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Edited Transcript of CFMS.OQ earnings conference call or presentation 4-Nov-20 9:30pm GMT

·21 min read

Q3 2020 Conformis Inc Earnings Call Bedford Nov 4, 2020 (Thomson StreetEvents) -- Edited Transcript of Conformis Inc earnings conference call or presentation Wednesday, November 4, 2020 at 9:30:00pm GMT TEXT version of Transcript ================================================================================ Corporate Participants ================================================================================ * Mark A. Augusti Conformis, Inc. - CEO, President & Director * Robert S Howe Conformis, Inc. - CFO & Treasurer ================================================================================ Conference Call Participants ================================================================================ * David Kuang Oppenheimer & Co. Inc., Research Division - Research Analyst * Eric Anderson Cowen and Company, LLC, Research Division - Associate * Ian Tolle Canaccord Genuity Corp., Research Division - Associate * Sarin Pennadam Murlidar JPMorgan Chase & Co, Research Division - Research Analyst ================================================================================ Presentation -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- Good afternoon. My name is Faith, and I will be your conference operator today. At this time, I would like to welcome everyone to the Conformis Third Quarter 2020 Earnings Conference Call. (Operator Instructions) Before we begin, I would like to remind you that Conformis' 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 but 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 expectations, plans and prospects, future operations, future financial position and results, gross margin, product margin, operating trends, financial guidance, market growth, total revenue and revenue mix by product and geography; the anticipated timing of product launches, including the new knee replacement offering targeted at hospital outpatient and ambulatory surgery centers; expectations about the impact of the novel coronavirus pandemic. When restrictions on elective surgeries will be relaxed and demand for procedures will increase, the potential impact and advantages of using personalized 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 of events to materially differ from those anticipated or implied by these forward-looking statements, including those discussed in the Risk Factors sections of Conformis' public filings with the U.S. 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, November 4, 2020. I will now turn the call over to Mark Augusti, Conformis' President and Chief Executive Officer. Mark? -------------------------------------------------------------------------------- Mark A. Augusti, Conformis, Inc. - CEO, President & Director [2] -------------------------------------------------------------------------------- Thank you, operator, and welcome, everyone, to Conformis' Third Quarter 2020 Earnings Conference Call. With me on the call today is our CFO, Bob Howe. During the call, we will share prepared remarks on a variety of topics, including our third quarter financial and operating performance as well as comments related to the COVID-19 pandemic's impact on our operations. Following the prepared remarks, we look forward to answering your questions. On March 23, 2020, we withdrew our full year growth targets and noted that it was due to the pandemic and its impacts on orthopedic scheduled surgeries. On October 6, 2020, we pre-released our third quarter revenue results, and those numbers are consistent with what we are reporting today. As expected, our third quarter performance was impacted by the pandemic. While we've continued to be pleased by the resumption of scheduled orthopedic procedures in the quarter, we're still not seeing primary arthroplasty surgical volumes at prior year levels. Please recall that Conformis does not have any revision oncology or trauma products. Therefore, we are heavily weighted towards pure elective total joint replacement. Nevertheless, we do expect Q4 revenue to be sequentially above Q4, although with the year-over-year growth rate in the fourth quarter slightly lower than Q3. We do anticipate that, in 2021, we will return to full year growth over 2019, and we'll provide more color on the 2021 quarterly phasing during our Q4 earnings call. Moving on, I would like to point out some other notable items from the past quarter. Our hip sales in the quarter grew 122%. Our team continues to make progress in this area in spite of the challenges related to new product introductions during the pandemic. In this quarter, we were able to hold our first medical education events since the pandemic started, which included both in person and virtual attendees. We were very pleased with the quality of education we were able to deliver for our virtual attendees and expect this to become a routine part of our surgeon training going forward. We're also pleased to see good operational rigor in the quarter. We saw our gross margin increase to 48%, which was, of course, an increase over the prior quarter but, importantly, an increase over prior year as well. Perhaps and most significantly in September, Conformis agreed to sell a combination of stock and warrants to a health care-focused institutional investor resulting in gross proceeds of approximately $17.25 million. This additional capital will be used to support continued execution of our strategic plans. Before I provide further comment on the quarter, let me turn the call over to Bob for a more detailed financial review. Bob? -------------------------------------------------------------------------------- Robert S Howe, Conformis, Inc. - CFO & Treasurer [3] -------------------------------------------------------------------------------- Thank you, Mark, and thank you, everyone, for joining us. We reported third quarter revenue of $16.1 million, representing a decrease of $1.2 million or 7% year-over-year on a reported and constant currency basis. Revenue in the third quarter of 2020 and 2019 includes royalty revenue of $146,000 and $191,000, respectively, related to patent license agreements. Third quarter product revenue was $16.0 million, representing a decrease of $1.1 million or 7% year-over-year on a reported and constant currency basis. Sales of our knee products decreased $1.6 million to $15.1 million or 10% year-over-year on a reported and constant currency basis. Sales of our Conformis Hip System were $0.9 million, an increase of 122% year-over-year on both a reported and constant currency basis. U.S. product revenue decreased $1.0 million to $14.1 million or 7% year-over-year. U.S. sales of our knee products decreased $1.5 million to $13.3 million or 10% year-over-year. Third quarter U.S. product revenue represented 89% of total product revenue, same as our third quarter last year. Rest of World product revenue was $1.8 million, a decrease of approximately $130,000 or 7% year-over-year on a reported basis and 10% on a constant currency basis. With that, I'll now move on to our results across the rest of the P&L. Third quarter gross margin was 48% of revenue compared to 44% of revenue for the same quarter last year, an increase of 360 basis points. The increase in gross margin was driven primarily by lower canceled case inventory reserves, improvements in yield and other manufacturing improvements. Total operating expenses increased $0.3 million to $14.8 million or 2% year-over-year. The increase in expense was primarily due to increases in general, legal and litigation expenses. Net loss was $6.2 million or $0.09 per share compared to net loss of $8.7 million or $0.13 per share for the same period last year. Net loss per share calculations assume weighted average shares outstanding of 71.2 million shares for the third quarter of 2020 compared to 64.8 million shares for the same period last year. Net loss in the third quarter included foreign currency exchange income of $1.5 million compared to foreign currency exchange loss of $1.3 million in the same period last year. We had cash and cash equivalents totaling $32.9 million as of September 30, 2020, compared to $26.4 million as of December 31, 2019. Lastly, I want to close with a few comments on liquidity. As Mark mentioned, we're pleased to have raised approximately $17 million of gross proceeds from the registered direct offering in the third quarter. The funds from this offering provide a significant amount of additional capital that will allow the company to continue to execute its strategic plans. We continue to make good progress on our Stryker development efforts. And during the third quarter, we achieved the second milestone to receive the associated $3 million payment. We are still on track to achieve the last remaining milestone, which we expect to be completed prior to the middle of next year and which will result in Conformis receiving an additional payment of $11 million. With the recent equity raise completed and the anticipated milestone payment, we believe we've made substantial progress in funding the company towards the goal of cash flow breakeven. With that, let me turn the call back over to Mark to add additional color. -------------------------------------------------------------------------------- Mark A. Augusti, Conformis, Inc. - CEO, President & Director [4] -------------------------------------------------------------------------------- Sure. Thanks, Bob. Okay. Well, the effects of the pandemic continue to be challenging. As mentioned in prior releases and commentary, Conformis has maintained its key development activities. As a result, we've continued to progress our most important new product development programs. This includes activities related to our Stryker partnership as well as work on the planned new knee offering we announced last quarter. But it also includes other important projects, such as our Identity PS knee and our Conformis Match Hip System, both of which received FDA clearance in the quarter. Identity PS is the posterior stabilized version of our Identity total knee system, which was launched in the cruciate retaining, or CR, version last year in limited release. Customer feedback on our Identity knee product has been very favorable, and we're pleased to be able to expand our addressable market with our PS offering. Our Conformis Match Hip System applies our leading patient-specific instrumentation, or PSI, capabilities to hip arthroplasty when utilizing our Cordera standard hip and comp implants. Combined with our proprietary iDuo planning system, we expect Conformis Match to allow surgeons to apply our innovative solutions to clinical situations where a personalized hip implant is not indicated. We believe Conformis Match will help expand and accelerate adoption of our hip arthroplasty technology. We anticipate launching Conformis Match prior to year-end. A few additional comments on the pipeline. As previously reported, we received our second of 3 milestone payments contemplated in the Stryker collaboration. This is an indication that we remain on track towards successful completion of that program in mid-2021. Regarding our new knee system targeted at hospital outpatient and ASC sites of care, we have made significant progress in the quarter and continue to believe we can meet an aggressive time line for launch. Thus, we continue to anticipate launching this innovative knee arthroplasty system in the second half of 2021. Lastly, I would like to comment on the capital raise we executed in the quarter. Though there remains uncertainty around COVID-19-related demand disruptions, as Bob previously mentioned, we believe this raise will allow us to focus on operational execution and on the commercial priorities of our business, such as attracting and retaining great surgeon customers and launching new and innovative products. Once again, I would like to acknowledge and thank all the Conformis employees, consultants, advisers and customers that continue to soldier on through us through the challenging time. All the efforts and goodwill are greatly appreciated. We are pleased with the performance we had in the quarter. Thank you. With that, I'll turn the call back over to the operator, and we'll take questions. ================================================================================ Questions and Answers -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- (Operator Instructions) Your first question is from Kyle Rose of Canaccord. -------------------------------------------------------------------------------- Ian Tolle, Canaccord Genuity Corp., Research Division - Associate [2] -------------------------------------------------------------------------------- This is Ian. This is actually Ian on for Kyle. I was hoping you could talk a bit about the benefit of having both the hip and the knee products together. Any potential cross-selling going on into accounts? Is it helping you potentially attract sales talent? Or is it still a bit early there given the COVID impact last quarter? -------------------------------------------------------------------------------- Mark A. Augusti, Conformis, Inc. - CEO, President & Director [3] -------------------------------------------------------------------------------- Thanks, Ian. Certainly, COVID's not helping, and everything's new these days. But there's no doubt the strategic reason for launching the hip and the innovation around it remains. We do have great opportunities for cross-selling, and we're actually very detailed tracking that and looking at that. That's obviously the low-hanging fruit for us is to present the new product innovations to customers who we have a relationship with. Having said that, I'm pleased with the ability to attract new surgeons, which we've done that haven't before been using our knee, as well as our ability -- the important piece of this, Ian, is our -- as I've mentioned this when we talked about the hip launch before is our ability to get on contract. So the ability to cross-sell and leverage the knee relationship isn't just for surgeons. It's also with the financial buyers and the people we contract with. So we've been very pleased with our ability to do that with our hip. So there's still a lot of work to do. It's never easy. It's a highly competitive market, but we think we've got a very differentiated solution. We're launching first with just a cryotype stems. But as we've talked about previously, we have other stems planned. And we think that will be a big source of growth for us in the coming quarters, okay? -------------------------------------------------------------------------------- Ian Tolle, Canaccord Genuity Corp., Research Division - Associate [4] -------------------------------------------------------------------------------- Perfect. And then just one follow-up, if I could. You talked a lot about the new knee system for ASC in the outpatient arena. Are you -- is there the same kind of opportunity for hips in that outpatient in ASC? Or is that a little less of an impact there in that segment? -------------------------------------------------------------------------------- Mark A. Augusti, Conformis, Inc. - CEO, President & Director [5] -------------------------------------------------------------------------------- So I fundamentally believe the opportunities there -- I think that the ecosystem that we're in and the physician community has done, let's say, a better job on the right clinical indications and the right clinical procedures to do outpatient total knee arthroplasty. And that's because also it was easier, a little easier, and also Medicare, CMS removed that from the inpatient-only list earlier. They have now, as you know, done it for the hip. And I think the work is being done in the hip. So that demand will follow. I think it will lag the knee a little bit. But it's like anything else. There are some physicians that are already aggressively doing outpatient and ASC hip arthroplasty. It's just not at the same level the knees will be, but we believe that opportunity is strong and will eventually follow just as strong as the knee. -------------------------------------------------------------------------------- Operator [6] -------------------------------------------------------------------------------- Your next question is from Josh Jennings of Cowen. -------------------------------------------------------------------------------- Eric Anderson, Cowen and Company, LLC, Research Division - Associate [7] -------------------------------------------------------------------------------- This is actually Eric on for Josh. In past quarters, you guys have provided the monthly progression of volume recovery through the quarter. I was just wondering if it would be possible for you to do the same here for 3Q. -------------------------------------------------------------------------------- Mark A. Augusti, Conformis, Inc. - CEO, President & Director [8] -------------------------------------------------------------------------------- Yes. We didn't do that just because it flattened out a little bit. I don't know if -- I don't want to put Bob on the spot. I don't know that we're prepared to do that. So we're probably going to decline at this point to be thoughtful about it. But it was something that we did just because I think it was more uncertain, but I do believe we've seen -- as I indicated, I alluded to, we've seen a resumption. We're not quite where we were from office visits and surgical levels of prior year, but it sequentially is back. -------------------------------------------------------------------------------- Eric Anderson, Cowen and Company, LLC, Research Division - Associate [9] -------------------------------------------------------------------------------- Understood. And then moving elsewhere, in the 2024 financial targets that you guys have outlined previously, expansion into international markets like China and Japan was highlighted as a key initiative. I was just wondering when we could possibly expect to see Conformis' entrants into those markets and then how the strategy might differ from other international markets that you guys are in. -------------------------------------------------------------------------------- Mark A. Augusti, Conformis, Inc. - CEO, President & Director [10] -------------------------------------------------------------------------------- Right. So that's a good question. And there, as you, I'm sure, likely know longer-term regulatory challenges, but we do have them in the out-year plans, and we are still planning on those and doing the work that we need to do for those regulatory approvals and all the stuff associated with that. I don't think I'm prepared to say exactly when you'll start to see us enter those markets, but it certainly would be prior to that -- prior to 2024. But it certainly won't be next year, for instance, because we know those -- in general, those approvals take longer. -------------------------------------------------------------------------------- Operator [11] -------------------------------------------------------------------------------- Your next question is from Robbie Marcus from JPMorgan. -------------------------------------------------------------------------------- Sarin Pennadam Murlidar, JPMorgan Chase & Co, Research Division - Research Analyst [12] -------------------------------------------------------------------------------- This is actually Sarin on for Robbie. Just a question on the ASC upcoming 2021. Have you seen anything in the quarter regarding the shift to ASCs that might have accelerated as a result of the pandemic, anything on that opportunity that might have kind of changed throughout the quarter? -------------------------------------------------------------------------------- Mark A. Augusti, Conformis, Inc. - CEO, President & Director [13] -------------------------------------------------------------------------------- Yes. I think the opportunity has only become more compelling. I am -- I remain hard-pressed to full out -- to pull out data sources that I think are specific, so to speak. But my conversations with physicians and people in the industry and people that are at the ASCs is -- and just -- really, our doctors are probably the key source to me is they're seeing more demand. They're seeing their patients seem to be more comfortable given the COVID environment to proceed with their surgery in an outpatient manner versus inpatient manner. I think there is some residual fright, if you will, around hospitals, whether that's warranted or not, but it's real. So on the margin, it's accelerated that shift, and I think it's made the opportunity more compelling. I mean I think if you look, overall, at total knee arthroplasty, the robotics trend, the cementless trend and the trend to ASCs are probably 3 of the biggest things going on right now. And so we're very pleased that we think we have the best delivery model for the ASC site of care. And as you know, we've talked about cementless from our standpoint. We've got to get that product launch, and so that remains a big impetus for us. -------------------------------------------------------------------------------- Sarin Pennadam Murlidar, JPMorgan Chase & Co, Research Division - Research Analyst [14] -------------------------------------------------------------------------------- Great. And just one quick follow-up. I know you gave some color on kind of the longer-term international opportunity, especially on that last call. But do you see anything in the quarter? I know the international opportunity is a smaller portion of the business now but the recovery by oUS versus U.S. -------------------------------------------------------------------------------- Mark A. Augusti, Conformis, Inc. - CEO, President & Director [15] -------------------------------------------------------------------------------- Well, that's a good question. And of course, I've monitored what other people have said. So I try not to -- I guess I just kind of come where I'm coming from, it's a challenge. But we just saw the U.K. go a month lockdown. We've seen some regional lockdowns in different parts of Europe. So that's why in my prepared comments I talked to this, and I appreciate you giving me the opportunity to talk about it. I mean we're not out of this. I'm not -- I want to be clear. I'm not being negative. I think that we're not going to see the broad-based level of demand disruption we saw in Q2. Having said that, there's still uncertainty around that. So we all have to be a little thoughtful about that. The good news is, I think our customers in our industry have done a great job in figuring out how to manage patients through, whether it's a hospital or outpatient environment, to protect them against COVID. How do we assure them? I think telehealth and different applications like that are allowing doctors to interact with their patients. But you can't get away from the fact that if you look around, we're seeing some various spikes in different geographies, and we just can't predict how the government's agencies will respond to that. And to answer your question specifically, yes, we've seen some shutdowns in some of our customer centers in Europe. They're not -- again, they're not -- they tend to be a little more thoughtful in the sense that they're not just -- we're shutting down, and there's no message about when or what we're starting back. It's more targeted. And it's not broad based across, so to speak, countries. It's more targeted around centers and geographies and with a time limit. So more to come on that. And that's some more color we'll provide later in the fourth quarter. -------------------------------------------------------------------------------- Operator [16] -------------------------------------------------------------------------------- Our next question is from Steve Lichtman from Oppenheimer. -------------------------------------------------------------------------------- David Kuang, Oppenheimer & Co. Inc., Research Division - Research Analyst [17] -------------------------------------------------------------------------------- This is David on for Steve. Maybe one for you, Mark. I was just wondering if you could provide an update on the status of the -- of your sales organization? And do you anticipate any changes over the near term? -------------------------------------------------------------------------------- Mark A. Augusti, Conformis, Inc. - CEO, President & Director [18] -------------------------------------------------------------------------------- Well, I'm really pleased with the sales organization and the focus they've been able to maintain coming through this COVID situation. I'm particularly pleased with -- we said at the beginning of the year, we wanted to add new agents, and we've done that. We've seen 7% growth in our agents since December 31, 2019, which I think is a good performance. We're targeting 10% for the full year. So we're well on the way, and we continue to do that. And so that's -- acquiring and retaining surgeon customer is important, but a big part of that is good distribution. And I think part of the success we're having this year is, again, going back to one of the first questions is by having the hip product, it allows us to be more attractive to agents that have both hip and knee relationships and skill sets. So having only the knee in prior quarters was a challenge for us in recruitment. But now that we've got, I think, an innovative hip system with also a plan to add and fill out that portfolio has made Conformis a more attractive place for experienced orthopedic agents. So we're pleased with the performance we've made. We can always do better and want to do better but like the direction it's going. -------------------------------------------------------------------------------- David Kuang, Oppenheimer & Co. Inc., Research Division - Research Analyst [19] -------------------------------------------------------------------------------- Okay. Great. That's helpful. And then just one follow-up. I was wondering if you could maybe talk about any updates on the reimbursement coverage status from Aetna. How is that progressing there? -------------------------------------------------------------------------------- Mark A. Augusti, Conformis, Inc. - CEO, President & Director [20] -------------------------------------------------------------------------------- Yes. No new news on that. I think we're settled into the long winter here. Typical litigation, it's going to be a while until these news there. I think that -- well, I don't think -- I mean we track now. We're able to track through some automation. I think I reported this last quarter. So we can start to see exactly what our payer mix looks like. And we still get some Aetna requests, and we have a process now for doing prior authorization and supporting surgeons. And we actually still get some approvals on appeal on that. But we don't see a lot of Aetna requests because I think our customers are sort of trained now to know. But every now and then, we still get them. And I'm pleased to see that we still get some approvals. But the most important thing is we don't anticipate or have any reason to believe there'll be any other changes to coverage at this point. Most of the commercial payers have been through this, and we are pretty pleased outside of the Aetna situation with the broad coverage that we have. -------------------------------------------------------------------------------- Operator [21] -------------------------------------------------------------------------------- There are no questions over the phone, presenters. -------------------------------------------------------------------------------- Mark A. Augusti, Conformis, Inc. - CEO, President & Director [22] -------------------------------------------------------------------------------- Okay. All right. Well, with that, we'll end it. I appreciate everybody who dialed in and listened in, and thank you. -------------------------------------------------------------------------------- Operator [23] -------------------------------------------------------------------------------- Ladies and gentlemen, this concludes today's conference. Thank you for your participation, and have a wonderful day. You may all disconnect.