Q2 2021 Conformis Inc Earnings Call
Okay.
Okay.
Good afternoon, and welcome to the second quarter 2021 earnings Conference call for Conformance, Inc. My name is Sarah and I will be your conference operator today.
All lines have been placed on mute to prevent background noise.
After management's remarks, there'll be a question and answer session.
Before we begin I would like to remind you that this call will include forward looking statements within the meaning of federal Securities Law, which are made pursuant to the safe Harbor provision other private security Litigation Reform Act of 1995.
Any statements made during this call that are not statements of historical facts should be considered forward looking statements.
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, including those discussed in the risk factors section of from foremost public balance with the U S Securities and Exchange Commission.
You should not place undue reliance on these forward looking statements.
<unk> disclaims any 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 will include time sensitive information and is accurate only as of the live broadcast today August for 'twenty 'twenty 1.
I will now turn the call over to Mark <unk>, President and Chief Executive Officer of come for Mis.
Thank you and welcome to our second quarter earnings call with me today is our CFO Bob Hau. We appreciate you joining us for an update on performance.
The second quarter was solid for us on nearly every level and close the gap for getting back for 2019 levels of performance and we made significant progress on the development of our key new products from a macro perspective, we are seeing similar trends on procedure levels and customer behaviors as other medical device players, especially when compared to companies with a less.
Diversified product portfolio.
Like all companies, we are carefully monitoring COVID-19 trends and vaccination rates trying to assess how they will play out over the coming quarters.
<unk> for the Phoenix surgical procedures continues to improve but it's not without challenges what can we take it in the news every day.
There are several complicating factors such as several areas of the world experiencing spikes in COVID-19 cases, the rise of the Delta variant nursing and critical support staff shortages medical facilities reconsidering, how to handle elective procedures and changing mass guidelines.
So although the environment is not yet stabilized we remain encouraged that the arthroplasty market is showing some level of resilience as a track back towards pre COVID-19 levels.
Our current thinking is that we will obtain a normalized medical procedure environment. Both in the U S and internationally by the end of this year or in early 'twenty 2 at the latest.
This timing works well from our perspective, because we have a number of growth initiatives that we expect to be well isn't the risk right at the time the broader market is nearing full recovery.
And we remain cautiously optimistic that we are on track to get back for a pre COVID-19 operating levels by the fourth quarter.
We looked out to provide you with an update on each element of our current growth strategy.
Number 1 is to grow our coordinate business.
For the procedure levels were the main driver for our revenue performance for the quarter Importantly, we saw sequential improvement on our core products, which is a great indicator for our expanded product portfolio leaves us will become even more pronounced in the relative near term as we are offering to our product portfolio.
Total smaller part of our business, we are moving forward with efforts to strengthen our presence in key international markets.
For example, this is our recent announcement about our plans to expand conformance this footprint into China.
Doing this through an exclusive distribution relationship, which will initially focus on the international medical Tourism zone in Henan Province, while it will take until the end of 'twenty 'twenty..1 on early 'twenty 2 before the first cases are performed.
Cited about the commercial potential of this relationship.
Number 2 is to grow our hip business.
During the second quarter, we generated 900000 of hip revenue, which was 62% growth over the second quarter of 2020.
We are seeing continued interest in our Cordero chip system from current and new surgeons on this system is designed to allow surgeons to flexibility for us either anterior posterior surgical approach.
Given the demand for reduced sterilization cost are searching a box model is gaining traction in both hospital and ASC.
We have more work to do as we build out our portfolio and our software capability, but we're committed to expand our hip franchise.
Number 3 is to continue to drive R&D efforts and to launch new and differentiated products. Although we have many projects on the pipeline 3 are expected to be particularly impactful for overall growth.
First is that the current project.
Received regulatory clearance in may and have been busy preparing our commercial team and training the surgeons that will participate in our limited market release.
Excited about its entity impressive potential because it integrates the best of personalized knee design with the convenience and flexibility of an off the shelf system. We're very pleased with the end product both in terms of attractiveness to customers and patients and with higher margin profile.
For the market for this system is of course for ASC in outpatient segment based on discussions with the customers recognize the delivery model efficiencies product features and sterilization savings.
We expect the first 1 for procedures to be completed later this quarter.
Another important R&D project is there some Atlas day, while we continue to make progress. We are currently reevaluating if we should focus on applying for Metallist technology first relative to the input given the increasing interest we are hearing from customers regarding this product.
And then third as I plan to introduce an additional hip stem that will complement our hip portfolio as we've mentioned in the past we continue to be on track.
Additional stem to our portfolio by mid 2022.
Our final strategic pillars to kitchen with protective monetize our intellectual property, we have a strong quarter on this from early in the quarter, we announced a non exclusive license for a subset of our patents 2 paragraphs 28, so that they can use our patient specific instrumentation IP with their new total ankle replacement system, we received $1.5 million.
From Paragon in 'twenty.
More recently resolve the open litigation, we had previously filed against Wright Medical on tour.
By entering into a favorable settle agreement with those companies that are on Stryker, which acquired them in November of 2020.
Well actually we had a lot of positive activity during the quarter on a patient specific instrumentation project for strikers travel on total knee replacement system in late April we received 500.10-K clear.
<unk> trigger the final milestone payments on the $11 million.
The limited market release again, shortly thereafter, and the first procedures using our patient specific instrumentation with Stryker traps on the endpoint for recently performed successfully although material product revenue ramp is not expected until 2022, we have the necessary manufacturing plants in place to support the sales right.
DSP customers accelerate their adoption of this solution.
We feel good about our strategy on the steady progress we continue to make.
Let me now turn the call over to Bob for a more detailed financial review of the quarter Bob.
Thank you Mark and good afternoon, everyone.
I'll start with some details on a few non recurring items in the quarter.
We recognized $41 million of royalty and license revenue in the second quarter, almost all of which was onetime in nature.
This included the final milestone payment for the development of patient specific instrumentation for Stryker the resolution of the Wright Medical litigation and our agreement with Paragon 28 as Mark outlined.
On this royalty and licensing revenue is nonrecurring it clearly demonstrates the strength of our IP portfolio.
Specific to the striker <unk> license and development agreement, we recognized $25 million of license revenue in the second quarter, which was triggered when we received FDA clearance in may.
Mark mentioned, we're now in the limited market release stage with Stryker.
A reminder, we do not expect material revenue ramp until 2022.
We had $2.5 million of other income which related to the Stryker development agreement.
Other income represents the difference between our direct R&D expense incurred to date and the contractual amount and the development agreement.
Lastly, during the quarter, our PPP loans was officially forgiven we.
We had borrowed $4.7 million back in March 2020, and use the proceeds to maintain staffing during the pandemic, which allowed us to keep R&D and business operations moving forward.
You will see the impact of the loans being forgiven in other income on our income statement.
With that I will now move to a review of our financial highlights.
We reported second quarter revenue of $56.3 million, which included royalty and license revenue I just mentioned.
This makes comparisons to prior year for 2019 tough due to the onetime nature of the royalty and license revenue to.
To be clear our royalty and license efforts are valuable component of our company, but these large settlements are nonrecurring.
The baseline recurring royalty and license activity is expected to be between 150 to 200000 per quarter.
Our focus on how we determined on long term success is on product revenue performance.
Second quarter product revenue was $15.2 million representing growth of 56% year over year on a reported basis and 54% on a constant currency basis.
<unk> strong growth rates over 2020 were expected since the second quarter of 2020 was the quarter most severely impacted by Covid.
As 2020 comparisons are less meaningful we are more focused on how we're doing against 2019 importantly, we saw sequential improvement from the first quarter growth rates when compared to 2019.
We were down 33% to 2019 in the first quarter and we were down 21% in the second quarter.
We believe this trend will continue as reflected in the guidance I will discuss shortly.
Sales of our new products were $14.3 million, representing a decrease of 24% versus 2019 on a reported basis sales.
Sales of our conformance hip system were approximately 900000, an increase of 82% versus the second quarter of 2019.
As a reminder, our hip franchise is fairly new and is still on the early stages of growth.
U S product revenue was $13.4 million, representing a decrease of 22% from 2019, which is also an improvement from the first quarter decline.
Rest of World product revenue was $1.8 million a decrease of 17% from 2019, but again improvement from the first quarter.
Our second quarter product gross margin was 42% of revenue, which was down 210 basis points from the first quarter.
This was driven primarily by higher scrap equipment repairs manufacturing variances and a decline in product sales price.
Near term, we expect our gross margin rates to be in the mid forty's growing over time as we ramp up important knee sales.
Total operating expenses for the quarter was $16.6 million, which reflects the modest investments, we're making in sales and marketing and R&D.
It also reflects higher G&A related to investment in professional fees, we're making to protect our IP.
We now have a well established approach to protecting our IP and we remain confident of a favorable outcomes in pending and future cases.
Our expectations for operating expenses for 2021 year remain unchanged from what we communicated last quarter, we anticipate sales and marketing expense to be between 26, and 27 million for fiscal year 2021, R&D to be between 16, and $17 million and G&A to be between 28 and $29 million.
Moving to our bottom line performance, we generated net income of $38 zero million dollars in the quarter for 21 per share.
Net income was driven by nonrecurring items I listed at the beginning of my remarks, namely the $41 million a royalty on license revenue for $8 million of other income from the PPP loan forgiveness and $2.5 million of other income related to R&D on the Stryker development agreement.
The net income in the second quarter included foreign currency exchange income of 500000 compared to foreign currency exchange income of 700000 in the same period last year.
Our balance sheet remains strong as we had cash and cash equivalents of $108.3 million, which was slightly higher than the 100 and for $6 million as of March 31, 2021, and significantly higher than the $28.7 million as of the beginning of the year.
Lastly, I would like to provide some thoughts on our outlook.
Our practice of providing full year guidance remains suspended due to the level of unpredictability caused by Covid. However, as we've done for the past several quarters, we're giving next quarter guidance with some thoughts on the rest of the year.
Based on our performance through July and our forecast for August and September we expect our total product revenue to be between 15, 5 to $16.5 million, which.
Which at the midpoint is another strong move to further close the gap as compared to 2019.
Another important note is that this guidance assumes sequential growth in product revenue when historically revenue goes down in the third quarter.
In addition, as we exited the second quarter and through the month of July activity levels in our weekly C. T scans have kept us cautiously optimistic.
But we are clearly not back to where we were in 2019, we do not expect to be until the fourth quarter of 2021 or the first quarter of 2022.
We believe that office visits and elective procedures will continue to improve throughout the second half of this year assuming of course, there are no unanticipated complications with vaccinations earn setbacks from the rise of Covid cases, due to the latest delta variant, which appears to be the variance with the most disruption potential to date.
Our goal for the fourth quarter remains the same we'd like to see product revenue get back from what we generated in the fourth quarter of 2019.
As a reminder, we typically experience a sequential bump in revenue in the fourth quarter as individuals complete procedures prior to the annual medical plan deductibles resetting on January 1.
While the sequential increase was fairly modest in the fourth quarter of 2020 due to COVID-19.
Our expectations for fourth quarter revenue of 2021 factories in a more normal sequential lift from the third quarter.
With that I will turn the call back over to Mark.
Thank you Bob.
I hope you can see our confidence in the business the elements of our growth strategy for all coming together as a core business recovers along with the demand for arthroplasty procedures in general.
The first few procedures using our <unk> technology with in conjunction with the Stryker traps on naval performed and Unfortunately went very well the limited market release for imprint will kick off soon with the first procedures to occur later this month and.
And we continue to successfully protect our IP as we reported today our entire company is feeling energized by the steady progress we.
Have a great culture here of conformance with many talented and dedicated individuals sometimes we were so focused on what needs to be improved on what needs to get done next lose sight of the bigger picture I want to make sure. We take time to acknowledge and celebrate successes along the way and with that I would like to very briefly shine a spotlight on our second quarter revenue results for 56.
3 million, we delivered was the highest quarterly revenue number in the company's history.
Yes, a big chunk of that is non recurring as Bob pointed out however, it happened and it was the result of a lot of hard work and strategic execution, which is an important consideration of distinction we've shown on multiple fronts that we have the ability to monetize our IP and this quarter was our best results to date and demonstrates just that I'd like to thank all the <unk>.
People, who performance that made that a reality.
In closing I would like to thank everyone associated with performance, especially our employees worldwide and our physician customers or non physician partners and our investors together, we are helping to make people's lives better and which in turn makes our company more valuable and creates a great place to work because we take great satisfaction.
What we're doing and we don't take that for granted.
So with that Bob and I are happy to take your questions. Thank you.
If you'd like to ask a question at this time. Please press. The Star then the number 1 key on your Touchtone telephone.
Withdraw your question press the pound key.
Again that is star then 1 if you'd like to ask a question at this time.
Our first question comes from Josh Jennings with Cowen.
Hi, This is Eric on for Josh Thanks for taking the question.
I appreciate the color you showed around expectations for 3 Q.
I'm wondering if you could help us understand what level of seasonality you baked into your guidance range here I understand that <unk> for most companies in a normal year youre going to see some level of seasonality, but do you think that impact could be a little more pronounced this year as we start to emerge from the pandemic.
Yeah well.
It's a good question Ark, and Youre, saying seasonality other than we do see seasonality in Q3, and usually it's a seasonal decline.
From Q2.
And then we get the step up in Q4 as Bob pointed out in his remarks, so we have factored that in.
We will say just like commentary I heard from other companies were sort of unsure how it's going to play out.
This year, we actually have.
Indicators, we expect to be able to show sequential improvement from Q2 for Q3, which is sort of against the seasonal trends and I think that's because we are seeing a recovery in procedures, but I am worried about you know.
All the other things that I mentioned, you know there is whatever happens with <unk>.
Vaccination rates and Covid, but also we're seeing sort of.
Different behavior from doctors, it's sort of like there I think there's a little bit of burn out theres a little bit of you know I'm, taking my full vacation and stuff. So I think there you know.
They are starting to see some of that so all in all it was.
It was a challenge for us to sort of think when we go on but we actually think we're going to show sequential improvement. So we're bullish on that.
And that should set us up hopefully what I'm more concerned about is actually for Q4 seasonality and thats, usually a pretty nice step up.
And the question for US there is will we be able to see that in the <unk>.
Book of business as we go forward in 'twenty 1.
We're assuming it will be there, but it's a risk.
Okay.
That's helpful. Thank you and then Mark earlier. This year you made some comments around orthopedic robotics and how can farmers. This strong cash position at the time would allow you to evaluate how robotics may complement the portfolio I was wondering if we could just hear an update on your evaluation process, there and if that if that could amount to anything in the near term. Thank you for the questions.
Well I don't think we have anything material to update other than we continue to look at all technologies that we think could benefit benefit us in robotics or you know I've put on the same category as inter operative.
Guidance Inter operative tracking is certainly in that category on 1 of the things we continue to look at.
So, yes, I mean I stand by my comments that we're looking at it.
We think that.
Our view here is that the solutions that are out there today.
Obviously have some level of commercial success, but I don't know that long term, they're sustainable I think it's the trend moves towards ASC, which is where we've indicated we're going where they're in current product. We then want to think about what follows within print and how we can burnish that technology and really bring something to that site of care. So that's sort of sort of where we're focused in on.
We have something material to disclose we'll do that but in the meantime.
And if you saw on the comments will disclose sort of what we're doing from R&D from Sterne spend standpoint, and we'll make sure we.
Net expectations correctly there okay.
Understood. Thank you.
As a reminder, if you'd like to ask a question at this time that is star then 1.
Our next question comes from Steven Lichtman with Oppenheimer.
Hi, guys. This is amir on for Steve how are you.
Sure.
I just had a quick question for your question. So overall it seems most companies are talking about a recovery trend in the back half.
Anything you guys are seeing on the recovery front as it relates to volume trends during the quarter or any commentary on backlog.
Yes.
Look I guess, thanks for the question Amir I guess, all things as I sort of indicated because I felt like there was a little bit of a.
A rush to suggest that you know U S knees would be from back in Q2, and I said, you know I might be wrong, but I don't think we're going to quite get there in my reading of.
The report says.
Most companies Didnt get back to 19 in Q2.
And Youre right that people are talking about back half, they're seeing a back half trend, which I don't know how to think about that does that mean, they won't be there in Q3, but it'll be there in Q4 or vice versa. So they're looking at that.
We basically correct me if I'm on Bob we're basically reiterating what we said before that we think it's a back half recovery.
With the idea that there might've been a chance to keep you I don't think were on a quite get there in Q3, because we're belief.
Comparable comfortable optimistic that we'll get there in Q4.
The.
<unk> is still not full on the market I mean, the patient demand just isn't there where it was pre 2019 the activity is just not there.
I think it will get their income there, but for US it's for US. It's a 22 story will recover throughout 'twenty, 1 as the market recovers.
We will continue to be there for the demand that's there and then win.
When we get traction from our new products will start changing our portfolio mix.
And drive things that way, but.
I'll just leave it at that that's sort of our view on the marketplace.
Right great. Thanks, and then just very quickly.
I know you guys provided guidance on the revenue side, how should we sort of think about gross margin in the back half of the year any any color you've got to provide on on that front.
Yeah, I mean, I'll take that we did I mentioned it in the call that you were targeting kind of mid forties, which is an improvement what we just put up it's a little bit north of what we had in.
In Q1, and again, the real story kind of Mark hit on revenue growth It's mark.
<unk> expansion as well in 'twenty 2 as.
As argument Brittany becomes more and more of our product mix. That's the that's the product that will definitely help move the needle.
Yeah.
Got it. Thank you Bob and then I guess, just 1 last quick 1 on sure.
We saw a strong growth and momentum on the on the hip side I guess can you just.
We sort of talk a little bit more about what youre seeing on the ground on what's driving demand.
Well look for.
Little bit of us.
You know, it's all new growth for us So that's a good story.
Our hip.
It's been frustrating because we think we think we have a good plan, but COVID-19 has really thrown us off on the ability to trained docs have docs travel and whatnot. So we've been fighting against that so as I've indicated before.
We're making sort of the numbers that we're putting up but they're certainly not on where we'd like to because you know prior to Covid, we would have expected frankly.
Bullish numbers.
For.
So having said that I still think we will be able to deliver some pretty good comparable growth on on hip but.
We still see a challenge to get training, we'd like to have more people train them and we are working on that.
But the key for US is building out that portfolio as I said in my remarks.
We're actively working on additional stems additional software enhancements and whatnot that will continue to provide a tailwind to that product segment. We're committed to hip. So we should we should see growth in that there'll probably be some you know some quarters that are better than others, but yes.
It's been a nice source of growth for Samir and as you just recognized in the last few.
Quarters, and it's going to be part of our product portfolio going forward.
Great. Thank you so much guidance.
I'm showing no further questions in queue at this time ladies.
Thank you operator.
Just say some of the other investor call, we know that a couple of analysts.
Had conflicts because of a number of other calls on 1 of them actually has.
Illness. So.
I don't see any other questions. So I think it's okay to end it now.
Okay.
Okay.
Ladies and gentlemen, this concludes today's conference call.
Thank you for participating you may now disconnect.
Okay.
Okay.
Yes.
[music].
Okay.
Okay.
Okay.
Net.
Sure.
Yes.
[music] line.
Yes.
Yes.
Okay.
Mark.
Net income.
[music].
Mark.
Yes.
Okay.
[music].
Okay.
[music].
So for us.
Sure.
No.
Okay.
Yes.
[music].
Right.