally to weather this pandemic.

With that I will now turn the call over to lower Francis our Chief Financial Officer, and Chief operating officer to provide more detail on our financial results.

Thanks, Jeff.

First quarter total revenue of $14 million decreased by 14% compared to the prior year period.

Sales at 13.2 million dollar, which accounted for over 94% in total revenue in the quarter declined 12% compared to the corresponding prior year period in 2019.

International revenue of $800000 declined 36% compared to the corresponding prior year period.

As Jeff discussed U.S.K. signs were significantly impacted by the reduction in elective procedures in the month of April followed by a gradual reopening of hospitals and surgery centers in may.

We ended the quarter with 62 direct sales Rep and 54 clinical support specialist retaining all members of our us feel fourth during the first full quarter in the pandemic.

We believe their strength will be essential and the recovery that follow.

Gross margin for the second quarter, 2020, with 85% compared to 90% in the second quarter 2019.

The decrease in gross margin was primarily due to certain labor and overhead cost charged directly to the cost and operation when run it some optimal capacity during the second quarter 2020 due to the impact of co. The 19 gross.

Gross margin was also impacted by higher inventory overhead costs due to increased cost of operations as we continue to scale.

Lastly, gross margins were impacted by an increase in inventory write off in the second quarter 2020.

Operating expenses decreased 3% to $22.1 million and the second quarter 2020, compared to $22.9 million in the second quarter 2019.

The decrease in operating expenses, primarily driven by Frampton steps taken to reduce discretionary spending in response to co. The 19.

In addition, reimburse $600000 that accrued litigation expense following the final claims resolution process associated with the TCPA class action settlement.

These decreases were partly offset by higher employee related costs and stock based compensation due to higher headcount mainly from sales hiring.

As mentioned on our first quarter call, we retained our employees and continued forward with all major new product initiative to ensure a robust return of the business.

However, we also took preempted step to curtail spending until they're worth more clarity on the extent and duration at the impact from the pandemic.

The cost saving measures included implementing hiring restriction, eliminating discretionary spending reducing executive salaries, reducing capital expenditures, reducing the use of outside contractor, reducing non essential marketing expenses and delaying certain clinical research projects.

Given the current fluid situation, we have implemented on dynamic forecasting process for the third quarter.

And biweekly basis, we are evaluating our revenue operating loss and cash we will continue to take a thoughtful approach to ensure a return to revenue growth, while protecting our bottom line and cash.

Our operating loss for the second quarter, 2020, with $10.1 million compared to $8.1 million in the second quarter 2018.

Our net loss was $12.5 million or 44 cents per diluted share for the second quarter 2020, as compared to $8.7 million or 35 cents per diluted share in the second quarter 2019.

Cash and marketable securities were $137.7 million at the ended the quarter.

Based upon our current operating plan, we believed that our existing cash and marketable security will enable us to fund our operating expenses and capital expenditure requirement.

To further strengthen our balance sheet and cash flow on May 29, we successfully refinanced our debt with a five year 40 million dollar term loan with favorable terms, including three years without principal payment minimal covenants and a lower cost to capital.

Due to the current environment and heightened level of uncertainty surrounding the cover the 19 pandemic, we remain unable to estimate the magnitude or duration of specific impacts on our business and for that reason will not be providing financial guidance at this time.

That said, we have sufficient inventory our supply chain economic dynamics are well in hand and product flow remains in good shape.

The company, we're well prepared operationally financially and strategically to navigate through this unprecedented period.

I will now turn the call back over to Jeff for closing comments.

Thank you Laura before closing I want to thank our team at ESI ball for their efforts and strength in these difficult times I'm incredibly proud to be part of this team and believe that we will come out of this period, even stronger as a company.

I also believe that are laser focused leadership in the central pelvic space is a huge opportunity and our current initiatives and plans. We have laid out for the next three to five years will help us to capture that opportunity.

While the immediate future is unclear I am confident that aside bone is well positioned to navigate these challenging times the underlying fundamentals of our business remains strong.

As we continue to do our part to Battle. This pandemic, we remain fully committed to support our patients customers and our communities stay safe and thank you for joining US we will now open it up to questions operator.

Ladies and gentlemen to ask a question. Please press Star then one or your telephone to withdraw your question press the pound Keith Please stand by by the capacity and then roster.

Our first question comes from David Lewis The Morgan Stanley. Your line is open.

Good afternoon, thanks for taking the questions. So Jeff almost a few for me, they're all kind of iterations on a theme, but your June recovery was very strong relative to peers uneven others, who also see this rescheduling dynamic you refer to.

They were generally 85% a normal in June to you or 50% above normal.

Since kind of curious if you think about the business relative to let's say spine companies in what do you what do you attribute that dynamic too.

Hi, David.

I think it's a combination of things I mean, I just think as you know in Q1, we were firing on all cylinder all the things we're working on the business.

Sales to reimbursement the reimbursement payment.

And I, just think that our fundamentals.

Continue to be strong and so.

You know certainly as you know we have a lot of cases cancelled and being down 85% in April a lot of those cases got pushed out but I think it's just.

I think we feel great about the business the strength of of of all pieces the product adoption.

The amount of surgeons that are interested in training even vary over.

Oh good times.

And.

I think it's just going to carry forward.

Into the future.

I think on the topics in the fourth.

Sorry, I was I was just going to say there maybe a couple of other things that they had an impact. So the fact that the majority of our procedures, we estimate around 80% our outpatient procedures, we think that we probably benefited.

From that and then we talked about Tele health, then and how our surgeons incorporated that into their practices and so that they would continue to feed the pipeline and then finally ambulatory surgical centers and a focus there has been helpful too.

Yes and May hurt.

As David we heard other companies sale Lake leave the surgeons alone. During this crazy time, and we Cup exact office attack. We said, let's go engage the surge as they have lots of time, let's do training, but helping get up to speed on how you do tele health and how you diagnosed patients. So that you can queue up these patients as best you can clearly.

Do physical exams, but there is a lot you can do so we took a pretty proactive approach across the board.

Okay very helpful. So clearly is underlying demand in the business, we saw that for a fourth quarter first quarter and it sounded as underlying momentum here.

Kind of adjusted for covert here in the in the second quarter. So Jeff I guess looking forward can you give us any help on how July trends, we're obviously, probably not 40% like you saw in June but how should we think about how the business credit in July in a relative to sort of pre covance growth that was cut up 25% to 30%.

And then.

There are other than.

Getting on the specific numbers of July David We certainly expect to see sequential improvement in Q3 over that down 14% number in Q2.

I think it's early to tell what that's exactly going to look like but but certainly we expect to see sequential improvement.

And going into Q4.

I guess my my concern is normally Q4 jumps up dramatically.

Obviously, there's some macro issues that I think all of us are unsure of and where we see that same push up in Q4. So we expect improvement in Q3.

Added in Q4.

We are a little more cautious around.

Are we really going to see that bigger jump up.

Okay. So just last question I'll jump back in two Jeff is just a referral channel you talked about this from.

In the June period, but just a sense here in July are going forward, what that mix is right now between rescheduled patients in new patient screening have you largely exhausted those rescheduled patients from April and May. So now you have a decent sensor that de novo demand and how does that new patient tunnel look.

Thanks, so much.

Yes, we welcome.

So I think most of the rescheduled cases of our are behind us the.

As as I think.

Are we stated.

Q2 number would have been down about 10%.

So if you look at the basic cases.

So I think we mostly exhausted I think it's it's a question of in our business anyways, keeping the funnel goal.

And all this tele health work on all this surgeon education work.

And and the fundamentals I think will help us flipped.

The direct answer as I think we've exhausted most of the rescheduled cases.

Our next question comes from Bob Hopkins with Bank of America. Your line is open.

This is Kyle Thats you on for Bob I Might've missed this and the answer to David's question, but I just want to make sure I understand this so.

In June you had a massive backlog of cases in may as well, but just wanted to understand kind of what that the new demand looks like in July I should we expect that you'll see pretty significant drop in July or should we expect that july's starting to get a little bit closer to these no to growing again I just want to make sure.

Understand on and I said, one quick follow ups will.

Well I mean, weve, maybe I can provide a little bit of response and it's really reiterating what you what she said to David Lewis. So what we really focused on Kyle is in May and June and we do have information.

About cases that were cancelled due to coal bed.

From the second half of March and all of April.

And we don't necessarily now, which cases, where we scheduled and when they were done but were making an assumption that a lot of those cases that were on our radar network.

In backlog on that were canceled that they did come into the mix in may and June and possibly some in July and so the information that Jeff gave I think is the best information that we can give to you is that if we if we took out what.

We believe to be rescheduled cases for the month of May in June the new cases would have been around 10% down.

Compared to a year ago may and June and so hopefully that gives you some information on at least where we were in May and June.

That said with the strength coming out of Q2 and based on what we're seeing through July we would expect the sequential improvement in Q3 revenue Berkeley Q2.

That's helpful and I just wanted to have one quick follow up as we think about the things that have been going well for the company on the coverage side in the physician fee increase I just wanted to think about.

Ask you to kind of help us with understanding when would you expect to start seeing a real benefit from improved commercial coverage and that increase position.

Do you think that started to manifest in growth there I mean, obviously, it's very difficult to tell it the way things been gone with coded, but just wanted to understand it. If you expect there to be a real impact from that as we look forward in the next few quarters.

Well Carl I think as we all have talked about in the past or it takes about our patients have to go through six months a conservative care. So for instance, atanas the latest.

Plan to come on on board after Cigna earlier.

And so it does take six months or unless they have good documentation.

That is already in place that they've been going through the conservative care.

Inside of that six month window. So.

I think we're starting to see at the cases.

I think that will accelerate.

Later in the year.

The big one that still sticking out there is ample were told that that they're meeting in August and we'll publish in September but we've heard that before.

And our about timing and so I and this covered world not everything gets done on time, but.

If that happens that will certainly potentially help in 2021.

Got it thanks, so much you.

Well.

Our next question comes from comp growth of Canaccord. Your line is open.

Great. Thank you very much in congrats on another strong quarter here.

So I wanted to touch on maybe a little bit move away from coal to just for at least one question here you talked a lot about.

See opportunity.

Preferred agreement with the surgical care affiliates.

Maybe just help us understand what that Ken can mean for the business going forward.

And then maybe what in what impact you can have on driving that forward and then also.

What that means for pricing.

I'll take the first part now I'll, let lorie talk about pricing a little bit.

And I think I think so much about.

Medical device. These days the trial is making things as frictionless or as easy as possible because as we all know it's not the easiest business. So you have to knockdown.