Earnings Call Transcript - GKOS Q1 2022

Operator, Operator

Good afternoon. My name is Julien and I will be your conference operator today. At this time I would like to welcome everyone to Glaukos' First Quarter 2022 Financial Results Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. If you'd like to ask a question during this time, please follow the instructions provided. Chris Lewis, Vice President of Investor Relations and Corporate Affairs, you may begin your conference.

Chris Lewis, Vice President of Investor Relations and Corporate Affairs

Thank you, and good afternoon. Joining me today are Glaukos Chairman and CEO Tom Burns, President and COO Joe Gilliam, and CFO Alex Thurman. Before we begin, we wanted to remind you of a change in the way we plan to handle our quarterly earnings disclosures and calls starting with this one. The company has posted a document on its Investor Relations website under the Financials and Filings Quarterly Results section titled Quarterly Summary. This document is designed to provide the investment community with a summarized and easily accessible reference document that details the key facts associated with the quarter, the state of the company's business objectives and strategies, and any forward statements for guidance we may make. This document has been and will continue to be provided alongside the company's earnings press release, and it's designed to be read by investors before the regularly scheduled quarterly conference call. As such, beginning this quarter, we will make very brief prepared remarks and quickly transition into a question-and-answer session. It is our goal that this change will make our quarterly earnings process more efficient and impactful for the investment community going forward. To ensure ample time and opportunity to address everyone's questions, we request that you limit yourself to one question and one follow-up. If you still have additional questions, you may get back into the queue. Please note that all statements other than statements of historical facts made on this call that address activities, events, or developments we expect, believe, or anticipate will or may occur in the future are forward-looking statements. These include statements about our plans, objectives, strategies, and prospects regarding, among other things, our sales, our products, pipeline technologies, U.S. and international commercialization, integration and market development efforts, the efficacy of our current and future products, our competitive market position, our regulatory strategies and reimbursement for our products, financial condition and results of operations, as well as the expected impact of the COVID-19 pandemic on our business and operations. These statements are based on current expectations about future events affecting us and are subject to risks, uncertainties, and factors relating to our operations and business environment, all of which are difficult to predict and many of which are beyond our control. Therefore, they may cause our actual results to differ materially from those expressed or implied by forward-looking statements. Review today's press release and our recent SEC filings for more information about these risk factors. You'll find these documents in the Investors section of our website at www.glaukos.com. Finally, please note that during today's call, we will also discuss certain non-GAAP financial measures, including results on an adjusted basis. We believe these financial measures can facilitate a more complete analysis and greater transparency into Glaukos' ongoing results of operations, particularly when comparing underlying results from period-to-period. Please refer to the tables in our earnings press release available on the Investor Relations section of our website for reconciliation of these measures to their most directly comparable GAAP financial measure. With that, I will turn the call over to Glaukos' Chairman and CEO, Tom Burns.

Tom Burns, Chairman and CEO

Thanks, Chris. Good afternoon, and thank you all for joining us today. We certainly hope everyone is safe and doing well. Today Glaukos reported first quarter net sales of approximately $68 million, up versus the year-ago quarter and up 1% on a constant-currency basis. Our first-quarter performance reflects solid execution across our global glaucoma and Corneal Health franchises amidst continued COVID-related volatility and headwinds globally, and U.S. combination cataract glaucoma dynamics associated in particular with the 2022 CMS final physician fee reimbursement rates that became effective on January 1st, 2022. From a commercial perspective, we've been very pleased with the execution of our strategies and the resiliency of our U.S. combo cataract franchise in the face of the reimbursement headwinds thus far in 2022. During the latter part of this first quarter, we launched our Iaccess device that has both minimally invasive and tissue-sparing features that will allow customers to perform goniotomy procedures. We also look forward to bringing iPrime to customers soon as well. Our international glaucoma and Corneal Health franchises continue to deliver strong results as we develop these important businesses. We are raising our 2022 net sales guidance range to $270 million to $275 million versus $265 million to $275 million previously given our better-than-expected first-quarter results and latest forward outlook. On the development front, we continue to advance our pipeline, following the recent clearances of Iaccess and iPrime. The FDA 510(k) review of iStent infinite is continuing and we remain focused on a potential mid-year clearance for this important product. iDose TR and Epi-AXA, or Epi-On activities, remain on track for NDA submissions and targeted FDA approvals in 2023. The iLution Phase III clinical trials for dry eye and presbyopia are well underway. Finally, the FDA did recently notify us that the PreserFlo MicroShunt PMA submission is non-approval. While the MicroShunt is not a material potential driver of our near-term business, this outcome is disappointing given our early positive commercial experience with this product in Canada and Australia, and encouraging surgeon feedback globally as they seek alternatives for late-stage glaucoma treatment. We intend to engage with the FDA to determine optimal clinical and regulatory next steps. Before we open up the questions, I'd like to reiterate our conviction in our long-term strategic vision. We anticipate and are planning for a robust cadence of new drop-less platform and product introductions over the coming years that have the potential to fundamentally transform Glaukos over time and meaningfully advance the standard of care and improve outcomes for patients suffering from sight-threatening diseases. We are continuing to invest in Glaukos to scale our team and to advance our mission to transform vision with disruptive, drop-less, game-changing platform innovations. So we're excited about our prospects and confident in our ability to execute our plans in the years to come. And so with that, I'll open the call to questions.

Operator, Operator

Thank you. Our first question comes from Andrew Brackmann from William Blair. Please go ahead, your line is open.

Andrew Brackmann, Analyst

Hey guys, afternoon and thanks for the questions. I like this new format. So congrats to Chris and the team for putting all this together. Maybe just to start here and have you address the elephant in the room on multiple procedure reimbursement. Obviously, the stock has been under pressure to a degree because of that, investors are certainly having questions around that. So can you just talk to us about your thoughts on that topic, specifically, how you're viewing the landscape there with Iaccess and iPrime and just what it means to your business? Thanks.

Joe Gilliam, President and COO

Thanks, Andrew, and Chris Pesh volunteers his sincere thanks as well. There's a lot in that. Obviously, there's been a lot of investor-related activity on this. So I'll try to cover the core topics, and if we got follow-ups, we can handle it. I think as it relates firstly to Iaccess, and just as a reminder for investors, reimbursement is determined by the procedure performed and not the device itself. And we believe Iaccess has features that allow surgeons to perform a goniotomy procedure that would meet the definition of CPT code 65820 if they deem it medically necessary and reasonable. As you think about iPrime, similarly, we believe surgeons can use the iPrime device to perform procedures that meet the definition of CPT code 66174 if they deem it to be medically necessary and reasonable at their own discretion. And to the heart of your question as it relates to the pairing of procedures, the Academy of Ophthalmology is really already weighed in formally on the subject of pairing these procedures where a surgeon feels it's medically necessary to maximize the clinical benefit for patients. In March 2022, they put a bulletin out that stated, if a canaloplasty is performed in conjunction with a Stent and cataract, then you should bill 66174 and 66991 as being appropriate. And more recently, in April of this year, they also released a bulletin that if a goniotomy is performed in conjunction with stents and cataracts, then you should bill 65880 plus 66991 as being appropriate. So I think, at the end of the day, we put it altogether, it appears many surgeons are increasingly turning to multiple procedures. Now they have the tools to do so and to provide the maximum benefit to their patients, given this is a sight-threatening disease, and ultimately our goal is to provide surgeons with truly minimally invasive alternatives to maximize the overall patient benefit and hopefully grow the overall markets while doing so. So I think hopefully that provides a little more clarity to some of the information flow that's been running in the investment community.

Andrew Brackmann, Analyst

Certainly. Thanks for that, Joe. And then maybe if I can just sort of switch topics here for a second, and I hate to be so near-term focus but as it relates to the guidance, you beat the quarter, you beat the street buys pretty handily by $7 million or so on the quarter, but only raising full-year range by I think it's $2.5 million. So can you just talk to us about and give us any additional detail with respect to the process or changes in our assumptions for that updated range? Thanks, Joe.

Joe Gilliam, President and COO

Thank you, Andrew. We provided guidance for the year, not the quarter, and we were pleased with the first quarter results compared to our expectations at the start of the year. It's important to note that this performance came without the benefit of new products, which is a positive sign as we look at the rest of the year. However, it’s still early, and we face several risks such as U.S. reimbursement cuts, their impact, and global competition. Change doesn’t occur in just one quarter, and we anticipate competition will continue to lag as the year progresses. We also have to consider factors like foreign exchange and the broader economic situation, not to mention ongoing COVID risks. Taking all of this into account, we are satisfied to have raised the lower end of our guidance by $5 million just two months after our initial projection given the challenges we faced at the beginning of the year.

Andrew Brackmann, Analyst

Makes sense. Thanks, guys.

Operator, Operator

Our next question comes from Chris Cooley from Stephens. Please go ahead, your line is open.

Chris Cooley, Analyst

Good afternoon, and thanks for taking the questions. Congrats on a great start to the new year, and let me just briefly also echo Andrew's sentiment. Great job to Chris and his team, this is such a better way to do a call. So thanks you guys. Just in terms of my two questions, could we unpack the growth a little bit that you saw, in particular, I should say, the 15% decline you saw in the U.S. glaucoma franchise. Help us think a little bit there about how much of that was volume-related versus price. And then as we think about stepping back up through the year, what you're assuming in terms of the contribution from both Iaccess and iPrime. And then I've got a quick follow up.

Joe Gilliam, President and COO

All right. Thanks, Chris. Chris, also thank you for the kind comments in the beginning of your question. On the first part, I guess I would answer this way: pricing remains stable in the first quarter, largely stable. So what you're seeing there is from a performance overall in the U.S. glaucoma segment is largely translated to volume dynamics over the course of the first quarter. Now, there's probably two things going on there. As you'll recall, COVID was still a reality globally at the beginning of the quarter in January and early February. And then, of course, on top of that, we have the dynamics around the changes in professional fee reimbursement. What was your second question?

Chris Cooley, Analyst

No, that addresses it. I was thinking about the second part regarding the contribution from Iaccess and iPrime, and how that supports the overall domestic glaucoma franchise, but I can follow up on that online.

Joe Gilliam, President and COO

That's fine, Chris. I can answer that. If it relates to going forward, we mentioned when we provided the guidance for the year of 265 to 275 that we expected some contribution, although modest, from Iaccess, iPrime, and iStent infinite, based on the anticipation of product launches from those throughout the year. I believe that still holds true. Therefore, I wouldn't expect too much regarding your contribution from those products at this stage. Ultimately, we will have much more to discuss as the year progresses regarding their adoption and how they are impacting our top line.

Chris Cooley, Analyst

And if I could just squeeze a quickie in, just in thoughts here, you clearly have a very strong cadence with the iPrime and Iaccess in the controlled launch here in the second quarter moving forward, we have Epi-On and iDose coming as well. But how are you thinking about the iLution platform? How will we start to see data and kind of milestones across the board there for both dry eye and presbyopia, just trying to think about some markers we can put out there just to kind of track the progress? Thanks again.

Tom Burns, Chairman and CEO

Thank you, Chris. This is Tom. I’ll address the question regarding our foundational platform with iLution. We are genuinely excited about this new platform, which not only serves as a depot for the cream but also allows the tissues in the eyelid to act as a depot. This presents an opportunity for various active pharmaceutical ingredients to be delivered through the conjunctiva or at a controlled rate, targeting the front of the eye to treat anterior segment disease. We have initiated two Phase II clinical studies: one involving 200 patients to evaluate the safety and efficacy of twice-daily iLution pilocarpine compared to placebo, focusing on signs and symptoms of dry eye. We anticipate completing this clinical trial by May 2023, and I believe we are on track to finish ahead of that deadline. Additionally, we are working on another proprietary formulation of pilocarpine in the iLution cream aimed at treating presbyopia, which affects nearly 100 million people in the U.S. If proven safe and effective, we hope to make a significant impact there as well, with a projected completion of the clinical trial by May 2023, and I am optimistic we will meet or exceed that timeline. This should give you some clarity on our progress; we will also be looking at dose ranging at various concentrations to identify the suitable option for our Phase III clinical trial, with the goal of advancing treatment for dry eye disease and presbyopia.

Chris Cooley, Analyst

Thank you.

Tom Burns, Chairman and CEO

Thanks, Chris.

Operator, Operator

Our next question comes from Larry Biegelsen from Wells Fargo. Please go ahead, your line is open.

Charles Wilson, Analyst

Hi, this is Charles Wilson on for Larry. First, congrats on the nice quarter. I had a question on iDose. It's like the one year follow-up, if I have this right, for the Phase III study is complete in June this year. Do you have a plan for disclosing the top-line results in the full data? Do you think you'll be able to present that in a medical conference before approval?

Tom Burns, Chairman and CEO

Yes, Charles, we will. As I mentioned earlier, we are aiming to release the Phase III pivotal trial data sets in the latter part of this year or by early next year at the latest. This should indicate that we are on track, and we will have those results available.

Operator, Operator

Our next question comes from Ryan Zimmerman from BTIG. Please go ahead, your line is open.

Phillip Dantoin, Analyst

Hey, this is Phillip Dantoin on for Ryan. Can you hear me all right?

Tom Burns, Chairman and CEO

We can.

Phillip Dantoin, Analyst

Great. I just have two quick questions here. Just number one, there's not really consistent coverage of goniotomy combined with stents for MAX across the U.S. So what is your expectation that LCDs could change both positively or negatively?

Joe Gilliam, President and COO

Thanks, Phil. I'll start off and if Tom wants to add anything, he certainly can. I think anytime you go through new product launches, you have a variety of things that you worked through. That's no different than what we've gone through over the years with the mixed devices with iStent inject and iStent in its original launch. We'll continue to work through those dynamics as it relates to the MAX and keep you advised as we move forward.

Tom Burns, Chairman and CEO

What's been powerful lately is the release and disclosure by the academy, which has taken a position that if surgeons deem it medically necessary and reasonable, that goniotomy and Stent can be used and they codify both codes 65820 and 66991 as the measures for how surgeons would use the codes to be able to code for these procedures. And so to me, that's a very forceful arbiter and gives us a powerful way to approach these marks, to be able to influence them positively going forward.

Phillip Dantoin, Analyst

Awesome. Thanks for that color. And then just on my second one, as far as you have a line of sight on this, what should we expect at the upcoming AMA meeting on canaloplasty? Why are we discussing this? What risks does this potentially present to the iPrime? Thanks.

Joe Gilliam, President and COO

Yeah. Thanks, Phil. I think there's been a little bit of a misconception around this upcoming AMA CPT editorial panel. We believe it's expected to discuss the simple addition of an example in a parenthetical 66174, the code. To basically clarify what that code is to be used for, for example, canaloplasty. The Academy of Ophthalmology asked for this given provider questions about proper terminology and ultimately, that parenthetical will become effective in January of 2024.

Phillip Dantoin, Analyst

Makes sense. And thanks, guys, and congrats again on this transition to the better format.

Tom Burns, Chairman and CEO

Thank you.

Operator, Operator

Our next question comes from Matt O'Brien from Piper Sandler. Please go ahead, your line is open.

Drew Stafford, Analyst

Hi, guys. This is Drew for Matt, thanks for taking the questions. I guess just to start off, maybe an update on Alcon and Hydrus, any changes so far with how that device is being marketed or anything you can speak to, as seen as far as the impact to Glaukos that you're baking into your guidance.

Joe Gilliam, President and COO

Thanks, Drew. I'll start by saying we've taken into account all competitive dynamics, including Alcon's acquisition of Ivantis, when setting our guidance for the year. We considered this in our financial expectations as we revised the bottom line of our guidance. We have a great deal of respect for Alcon as a company, and they now have full control of the Hydrus stand. We have observed their presence in the marketplace for several years, and I expect they will continue to establish themselves over the course of the year. We will see them as a competitor not only in the U.S. but globally. Overall, I anticipate more of the same.

Drew Stafford, Analyst

Okay, that makes sense. And then just thinking about the 15% decline in the U.S., it sounds like that's largely related to volumes. I assumed some of that earlier in the year here would be temporary competitive trialing. So just any sense for how some of those trailing activities have gone for Glaukos? Have you had surgeons try other devices and come back to Glaukos? And when do you expect some of that temporary trailing to begin to wind down? Thank you.

Joe Gilliam, President and COO

It's a fair question; it's a difficult one to answer. Whenever there's an adjustment in professional fee reimbursement, disruptions in ordering patterns and customer trials are expected. Some of these patterns have started to return, while others may take time, and there could be ongoing losses as physicians become aware of the situation. It remains a fluid dynamic. We're encouraged by the results from the first quarter, and that is reflected in the guidance we provided.

Operator, Operator

Our next question comes from Tom Stephan from Stifel. Please go ahead, your line is open.

Thomas Stephan, Analyst

Great. Hey everyone. Thanks for the questions. If I can just start big picture. A lot of things happening in 2022 with MIGS between new products, obviously reimbursement changes. And we pick up in our checks a lot that there just seems to be a bit of confusion in the marketplace among doctors. So I guess, would love to hear your perspective just on the state of the U.S. MIGS market today and how you believe the longer-term, I guess competitive dynamics may ultimately play out?

Joe Gilliam, President and COO

Yeah. Thanks, Tom. I'll start off and then, Tom, if you want to add comments you can add to that. I think it is true that there has been a fair number of new product introductions in recent years, including some of our own here as we navigate 2022. And whenever you do that or go through that, surgeons are going to be evaluating what's their optimal algorithm with the products that are available and the patients and the state of disease that they have. So I think it's natural that there be some of that here, now, as we go through all this. I think you've heard us say for a long time that part of the mission at Glaukos was to provide the full portfolio of alternatives for these surgeons as they move forward. So I think those are discussions that we look forward to engaging in with these surgeons as I think about those algorithms and how our product portfolio may map against that. Ultimately, our goal is to provide the most minimally invasive alternatives and to hopefully maximize the overall patient benefit and expand the market while we do it.

Tom Burns, Chairman and CEO

And I would just add that as we look at this, there are a number of alternatives that have entered in as surgeons grapple with that and get their sea legs as to how they want to build their own algorithms. That probably leads to some of the near-term confusion over what you're hearing from the end market. What I am very encouraged by is the movement of surgeons independently of us to the use of paired procedures to be able to arrest this sight-threatening disease. Clearly, there's a need to be able to drive to lower intraocular pressures through the use of procedures that may be either additive or synergistic to be able to get them there. Because of that, I think we've been perhaps a little pressured and put ourselves in a very, very good position as we move forward in this marketplace.

Thomas Stephan, Analyst

Got it. That makes sense. If I can quickly pivot just to supply chain disruptions, inflationary pressures, any updated view kind of as we sit here today or any moving parts in particular we should be mindful of, whether it's in relation to your core portfolio or the pipeline. And then do you guys still feel comfortable with that 83% to 84% gross margin range you've talked about recently? Thanks, guys.

Joe Gilliam, President and COO

Yeah. Tom, it's Joe. I'll start with some macroeconomic points and then I'll turn it to Alex for the gross margin view. We're certainly not immune to the ongoing new supply chain challenges. I'm proud of how our organization has responded, showing creativity and ingenuity to navigate these complexities successfully. So far, we've maintained product supply and clinical trial supply, but navigating these circumstances is much harder now than it was before the pandemic. We've also been impacted by inflation dynamics, which many are discussing. This is affecting our suppliers and partners, as well as our pipeline and almost everything we do from a human resource perspective. It's a significant challenge, but so far we are managing it well. Alex.

Alex Thurman, CFO

Yeah. Hey, Tom, this is Alex. So on the margin, the range of 83% to 84%, we do believe that is still the appropriate margin for the business. We did an 83 in the quarter. That was about 160 basis points less than fourth-quarter. However, that was primarily driven by geographic revenue mix. Our international revenues had a much higher percentage of our overall revenue mix in the first quarter, which drove it down a little bit. As we've said, historically, our international margins are a little bit lower than our U.S. margins. But given that fact pattern, we still believe and we still target internally and we express that same sentiment to you that the 83% to 84% range is the correct one.

Thomas Stephan, Analyst

Very helpful. Thanks, Alex. Thanks, everyone.

Joe Gilliam, President and COO

Thanks, Tom.

Operator, Operator

Our next question comes from Allen Gong from JPMorgan. Please go ahead, your line is open.

Allen Gong, Analyst

Hey guys, congrats on the good quarter. I just had a few quick ones. The first one is obviously a very strong trend in your core glaucoma business with any of that stocking dynamics earlier on in the quarter as physician practices really prepared for things to hopefully get back to normal on for them to give you getting back to normal levels of volumes?

Joe Gilliam, President and COO

I think it's a good question, but the answer is no. I don't think there was really any stocking dynamics associated with the first-quarter results. If anything, you had a little bit more noise associated with COVID and just the general sort of environment.

Allen Gong, Analyst

Got it. And I think someone already asked something along the lines of this, but glad to see the bottom end of the guidance range moving up. But even if I just take the sales that you had in the first quarter and annualize it, you're already at the very bottom of the range. So when we think about the sequential improvement we should really be seeing as hopefully trends get a little bit better, as new products launch, what are you assuming for competitive dynamics? Is it just assuming that as you said, Alcon, maybe gets a little better, a little bit more pressure from Alcon and other competitors offset by these new products and hopefully just broader trends getting better? And yeah, I ask why isn't the top end of the range where we should be off the back of such a strong first-quarter. Thanks.

Joe Gilliam, President and COO

Again, I think it's fair and we acknowledge that we are pleased with the way that the first quarter played out relative to our expectations entering the year. But as I said earlier, I just think it's still early in the context of the risks we face entering the year and that we still face, namely the reimbursement cut dynamics and just in competition generally. When you overlay some of the FX-related considerations, the macroeconomic factors, and the COVID risk, we came into this call quite pleased that we were able to raise the bottom end of the range by $5 million, just two months after giving our initial guidance.

Operator, Operator

Our next question comes from Stephen Litchman from Oppenheimer. Please go ahead, your line is open.

David Kuang, Analyst

Hi, this is David on for Steve, thanks for taking the questions. I was wondering if you can provide any more color on the latest Macro Outlook you're seeing through April relative to procedure volumes, new patient flow, and backlog?

Joe Gilliam, President and COO

Thanks, David. When responding to that question, it's important to consider individual regions. In the U.S., we are pleased with the stability we've observed concerning macro dynamics around COVID, procedure flow, and seasonal changes as we transition from winter to spring. Internationally, most markets align with this observation, but there are still areas with a resurgence of COVID that can lead to both temporary and prolonged disruptions in procedure volumes. This has been a dynamic we have adapted to for over two years now. While the impact is somewhat less than before, it remains significant.

David Kuang, Analyst

Got it, thanks. And then just one question on how we should think about the OpEx spending trend to the rest of this year. Is there any significant investment planned for additional sales reps or pipeline products that we should think about? Thanks.

Alex Thurman, CFO

Hey, David. This is Alex. Happy to take that question on the OpEx. So as you saw, we posted about a $70 million non-GAAP OpEx in the first quarter, which if you run that out for the year, it's about $280 million. However, Joe has said in the past, and we believe this still holds true, that our business justifies around a $300 million run rate for the year. So we would encourage you to think about that and to put that into your model, which also says that you're going to see sequential increases over the year to get to that $300 level of OpEx.

David Kuang, Analyst

Thank you.

Operator, Operator

We have no further questions in queue. I'd like to turn the call back over to management for closing remarks.

Tom Burns, Chairman and CEO

This is Tom, and I want to thank you all for your time and attention today. We again hope everyone is staying safe and we thank you for your continued interest in Glaukos Corporation. So with that, goodbye.

Operator, Operator

This concludes today's conference call. Thank you for your participation. You may now disconnect.