Q3 2021 Conformis Inc Earnings Call
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My name is Telus and I will be your conference operator today.
All lines have been placed on mute to prevent any background noise.
After management's remarks, there will be a question and answer session.
We begin I would like to remind you that this call will include forward looking statements within the meaning of federal Securities law.
And are made pursuant to the safe Harbor provisions of the private Securities Litigation Reform Act of 1995.
Any statements made during this call that are not.
Not statements of historical facts should be considered forward looking.
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.
<unk> discussed in the risk factors section of conformance public filings with the U S Securities and Exchange Commission.
You should not place undue reliance on these forward looking statements conformance disclaims any obligation except as required by law.
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 November 3rd 2021.
I will now turn the call over to Mark I guess, the President and Chief Executive Officer of Conformance.
Thank you, Phil and welcome everyone to our third quarter earnings call.
With me today is our CFO Bob Howe.
Appreciate you joining us for an update on performance.
We're pleased with the progress we made against our stated growth strategy in the third quarter, we had several wins on important initiatives that I'd like to discuss.
Regarding your identity imprint knee system, we're off to a nice start with our limited market release.
The first procedures were completed by several surgeons and all met our high expectations are.
Our in Britney was designed to integrate the benefits of our personalized based solution with the convenience and flexibility of an off the shelf system.
This allows us to deliver needs faster and a lower cost while maintaining the unique surgery in a box delivery model that surgeons prefer.
While we expect our and Britney to be used at hospital settings believed that the unique value proposition imprint offers will be particularly attractive to ambulatory surgery centers.
Notwithstanding disruptions caused by COVID-19, and the Delta Barry we've been pleased with the ASC interest we have received interim Brittany since FDA clearance and Matt.
We were also pleased to complete the first procedures under the limited market release specific to our Stryker partnership.
Our patient specific instrumentation is being used in conjunction with strikers popular travel on me.
For those following us for a while you know this partnership is a great Testament to our extensive knowhow related to patient specific instrumentation in a capital light delivery model.
We're working with Stryker on a regular basis to plan and execute on the supply levels needed for full commercial release.
With me in Brittany, and Stryker Si projects, both in limited market release.
R&D team has turned their focus to delivering in the next two critical projects for our company.
The first is our cement less knee.
Last quarter, we mentioned that we were evaluating the application of some Atlas technology to our imprint knee system given the initial feedback from surgeons.
Following our evaluation, we decided to play some Atlas technology first store in print system, and then to a fully personalized solution identity.
Currently expect a limited market release for some Atlas in the fourth quarter of 2022.
The second key project is the expansion of our hip portfolio.
We plan to offer additional steps to address specific segments of the hip arthroplasty market that are projected to grow at higher rates over the next several years.
Our second stem, which we expect to add by mid 2022 will be a shorter style model conducive to the popular direct anterior approach.
Nice progress on our hip business to date this quarter notwithstanding we've had a nice ramp of growth in hip revenue since we launched it in the third quarter of 2018, and we expect this to resume in the coming quarters.
Our progress on the products in limited market release, and R&D projects was particularly pleasing given we were once again faced with COVID-19 headwinds due to the delta vary.
As we entered August we expected to see a modest sequential bump in our third quarter revenue as business continued to recover.
This is important since historically, we have seen a seasonal dip in the third quarter.
We believed at the time that we had adequately incorporated the impact of the Delta would.
Would have into our planning.
Over in mid August we began to see a higher than usual drop off with scheduled cases.
That continues for the rest of the quarter as hospitals were once again managing levels of elected procedures.
We do have some visibility into the status of cases that did not take place as originally scheduled.
The vast majority of those cases have either been rescheduled or are in the two to be determined status, which for US is just a temporary hold without a specific rescheduled surgery date.
Typically cases of reschedule them four to six weeks recently that range has been wider as we are seeing up to 20 weeks between the original date reschedule date.
We believe the delays and wider range for rescheduling are related to Covid, 19, and staffing shortages and medical facilities.
We further believe is schedules for both surgeons and patients normalized R. D. V. D cases are likely to become scheduled procedures.
Our current thinking is that hospitals and a seasonable attained normalized elective procedure environment. Both in the U S internationally at some point in 2022.
Clearly this assumes recovery from the Delta variant that no other significant variance present themselves and that staffing levels at hospitals get back to normal levels.
We cannot say exactly when this will happen, which makes planning and forecasting challenging.
That said, we tentatively plan to provide our preliminary thoughts on 2022 in early January.
Let me now turn the call over to Bob for a more detailed financial review of the quarter.
Thank you Mark and good afternoon, everyone.
A fairly straightforward quarter from a financial perspective, I'll jump straight to remedy.
We reported total revenue of $14 $3 million in the third quarter, which was down 12%.
Product revenue was $14 $1 million for the third quarter, which was down 12% year over year on both a reported and constant currency basis.
Mark mentioned earlier, our product revenue was significantly impacted by delta various headwinds in the second half of the quarter.
Sales of our new products with $13 $4 million, representing a decrease of 11% versus 2020 on a reported basis.
Sales of our conformance hip system were approximately $700000 a decrease of 16% versus the third quarter of 2020.
Our hip business still has a small base of surgeons and during the third quarter several of our largest surgeons were notably impacted by the surge in the COVID-19 Delta Vernon.
U S product revenue was $12 4 million, representing a decrease of 12% in the third quarter of 2020.
Rest of World product revenue was $1 $7 million, a decrease of 6% on a reported basis and down 10% on a constant currency basis.
Our royalty revenue for the third quarter was $123000.
As a quick reminder, we had a number of onetime items in the second quarter, which resulted in an all time quarterly high for royalty revenue of $41 million.
This included the final milestone for the development of patient specific instrumentation for Stryker revenue related to the protection of our IP and a small new licensing deal.
Our product gross margin was 42% of revenue in the third quarter, which was flat from the second quarter.
And down 540 basis points from the third quarter of 2020.
This was driven primarily by lower volume increased material labor and other manufacturing costs higher canceled case inventory expense and a reduction in selling price.
Like many other manufacturers, we are experiencing a challenging labor market.
As a resulted in higher than normal employee turnover increased labor costs and temporary manufacturing inefficiencies as we recruit and train new employees.
In the near term, we expect our gross margin rates to be in the low forty's, but growing overtime to anticipated higher overall production volumes and increased revenue contribution from our higher margin products.
Total operating expenses for the third quarter was $17 4 million.
<unk> reflects the modest investments, we are making in sales and marketing and R&D. It also reflects planned higher G&A related to the investment in professional fees, we are making to protect our IP.
We've been extremely successful in winning or settling these cases as evidenced by the over $51 million, we have generated from royalty and license revenue over the past 10 years.
We expect operating expenses for 2021 to end the year relatively consistent to our previous assumptions communicated last quarter.
We anticipate sales and marketing expenses to be between 25 and $26 million.
For fiscal year 2021.
R&D to be between 14, five and $15 5 million.
And G&A to be between 28, 5% and $29 $5 million.
Both sales and marketing and R&D are modestly lower than the projections provided last quarter.
Moving to our bottom line performance, we generated a net loss of $13 $3 million in the quarter or seven cents per share. This included foreign currency exchange loss of $1.0 million compared to foreign currency exchange income of $1 $5 million in the same period last year.
Our balance sheet remains strong as we had cash and cash equivalents of $97 $1 million at the end of the third quarter.
In October we received $15 $5 million related to the license settlement agreements, we resolved and recorded revenue for during the second quarter.
These payments further strengthen our balance sheet and provide the capital needed to execute our growth strategy.
Lastly, I would like to provide some thoughts on our outlook.
Based on our performance through October and our forecast for November and December we expect our total product revenue to be between $15 million to $17 million.
This wider than usual range is due to the unpredictable recovery from the Delta variant.
<unk> impacts from staffing shortages in medical facilities and the uncertainty of rescheduling cases over the coming months.
To the extent, we see a more normal conversion rate of our existing Q4 scheduled surgeries into revenue.
And we experienced the typical seasonal bump we see as patients book procedures before the end of the insurance plan year, we expect to be closer to the high end of the range.
If we do not see any meaningful improvement in electric procedures, we experienced a higher postponement rate of existing scheduled surgeries.
Staffing shortages continue or get worse, we expect to be closer to the low end of our revenue range.
Either way, we expect to grow sequentially from the third quarter.
Our corner that this outlook does not reflect any potential impact due to manufacturing inefficiencies, which may become associated with the difficult labor market and the shipping disruptions that many companies have experienced over recent months.
The good news is that the feedback we're hearing from our surgeons on resuming procedure levels and Ernest is trending positive. So we are optimistic that we are on a path to return to growth as the environment normalizes.
That I will turn the call back over to Mark.
Thank you Bob.
I'd just like to make a couple of closing comments.
First we've been saying all year that 2021 is the transitional and recovery year in the 2022 is where our growth strategy will really begin to see traction.
I still see that as the case our company has worked extremely hard to get all the pieces in place to win in 2022.
How fast the full recovery will take us still a question, but we believe that our preparations to succeed are well on track.
It's an exciting time for performance and we're all aligned behind our new strategy.
In the meantime, like our customers and patients we're looking forward to a normalized operating environment.
And on behalf of our entire company, we wanted to acknowledge the efforts and sacrifices of every health care professional who is helping us navigate through the continued effects of COVID-19 their work is inspiring.
With that Bob and I are happy to take your questions. Thank you.
Thank you.
As a reminder to ask a question you will need to press star one on your telephone to withdraw your question. Please press the pound key please standby, while we compile the Q&A roster.
Our first question comes from Josh Jennings with Cowen. Your line is now open.
Hi, This is Eric on for Josh Thanks for taking the question.
Like to focus just on your guidance for <unk> and what you're baking in in terms of Covid disruption.
It looks like we may be finally returned to normal as vaccination rates continuing to continue to improve.
Just thinking about the $15 million to $17 million range does the top end of this range still suggest some level of COVID-19 disruption or if we were at that $17 million figures that.
Virtually no COVID-19 impact later this year any detail there would be helpful. Thank you.
Eric This is Marc Thank you I'll comment and then Bob can.
His color I think obviously the top end of the range would be say a more muted impact.
Really a manageable sort of situation with staffing shortages from our customers as well as there is an assumption.
Our customers being able to reschedule some of the deferred cases at a higher rate ended the year.
So that would that's what would get us to that higher end of the range am I missing anything else Bob.
Alright, I think thats accurate, it's a combination of procedures.
As you know we have visibility to schedule cases, so it's really converting those at a more normal rate.
Would get us closer to that top end of the range.
That's helpful. Thank you and then international.
International expansion remains of untapped opportunity for you guys here.
We're making some great progress with China, I think possibly seeing the first conformance procedures. Later this year are there any other markets that you would highlight that we could see conformance, possibly entering.
Probably not later this year, but maybe in 2022 and then maybe just if we could get an update on the progress in China that would be great as well thanks for the questions.
No we don't have a specific update on China Eric.
We're really trying to keep expectations somewhat muted because it's early and we're figuring that out frankly.
Frankly.
A lot of this is made difficult more difficult by the pandemic.
Current requirements in each market, but I.
I can't tell you.
Australia is a target for us.
We just received some approvals around her.
Our knee variations or cruciate retaining your CRD.
Variation, that's going to help with reimbursement. So we would expect to see some better performance out of there.
Remains a challenge for us internationally because of the reimbursement headwinds that we've suffered all along in Germany and frankly.
The medical necessity approval hoops that they required us to go through.
I'll tell you the one area that I think we're seeing.
Some slight improvements, it's not a new market, but I'll comment on it and I hope it doesn't.
No.
Again have more pandemic challenges, but.
Starting to slowly see some improvements in the U K, we have an incredible incredible back order on their list as you know in our model is helpful for that we've seen some stability in those customers as those medical facilities have been able to.
Try to ramp up the demand so.
Going forward I'm, a little more bullish on.
On those markets U K and Australia.
And I'll just leave it at that but Youre right, we need to do better there. It's just been it's been really challenging.
Great. Thanks again.
Thank you as a reminder, Thats star one to ask a question. Our next question comes from the line of Steven Lichtman with Oppenheimer <unk> co you.
You may begin.
Hi, guys. This is a mere in for Steve.
My first question was can you guys talk about any initial feedback you've gotten from the limited launch of identity imprint.
And I guess in particular, how it fits in the Acs study.
Thank you.
Yes, I can and thanks for that Amir and Thats.
Certainly one of the highlights for us.
We're pretty excited about the initial feedback that we've gotten.
We're also still in limited release, we're pretty excited about.
The percentage of new users or new cases, if you will that we booked in the users to take it out so.
General they found the technique.
Similar type total with the same principles if you will.
The shelf, especially as it relates to positioning of the JV and whatnot, they really like the surgery in the box model.
And all the things I've always liked about our I view in our jig the jigs.
As you would expect are working and are accurate just like they are.
In our fully custom model.
But probably the biggest thing that is maybe not appreciated is our ability to really predict the sizing I mean, the whole secret sauce in here, which will be more about when we go on.
Market releases, how we used our data to design the sizing of the implants.
Three dimensional design and sizing and then converted that into our sizing software, which is all FDA cleared and allows us to really accurately provide surgeon.
<unk> femoral and to be a component.
That is fast and then the alignment to execute that.
One of the things we're exploring in our early market release was.
Would there be a condition.
Conditions are scenarios, where we would need surging too.
To improve trade offs, if you will that they.
Necessarily have to make in the off the shelf world because there is different.
There's just it's there.
Sit more poorly if you will our quarterly compare dark and lit.
I'm trying to make it that is going exceedingly well like as we've gone through these first cases are sizing is really accurate and there's actually very little.
Question about the right the right thermal and to be a combination.
With our lineup.
It's early days, but we've planned.
Well over 50 of these in the first 60 days or so and we're really excited about how the products.
Fitting and how our software is working so more to come the goal is to get through the end of the year and make sure all signals will go but right now we're pretty excited about the early returns.
That's great that's great and just one more follow up from Covid.
I guess I guess, you guys sort of spoke about it in the prepared remarks, but I guess what are your latest thoughts I guess, if you could just comment a bit more in terms of the timing for when these previously.
<unk> procedures could be an incremental tailwind for you guys any color on that would be great.
Well I think as you've seen in the prepared remarks, it's one of the reasons why our a range is a little larger here.
It's just really hard Amir.
You know theres no predictable cadence with Covid.
Disruption of operations and I'm not trying to.
You know.
Whatever.
What the right word is I'm, just again I'm trying to be as transparent and provide you guys as much color as I can if I knew I would tell you, but the models, we had and the amount of typical reschedule the drop off that occurs normally has gone out the window.
And handle.
A lot of that is due to just the capacity of the medical facilities too.
To staff up and to reschedule and really worked through the schedule and it's really hard so in the past.
I guess, the only way I can look at this in the past.
The ability to reschedule.
With easier and it was just there was more capacity so surgeons could do that but they sort of.
That limited capacity you have there is uncertainty and so we're not seeing them get reset schedule. This quicker into the queue and thats the real challenge for us So it's really hard for us to predict.
Are some of these cases is going to come into Q4 are they going to end up in Q Q1 of 'twenty. Two so you know as we realized that will provide more color on it but.
It's one of the reasons why the range is a little.
Little wider than normal as well as just our concerned about staffing and impacts in general in Q4, Bob is there anything else I'm missing there, but I think that sort of the gist of it right.
No I think you nailed it markets that suggests that.
Predictability of the traditional model we had in the past has been thrown for a loop with with Covid.
But you know as we spin out of this we should see those start to schedule. It just challenges they've been unpredictable and they have been taking a lot longer to get them on the back on the books because everything that's been going on.
Yeah.
Okay.
Thank you. Thank you guys.
Thank you Amir.
Thank you and at this time I'm showing no further questions doesn't acute.
I'd like to hand, the call back over to Mr. Mark <unk> for any closing effects.
No. Thank you operator.
I Hope you can tell we are pleased with the progress we're making at our strategy. We really look forward to closing out the year on a good note and heading into 'twenty two.
Some tailwind hopefully.
And in the form of normalized you stabilized the operations on behalf of our customers, but most importantly with getting into full market release on the critical projects. We've launched we're obviously really excited about what we've done in very short amount of time with our important product and really like the value proposition. So we will be providing more color on that.
As time moves on.
<unk>. Please reach out if anyone has any questions. We thank you for joining us today and everyone. Please have a great evening.
This concludes today's conference call. Thank you for your participation you may now disconnect everyone have a wonderful day.
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