Inari Medical, Inc. (NASDAQ:NARI) Q3 2023 Earnings Call Transcript

Inari Medical, Inc. (NASDAQ:NARI) Q3 2023 Earnings Call Transcript November 1, 2023

Operator: Good day and welcome to Inari Medical Incorporated Third Quarter 2023 Earnings Conference Call. At this time, all participants are in a listen-only mode. At the end of the company's prepared remarks, we will conduct a question-and-answer session. As a reminder, this call is being recorded and will be available on the company's website for replay shortly. And now I will turn the call over to John Hsu, Vice President of Investor Relations. Please go ahead.

John Hsu: Thank you, operator. Welcome to Inari's conference call to discuss our third quarter 2023 financial performance and the acquisition of LimFlow. Joining me on today's call are Drew Hykes, President and Chief Executive Officer; and Mitch Hill, Chief Financial Officer; and Dr. Tom Tu, Inari's Chief Medical Officer. This call will include forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Statements made on this call that do not relate to matters of historical facts should be considered forward-looking statements, including statements related to Inari's estimated full year 2023 revenue, anticipated closing of the LimFlow acquisition, potential strategic benefits of the LimFlow acquisition, expectations regarding our proposed acquisition of LimFlow, and potential operating performance of LimFlow.

A biomedical research team taking notes and making calculations on tablets after testing preclinical product candidates.

And are based on Inari's current expectations, forecasts, and assumptions, which are subject to inherent uncertainties, risks, and assumptions that are difficult to predict. Actual outcomes and results could differ materially from any results, performance or achievements expressed or implied by the forward-looking statements due to a number of factors. Please review Inari's most recent filings with the SEC, particularly the risk factors described in Inari's annual report on Form 10-K for the year ended December 31st, 2022 and subsequent quarterly reports on Form 10-Q for additional information. Any forward-looking statements provided during this call, including projections for future performance, are based on management's expectations as of today.

Inari undertakes no obligation to update these statements, except as required by applicable law. The press release and slides to accompanying this call are available on our website at inarimedical.com. A recording of today’s call will be available on Inari’s website by 5:00 P.M. Pacific Time today. With that, I'll turn the call over to Drew.

Drew Hykes: Thank you, John and thank you, everyone for joining us today. We're pleased with our third quarter performance. We generated record revenue and executed crisply across all our growth drivers. First and foremost, growth was driven by continued strength in our core VTE business, along with meaningful contributions from our international business and new products. Indeed, our end markets are large and remain highly underpenetrated, and we continue to see healthy procedure volume underlying the VTE market. From a profitability perspective, we continue to make steady progress, returning to positive operating income for the first time since Q4 of 2021. We also generated positive net income for the second consecutive quarter.

We continue to build on our significant base of clinical evidence, making progress across our three RCTs, while publishing the FLAME study results. As our Q3 results demonstrate, we remain the clear market leader in VTE and our future growth prospects have never been more compelling. Building on this strength, we are opportunistically broadening our capabilities to address significant new market opportunities via the LimFlow acquisition, which we will discuss later in the call. Most importantly, LimFlow is aligned with our patient-first philosophy. This will be reflected in a story highlighting the impact LimFlow can have on the significant unmet need of no-option patients with chronic limb-threatening ischemia or CLTI. Back to the quarter, I'd like to start with a summary of our Q3 financial performance.

Revenue in Q3 was $126.4 million, up 31% year-over-year. Our international business generated revenue of $6.5 million in Q3, up 151% year-over-year and 26% sequentially from Q2. In addition to our topline performance, we also made steady progress during the quarter on our bottom-line and returned to operating profitability for the first time since 2021. This achievement underscores our commitment to invest strategically in the business, while also driving operating leverage with revenue growing at double the rate of OpEx in the quarter. During Q3, we also made progress across our five growth drivers. Our first growth driver expanding our US commercial footprint. We added more headcount in Q3 and remain on track to meet our year end goal. We continue to generate operating leverage and productivity gains from a more measured pace of territory development.

Our broad commercial footprint and methodical approach to expansion results in focused areas of coverage, positioning us well to introduce new products to the market and to execute on our second growth driver, increasing penetration of existing accounts. VTE Excellence is a highly differentiated, comprehensive, and repeatable approach to help hospitals establish VTE programs and drive deeper penetration of our therapies. We remain in the very early innings of market penetration and we continue to see tremendous value and a programmatic approach to ensure patients are consistently identified screened and evaluated by a VTE expert. We continue to make progress and are successfully moving customers along the VTE Excellence Continuum to more advanced phases of program development, where TAM penetration is three to four times higher than in earlier phases.

Our third growth driver is to increase awareness and adoption for Inari's products by building on our broad base of clinical evidence. In the third quarter, we continued advancing both the quality and quantity of our clinical data. First off, as we anticipated, the FLAME study was published on October 17th in the Journal Circulation Cardiovascular Interventions. With the recent publication, we expect to see further awareness of this important study and physicians taking notice of the FLAME data, which is already beginning to change practice pattern. We believe the highly positive results of FLAME in extremely sick patients is powerful enough to build physician confidence for intervening on less sick intermediate risk patients, spilling over into a patient population that is five times larger.

Turning to an update on our RCTs, patient enrollment in our PEERLESS 1RCT comparing FlowTriever to catheter directed lytic therapy remains strong and has eclipsed the three quarter mark during Q3. We anticipate a data readout in 2024. For PEERLESS 2, the RCT for intermediate risk PE patients randomizing treatment with FlowTriever to anticoagulation alone, we remain focused on site activations and expect patient enrollment to commence in early 2024. Lastly, we continue to ramp up enrollment in defiance, the RCT comparing ClotTriever to any coagulation alone. Executing three simultaneous RCTs, which will collectively enroll up to 1,700 patients, clearly reflects our commitment to generating high quality clinical data. We will leverage these data to change the standard-of-care for VTE.

Our fourth drivers to expand our product portfolio. We continue to make progress across the six products that are in full market release in the second half of 2023. Three of these products REVCORE, InThrill, and ProTrieve add direct incremental revenue opportunities. We've gained good initial traction and are receiving excellent clinical feedback across all three products, and we still see tremendous opportunity to keep building awareness and usage across our customer base. The other three products, which are now in FMR, enhance our existing purpose-built tool kits, demonstrating continued innovation in our core VTE portfolios. Those products are T16 Curve and the two products that have most recently entered FMR, ClotTriever XL, and the Generation 2 version of ClotTriever Bold.

ClotTriever XL extends the treatment range of the ClotTriever platform, which together can now target a range of clot chronicity from the vena cava to the popliteal vein. The Gen 2 ClotTriever Bold delivers the same stellar performance for clot clearance with greater ease of use and procedural efficiency. These six products in FMR are testament to a robust pipeline and commitment to addressing unmet needs with purpose built tools. Our last growth drivers expansion into international markets. Q3 marked another quarter of record case and revenue production outside of the US. Our performance was driven primarily by increased adoption in Western Europe, complemented by solid case growth in our early stage markets in Latin America, Canada, and Asia-Pacific.

We continue to make good progress in both China and Japan and anticipate beginning to treat patients in both of these markets in 2024. We will have more to share on our go-to-market strategies in these two important markets over the coming quarters. Given the spectacular unmet need, we expect our international business could represent greater than 20% of total revenue over time. And now, I'll turn it over to Mitch to discuss our Q3 financial performance in greater detail.

Mitch Hill: Thank you, Drew and good afternoon, everyone. Inari's revenues for the third quarter of 2023 were $126.4 million, up 31% over the same period as prior year. The revenue split between product lines is similar year-over-year, with 68% of our revenue derived from the sale of FlowTriever Systems compared to 69% in 2022 and 32% from the sale of ClotTriever and other systems compared to 31% in 2022. In addition to our strong commercial execution in the quarter, we recently signed a lease to expand our operations footprint with a facility in Costa Rica. Although it will take some time to develop the location, we expect this investment to provide additional manufacturing capacity, while also supporting our premium gross margin profile.

Turning to the P&L, gross margin remained flat at 88.5% for the third quarter of 2023 and the third quarter of 2022. Operating expenses were $109.8 million in the third quarter of 2023 compared with $94.9 million for the same period of the prior year. R&D expense was $21.5 million in the third quarter of 2023 compared with $19.1 million for the same period of 2022. The $2.4 million increase in R&D expense was primarily driven by an increase in material and supplies expenses and secondarily, due to higher personnel-related expenses as we increased our headcount. SG&A expense was $88.3 million in the third quarter of 2023 compared with $75.8 million for the same period at the prior year. The $12.5 million increase was primarily due to personnel-related expenses as we increased our headcount and secondarily, due to higher expenses related to professional fees.

Operating income was $2.1 million in the third quarter of 2023 compared with a $9.8 million operating loss for the same period in the prior year. This performance reflects our team's commitment to discipline spending controls, while fully funding our commercial, clinical, and innovation growth drivers. Net income for the third quarter of 2023 was $3.2 million compared to net loss of $10.2 million for the same period in the prior year. The basic and fully diluted net income per share for the third quarter of 2023 was $0.06 and $0.05 based on weighted average basic and fully diluted share count of 57.4 million and 58.6 million, respectively. These compare with a basic and fully diluted net loss per share of $0.19 based on a weighted average basic and fully diluted share count of 53.5 million for the same period of the prior year.

Moving on to the balance sheet, our cash and investments at the end of Q3 totaled $351.3 million, consisting of $89.2 million of cash and $262.1 million of short-term investments. This compares with cash and investments as of the end of Q4 of 2022 of $326.4 million. Our cash flows provided by operating activities were $15.9 million for the third quarter of 2023 compared to cash flows used in operating activities of $13.1 million in the third quarter of 2022. Lastly, I'd like to address Inari's financial guidance. For the full year 2023, I'd like to note that we are increasing our revenue guidance to $490 million to $493 million, an increase of $4.5 million at the midpoint relative to our prior range. Now, I'd like to turn it back to Drew to discuss our acquisition of LimFlow.

Drew Hykes: Thanks Mitch. We are thrilled to discuss Inari's acquisition of LimFlow, a pioneer in limb salvage for patients with CLTI, which is one of the most significant unmet needs in all vascular medicine. We made a minority investment in LimFlow and became a board observer in early 2022. We have long respected the LimFlow team and their progress in transforming the treatment paradigm of CLTI. We're looking forward to welcoming LimFlow to the Inari family. Most importantly, the acquisition aligns with Inari's mission of addressing large unmet patient needs. LimFlow's novel purpose-built technology has full FDA approval, is supported by high quality clinical data and is commencing launch into a significant incremental TAM.

We're confident we can leverage the core competencies we've developed in VTE to make LimFlow a success and can do so without distracting ourselves from our ongoing work in PE and DBT. For all these reasons, we view the acquisition as a great strategic fit for our business. We'll discuss each of these elements in greater detail. Executing this transaction is a significant milestone for Inari. It reflects the rock solid performance of the core business, has enabled us to capitalize on this compelling opportunity from a position of strength. Our business is thriving and our relentless focus on execution allowed us to deliver robust revenue growth in Q3, alongside disciplined OpEx control. Further, we're announcing this transaction on the foundation of a robust balance sheet.

Since our IPO, we've been focused on maintaining a strong cash position, while being good stewards of capital. That discipline has put us in a position to pursue this acquisition. Despite the exciting opportunity to enter the CLTI market, I also want to emphasize that we remain fully committed to our mission to improve outcomes of VTE patient and firmly believe we can continue our work in VTE, while also taking on this acquisition. Our team's tireless efforts and dedication to this mission have positioned us to pursue this acquisition with a partner that is equally committed to creating innovative solutions to address unmet patient needs. Before diving into a more detailed look at LimFlow, I'd like to share, as well with you, a patient story that underscores the dramatic improvement that this technology delivers.

In 2019, a 70-year old man had to have his right leg amputated due to CLTI because there were no other options available to him. A short time later, he also developed pain and gangrene of his left foot and geography demonstrated highly occluded and calcified peripheral arteries with no suitable anatomy for bypass or intervention. Facing a second amputation, he was desperate for a better option. This patient's interventionist provided him with a new treatment option, performing a novel transcatheter arterialization of the deep veins, or TADV with the LimFlow system. The simple percutaneous procedure rerouted arterial blood to the patient's intact venous system, restoring healthy perfusion to his foot. Post-procedure is ischemic pain resolved and over time his foot healed completely.

Thanks to LimFlow, he was able to keep his leg and avoid the extremely dire prognosis associated with being wheelchair bound. LimFlow quite possibly saved this patient's life. The profound clinical impact from one of the first patients treated with this novel technology underscores the ability of a purpose-built toolkit to address a tremendous unmet patient need. The story also highlights common themes with Inari's core VTE platforms, a differentiated solution utilized by our same physician call point that delivers an effective and life-changing improvement for the patients being treated. As I just outlined in the patient story, living with CLTI is quite challenging and the most advanced stages of disease carry significant morbidity and mortality burden.

CLTI is a global health care crisis impacting more than 1.5 million patients each year globally, approximately 560,000 of which patients are in the US. There are approximately 150,000 non-traumatic ischemia related amputations annually in the US, which lead to high mortality rates, repeated hospitalizations, and significant medical costs. With no other options currently available, LimFlow was designed to provide a solution for these patients. In terms of sizing the opportunity for Inari, of the 560,000 patients suffering from CLTI in the US each year, we estimate approximately 55,000 patients have disease that has progressed to the point where they have no treatment options other than amputation. These 55,000 patients have approximately 70,000 limbs that are immediately addressable with the TADV system.

Applying our target ASP against this figure results in a $1.5 billion TAM. Beyond this immediate no-option US addressable market, we believe there are two opportunities that offer the potential for significant expansion. First, we see opportunities to target US patients with less severe disease, which we believe will expand the TAM by about $500 million. We also agree there is a significant opportunity to commercialize LimFlow's device internationally, which we believe would further expand the TAM by $2 billion. By pursuing these additional growth avenues, longer term, we see a path to upside expansion of LimFlow's nodes global TAM to over $4 billion. Next, I'd like to provide an overview of the purpose-built technology that is enabling his game-changing TDAV procedure.

The LimFlow system consists of multiple purpose-built components, including specialized catheters to enable the below the knee artery to vein crossing, a differentiated push value at home and covered stents. In the TADV procedure, the toolkit is used to reroute arterial blood into the healthy venous system to deliver oxygenated blood back into the foot. The technology has been proven to save limbs by healing wounds and preventing amputation. LimFlow has generated compelling clinical evidence across multiple trials to demonstrate the safety and effectiveness of its treatment. Of note, the landmark PROMISE II study was published in the New England Journal of Medicine in March of 2023. This trial demonstrated 76% of no-option CLTI patients were able keep their leg and experience progressive wound healing, with many having significant pain relief during the time following LimFlow treatment.

Now, I'd like to go over the compelling strategic rationale underpinning this transaction. Our ethos and mission are focused on addressing significant unmet needs and thinking big. LimFlow is equally committed to these same important ideals, in perfect alignment with Inari's mission. LimFlow has several attractive attributes from a regulatory, IP, and reimbursement standpoint. The system is fully PMA-approved and the only on label device for no-option CLTI. As the first mover in the market, LimFlow has a robust IP portfolio, and there are significant barriers to entry for new entrants. The key elements of reimbursement are in place, with an established path to enhanced payment in multiple sites of services. The transaction expands our total addressable market with significant revenue and profit potential.

Building on this foundation, LimFlow is a natural fit with our specific commercial expertise, clinical capabilities, market development playbook, and ability to iterate new products. We believe that leveraging Inari's core competencies will make a meaningful impact on LimFlow's trajectory and ultimately allow us to treat more patients faster. Importantly, we are confident we can integrate and execute on the LimFlow opportunity, while maintaining the same momentum and focus on VTE. LimFlow will be commercialized using an independent sales organization, completely separate from VTE. This team will pursue a narrow and deep commercial strategy, focused on a relatively small number of high-volume CLTI centers. Following FDA approval in September, we believe LimFlow became a must add technology for all limb salvage centers of excellence, capable of differentiating and growing these programs.

Despite the largely independent sales effort, we believe there are significant similarities between LimFlow and the market development work Inari does every day in the chronic unit disease space. We also anticipate synergies when we reenter the acute limb ischemia market with Artix next year. Taken together, LimFlow will offer compelling additional growth opportunity for Inari, and has the potential to be an important component of our overall revenue mix. Framing the opportunity, one could use our commercial ramp in VTE as an analog. After seven years of commercial effort, we have currently reached approximately 7% penetration in our $6 billion US VTE market. No-option CLTI is a similarly large underpenetrated $1.5 billion US TAM, with equally compelling unmet needs.

We believe over the medium term, we can achieve similar penetration in CLTI as to what we have accomplished in VTE. In fact, we're optimistic that we may be able to ramp faster in CLTI given the more concentrated customer base, the no-option nature of these patients, and the high quality published evidence we will be able to leverage right from the start of the launch. LimFlow is commencing its US commercial ramp. Sales reps are hired, fully trained, and beginning to sell. LimFlow's TADV toolkit offers a clear first-mover niche as a fully FDA-approved product and the only on label device for no-option CLTI. The team will be able to efficiently drive adoption given the concentration of procedures among a relatively small number of CLTI centers of excellence.

In conclusion, We are excited to bring LimFlow's clinically differentiated technology in house. The acquisition aligns with our mission to address unmet patient needs, offers an additional growth driver and a significant incremental TAM, and leverages the core competencies we honed in our successful commercial ramp in the VTE market. We believe LimFlow will make an incredibly positive impact, not only on patients, but also our business. I'll now turn it back over to Mitch to discuss the deal terms and financial considerations.

Mitch Hill: Thank you, Drew. Starting with the deal terms, our agreement to acquire LimFlow includes a payment of $250 million paid in cash at close, which is expected to occur in the fourth quarter of 2023, plus additional contingent consideration of up to $165 million in cash based on the achievement of certain reimbursement and commercial milestones with the potential to be paid over the next three years. The earliest potential milestone payment under the agreement is due in 2025. Inari closed Q3 with just over $350 million of cash and cash equivalents and currently has access to $75 million in liquidity from an asset based credit facility. Our strong cash position has allowed us to be nimble as it relates to various strategic opportunities, and will enable us to fund our acquisition of LimFlow.

As Drew mentioned earlier, one of the core elements of our strategy since the IPO has been to operate with a strong balance sheet and we will continue to evaluate opportunities to further strengthen it. Turning to the financial highlights of the transaction, you heard Drew describe, we believe LimFlow has significant revenue growth potential. We anticipate initial operating support for LimFlow's commercial launch approximately 2 million to 3 million per month. As LimFlow's revenue begins to ramp throughout 2024 and into 2025, we believe it will increasingly cover its expenses reducing the impact on our operating income. Regarding profitability, we will continue to invest in our growth drivers in a disciplined manner while leveraging our commercial infrastructure.

As a reminder, at our September 2022 Analyst Day, we committed to achieving sustained operating income by the first half of 2024. We continue to take this commitment seriously and based on our Q3 results, we are a bit ahead of schedule. On a pro forma basis with the acquisition of LimFlow, we now expect to reach sustained operating profitability in the second half of 2025. In summary, we're pleased that Inari is in a financial position to move forward with the acquisition of this important technology. And with that, I'll hand the call over to the moderator for Q&A.

Operator: Thank you. We will now begin the question-and-answer session. [Operator Instructions] And our first question comes from Kallum Titchmarsh from Morgan Stanley. Please go ahead.

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