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Edited Transcript of CGNT earnings conference call or presentation 2-May-17 8:30pm GMT

Thomson Reuters StreetEvents

Q1 2017 Cogentix Medical Inc Earnings Call

Orangeburg May 23, 2017 (Thomson StreetEvents) -- Edited Transcript of Cogentix Medical Inc earnings conference call or presentation Tuesday, May 2, 2017 at 8:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Brett A. Reynolds

Cogentix Medical, Inc. - CFO, Principal Accounting Officer, SVP and Corporate Secretary

* Darin Hammers

Cogentix Medical, Inc. - CEO, President and Director

* Douglas Sherk

EVC Group Inc. - Founder and CEO

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Conference Call Participants

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* Christopher William Lewis

Roth Capital Partners, LLC, Research Division - Senior Research Analyst

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Presentation

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Operator [1]

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Good day, ladies and gentlemen, and welcome to the Cogentix Medical Incorporated First Quarter Fiscal 2017 Financial Results Call. (Operator Instructions) As a reminder, this conference is being recorded.

I would now like to introduce your host for today's conference Mr. Doug Sherk. Sir, you may begin.

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Douglas Sherk, EVC Group Inc. - Founder and CEO [2]

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Thank you, Bruce, and good afternoon, everyone. Thank you for joining us for Cogentix Medical Conference Call to review Financial Results for the First Quarter of 2017, which ended on March 31, 2017. The news release announcing the results crossed the wire shortly after the market closed and is currently available on the Cogentix Medical website. We have arranged for a taped replay of this call, which can be accessed by phone. This call is also being streamed live on the Investor Relations section of our website at ir.cogentixmedical.com and will be archived there.

Before we get started, we'd like to remind you that during the course of this conference call, management will make projections and other forward-looking statements regarding future events that are subject to risk and uncertainties that could cause actual results to differ materially from anticipated results. Such risks and uncertainties are more fully discussed in the company's annual report on Form 10-K for the fiscal year ended December 31, 2016, and other periodic filings with the SEC. Further, such statements are made only as of today, May 2, 2017, and the company assumes no obligation to and does not intend to update these projections and forward-looking statements to reflect future events or actual outcomes.

And with that, I'd now like to turn the call over to Darin Hammers, President and Chief Executive Officer of Cogentix Medical.

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Darin Hammers, Cogentix Medical, Inc. - CEO, President and Director [3]

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Thank you, Doug. Good afternoon, everyone, and thank you for joining us today. With me on the call is Brett Reynolds, our Chief Financial Officer. I will open the call with an overview of our progress during the first quarter and several operational highlights, including some observations about the competitive landscape for PTNS business that we are viewing as very positive. Brett will then provide a review of our financial results before we open the line to your questions.

Our performance in the first quarter was driven by significant growth from our PrimeSight Urology business, moderating competitive pressure on our Urgent PC business and an as expected performance for Macroplastique. Together these 3 product lines, which constitute our urology business, achieved 11% revenue growth in the first quarter as compared to the prior-year period. And urology revenue represented 80% -- 88% of our total revenue in the first quarter.

The end of the first quarter marked the 2-year anniversary of the formation of Cogentix Medical through the merger of Vision-Sciences and Uroplasty. Much has happened over the past 2 years, but the vision of the merger remains as vivid today as it was 2 years ago. That vision was to create a high-performing, urology-focused medical device company with multiple product lines enabling each member of our high-performing sales organization to become more valuable and more meaningful to the urologist customer. We have been successful in executing this vision and look forward to creating even more growth from our current urology product lines as well as the new products we expect to add through our focused business development activities.

Our PrimeSight technology platform meets the needs of our urology customers for always-sterile, always-ready, flexible endoscopy solutions. This need is being increasingly recognized by our customers as demonstrated by the 45% PrimeSight revenue growth this quarter. The first quarter performance builds on the momentum generated from the double-digit PrimeSight growth during calendar 2016. Our PrimeSight platform has been clinically proven to reduce the risk of cross-contamination associated with the reuse or reprocessing of difficult-to-clean conventional endoscopes. Our technology allows for greater patient throughput and increased physician productivity by reducing the typical 45-minute endoscope reprocessing time to less than 10 minutes. Our sales organization is now increasingly more proficient at selling PrimeSight Urology into the urology practices and building their sales funnel.

We have had tremendous growth for this product line over the past 2 years, including many of the largest orders in the company's history. We believe the combination of market dynamics, PrimeSight product features and our strong relationship-focused sales organization provides us with a continued runway of high growth from this product line. We estimate our current market share of the U.S. cystoscope market to be less than 10%, and we fully expect to meaningfully grow our market share as more physicians appreciate the always-ready, always-sterile nature of our PrimeSight products.

Our company also offers Urgent PC for overactive bladder, or OAB. Urgent PC serves as a large and growing market of more than 42 million Americans, who suffer from overactive bladder and its symptoms. OAB patients are typically prescribed medications to treat their conditions as the first-line of interventional therapy, but nearly 90% of those patients discontinue taking those drugs within 1 year, primarily due to their side effects. The next line of therapy includes Urgent PC, BOTOX and InterStim. Urgent PC is the least invasive of the 3 with a significantly lower risk profile for potential adverse events as well as being a low-cost treatment option. Urgent PC is a Percutaneous Tibial Nerve Stimulation solution done in a physician's office.

Until recently, we had the PTNS market to ourselves, as many of you know. In early 2016, a second well-capitalized competitor entered the PTNS market and began selling the product through a 15 to 20-person dedicated sales force. Recently, we learned that the competitor's dedicated sales force has been eliminated and sales will now be combined with the competitor's InterStim product. We are encouraged by this development, but as I've said in the -- since the beginning, we don't underestimate a big competitor, and the market is certainly big enough for 2 players in this space. Once again, we believe and we are confident that a rising tide will lift all boats.

We do believe that as a result of the altered competitive landscape for Urgent PC, we can even better utilize our highly trained and focused sales team for the urologists' benefit. For example, while PTNS is a highly effective, minimally invasive therapy, management of PTNS patient flow at the urologist's office is critical to maximizing the benefits of the treatment for the practice. Our sales organization has developed a deep understanding with this aspect of the administrating patient PTNS treatment, and the competitor's move is enabling Cogentix to further differentiate the Urgent PC offering to the urology practice.

So let me now touch on 3 areas of expanded operational focus aimed at driving additional growth. First, we began an expanded focus into urogynecology and gynecology markets for our Urgent PC product in the first quarter of this year. As we mentioned on our last call, we began to see demand for our urology product lines extend into these related urology specialties in early 2016. Our plan for 2017 has, and continues to be, to aggressively convert new customers from the Uro/GYN and GYN segments. Through the end of Q1, we now have close to 400 active GYN accounts and expect that number to grow exponentially throughout the rest of this year. We continue to see success with this initiative, and remain confident that we will successfully expand the market through our execution at this call point.

A second operational strategy in 2017 is the pursuit of additional business from the government and large strategic accounts, including the VA. We believe this will benefit both our Urgent PC and PrimeSight product lines. To execute this effort, we created and hired a new Director of National Accounts position to oversee government and strategic accounts. This person began working with our sales organization in February. Since that time, we have developed and have started deploying several strategies to grow our business with these accounts. To date, we have approximately 60 active VA accounts and have more than that number on our near-term target list.

And finally, we have strengthened our marketing and business development strategy with the recent hire of industry veteran, Ash Keswani. Ash joined us just a couple of weeks ago and has deep marketing and strategic business development experience in the urology space with both large and small companies. His work will entail amplifying the always-sterile, always-ready infection control and efficiency message of our PrimeSight technology as well as other technology advantages of Cogentix Medical products, as we work to further penetrate the market including the additional channels just discussed.

As an example, dirty endoscopes and reprocessing risks have been featured on the ECRI top 10 technology health hazards list every year since 2010, including the #1 and #2 spots in 2017 and 2016, respectively. This is a story that is sometimes overlooked, but our potential PrimeSight endoscopy customers need to hear. Ash will work with -- to amplify this among other messages. Ash will also expand our ability to analyze the significant number of business development opportunities. The number of inbound business development ideas continue to be robust, and we welcome Ash's skill set to vet potential candidates for consideration by our management team and our board.

I would now like to turn the call over to Brett for a review of our first quarter financial results.

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Brett A. Reynolds, Cogentix Medical, Inc. - CFO, Principal Accounting Officer, SVP and Corporate Secretary [4]

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Thank you, Darin, and good afternoon, everyone. Overall, we had a very successful first quarter. We achieved total urology revenue growth of 11%, which on a constant currency basis was 13% growth over the year ago quarter. Total revenue growth for the company, which was negatively impacted by our product lines outside of urology, was 6% as reported and 8% growth on a constant currency basis.

Total revenue for the first quarter was $13 million as compared to $12.2 million in the year ago quarter. The nearly $800,000 increase in total revenue was comprised of slightly more than $1 million increase in urology revenue, partially offset by a decrease of approximately $350,000 in our noncore industrial and airway management business.

The company's $1.1 million or 11% revenue growth in urology was driven by our PrimeSight business. PrimeSight revenue in the quarter was $4.5 million, representing an increase of $1.4 million or 45% compared to the year ago quarter. The increase is primarily due to the fact that our PrimeSight technology meets the needs of our medical customers, for always-ready, always-sterile flexible endoscopy solutions as well as our sales force becoming more proficient in selling our innovative technology.

Urgent PC revenue in the first quarter was $5 million, a decline of approximately $100,000 or 2.5% over the year ago period. While Urgent PC revenue was down slightly in the quarter, unit growth for this product line in the U.S. was up 3%. We sold nearly 5,750 Lead Set boxes in the U.S. in the first quarter, and the utilization per active customer was slightly more than 3.3 boxes, up from 3.2 boxes per active customer in the year ago period. Utilization among our top 50 accounts in the first quarter was 28.9 Lead Set boxes, up from 27.4 boxes last year. We continued to experience growth within our existing customer base.

Offsetting the unit growth was a lower average selling price. The ASP for a box of Lead Sets in Q1 was down 5% versus the same period of last year, but was essentially the same as the pricing we experienced in the fourth quarter of 2016.

Our third urology product line, Macroplastique, had revenue of $1.8 million in the first quarter, which represented a decline of approximately $100,000 from the same period of last year. As we have mentioned on past calls, Macroplastique is a mature product line, for which we expect that revenue will fluctuate from quarter-to-quarter.

Revenue from our non-Urology products of airway management and industrial, totaled $1.5 million in the current quarter, a decrease of 20% over the first quarter of last year. The decrease in revenue for these products, which represented only 12% of our revenue in the first quarter, is primarily due to our increased focus on our urology products.

Our overall gross margin in the first quarter was 65.3% as compared to 68.9% in the year ago quarter. The change in gross margin was attributable to product mix, with a higher proportion of our total revenue from capital sales in our endoscopy business and a lower proportion of our total revenue from our higher-margin Urgent PC and Macroplastique products.

Operating expenses for the first quarter totaled $9.7 million and were $700,000 higher than the year ago quarter. The increase includes approximately $150,000 associated with due diligence related to a business development opportunity that we ultimately decided not to pursue as well as higher, noncash share-based compensation expense. Further, R&D expenses increased by approximately $350,000, as we are investing in certain ongoing enhancements to our endoscopy product line.

Operating loss for the first quarter was $1.2 million compared to an operating loss of $600,000 in the year ago quarter. Cash operating loss, which excludes noncash charges, was approximately $100,000 in the first quarter of 2017 compared to a cash operating profit of $300,000 in the year ago quarter.

Turning now to the balance sheet. We ended the first quarter with $25.8 million in cash and investments, and we had no borrowings outstanding under our $7 million line of credit. Cash usage during the quarter was approximately $2.5 million, primarily related to payment of year-end accruals and payables as well as slightly higher inventory levels to support increased sales of our PrimeSight products.

I'd now like to turn the call back to Darin. Darin?

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Darin Hammers, Cogentix Medical, Inc. - CEO, President and Director [5]

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Thanks, Brett. Our organization remains committed to increasing the value of our core urology products through organic growth. Additionally, and equally important, we also remain committed to growing the company through business development opportunities that make sense for Cogentix Medical and our shareholders.

As Brett mentioned, we incurred some due diligence costs in the first quarter related to a business development opportunity that we and our board ultimately decided not to execute. In this particular case, we chose not to move forward on this opportunity once we completed a thorough due diligence, including significant voice of customer work. As we have told you in the past, we are only going to do a deal that we believe is in the best interest of our shareholders and adds significant growth potential for the organization.

In addition to the strategies we are executing to grow our urology business, we have started to explore strategic alternatives to our nonurology business of airway management and industrial. The products of both of these businesses are high-performing products, but our focus and our core competency has been and will remain on growing our urology business. I'd like to thank our board and the entire Cogentix Medical organization for their focus and dedication as we work to realize the full opportunity of Cogentix Medical and build the valuation of the company.

Operator, please open the line for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And our first question comes from Chris Lewis from Roth Capital Partners.

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Christopher William Lewis, Roth Capital Partners, LLC, Research Division - Senior Research Analyst [2]

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Wanted to start on Urgent PC. Darin, can you talk about what you've seen in the field since the -- since the news that Medtronic had eliminated that specialty sales force? And elaborate on just the dynamics you're seeing since then.

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Darin Hammers, Cogentix Medical, Inc. - CEO, President and Director [3]

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Yes. Sure. So it just happened just a couple of weeks ago and certainly haven't seen a lot of change other than the realization from some of our accounts that they don't have a dedicated rep for that product line anymore. So I think a couple of encouraging things out of that, Chris. Number one, we've seen the ASP stabilize over the last several quarters, which is something that we've talked about on the calls in the past. And we expect that right now the InterStim reps have a lot on their plates with their current business and certainly folding this in is not going to be a simple thing for that sales force either.

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Christopher William Lewis, Roth Capital Partners, LLC, Research Division - Senior Research Analyst [4]

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Then I guess given kind of the focus on InterStim within that rep base, would you expect some of those customers that perhaps did convert to Medtronic would eventually come back to Cogentix over time?

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Darin Hammers, Cogentix Medical, Inc. - CEO, President and Director [5]

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Well, we absolutely do. We've already seen some customers start to move back. So it's encouraging, but I've said it on the -- during the call and in the past that I don't underestimate a large competitor. And the market certainly is big enough to have 2 competitors in this space.

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Christopher William Lewis, Roth Capital Partners, LLC, Research Division - Senior Research Analyst [6]

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Got you. And if I just look at just the underlying volume growth in the U.S. for Urgent PC, kind of low to mid-single digits past few quarters, obviously, maybe those dynamics change a little bit going forward. But any color you can provide on how we should kind of look for the unit growth in the U.S. Urgent PC business to trend going forward?

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Darin Hammers, Cogentix Medical, Inc. - CEO, President and Director [7]

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We talked even as early as 3 or 4 quarters that we expected the first 12 months to be fairly turbulent. If we were to say, we're going to continue to have unit growth quarter-over-quarter and year-over-year in that time frame, I think we would've gotten a lot of puzzled looks. So we're encouraged by what we're seeing. We think there is going to be some stabilizing there. And the market is hopefully being better educated and understanding the value that PTNS, in general, brings. So our expectation as we move forward is to try to move that back towards the double-digit range.

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Christopher William Lewis, Roth Capital Partners, LLC, Research Division - Senior Research Analyst [8]

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Great. Moving on to PrimeSight, it continues to be a really nice growth driver for you, 2 really strong quarters in a row here. Can you talk about just how big that market is today? You mentioned less than 10% market share? So maybe just talk about kind of the market as a whole and where you think you can get your share over the coming years?

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Darin Hammers, Cogentix Medical, Inc. - CEO, President and Director [9]

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Yes. I think, as I said earlier, we believe we are about an 8% market share in flexible cystoscopy, and the market is north of $200 million when you look at the sheath opportunity for us as well. And I've said it a couple times in the past that the market seems to be moving towards sterile endoscopy, and so there is not a lot of options in that space. We provide a great opportunity for especially urology customers who do 60- to 90-minute -- 90-second procedures in their office. And our technology gives them the flexibility to provide sterile endoscopy and sterile cystoscopy to those patients.

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Christopher William Lewis, Roth Capital Partners, LLC, Research Division - Senior Research Analyst [10]

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And R&D has ticked up related to some enhancements you're working on. Can you provide any color on what those enhancements may include and timing of when those could come to market?

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Darin Hammers, Cogentix Medical, Inc. - CEO, President and Director [11]

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Yes. So the enhancements are really around the processor. As time goes by, it's just like any laptop or any computer, the infrastructure needs to be updated and that's something that we've been working on over the last year and expect to launch sometime in 2017. And we're excited about that opportunity and that's why you've seen the increase in the costs.

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Christopher William Lewis, Roth Capital Partners, LLC, Research Division - Senior Research Analyst [12]

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Okay. Great. And then on the new sales strategy is kind of expanding outside of the core urology focus into the GYN and Uro/GYN kind of space. Can you elaborate on how that strategy is going? I think you mentioned 400 GYN accounts. Perhaps -- where was that at the end of 2016? How many GYN accounts do you plan to target this year and how big is that sales force today?

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Darin Hammers, Cogentix Medical, Inc. - CEO, President and Director [13]

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Sure. So I couldn't tell you the exact number from where we ended '16 to '17. We -- I can probably pull that up, but our focus has been, since the beginning of 2016, to really explore that as a strategic alternative, just because the GYN is the primary physician for a lot of women. And so we doubled down in January or February, when we did our national sales meeting, because we recognized that the opportunity to certainly expand our footprint was there, and the opportunity to get access to more patients.

As far as what we expect in 2017, it's -- we really just kicked this off in earnest in February, and so each sales rep and territory manager has the target list. We bought data that shows which of these GYNs are the highest prescribers of OAB drugs. So we feel like we've got a great target list. We feel like we've got a great message and a great strategy to really access those markets.

But at the same time, we're not -- we're not turning our backs on the urologists. Certainly we think there is still opportunity for growth there. And not just bringing on new customers, but driving utilization within our existing customers.

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Christopher William Lewis, Roth Capital Partners, LLC, Research Division - Senior Research Analyst [14]

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Great. To the extent you can, sounds like you got pretty far down the path of at least one deal, but didn't work out for various reasons, it sounds like. But can you describe the pipeline of potential opportunities you're seeing? And I think you had committed to doing 2 BD deals this year. Is that still the company's plans?

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Darin Hammers, Cogentix Medical, Inc. - CEO, President and Director [15]

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Yes. We committed to 1 to 2, and we do have a pretty robust list of opportunities we've looked at. We're deep in conversations with a couple of those, and we feel still strongly that we're going to be able to execute on 1 to 2 deals in 2017. Obviously, we would have liked to have completed the last diligence that we did to the point that was an executed deal, but it didn't make sense for us, once we dug in and understood more.

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Christopher William Lewis, Roth Capital Partners, LLC, Research Division - Senior Research Analyst [16]

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Okay. And then maybe a question, I think, for Brett. Gross margin has, obviously, ticked down in the quarter. I understand the mix trends, but going forward, is -- PrimeSight continues to be kind of the company's growth driver. How should we think about kind of the gross margin profile trending here over the remainder of this year?

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Brett A. Reynolds, Cogentix Medical, Inc. - CFO, Principal Accounting Officer, SVP and Corporate Secretary [17]

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Yes. If we look back to '15 and '16, I think gross margin was from 65% to 69%, give or take, in any given quarter. This quarter, we're at 65.3%. As we move forward, it's so dependent on product mix, but as we look going forward, we think that the mid-60s% -- mid- to upper 60s% is where we'd be.

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Christopher William Lewis, Roth Capital Partners, LLC, Research Division - Senior Research Analyst [18]

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Okay, great. And then any guidance on how we should view OpEx trending over the remainder of this year as well?

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Brett A. Reynolds, Cogentix Medical, Inc. - CFO, Principal Accounting Officer, SVP and Corporate Secretary [19]

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Yes. And so the last couple quarters where we've talked about expectations that operating expenses should go up, it did not really materialize in Q3 or Q4. Here in Q1, we saw the tick-up, some of it was the business development expense, which we would have that continuing as we look at opportunities as well as the R&D expense. So I think that the level we're at is a good approximation, there's going to be fluctuations as we move forward.

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Operator [20]

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And at this time, I'm showing no further questions. I'd now like to turn the call back over to management.

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Darin Hammers, Cogentix Medical, Inc. - CEO, President and Director [21]

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Thanks, operator, and thanks to everyone for your participation today. We appreciate your interest, and we look forward to updating you on our progress.

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Operator [22]

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Ladies and gentlemen, thank you for your participation in today's conference. And this does conclude the program. And you may all disconnect. Everyone, have a great day.