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Edited Transcript of CFMS earnings conference call or presentation 31-Jul-19 8:30pm GMT

Q2 2019 Conformis Inc Earnings Call

Bedford Aug 6, 2019 (Thomson StreetEvents) -- Edited Transcript of ConforMIS Inc earnings conference call or presentation Wednesday, July 31, 2019 at 8:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Mark A. Augusti

Conformis, Inc. - CEO, President & Director

* Paul S. Weiner

Conformis, Inc. - CFO & Treasurer

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Conference Call Participants

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* Joshua Thomas Jennings

Cowen and Company, LLC, Research Division - MD and Senior Research Analyst

* Kyle William Rose

Canaccord Genuity Corp., Research Division - Senior Analyst

* Ryan Benjamin Zimmerman

BTIG, LLC, Research Division - Director & Medical Technology Analyst

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Presentation

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Operator [1]

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Good afternoon. My name is May, and I will be your conference operator today. At this time, I would like to welcome everyone to the Conformis Second Quarter 2019 Earnings Conference Call. (Operator Instructions)

Before we begin, I would like to remind you that the management will make 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 1995. Any statements contained in this call that are not statements of historical facts should be considered to be forward-looking statements. All forward-looking statements, including without limitation, statements about Conformis' strategy, future operations, future financial position and results, gross margin, product margin, operating trends, financial guidance, market growth, total revenue and revenue mix by products and geography, the anticipated timing of the limited launch of our hip product offering, the potential impact and advantages of using customized implants, business initiatives and transitions in our commercial operations are based upon current estimates and various assumptions. These statements involve material risks and uncertainties that could cause actual results or events to materially differ from those anticipated or implied by these forward-looking statements, including those discussed in the Risk Factors section of Conformis' public filings with the Securities and Exchange Commission. Accordingly, you should not place undue reliance on these forward-looking statements. While Conformis may elect to update these forward-looking statements at some point in the future, Conformis disclaims any obligation, except as required by law, to update or revise any financial projections and forward-looking statements whether because of new information, future events or otherwise. This conference call contains time-sensitive information and is accurate only as of the live broadcast today, July 31, 2019.

I will now turn the call over to Mark Augusti, the company's President and Chief Executive Officer. Mark?

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Mark A. Augusti, Conformis, Inc. - CEO, President & Director [2]

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Thank you, May, and welcome, everyone, to Conformis' Second Quarter 2019 Earnings Conference Call. With me on the call today is our CFO, Paul Weiner. During the call, Paul and I will share our prepared remarks on a variety of topics, including our second quarter financial and operating performance. Following the prepared remarks, Paul and I look forward to answering your questions. From a commercial perspective, our U.S. business delivered 5% revenue growth, which we believe to be an above-market growth rate. Our international revenue declined 10% on a constant currency basis, which was an improvement over the rates of decline in previous quarters. We believe this improvement is due to results of our two-part strategy to open up new international markets and to work with German surgeons to better document their clinical decisions prior to surgery. The overall revenue growth rate in the second quarter was 3%.

Operationally, we realized the gross margin of 49%, which was in line with our expectations and demonstrating an improvement in gross margin from the prior quarter. As announced previously, we took significant actions in the fourth quarter of 2018 that were intended to optimize sales, marketing and administrative expense to achieve operational efficiencies, sharpen focus on new product development by prioritizing product segments with higher growth opportunities, continue opportunistic international expansion as well as we streamlined personnel to create a more focused organization resulting in a headcount reduction at the time.

I'm pleased to report that for the second quarter 2019 and for the second quarter -- consecutive quarter, these actions resulted in significant expense reductions and there's corresponding reduction in cash utilization. This performance combined with our recent debt financing is consistent with our longer-term plans to manage cash and expenses as we launch our new product platforms.

Let me now turn the call over to Paul for a more detailed financial review. Paul?

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Paul S. Weiner, Conformis, Inc. - CFO & Treasurer [3]

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Thank you, Mark, and thank you all for joining us. We reported second quarter revenue of $19.6 million, representing an increase of 3% of $493,000 year-over-year on a reported basis. Excluding the negative impact of changes in foreign currency exchange rates of $149,000, revenue increased 3% on a constant currency basis. Revenue in the second quarter of 2019 and 2018 includes royalty revenue of $256,000 and $192,000 respectively, related to a patent license agreement.

Second quarter product revenue was $19.3 million, representing an increase of $429,000 or 2% year-over-year on a reported basis and 3% on a constant currency basis. Sales of iTotal PS increased $1.2 million to $7.2 million or 19% year-over-year on a reported basis and 20% on a constant currency basis.

Sales of iTotal CR, iDuo and iUni declined $1.2 million to $11.7 million or 10% year-over-year on a reported basis and 9% on a constant currency basis. iTotal PS represented approximately 37% of total product revenue in the second quarter of 2019 compared to approximately 32% for the same quarter last year. With the limited launch beginning in the third quarter of 2018, Conformis hip system sales were approximately $500,000 in the second quarter of 2019. U.S. product revenue increased $839,000 to $17.2 million or 5% year-over-year. U.S. product revenue was driven by sales of our iTotal PS, which increased 19% year-over-year, offset by a 10% year-over-year decrease in sales of the base business product lines. Second quarter U.S. product revenue represented 89% of total product revenue compared to 86% for the same quarter last year. Rest of World product revenue was $2.1 million, a decrease of $410,000 or 16% year-over-year on a reported basis and 10% on a constant currency basis.

Rest of World product revenue was affected primarily by reimbursement challenges in Germany.

Turning to our view of our results across the rest of the P&L. Second quarter gross margin was 49% of revenue compared to 48% of revenue for the same quarter last year, 100 basis point increase.

The gross margin improvement was driven by cost reductions as a result of vertical integration and manufacturing efficiencies. As we stated during the last 2 earnings calls, we incurred some short-term manufacturing costs during the final stages of offshoring our software-designed manufacturing team to India, which we believe are now resolved. Due to this, we indicated that we expected our gross margin to remain relatively flat from the fourth quarter of 2018 through the first half of 2019 and returned to expanding our gross margin in the second half of the year.

Total operating expenses decreased $4.9 million to $15.5 million or 24% year-over-year. This decrease in expenses was driven primarily by reductions in personnel costs, marketing programs and patent litigation expenses as part of the plan announced at the end of 2018 to reduce cash burn in 2019. Personnel costs in sales and marketing were reduced as a result of the reduction in the number of sales managers, open positions, the conversion of direct reps to independent agents and the reduction of certain marketing programs. Personnel costs in research and development were reduced mainly due to the completion of certain software and product development projects in 2018 and the timing of product development projects in 2019.

Additionally, patent litigation expense was reduced due to the settlement with Smith & Nephew. Net loss was $6.8 million or $0.11 per share compared to net loss of $14.1 million or $0.24 per share for the same period last year.

Net loss per share calculations assume weighted average shares outstanding of 63.3 million shares for the second quarter of 2019 compared to 59.8 million for the same period last year.

Net loss in the second quarter included foreign currency exchange income of $398,000 compared to foreign currency exchange expense of $2.1 million in the same period last year. We had cash and cash equivalents and investments totaling $20.7 million as of June 30, 2019, compared to $23.6 million as of December 31, 2018. We had announced on June 25 that we secured up to $30 million in debt financing and $3 million in equity financing. The debt financing is comprised of a term loan of $20 million of which we netted $3.4 million in additional cash after the payoff of our existing $15 million term loan and related costs and a revolver line of credit for up to $10 million, which we have not borrowed against.

We estimate quarterly interest expense of approximately $575,000 going forward.

Excluding this financing, we were successful in reducing our cash burn during the quarter to $4.2 million versus approximately $9 million to $10 million in each of the quarters last year, excluding last year's financing and patent litigation settlement. Although we are pleased with our first half revenue performance, we are experiencing weakness in orders for the third quarter, including in the United States. Due to this, we are now estimating generally flat year-over-year product revenue growth for the full year.

With that, let me turn the call back over to Mark to add additional color.

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Mark A. Augusti, Conformis, Inc. - CEO, President & Director [4]

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Thank you, Paul. Look, as Paul just mentioned, we now expect a decreased growth for the second half of the year primarily due to denials of coverage from Aetna. Aetna has issued a policy stating that Conformis total knees investigation experimental, we believe that the policy was issued mistakenly in an attempt to limit pain for PSI with standard implants. We have submitted a complete clinical and health economic package set and regarding our knee arthroplasty results. This package includes the letter from AAHKS, the American Association of Hip and Knee Surgeons, supporting coverage of Conformis products and indicating that our products are not investigational, nor experimental. While we cannot predict the ultimate outcome, we should note that we have had success in the past as we've reported previously in working with payers to adjust their policies.

In addition, we anticipate 3 other minor headwinds in the second half, a slowdown of U.S. CR demand in light of the cementless segment growth, continued our U.S. revenue decline due to reimbursement challenges in Germany, although at a slower rate, and moderately less hip revenue as we focus on the full commercial release and the rollout of new features based on the limited market release customer feedback.

As noted in previous calls, we believe the market demand for cementless knees is accelerating at the expense of cemented CR knees. We remain confident that our new product pipeline will address this issue. However, the timing says that we expect pressure on the core cemented CR business throughout the remainder of this year.

Our Conformis Hip System remains in limited market release as we finalize improvements for the system and seek regulatory clearance for those changes. We still anticipate full market release prior to year-end, likely late in Q4. And therefore, as previously stated, we do not expect to see a positive revenue impact from our hip system until 2020. Clearly, the change in sentiment regarding our U.S. business is disappointing. We believe this is a near-term impact that is correctable. We hope to -- we expect that our operational improvements, expense optimizations and refinancing actions we have successfully undertaken will allow us to continue to execute on our commercial strategy moving forward.

With that, I thank you. And we'll open the call, operator, to questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Your first question is from the line of Ryan Zimmerman from BTIG.

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Ryan Benjamin Zimmerman, BTIG, LLC, Research Division - Director & Medical Technology Analyst [2]

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I want you to elaborate on what Aetna is saying to you. Just by our math it's just about $3 million to $4 million in sales in the back half of the year. And what is the mix of denials between the product categories? Is it all PS? Is it all CR? Just maybe help provide a little more color there.

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Mark A. Augusti, Conformis, Inc. - CEO, President & Director [3]

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Yes, Ryan. A great question. This is Mark, and that's the frustrating thing and why we think it is incredibly an incorrect policy. They're actually just denying Conformis. They're not even getting into the product or anything. So as far as our advisors and we're aware, this is first time a payer has ever actually just denied a company by name versus the products. And again, we just think this is a snafu, and it's incorrect. We are aware that they're reviewing the policy this month as we speak. And I'd just reiterate again, we're hoping that we'll see a change or at least get some answer no later than sort of mid-September. But yes, disappointing because it's just Conformis, if you will.

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Ryan Benjamin Zimmerman, BTIG, LLC, Research Division - Director & Medical Technology Analyst [4]

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Okay. Helpful. And then international, you've lapped international comps that have been weak, particularly with reimbursement in Germany. So I'm just curious, are the reimbursement levels in Germany getting worse than they were previously? Or is there something else that's causing kind of the continued deceleration in international business?

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Mark A. Augusti, Conformis, Inc. - CEO, President & Director [5]

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Yes. No. And let me -- and I talked about this before, so I'll just reiterate it again because it is a little convoluted. But this all started if you remember on partials, and that was sort of a different thing because there was a massive change about the reimbursement rate in partials, and that impact was, I'm going of memory here, but I want to say it was about $4 million give or take. And that was one that would annualize out, and we talked through all that. The problem was then if you look at our total business, it wasn't about our reimbursement rate change, Ryan, it was about medical necessity, and frankly, not reimbursing based on medical necessity by the firm called MVR, which is an acronym over in Germany. Yes, around -- excuse me, MVK around -- after the surgery. So that's why we're not really annualizing out. So initially, it was very sporadic. It's gotten a little worse each quarter. It's that -- it's done, but it's lessened and that's why we're seeing the decline, but it's not really an annualizing out. Just a continued sort of construct that the MVK is doing on the medical necessity of our products. And as I said in my comments, we actually are working now with surgeons upfront to demonstrate the medical necessity prior to surgery, and that has had some limited success. So we've kind of slowed this down, if you will. But it's still going to be a headwind in my mind for the foreseeable future.

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Operator [6]

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Your next question is from the line of Josh Jennings from Cowen.

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Joshua Thomas Jennings, Cowen and Company, LLC, Research Division - MD and Senior Research Analyst [7]

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I just had a follow-up on the Aetna issue. It looks as if the policy was reviewed last September and is currently being reviewed again now. I guess why have the denials picked up? Do you have any sense recently versus over the last 9 or 10 months?

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Mark A. Augusti, Conformis, Inc. - CEO, President & Director [8]

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Yes. Josh, so it's a really good question. So as you know, we had a pretty strong Q4 and Q1, and we -- as a medical device manufacturer, we don't have really good visibility to this because this is on the hospital side. And as a result, we didn't really kind of feel it. We -- I'm trying to recalling exactly when the policy first came. It wasn't until after the new year that we sort of became aware of it, if my recollection is right, but -- and we started the process, but we didn't really see an impact on our end, and it's really been in the last sort of 60-or-so days that we've seen kind of this hit. And don't forget we saw this phenomena with Cigna, right? If you recall when this happened and we are able to effect the change, but it takes them a quarter or more to operationalize kind of what their policy is. So they may -- the medical guys may make a policy determination but then operationally each organization is a little different about how they roll it out and how effective they are at actually communicating it. And the only thing I can attribute it to is that it took a little while for them to put the wheels in motion. But then when they did, and as we've seen, like they've gotten pretty good compliance nationally. And the other thing about this is, which is disappointing, is by our math, they are like the third -- by our understanding, they're like the third largest commercial player. So this is a bigger impact to us than it was previously. But again, I want to be confident in that we have a great product performance, a clinical reputation. We've got a dossier that we stand behind that we provided to Aetna. I'd like to believe, though, I can't predict the future that the right decision will be made here in the short term. But at this point, we want to talk about this, and we're going to do the best we can with our advisors to make Aetna aware of this and that it was incorrect. And like I said, we believe it was an incorrect determination that they came to without looking at our dataset because they did not look at any of our actual clinical total replacement publish papers.

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Paul S. Weiner, Conformis, Inc. - CFO & Treasurer [9]

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And they have all the relevant papers behind them now.

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Joshua Thomas Jennings, Cowen and Company, LLC, Research Division - MD and Senior Research Analyst [10]

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Great. And then just a follow-up on that. I mean reading through the document of Aetna's, it doesn't look like they're referencing customized implants as being the iTotal to referencing some other patient-specific instrumentation or other customized implants, which is a little bit confusing. But is that your read as well as that's why you're stating that you think that this is just a confusion on Aetna's part and these policymakers?

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Mark A. Augusti, Conformis, Inc. - CEO, President & Director [11]

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I agree. And then I want to be clear this is our belief. And if you read it just like you have and we've looked at it. There is the [Bill] study, for instance, in sight. It wasn't even a Conformis study, it was a PSI study. It had nothing to do with Conformis. Then one of the studies they represented was a partial knee study. They have nothing to do with total knees. Another one they reference is our color study, which is our study, but it's a health economics study, and it's a positive study and they acknowledge it's the positive study. But they, nevertheless, then come through a convoluted tortuous thing at the end of this broad policy that it's investigational and experimental. And again, we believe it's because they were referring to PSI and not with -- use with standard implants and got confused and really don't understand it. So we're working to correct that and make them aware of our actual iTotal studies and the quality of the work behind that.

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Joshua Thomas Jennings, Cowen and Company, LLC, Research Division - MD and Senior Research Analyst [12]

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And then just it's the only -- their website says the next review for this policy is July 11, so this year, but that's only about 9 months or so after the last review. Historically, they've reviewed between 12 and 18 months. Is the shorter review period driven by your work in terms of getting them to recognize this? Is that your understanding of it?

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Mark A. Augusti, Conformis, Inc. - CEO, President & Director [13]

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No. I wouldn't want to comment on that. The only thing I can comment is we've been told and so we have a belief that they actually are indeed reviewing it. But I'm not going to try to speculate what motivated the review on their behalf. It's within their typical review thing, but they have confirmed through conversations with other third-parties that are working as advisors to us that the review is indeed occurring. So that is good news in our mind that is -- but I'm not going to speculate as to what motivated their review.

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Joshua Thomas Jennings, Cowen and Company, LLC, Research Division - MD and Senior Research Analyst [14]

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Okay. I mean just one last one for me off of the Aetna issue. Just on iHip. Can you just walk us through, again, how we should be thinking about the launch here? I guess, most importantly, how long will the limited launch last? It sounds like through the end of this year. And then can you help us think through the, I guess, more fuller commercial launch in 2020 when that starts and how you expect that rollout to progress. That'll be super helpful just from thinking about that revenue line item. Appreciated.

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Mark A. Augusti, Conformis, Inc. - CEO, President & Director [15]

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Yes. Sure, Josh. And as we've said, all along we target the second half, it's turning out to be late in the second half, but we -- so let me step back. First off, the limited release has been very good for us. We've gotten a lot of good feedback. We have a lot of still enthusiasm and excitement about our product, and our team is really excited for the launch. But we found some really good opportunities to upgrade and do some things as we move forward to full commercial launch. So we made the decision better to do that work, get it right and launch towards the end of the year versus rushing to do it here in the third quarter, plus some of the stuff on the improvements are going to require FDA submittal. We believe it'll be a short review and shouldn't be problematic. But again, no one would ever want to predict what will happen when you're doing a review with the agency. So we have some of those traps to still run, but if all things move forward as predicted -- as projected, we should do our first surgeries in the month of December, and then we would look at a slow ramp-up through 2020, and we're not going to -- we'll give you further color on that, obviously, as we go forward, but you would expect a ramp-up, and you can see what we've done even in limited release. And then we'll think about that. But that's why we've said in the comments that the real opportunity for growth from the hip is more in 2020 and probably moving it towards the back half of 2020 as the ramp accelerates.

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Operator [16]

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Your next question is from the line of Kyle Rose from Canaccord.

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Kyle William Rose, Canaccord Genuity Corp., Research Division - Senior Analyst [17]

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So I'm going to circle back on Aetna here and just follow up. I guess, is it fair to think that the $3 million to $4 million is split -- or not the $3 million to $4 million, but the adjustment to guidance is split over the back half of the year pretty evenly? And then I guess, what I really want to understand is, is the adjustment to guidance only related to Aetna or how much of the adjustment to guidance is specifically related to the change in Aetna reimbursement? I guess I'm just trying to understand, do you have territories and regions that are over indexed to more Aetna customers? So you've just got physicians who are saying, I'm just going to stop doing Conformis overall and then will circle back when this is resolved. I guess maybe a little more color there specifically around what you're seeing from the more effective regions and physicians.

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Mark A. Augusti, Conformis, Inc. - CEO, President & Director [18]

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Right. So Kyle, that's very insightful because this is a point I want to get across. First, I want to remind everybody, look, we've been through this before and we got it done in 2017. Again, I can't predict the future, but I'm confident our clinical data is strong and we'll get to the right answer here. But as I said, in '17, I say again in '19, the problem with this is very unfair. It's unfortunate this has happened, but it does create kind of that annoyance factor with our surgeons. So you can look at Aetna's market share, for instance, and say they're 14% and then you can also say of the commercial payer, right? And then you can say they're more regional in certain areas, which all is true. The problem is if you're a surgeon, you don't really want to be bothered by all this, right? And if we're being singled out, as long as we're still being singled out, if you're a surgeon on the margin, you're probably just going to say, you know what, I'm going to wait until we get this fixed because my office doesn't want to deal with this annoyance and we'll come back. Now we've certainly plenty of surgeons that fight for us and go through surgeon appeals. We've patients that love our technology and fight for us. I know I'm not going to say it's a normal case, but I know of instance where patient has actually been successful on appeal with Aetna. It just creates a big challenge. And unfortunately, I think we've got in this situation through just an incorrect application of what they're trying to do with their medical policies, and we're going to work very hard to get this fixed. But it ends up being a bigger issue beyond even just Aetna thing because it can be an annoyance. But it's not with everybody. Like I said, some patients and some physicians still fight with us. And I can't stress enough, it's hard as device companies, we don't get that payer and reimbursement information. So until we hear from our surgeons and other stuff or we can read stuff online about policy, but until we start to get that, it's very hard to know exactly what's going on. And we're going to work behind the scenes to do things a little differently to get better market intelligence on the front of it because, obviously, we don't want to go through this. But it's disappointing because of all the commercial work we've done over the last 4 to 6 quarters, all the operational stuff we've done, we had a pretty good Q4 and Q1, and our Q2 is pretty good as well. But we now -- looking back now, we can see that probably Q2 could have potentially been better, if not for this policy change. And it's clear that Aetna in the last however many months has institutionalized this, and it's created this headwind, and that's why we've issued the guidance that we have. And hopefully, we'll get this, like I said, resolved here through this -- the review that's coming up.

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Kyle William Rose, Canaccord Genuity Corp., Research Division - Senior Analyst [19]

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Okay. And then just 2 follow-ups there. I guess when you think about the change in guidance, to your point, you did have a pretty good Q1. Maybe you left a little bit on the table in Q2 if Aetna was kind of starting to impact a little bit. But how did you think about contemplating guidance for the second half of the year? Specifically, what assumptions did you pull in? I mean did you look at the contribution of Aetna historically and to just strip out all revenues? I guess I'm just trying to understand what makes you comfortable that your flat year-over-year is the right number? And then #2 is, any impact that the change in the revenues they're going to have as far as gross margin guidance and burn guidance for the year?

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Paul S. Weiner, Conformis, Inc. - CFO & Treasurer [20]

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Okay. Thanks, Kyle, for the question. So as you know, we do have visibility, let's say, 2 months out based on scans and orders that come in. And based on that, we see weakness in the third quarter by about $1.5 million, which matches up to about where we see Aetna's percentage in the private market, and therefore, percentage of our revenues potentially. And then looking at seasonality with fourth quarter being the strongest, but then applying the headwinds that we have from Aetna, I came up with an analysis of a bit over $2 million weakness in the fourth quarter related to these types of issues. So how does that affect gross margin? We've decreased -- we're still working on the cost-reduction initiatives. We do see still an increase in gross margin in the second half of the year over what we've talked about in the first half of the year. The question is with the decrease in revenue, how much does the overhead absorption impact gross margin? That's to be seen. But we do expect still an increase in gross margin in the second half of the year over what we have experienced that 48%, 49% in the first half of the year. So we should be in, I would say, in or around the low 50s in the second half of the year.

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Kyle William Rose, Canaccord Genuity Corp., Research Division - Senior Analyst [21]

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Okay. Great. And then switching to something a little more positive. You put out a press release a few weeks ago talking about some partnership in the ambulatory surgery center arena. I just wonder if you could talk a little bit more about what that opportunity is and then also kind of how you see the ASC market now and then where you see that evolving over the next several years? And I'll hop back in queue.

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Mark A. Augusti, Conformis, Inc. - CEO, President & Director [22]

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Yes. No, it's a great question too and I'll comment on that and figure we just got the information as I'm sure you did on the CMS new proposed rule, so regarding outpatient total joint surgery or Arthroplasty. So first thing, and we're pleased to do the partnership in the region. It's a good opportunity explaining to people. This wasn't a partnership around any type of volume or purchase commitments, which is kind of old thinking, if you will. This was a partnership about working together to identify opportunities to -- for Conformis to be able to utilize them as a resource to help the surgeons that we have. They're interested in moving to lower cut side of care and do outpatient surgery as well as potentially doing a bundle. And we've already had, on Friday, our first national webinar with Regent training our sales force around the linguistics, the methodologies, things like that, and we've got another webinar scheduled as well. So we'll do that. So we'll look at those things as we continue to educate and go through the opportunities with outpatient joints. And we think this is the right move because we've got the best business model, and it's clear that the market is moving towards that. And you can see what's happened with, obviously, with CMS actually looking to move patients to outpatient as well.

Is that it, Kyle? Did we lose you?

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Kyle William Rose, Canaccord Genuity Corp., Research Division - Senior Analyst [23]

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No, no. Yes. Thank you very much.

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Operator [24]

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Your next question is from the line of [Ameer Dashaar] from Oppenheimer & Co.

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Unidentified Analyst, [25]

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This is [Ameer] filling in for Steve. My first question was regarding Aetna again. And the question is, back in 2017, you obviously had the denials of coverage by Cigna that ultimately got reversed as you guys mentioned previously. Can you just like walk us through the data you're able to provide Cigna? And if you'll be taking that same approach this time with Aetna?

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Mark A. Augusti, Conformis, Inc. - CEO, President & Director [26]

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Well, look, every approach is tailored towards the right thing. In the case of Cigna, we had the data that we had at the time, and we explained the market, we explained the difference between PSI with the standard implant and a custom implant. We talked -- and the fact that you use -- by necessity you use PS guides with the custom implant, there is no other way, and there's no other expense around that as well as we walked through kind of the longer-term outcomes we had. A big thing is, of course, as you know we have broad coverage with Medicare, we have all the FDA clearances with the same indications of use that standard implants have, and in that, the reality is, as far as we know that no review is ever done every time any orthopedic company puts out another knee arthroplasty product, and this is about prior authorizing knee surgery, not about making medical decisions about the implant. And at the end of the day, as our -- as this report from AAHKS indicates, it's up to the surgeon and the patient in consultation between those 2 parties to decide what's the best approach to knee surgery. And that fits -- what we're doing is knee surgery, and that is very persuasive argument, and it worked well in the case of Cigna. Now we will do the same thing with Aetna, but we'll do it with another 1.5 years or so of data and more peer review published studies than we had in 2017, actually close to 2 years now. So again, I can't predict the future, but we're very confident about the outcomes and the technology we have. I view this as a short kind of 2-quarter blip, which is very unfortunate for us, given all the work we've done to get to where we are and what we have going forward, but I'm really confident that we'll get to the right place. We've got great opportunities with our hip, and the launch we've got contemplated there as well as the things we continue to do with our other product launches, our identity launch, our cementless knee work as well as the move towards outpatient total joint surgery. So it's an unfortunate bump in the road, but it's very correctable.

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Unidentified Analyst, [27]

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Got it. Great. And just following up about one more question on my side. Would you be able to update us on your commercial build-out efforts? Last quarter, you talked about a targeted 10% increase in feet on the street this year. Are you guys still tracking to that 10%?

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Mark A. Augusti, Conformis, Inc. - CEO, President & Director [28]

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Yes. We're still targeting that. We're not at that target yet. We've obviously continued to work out poor performers and do that. We're also recruiting for overall global commercial sales leader, which is an exciting opportunity for us. So that continue -- distribution in the U.S. continues to be an important thing to us. And as we've said in the past, we're really excited about the opportunities that the hip launch gives us because it moves us towards being a full total joint company.

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Operator [29]

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Next question is from the line of Ryan Zimmerman from BTIG.

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Ryan Benjamin Zimmerman, BTIG, LLC, Research Division - Director & Medical Technology Analyst [30]

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Just a quick follow-up for me. Mark, you indicated that 2Q could have been better this quarter. Do you have any sense for what that denial amount was in the quarter related to Aetna?

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Mark A. Augusti, Conformis, Inc. - CEO, President & Director [31]

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So I said like once we realized this was happening, we think it probably could have been better, and we didn't have any kind of way to go back and look at. I will tell you we have done some of our own internal confidential surveys, which are -- a statistician would probably say far from scientific, but again, we don't have -- we don't do prior authorization ourselves. We don't have the data, Ryan, but we went back and serviced all of our agents and a few of our customers and tried to estimate it. So once we realized we saw the weakness in scans, if you will, so we do have sort of some internal estimates. Internally, we're not going to kind of say exactly what those were, I don't think, but there's no doubt that I think the good guidance is in line with -- it sort of tracks Aetna's market share as we look at kind of what's going forward, not as much so much in 2Q, but pointing that way when you do the math.

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Operator [32]

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(Operator Instructions) There are no further questions at this time. I'll turn the call back over to Mr. Mark Augusti.

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Mark A. Augusti, Conformis, Inc. - CEO, President & Director [33]

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Okay. Thank you, operator. Appreciated, again. And guys, thanks for your attendance. Appreciate your questions. And again, I just want to reiterate, obviously, it's disappointing blip in the road, but I feel very confident that ultimately correctable, and I look forward to the opportunities we have in front of us with, as I said, our new product launches and some of the other work that we're doing. So thank you.

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Operator [34]

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Thank you, presenters. This concludes today's conference call. Thank you all for participating. You may now disconnect. Have a great day.