RxSight, Inc. Q4 FY2021 Earnings Call

Thank you for standing by and welcome to RxSight Fourth Quarter 2021 Earnings Conference. At this time, all participants are in a listen-only mode. Please note the conference is being recorded. Now it's my pleasure to turn the conference to Philip Taylor. The floor is yours.

Thank you, operator. Presenting today are RxSight President and Chief Executive Officer, Ron Kurtz, and Chief Financial Officer, Shelley Thunen. Earlier today, RxSight released financial results for the three months and full year ended December 31, 2021. A copy of the press release is available on the company's website. Before we begin, I would like to inform you that comments and responses to your questions during today's call reflect management's views as of today, March 08, 2022, only, and will include forward-looking statements and opinion statements, including predictions, estimates, plans, expectations and other information. Actual results may differ materially from those expressed or implied as a result of certain risks and uncertainties. These risks and uncertainties are more fully described in our press release issued earlier today and in our filings with the Securities and Exchange Commission. Our SEC filings can be found on our website or on the SEC's website. Investors are cautioned not to place undue reliance on forward-looking statements. We disclaim any obligation to update or revise these forward-looking statements. We will also discuss certain non-GAAP financial measures. Disclosures regarding these non-GAAP financial measures, including reconciliations with the most comparable GAAP measures, can be found in the press release. Please note that this conference call will be available for audio replay on our website at rxsight.com on the Investor Calendar page and the News and Events section on our Investor Relations page. With that, I will turn the call over to CEO Ron Kurtz.

Good afternoon, everyone and thank you for joining us. I'll begin with an overview of our progress in 2021 and more specifically in Q4 followed by a discussion of our plans for further growth in 2022. Shelley Thunen will then take us through the financial details for Q4 as well as our 2022 guidance, after which we'll open up the call for questions. 2021 was a very productive year for RxSight. We accelerated the adoption of our light adjustable lens, or LAL, completed a successful IPO, introduced key product advancements like ActivShield and rapidly expanded our U.S. commercial team. These accomplishments, coupled with the LAL's unique ability to deliver precisely customized vision for patients as well as to expand premium cataract surgery revenue for doctors and practices, have created substantial momentum for RxSight to drive continued growth in 2022. Our primary growth driver is building out the infrastructure of postoperative LAL treatments. This involves both the sale of light delivery devices, or LDDs, to new practices, as well as the training of new doctors and staff, thereby enabling more patients to select the LAL for premium cataract surgery. In the fourth quarter, we added 45 LDDs to the network of clinical sites offering postoperative LAL treatments, bringing the installed base to 206 at the end of 2021 and representing a substantial increase from the 31 LDDs sold in Q3 of 2021. We believe our strong Q4 LDD sales were driven by a combination of factors, including positive references from existing RxSight customers using our ActivShield LAL, favorable seasonality, and expanding productivity of our LDD sales force and processes. As we have noted before, peer-to-peer technology endorsements are very important in ophthalmology and willingness to recommend RxSight to a friend or colleague is the key question we ask on our annual customer survey. For the survey performed in Q4 2021, just after the conversion of all RxSight practices to the ActivShield LAL, we recorded an extremely high 97% willingness to recommend. I'll discuss more about ActivShield in a moment, but we believe the very positive reception this technology advancement received from then-current RxSight practices influenced a number of new accounts to purchase LDDs in Q4 so that they could offer the LAL to their patients. In Q4, we also likely benefited from favorable seasonality, which is a longstanding occurrence within ophthalmic capital equipment purchasing cycles. The annual meeting of the American Academy of Ophthalmology, the largest ophthalmic conference of the year, returned to an in-person event in Q4. Though international attendance was low, we experienced excellent engagement and interactions with a high volume of U.S. doctors, both in our booth and at other venues. With good visibility to their overall capital spending in 2021, many of these practices were able to move ahead with LDD purchases and take advantage of end-of-year tax savings. The last driver of Q4 performance we will discuss is our LDD sales force, which increased from six professionals at the time of the IPO in July to 18 at the end of Q4. This highly experienced team has deep relationships with doctors in their regions and has continued to mature and expand the LDD sales funnel as we further penetrate the market. While growth of our LDD install base is a major driver for increased LAL sales, the 2,959 LALs implanted during the fourth quarter represented a significant jump from the 1,977 implanted during Q3. We saw increased LAL use across both new and established accounts from Q3 to Q4, suggesting that the introduction of ActivShield was continuing to have an impact on utilization. ActivShield provides an extra layer of UV protection on the surface of the lens, giving doctors and patients confidence that they will not damage the LAL if they're not fully compliant with UV protective glasses. Coupled with the patient's ability to test drive and optimize their vision, this additional level of confidence creates a positive feedback loop. Importantly in Q4, we also began a collaboration with RxSight practices to collect real-world clinical data on an ongoing basis. So far, approximately 70 practices have agreed to share data captured and stored on their LDD, which includes the final refraction of each patient as well as other useful clinical information. In a subset of approximately 50 practices operating under an IRB-approved protocol, we also began to collect additional data one to three months after completion of all light treatments. A preliminary snapshot of both these datasets was shared at the American-European Congress of Ophthalmic Surgery (AECOS) last week, indicating that over 90% of more than 500 eyes analyzed to date had very low residual refractive error after the final adjustment—less than a half diopter residual sphere or astigmatism. These real-world results, which included a number of complex patients, are superior to any reported for other premium IOLs and are on par with both our Phase 3 data and published reports for LASIK, which is considered the standard for refractive procedure accuracy and precision. In a validation of observations we have previously noted, approximately 75% of patients elected to customize their vision in both eyes to optimize their binocular vision at a range of distances. Because the LDD also records the target refraction at each adjustment, the collected data also indicates that for more than half of patients, the refractive goal was changed during the adjustment period, suggesting most patients were taking advantage of the ability to test drive and make small adjustments to their vision. Approximately 160 LAL eyes have also undergone depth-of-focus evaluation, demonstrating an extended range of vision without glasses, similar to currently marketed enhanced and extended depth-of-focus IOLs. However, unlike these IOLs, the LAL minimizes residual refractive error and does not increase glare, halo, or reduce best-corrected or contrast vision relative to a conventional monofocal IOL. Additional presentations of this expanding dataset are planned for the American Society of Cataract and Refractive Surgery (ASCRS) meeting in May, as well as at a meeting in October. We also anticipate that our newly formed team of LAL account managers will use this data to help doctors optimize the results and educate their teams and patients on the clinical benefits of the LAL. Because patient refractions are stored in our LDD, we are the only cataract company that can easily collect such large-scale data. I would also like to provide an update on the lower cost-to-manufacture LDD, which we have reported on previously. As you may recall, this device will have the same functionality and performance as our current LDD and so we do not consider it a growth driver. However, its introduction is expected to reduce our cost of sales and improve our gross margin. We continue to expect to receive FDA approval for this device in Q2 of this year. However, we expect to ship our current LDD at least through the end of the year to mitigate significant industry-wide supply chain risks. Since components for our current LDD have been in the supply chain longer, we believe we are more likely to be able to source them during this difficult period. I also want to provide an update on our request for labeling changes related to indoor UV spectacles used with the ActivShield LAL. Because the functionality of the ActivShield LAL has already been approved and is being used on a daily basis by doctors and patients, we also do not consider this labeling change to be a growth driver. Based on the FDA's request for additional data, we do not anticipate approval for these labeling changes this year. As we look to 2022 and beyond, we believe the major growth catalyst for our business will continue to be growing awareness of the LAL's superior clinical results, including its ability to allow patients to test drive and optimize their vision before making a final decision. Superior outcomes help practices convert more patients to higher-revenue LAL procedures, thereby driving both a better medicine and better business value proposition. By leveraging real-world data that we can uniquely collect and increased access to doctors, our expanded sales team is already building on the momentum established in 2021. With that, I'd like to turn it over to Shelley for more details on the fourth quarter and on 2022 guidance.

Thank you, Ron, and good afternoon, everyone. Total revenue in the fourth quarter of 2021 was $8.4 million, an increase of 46% sequentially compared to the quarter ended September 30, 2021, and a 71% increase compared to the fourth quarter of 2020. Looking at revenue by product line, we sold 45 LDD systems in the fourth quarter of 2021, generating $5.3 million in sales compared to 31 LDDs driving $3.7 million of LDD sales in the third quarter of 2021 and 23 LDDs in the fourth quarter of 2020 for $3.3 million in sales. As expected in our early stage of commercialization, LDDs continue to dominate the sales mix, representing 63% of our revenue in the fourth quarter of 2021. We sold 2,959 LALs in the fourth quarter of 2021 generating sales of $2.9 million compared to 1,977 LALs driving $1.9 million of LAL sales in the third quarter of 2021 and 1,577 LALs for $1.5 million of LAL sales in the fourth quarter of 2020. Fourth quarter gross profit was $2.9 million or 34% of revenue compared to gross profit of $1.3 million or 23% of revenue in the third quarter of 2021 and $1.4 million gross profit in the fourth quarter of 2020 or 28% of revenue. The sequential and year-over-year increases in gross profit were primarily due to higher sales volumes. Selling, general and administrative expenses for the three months ended December 31, 2021 were $11.6 million compared to $9.1 million for the three months ended September 30, 2021 and $4.4 million in the same period of the prior year. The sequential increase in SG&A expenses in the fourth quarter of 2021 compared to the third quarter of 2021 was primarily due to increased headcount in sales and marketing, increased cost to operate as a public company, and an increase in stock-based compensation. Research and development expenses for the three months ended December 31, 2021 were $5.9 million compared to $5.4 million for the three months ended September 30, 2021 and $5.3 million in the fourth quarter of 2020. The increase in research and development expenses, sequentially and as compared to the prior period, resulted from higher consumable materials for testing and prototype expense. Our research and development expenses can vary quarterly depending upon stage of development of products and timing of clinical studies. Our net loss in the fourth quarter of 2021 was $15.7 million or $0.58 per share basic and diluted attributable to common stock using a weighted average share count of 27.4 million common shares. I would also like to highlight the non-GAAP disclosure in the press release for the non-cash stock-based compensation expense and the change in the fair value of warrants as it provides investors with useful comparative information. Stock-based compensation in the fourth quarter of 2021 was $2.9 million, and there was no change in fair value of warrants in the quarter, resulting in a non-GAAP loss of $12.8 million and a basic and diluted loss per share of $0.47. Moving to the balance sheet, we ended the fourth quarter of 2021 with $159.3 million in cash, cash equivalents, and short-term investments. Long-term debt was $39.8 million. During 2021, our cash use excluding the proceeds of $15 million in debt and $119.6 million of net proceeds from our initial public offering was $44.2 million. Moving to guidance, we expect revenue for the full year of 2022 to be between $40 million and $44 million, an increase of 77% to 100% over the full year 2021. We continue to expect to see seasonality in 2022 with the second and fourth quarters generally the strongest for capital equipment, which is our LDD, and slower IOL growth in the third quarter as doctors and patients take time off during the summer. Gross margin is expected to be between 35% and 36% of revenue. In 2022, we expect higher-margin LAL revenue increasing as a percentage of sales, offset by pressure from higher cost to produce our LDD due to supply chain constraints. As Ron noted, we plan to ship our current LDD throughout 2022 and expect gross margin expansion in 2023 as a result of the introduction of our lower cost-to-manufacture LDD. We expect operating expenses to be between $86 million and $90 million. While we expect increases in research and development in 2022 over 2021, the majority of operating expense is in SG&A as we increased our combined LDD and LAL sales personnel from six at the time of our IPO at the end of July 2021 to 32 at December 31, 2021, and we expect to be at 38 by the end of the second quarter of 2022. In addition, we have commenced Phase 4 clinical studies which Ron mentioned earlier, which are charged to sales and marketing. While most of the SG&A expense is in sales and marketing, there is some increase in G&A for the cost of being a public company borne over 12 months, rather than the five months in 2021. We estimate non-cash stock-based compensation to be approximately $12 million to $13 million versus $7.6 million in 2021. Now, I will turn the call back to Ron for closing remarks.

Thank you, Shelley. To conclude our prepared remarks, we're proud of the progress made in 2021, and look forward to continued momentum in 2022—another important year as we work with our customers to establish a new standard that meets or exceeds the progressively higher expectations of premium cataract patients. And now operator, please open the call for questions.

If you would like to ask a question, please press star, then the number one on your telephone keypad. First question comes from Charles Elson with Wells Fargo. Please go ahead.

Hi, thanks for taking the question. Ron and Shelley, first congrats on the strong quarter. First question, and a quick follow up, just digging in a bit on the 2022 guidance. First, why does it look when you look at just total dollar amount that OpEx is growing faster than revenue in 2022? Just curious where that is. You talked a bit about where the spending is going, but I guess how should we think about leverage beyond 2022? And then I have a quick follow up.

Good question. Thank you very much, Charles. Yes, it is increasing this year faster than revenue in part because we are making significant investments in sales and marketing. This is a year of significant investment as we take our sales and marketing team to 38. In addition, sales and marketing is also bearing the cost of our Phase 4 studies and that's a major driver in SG&A. Overall, as we think about SG&A, the sales and marketing component of it is about 70% of the total and so it's very heavy. So it's a year of investment as we continue to grow in 2022. We gave guidance of $40 million to $44 million in revenue. So we want to be able to leverage that and set us up for 2023 as well.

All right, thanks. And then, just a quick question on cadence. So you mentioned Q2 and Q4 are typically a little bit heavier. I guess just looking in the near term, what about Q1? So it looks like last year Q1 was close to like a 30% step down from the prior Q4 that's like at the start of last year. Is that a fair spot to kind of think about that the start of Q1 '22 might be down a similar amount or are there any other puts and takes that might make that a little bit different?

Yeah, I think the puts and takes are the following. First of all, we have a higher installed base as we exit 2021 and go into 2022. So I think that the first quarter is important for us because that way you can generate more LAL sales. The second thing is, we saw very little COVID impact from the end of 2021 and in the first quarter of this year it looks like that's ended. We'll see, and so I think that this quarter is different and we would not expect to see that level of step down.

Great. Thanks Shelley.

Your next question comes from Robert Marcus with JPMorgan. The line is open.

Oh, great. Thanks for taking the question. Maybe, if you give us thought on how we should think about LDD versus LAL placements throughout 2022, is the mix shifting at all? And then I have a follow up. Thanks.

Okay. Thank you, Robbie. The mix is shifting a little bit. For the entire year of 2021 LDD sales represented about 61% of revenue. We don't see the LDD ASP coming down significantly during the year; it should remain relatively stable and then as all capital equipment does, it tends to come down a little bit the deeper you get into the new customer base. But it will shift more. If I think about the growth, which is pretty heavy at 77% to 100% in our guidance, you'll see growth obviously both in LDD and LAL, but higher in LAL and we'll see some shift during the year. I still expect that LDD revenue will exceed revenue for LAL, but not by as much as it did last year.

And Shelley, I think originally the expectation was that the LDD price could come down materially over time, starting in 2022. Just remind us what happened there, why it's not coming down, how we should think about future pricing?

Yeah, no, I think the good news is that it remains stable in the second, third and fourth quarters of 2021. And we look at it being relatively stable in this first quarter of 2022 as well. We haven't had to bring down the price. I think that the strong references from our existing customers, ActivShield, and some pickup in terms of volume, which obviously makes the practices more profitable, have allowed us to maintain our price much better than we originally thought.

Great. And then last for me, Shelley, the gross margin guidance was somewhat lower than we were hoping for in 2022. Maybe just walk us through the different puts and takes there. How much is inflation, FX, etcetera?

Yeah. I think two things. Of course, one is that we continue to expect to receive FDA approval for our lower cost LDD by the end of the second quarter of this year. However, as Ron mentioned, it is less risky in an increasingly difficult supply chain environment for us to source product that are already in the supply chain rather than newer chips and components that, while we might have on order, are not yet as available. So we took the less risky approach from a revenue viewpoint, but that brings down our margin. I do anticipate some cost increases, primarily chips, components, and sheet metal, in the first and second quarter and into the third and fourth quarters. That is offset in part by the fact that our LAL has much higher margin and is growing faster than the LDD. As you recall, at volume we expect that LAL margins in future years to be somewhere in the 80% to 90% level, but certainly not this year. The LAL price remains consistent. Overall, our LAL ASP is very stable; we sell it for about $1,000 and that remains very stable. Our cost of the LAL remains stable throughout the year, as we build to a level-loaded build plan to fulfill both our sales requirements as well as stocking new ASCs as we add new customers.

Great. Thanks a lot.

Your next question comes from Ryan Zimmerman with BTIG. Your line is open.

Great. Thanks for taking the questions. Congrats on a strong end to the year. Ron and Shelley, just, maybe you could talk about the top line guidance for a moment. It's a little bit better than I think the street was expecting and I'd love to get your view around your line of sight on LDD sales and kind of how that's come together relative to your expectations for 2022. What you learned in '21 that gives you that confidence that you can count on some of those LDD sales as we look ahead to 2022, and then I have a follow up.

So, thank you, Ryan. I think one thing to think about is the backdrop of the market that we're operating in. Cataract volumes continue to increase as the population ages and people's visual demands increase, and that also drives the premium cataract surgery market. Practices and doctors are also more focused on that market as the reimbursement for conventional IOLs has dropped. So there's just a lot of focus in the market for premium and, of course, our clinical results are outstanding and that certainly drives happy patients, but it also drives greater revenue and that's something that we've seen in our practices. That information, of course, is passed peer-to-peer to practices considering adopting RxSight and that helps build our funnel along with the expansion of our sales team. So it's just added to our growing confidence with the placement of new LDDs and establishment of new accounts.

Yeah, I would also like to talk about LALs because one of our goals is to continue to increase LAL growth as well. And one thing that helps us is that the COVID impact as we exited 2021 and went into this first quarter of 2022 has eased significantly. We think the momentum that we had in the fourth quarter has continued into the first quarter as well. We are very focused on that. I think our new LAL sales force—of course, we added 14 of those people in five months in 2021—are still in training, but I think we'll see some generation in the second half of the year from their productivity as well.

Thanks for all that color. And then just as you think about the install base up to 206 now on the LDD side, have you moved beyond in any capacity? I think when we first thought about the company, the focus was initially on the higher-volume premium practices. Are you seeing any adoption beyond that group at this point? Or is that something we should think about when LDD pricing could come down, potentially in '23?

So I think we've always had a range of practices. Although we are focused obviously on higher-volume premium practices, there are also some lower-volume practices that do a high percentage of premium. So we've had a range of practices in our innovators and early adopters group, but we're certainly expanding beyond that into what I would consider the early majority. There are a number of practices in that group that are higher volume conventional cataract surgery with lower penetration of premium, and they're looking to the light adjustable lens as a way that they can build premium volumes without having to offer LASIK, which is more common with high-volume premium practices.

Got it. Thanks for taking the questions.

Thank you. Next question is from Danielle Antalffy with SVB Leerink. Your line is open.

Hey, this is Erin on for Danielle. Thanks so much for taking our questions. I was just hoping if you could maybe provide some color on the typical adoption curve of some of these new customers. How long after an LDD is placed does it take for these practices to get ramped up to speed? I'm just trying to think about how these 45 new placements in the quarter will contribute to revenue throughout the year.

Yeah. Again, there's a lot of variability. It really is practice-to-practice dependent at this point. Clearly it's in our interest to have practices adopt at the highest level as quickly as possible and we certainly are focused more and more on that, especially with our new LAL account managers; that is their primary focus. But there can be a range and we can see some practices are more conservative. They'll want to start out with a few patients a month, get their feet wet and then expand. Some practices will base it more on the information that they've gotten from similar practices that already have the technology and will be more aggressive out of the gate. So it's still a range, but I would say generally we're seeing practices adopt at a slightly quicker pace than they were previously and some of that may also be due to ActivShield.

Okay, great. Thanks. And then I was just wondering if you could maybe touch on where you guys are gaining share from. Is it primarily that you're taking share from other premium IOLs, or are you also picking up some patients who would not otherwise have gotten a premium IOL?

We did a survey last year where we looked at where LAL implants were coming from and at that time it looked like about a third were coming from patients who otherwise would have gotten a monofocal IOL, about a third from patients who otherwise would have gotten a toric or astigmatism-correcting IOL, and about a third from patients who would have gotten a presbyopia-correcting IOL. We haven't repeated that survey yet, but I don't see any anecdotal data that would suggest it's different. We get a lot of patients who would not have been good candidates for a multifocal IOL. This offers them a great opportunity to achieve great vision with reduced spectacle use and does not reduce contrast vision or the quality of vision for eyes that might otherwise be more sensitive to that. For patients who otherwise might have been getting a toric IOL, we correct astigmatism at about twice the rate of a standard toric IOL, and we also correct sphere and offer a broader range of vision, so that's a competitive advantage. Versus multifocal IOLs, the LAL is for patients who don't want to compromise on quality of vision and who want to be able to be sure that they're going to maintain excellent vision under all conditions including at night. So I think it's still roughly the percentages that we've previously stated.

Okay, great. Thanks so much for taking our question.

I'm not showing any further questions in the queue, sir.

Great. Well, thank you very much, everyone. I wish you the best for the rest of your day.

And with that, ladies and gentlemen, we conclude our program for today. Thank you for your participation and you may now disconnect.