Q4 2021 Conformis Inc Earnings Call
Okay.
Good afternoon, and welcome to the fourth quarter and full year 2021 earnings conference call for Conforming Inc.
My name is Justin 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'll be a question and answer session.
I would like to remind you that this call will include forward looking statements within the meaning of the federal Securities Law, which are made pursuant to the safe Harbor provisions of the private Securities Litigation Reform Act of $19 95 any.
Any statements made during this call that are not statements of historical facts should be considered forward looking these.
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.
These discussed in the risk factors section of <unk>.
<unk> public filings 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.
Call will include time sensitive information and is accurate only as of the live broadcast today March 2nd 2022.
I will now turn the call over to Mark Gusty, President and Chief Executive Officer of <unk> format.
Thank you operator, and welcome everyone to our fourth quarter and full year 2021 earnings call with me today is our CFO Bob Hau. We appreciate you joining us.
As for an update on performance.
Since our business update on January six we've continued to execute on our core growth initiatives. While early we are receiving positive feedback on our platinum services program. We continue to make strides with our Disney imprint in limited market release, and we continue to grow our hip business.
From a strategy perspective, conformance has never been positioned better.
With our product lineup of new service offerings, we now have expanded revenue opportunities and a clear path to grow our margins materially over the next few years.
With that being said 2021 proved to be another challenging year for the medical community. We serve the ups and downs caused by Covid variance were further impacted by hospital staffing challenges and supply chain pressures.
Weird Al Conformance state focused all year and achieved a number of key wins in 2021.
We had a new company record for total revenue generating $99 9 million for the year. This was driven by our exceptional performance in protection and monetizing our IP.
While we celebrate this achievement, we're not satisfied for those who have been following our progress over the past few years, you know that product revenue is how we measure our business our product revenue in 2021 was roughly what it was in 2020 this was equally rewarding and frustrating.
Rewarding in a sense, we commenced a limited market release with both our <unk> knee system and our.
Partnership with Stryker frustrating and that we had to do this in the face of COVID-19 related headwinds, causing instability with elective procedures and staffing shortages at hospitals.
I'm Gonna increases have declined substantially over the past few weeks, which is a welcome trend, although we have not yet seen a substantial change in the headwinds. We are facing we do believe clinic visits will improve throughout the year with a corresponding increase in elective procedures right now we do not anticipate nor can we predict any additional variance that would have meaningful.
Impact on our business and we still believe that as elective procedures return to more normal level, we will see it.
Improved recovery.
Although we continue to face headwinds we are confident in our strategy I'd like to share some highlights from those aspects, which had the most activity in the past quarter.
The most significant activity was devoted to the final preparation of the ACA and the actual January six launch of our platinum services program.
This was a tremendous accomplishment by our entire organization. This program will allow facilities to offer fully personal lines knee system as a deluxe upgrades to their patients.
At its core we believe this program increases access and choice to a broader patient population Medicare and commercial payers permit patients to pay out of pocket for non covered deluxe services, just as patients can pay extra for a private hospital bed or for premium intraocular lens product platinum services brings a first of its kind.
Premium pricing structure towards the peaks, where medical facilities can charge patients in out of pocket fee for their upgrade which creates a new and incremental revenue stream for the facility.
While early the program introduction has gone well, we're onboarding a current hospital and ASC facilities, and we are attracting interest from new customers across the country.
Feedback remains consistent with our market research confirms that patients are looking for greater say in their care and are willing to pay the out of pocket premium to fully personalize their implant.
We also had solid progress advancing our Brittany Alright, then the Britney system combines the benefits of our personalized solutions with the convenience and flexibility in the off the shelf system. We believe represents a significant advancement over standard off the shelf knee systems. Since it includes several of the features of our personalized knee system.
We see this filling the void between the crowd and off the shelf category and a fully personalized category, where we are the only player.
We recently achieved an important milestone as we successfully completed our 100 million per procedure interestingly, 45% of surgeon users are competitive meaning those surgeons are new the conformance, we acknowledged the need to expand our surgeon users and we believe the product benefits of improved along with the economic and efficiency benefits of our surgery in the box.
Model provide a significant market share opportunity throughout the limited market release, the clinical feedback has been strong during the fourth quarter and early part of the first quarter Surgeons completed a questionnaire and really the 100% of the imprint cases is either four or five star experience based on a number of criteria, including AP and M O.
And to be a bone coverage.
Maybe a new surgeon users have rated the femoral fit significantly better than the competitive system. They use which is excellent news and confirms our excitement about the superior quality of the product design, we remain on track for <unk> transition to a full market release.
Lastly, our hip business at 8% revenue growth for the quarter and 19% growth for the year, which is particularly pleasing since we still have a limited product portfolio and likely replacements hip procedures are very susceptible to deferral is an elective procedure. In addition, kogan has resulted in less new product Trialing, which is an important requisite for growth since we are.
Relatively new in the hip space.
Continued focus on the training and education of the growing group of surgeons, who use our hip implants like her knees or hips offers inc. Leverages unique delivery model to provide customers, an efficient and economic benefit solution.
In addition, we made progress on our <unk> primary hip stem this will be our second stem and we remain on track for a mid 2020 to launch a carrier will be assure style model conducive to the popular direct anterior approach, we believe having a broader portfolio is important for us to attract new surgeons to conformance.
Now I'd like to shift gears and highlight two recent achievements reinforcing the compelling clinical success of our personalized knee implants first the orthopedic data evaluation panel in the United Kingdom, and independent positively commonly referred to as Oda where did the performance side total CRT D replacement system, seven eight rating, which reflects seven years with <unk>.
<unk> data as reported in the U K 's National Joint Registry, where the yen Jr.
<unk> is one of the most respected registries in orthopedics. So this clinical performance as reported is a fantastic independent validation of the quality of the conformance personalized knee design.
The other clinical win and perhaps even more significant was the recent publication in J P. J S reviews really journal for the publishers of the journal of bone and joint surgery.
This study looked at patients that had a fully personalized conformance implant in one knee and off the shelf implant and the other knee. The authors reported that 72% of patients for further performance knee only 6% of patients for further off the shelf knee and 22% were neutral on preference as the authors noted patients to this study with bilateral.
The joint replacement showed an overall preference for customized total knee replacement.
We believe both these studies will be of particular interest to patients concerning upgraded through our platinum services program.
As you know the overall environment has been everything but predictable we continue to believe hospitals in Acs or turning to normalized elective procedures. Both in the U S and internationally at some point in 2022. However, our plan will assume we operate in a similar environment that we've seen in the past six to eight quarters until we see a sustained improvement in our scan acts.
<unk> and procedure bookings.
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.
I'll start with a walk through of our financial highlights and then close with a few thoughts on our outlook.
We reported total revenue of $15 4 million in the fourth quarter, which is down 8% from the fourth quarter of 2020 on both a reported and constant currency basis.
For the year as Mark mentioned, we hit an all time record with $999 $9 million.
Product revenue was $15 3 million for the fourth quarter, which was also down 8% from the fourth quarter of 2020 on both a reported and constant currency basis.
For the year, our product revenue was $58 3 million, which is roughly flat to 2020.
Within product revenue sales of our conformance hip system were approximately 700000 up 8% compared to last year's fourth quarter.
For the year, our hip business grew 19%.
2000 $21 million to $3 million.
We expect our hip growth rates to accelerate in the second half of the year as we expand our product portfolio and trialing by surgeons resumed in earnest since it was slowed considerably during COVID-19 .
Our royalty revenue for the fourth quarter was 146000, and a record $41 5 million for the year, which included several nonrecurring, but significant dollar value items relating to protecting and monetizing our IP.
Our recurring licensing revenue is expected to be approximately 125000 per quarter.
Our product gross margin was 38.0% in the fourth quarter and was adversely effected by primarily two items.
The first was an increase in our cancel case inventory reserve, we have seen an increase in the aging of cases that had been postponed but not yet rescheduled as well as the lower than estimated conversion rate of these cases into revenue.
They canceled case inventory reserve is associated with fully manufactured implant kits for surgeries that were postponed at this point of future surgery date is yet to be scheduled.
These unscheduled surgeries can still occur and we continue to work with the health care facilities to get these back on the calendar.
The second item is that over the past few quarters, we've experienced an increased impact from a tough labor market combined with Covid related absenteeism.
This isn't has negatively affected our manufacturing capacity and efficiency and resulted in higher scrap shipment delays and a temporary increase in our delivery lead times.
While there are many advantages to our just in time manufacturing model. It can work against us when our manufacturing facilities are not operating at the right capacity and efficiency levels.
To address these challenges we've invested in recruiting new team members focused on retaining our talented operators and increased our focus on training to get new hires up to speed faster.
For the full year product gross margin was 41, 4%.
Like many other companies, we continue to face margin headwinds from higher material labor and other manufacturing costs. In addition, we have felt the impact of higher cancel case inventory expense lower sales volume and a reduction in selling price.
Until the medical facility environment Normalizes, we are operating closer to our target capacity and efficiency levels. We expect our gross margin rates to remain in the high 30 to low forty's. However.
However, as the environment improves we should be able to ramp our gross margins back to the mid forty's.
Longer term, we expect our gross margin to increase meaningfully driven by growth of our implant products, which is targeted to have gross margins in the low seventies at scale and our platinum services, which is targeted in the low sixty's at scale.
Total operating expenses for the fourth quarter fourth quarter were $19 3 million, which reflects the investment we're making in sales and marketing and R&D.
It also reflects the planned higher G&A related to investments in professional fees to protect our IP.
G&A was also impacted by higher freight expense as we relied more heavily on expedited shipping methods as a result of our manufacturing capacity challenges.
In 2021, we finished the year with $68 7 million of total operating expenses. This includes the planned investments we made in the second half of the year and was in line with our previous guidance.
We continue to closely manage our expense structure and have focused the majority of our investments towards supporting our growth plan.
For 2022, we expect operating expenses to be between 75, and $81 million, which reflects continuation of our planned investment to drive our growth as well as associated variable expense increases as a result of this growth.
I'll walk through how 2022 compared to 2021 and highlight a few key areas driving the year over year increases.
From a high level like almost all companies, we're facing a tough labor market.
Turnover is higher than normal in finding qualified talent is taking much longer and is more expensive.
We have addressed this by adjusting compensation for our workforce to align with current market trends. This impacts all operating expense categories to an extent.
For sales and marketing, we had $24 9 million in 2021.
We anticipate sales and marketing expenses to be between 29 and $32 million in fiscal year 2022.
At the high end of this range about half of the increase is related to variable costs associated with the revenue growth and half is related to the continuation of planned investments that we started in the second half of 2021 to support <unk> and other product introductions and the launch of platinum services program.
For R&D, we had $14 8 million in 2021 for 2022, we expect R&D to be between 16 and $17 million.
This increase is to continue to drive our priority products and our development pipeline at AI technologies to enhance our CAD process and support our regulatory efforts to transition to European Union medical device regulations.
Finally for G&A, we had 29 from several million dollars in 2021.
For 2022, we expect G&A to be between 30% and $32 million.
The increase is primarily driven by higher compensation expense increased freight costs and additional investments support it initiatives.
Moving to our bottom line performance, we generated a net loss of $16 <unk> million dollars in the quarter or <unk> <unk> per share.
This included foreign currency exchange loss of 865000 compared to foreign currency exchange income of $1 7 million in the same period last year.
Interest expense was $1 7 million compared to <unk> 6 million in the same period last year.
The increase was due to $1 1 million of expense related to the extinguishment of debt recognized as a result of our debt refinancing.
Our balance sheet remains strong as we had cash and cash equivalents of $100 6 million at the end of the fourth quarter.
This included a $15 5 million of license and royalty payments I mentioned last quarter that we received in October .
One balance sheet item to note is inventory, we expect to continue to build our inventory of imprint needs as well as at Cara hit over the coming quarters to support our product launch cadence.
As noted earlier, we refinanced our credit facility in November .
This new $21 million facility extends the term until 2026 has a three year interest only period, a reduced interest rate and includes more favorable covenants.
Lastly, I would like to provide some thoughts on our outlook.
Based on our performance through February and our forecast for March we expect Q1 product revenue to be between $13 5 million to $14 5 million.
As compared to the first quarter of 2021, which was $13 7 million.
Our Q1 guidance reflects the forecasted impact from continued disruption of electric procedures caused by omicron variant.
GAAP insurers in the medical facilities and our own manufacturing capacity challenges.
With that Mark and I are happy to take your questions.
And thank you as a reminder to ask a question you will need to press star one on your telephone to withdraw your question press. The palanquin. Please standby we compile the Q&A roster.
And our first question comes from Kyle Rose from Canaccord.
Your line is now open.
Great. Thank you for taking the questions. Just wondering if we could kind of walk through your expectations, maybe beyond the Q1, just with respect to all the moving pieces you have on the revenue line this year.
When we think about new striker and that relationship rolling out as well as the combination of a full launch from.
The platinum services as well as in Brent can you kind of help us understand the puts and takes of what youre thinking for the full year number.
Hey, Mark.
And I'll, let Bob have a chance to comment.
Comment, but I think look.
We're looking at is.
Sequential quarter over quarter improvement on the topline.
And that'll be through continued launch of our <unk> and our.
Platinum services program I think in the back half has benefited a little more from the launch of the hip stem So hipple sort of continued.
Contributing to that growth a little more in the back half.
And Stryker is in there again as I said before we're not really going to comment to meaningfully on that are respectful relationship but.
It's showing.
Low lower than maybe I personally would like but continued growth to lower actual sales, but continued sales each month, I mean like us with our.
Launches and stuff the industry, which strikes me as a part of it is impacted by.
You know the omicron and stuff in January and kind of being closed so for instance.
No person, we couldnt have a sales meeting I think other companies got affected by that the ability to train sales force launch new products have been impacted so a lot of those plans for 'twenty two that companies like the launch in Q1, I've sort of been pushed out later in the year. So I think we will.
We see some continued growth from that but but the thematic Lee what we're looking for is you know.
Sequential quarter core growth improvement throughout 2010, right. Okay, yes, the only thing I would add I think is obviously, there's an assumption we had signaled a range of 60 to 70 on our <unk>.
January six call 60 represents if the market doesn't really improve that kind of a down case scenario 70, obviously.
Assumes improved so obviously sequential improvement would be benefited by an improvement in your overall elective procedure market, yes, absolutely.
Okay.
Yes, and then just one more on my end could you just talk about maybe breakdown. The gross margin headwinds that you saw in the Q4 I mean, how much of that is royalty reserve versus how much of that is coming from.
Input costs and capacity constraints, just really trying to understand.
Those two pieces and with respect to how gross margins are going to shake out for the full year, yeah, Yeah, and again I'll, let Bob kept some more detail, but theres no doubt as.
He said in the prepared remarks, there was some one off drops stuff I mean cancel cases as you might imagine this environment are higher than we've typically run. So we decided to go ahead and make for that provision in Q4.
And we're going to keep looking at that obviously throughout 'twenty two there's no doubt that labor input as Bob partner has gotten higher.
And with turnover.
It's a challenge on that so.
That's impacted us some small things from raw materials.
I don't think its.
Been crazy, but we're seeing and we're seeing some of that continue to come through and that's a challenge for all medical Med Tech companies and so we're we're bearing some of that as well.
I can tell you first quarter.
22, right we're not.
I'll, let Bob talk about but there's no doubt that January was a tough month. So we're seeing some sequential improvement through February we're hoping that March holds up January was a tough month and it was a tough month all around not only on the revenue line, but as you might imagine that that impacted efficiencies.
Efficiencies, because we had a ton of absenteeism.
Late December and all through January .
Due to our manufacturing sales force Workforces up here in the New England area, primarily and we got really really hit hard with omnicom. So the good news is people got very healthy they're able to come back and I'm pleased to say on that but when you see the kind of absenteeism, we experienced its hard to run an efficient plant.
So so that was a challenge for us, but we should see some sequential improvement in gross margin as well not only through topline improving but also through efficiency, improving but not at all.
Yes, I mean, just specifically on the question on Q4 and bridging it I mean, I would say that cancel case adjustment.
It's probably about a third of the head and without that we probably would've been in the low low forty's, which is roughly where we were thinking outside of that you probably have.
Third Thats do you do efficiencies a little tricky to get the exact number on that as you can imagine and then there's probably another 2030% that's inputs, whether it's labor or whether it's raw materials.
That's probably directionally Kyle.
And the mezzanine and Theres, a little bit of price, but that's not not the biggest driver.
Okay.
Yes.
Thank you.
Thanks Kyle.
Thank you.
And our next question comes from Steven Lichtman from Oppenheimer. Your line is now open.
Thank you hi, guys.
Wanted to start off with with <unk>.
Great data point on the competitive surgeon conversion that 45%.
I was wondering also what youre seeing in terms of the.
Location of these procedures are most of them know AFC.
And what is your thought in terms of where the mix of AFC versus hospital will be for in cranes that you look out over the next couple of years.
Okay.
Steve.
I will tell you I don't want to put a number on it because I don't want to be wrong, and we are looking at that and we're looking at.
Essentially providing more color on that for you guys as we go through the year I mean, it's a little early.
But I will say, it's primarily ASC, so a lot of ASC.
I'm not going to say, there's not any in the hospital because theres some but.
Without giving you exact number.
It's a lot of ASC and it's a great great question I want to get too but.
That's one of the reasons why.
We're in a challenging time and there's a lot of things buffeting us, but we're really excited about our strategy because we're having a lot of productive conversations.
Within print two four.
ASC utilization, which is what we targeted so we're really pleased about how that is sinking in.
Great answer.
Mhm services based on what you're seeing so far do you anticipate the.
The whole custom program to be converted to platinum.
Remember I think Thats when you would.
Targeted before.
Yes, that's still our plan I'm not sure it'd be the whole cost of the program, but I think what you mean, which is right is the only way to access a fully personalized me will be through the platinum services program starting in September now to be clear.
That between now and then it's really only our existing users that were transitioning starting as we speak you know new new customers, which we're getting with imprint new customers only can get to.
To the fully custom product grew platinum services, but.
But yes by September that'll be the only way to get a fully custom implant from conformance.
Great last question.
Thanks, Mark and then on the new primary hip stem in mid 'twenty, two should I assume that that's going to be a limited launch in the back half and that the sort of the full benefits.
The portfolio on him.
We should really be targeting for 2023 or will that be.
More of a full launch in the back half yeah, Yeah, that's pretty much our cadence.
Would hopefully the limited release will go well and we will only be in limited release for for a couple of quarters and then we will get close to a full year benefit that would be the plan in 'twenty three.
That's the way to think about it.
But as you know our numbers are smaller with our hip franchises. So even in limited release. If again, you don't know until you there, but it should be able to incrementally drive growth for us because we've got a small base were working off of even in limited release okay.
Got it thanks Mark.
Thank you.
And our next question comes from Josh Jennings from Cowen.
Your line is now open.
Hi, good afternoon. Thanks for taking the questions I was hoping to just make sure I was clear on the full year guidance and just that you are formally reiterating.
Got that $60 million to $70 million today, sorry, I just didn't see in the press release or in the formal remarks.
I think you answered it in one of the questions that that is still in place.
Yes, I mean, that's yes.
I think the way I would say it is the answer is yes, and if we saw a need to say something differently, we would tell them yourselves.
Got.
It's our it's our expectations for the full year haven't changed.
Yes.
No.
I want to make sure I wasn't clear on that and then second.
Just thinking about the hikes in and labor costs.
Does that pertinent to the sales force and if so is this an opportunity where you can spend a little bit more to pluck off some talent or on the other hand are you seeing any pressure for reps, leaving for greener pastures, if you will.
Is there just an overall kind of sales rep hops.
Hopscotch going on and <unk> across the industry.
Well, that's a really interesting question, Josh I haven't sort of got it that way. So when we referred to this and what we're experiencing is is really our employee workforce our W. Two workforce.
No most most not all but most of our sales reps are commissioned agents and we're not seeing losses, there through that or anything around that as a matter of fact, I will tell you and it's one of the statistics will look at but.
We led by our commercial team, we're making changes in our agent structure, where we're and our leadership team. They are doing a great job, we're seeing a lot of interests from new agents come into performance because the input and platform services story.
Is attracting them so.
I think we're going to you know.
We're going to plan to be adding significantly to our sales force and I'll probably talk through some of those metrics as we as we have something to report in Q1 at our Q1 earnings call that but Thats. Our goal I can say publicly like it's always been our goal, but it's been hard it's been hard during COVID-19 .
To do that 2020 was basically a last year in 2020 was a little challenging and we havent really gotten into the launch of important but now that it's out there people are seeing that it's real we're delivering on it they are seeing the story they understand the ASC strategy and Thats gaining traction that's the best word I can say is it's getting traction.
And good agents in orthopedics, if nothing else the good sniffing out an opportunity to make money and that gets through you know a good story to sell at a good product to represent and Thats, what we have within printing plant in services.
Okay.
Great and just one last follow up just in terms of the your expectations for recovery in the U S versus Europe .
Any any difference there in terms of the pacing and the cadence of what Youre seeing so far in Q1, thanks a lot.
Yeah, I'll, let Bob talk about that I think he's a little closer but in general Europe is still a challenge for us as a company because number one where we're lacking.
We are even more limited in our critical mass and support.
No.
The challenge we have is is still if you think about our so we don't have any plans to launch it at this point internationally, our knee portfolio is challenged as always through reimbursement challenges and pricing and other stuff and the MTR regulation has continued to be a big headwind that we have.
To get through and represent a risk and where we want to go as we'd like to get to in print as the main product over there, we do see except for limited opportunities in certain markets.
We don't see the same opportunity that we have in the U S with platinum services.
So while were.
While we're thinking about adding distribution in Japan, and then you know Australia has gone in some others. There's just still risk for us as we think about that in the recovery frankly.
And then I don't believe is going to be as pronounced as much because our biggest revenue sources still Germany and Germany still.
Is just the reimbursement drags from us on on that.
Because all we have is the fully personalized revenue and that's what they're.
Banging on so it's a challenge for US having said that it's become almost to the point, Josh where it's meaningful but it's fairly more than 10% of our revenue at this point, where it was high right.
<unk>.
We're right about the timing around that effort, so give or take a few points. So it's it is continues to be.
To be challenging for us, but we continue to two two.
To push at some of the new countries that we want to watch so yes, I mean market boom you know all the points I mean, we don't have the growth drivers overseas that we do in the U S. But we do have some arrangements like Australia for instance, which we are hopeful and we want to see it but we're seeing are prices were starting to see it but where I would say for next year take a little.
More conservative.
Hopefully procedures will benefit like they have in the U S with <unk>.
You know like the procedure market, but.
They don't have the growth drivers that we and I think I mean, we don't report out I don't believe we're a country by country, but the issue is the issue is even though we get certain growths in some of the smaller companies and Thats helpful. Germany has been such a big portion of the international revenue line. The O U S revenue line that is Germany struggled.
It's you know as you know John .
Josh because you've followed the company I mean, I've been very transparent about it as a continued challenge for us.
Struggling for Covid, even you've been hurt more.
Okay.
Understood. Thanks, gentlemen.
Thank you Josh I appreciate it.
And operator any more questions.
I am showing no further questions I would now like to turn the call back over to Mark Augusta for closing remarks.
Thank you operator, and once again, thank you everyone for participating today, we have a solid strategy and we're focused on executing it we continue to believe our move to platinum services program and the <unk> system focused on the afcs.
Is the right thing to do and it really reinforces our unique and differentiated portfolio.
Most importantly, it's allowing us to implement a disruptive pricing model to arthroplasty.
The key insight that.
Focus on and we're excited about so.
We have our leadership team I want to thank our entire employee base for doing their part.
To help our surgeons do business easier and help our patients continue to.
Game paint.
Pain free lives I mean, it has been tough at the close of the year and in January .
All of our employees are making a difference, making a difference with our surgeon patients and patients we're going to be participating in several healthcare investor conferences over the coming months. So we look forward to seeing our community there and talking more about the company. Thank you for your interest and have a great evening.
Thank you. This concludes today's conference call.
Thank you for participating you may now disconnect.
Okay.
Yes.
[music] economy.
Yes.