Second Sight Medical Products ' (EYES) CEO Will McGuire on Q1 2016 Results - Earnings Call Transcript

| About: Second Sight (EYES)

Second Sight Medical Products, Inc. (NASDAQ:EYES)

Q1 2016 Earnings Conference Call

April 28, 2016 4:30 PM ET

Executives

Lisa Wilson - Investor Relations, In-Site Communications

Robert Greenberg - Chairman

Tom Miller - Chief Financial Officer

Will McGuire - President and Chief Executive Officer

Analysts

Jeanne Wong - Granite Investment Partners

Amit Dayal - Rodman & Renshaw

Operator

Ladies and gentlemen, thank you for standing. Welcome to the Second Sight Q1 2016 Results Call. During the presentation, all participants will be in a listen-only mode. Afterwards, we will conduct a question-and-answer session. [Operator Instructions] As a reminder, this conference is being recorded Thursday, April 28, 2016.

And I would now like to turn the conference over to Lisa Wilson, Investor Relations for Second Sight. Please go ahead.

Lisa Wilson

Thank you. Good afternoon, and welcome to Second Sight's first quarter 2016 earnings call. This is Lisa Wilson of In-Site Communications, Investor Relations for Second Sight. With me on today's call are Dr. Robert Greenberg, Chairman of the Board; Will McGuire, President and Chief Executive Officer; and Tom Miller, Chief Financial Officer of Second Sight.

At the close of market, the company issued a press release detailing financial results for the quarter ended March 31, 2016. The press release can be accessed through the Investor Relations section of the Second Sight website at secondsight.com. You can also access the webcast of this call from there.

Before we get started, I would like to remind everyone that any statements made on today's conference call that express a belief, expectation, projection, forecast, anticipation or intent regarding future events and the company's future performance may be considered forward-looking statements as defined by the Private Securities Litigation Reform Act.

These forward-looking statements are based on information available to Second Sight management as of today, and involve risks and uncertainties, including those noted in this afternoon's press release and Second Sight's filings with the SEC. Such forward-looking statements are not guarantees of future performance. Actual results may differ materially from those projected in the forward-looking statements. Second Sight specifically disclaims any intent or obligation to update these forward-looking statements, except as required by law.

A telephone replay of the call will be available shortly after completion of this call for the next two weeks. You'll find dial-in information in today's press release. The archived webcast will be available for one month on the company's website, secondsight.com. For the benefit of those, who may be listening to the replay or archived webcast, this call was held and recorded on April 28, 2016. Since then Second Sight may have made announcements related to the topics discussed, so please reference the company's most recent press releases and SEC filings.

And with that, I'll turn the call over to Second Sight's Chairman, Dr. Robert Greenberg.

Robert Greenberg

Thank you, Lisa. Good afternoon, everyone. Thank you for joining us on today's call. The first quarter of 2016 proved challenging as expected, but we continue to believe that our commercialization and R&D efforts keep us well positioned for future growth.

As we stated on last call, we expected Q1 2016 to be down sequentially compared to Q4 2015. Net sales for the quarter totaled $1.1 million reflecting 10 Argus II implants worldwide. We experienced delays in implants and at least one delay in opening of an implanting center due to concerns related to lower 2016 Medicare outpatient payment rates that became effective on January 1, 2016.

After careful consideration, we made a strategic position to temporarily discount the price in the United States at the end of February, so that U.S. hospitals and ambulatory surgery centers continue providing our life changing technology to patients. With U.S. discounts in place, we expect to see implants rebound in the upcoming quarters.

Also, we made meaningful progress on our R&D programs. Our work on enhancing the externals for the Argus II are well underway and we expect to file with the FDA for approval of this next generation product by the end of this year. The fifth and final subject of our Dry-AMD trial was successfully implanted on April 12 and the team is now focused on evaluating patient performance in order to develop our strategy for pursuing this market.

On the Orion project, we’ve had a couple of positive meetings with the FDA and have concurrence on key pre-clinical tests needed to progress through unit [ph] feasibility study. To-date, we have completed 11 animal implants with plans to conduct an additional three implants over the next month. We remain confident that we are on target to file with the FDA this year and to perform the first human Orion implant in 2017.

Now that our Q1 results have been released and we intent to proceed with our plan to complete rights offering in the near future pending SEC approval and we expect that we will raise the funds required to implement our strategic plan. We have the strong support of two founding shareholders, who have expressed interest in participating in this round for up to $12.75 million.

Turning briefly to the competitive landscape, some of our European competitors have been in the news recently. One company based on France announced in February that they had implanted their first subject with the new retinal prosthesis and a clinical trial in France.

Another company in Germany announced that they had received CE mark for a new retinal prosthesis that is expected to last several years representing an improvement over their prior device for which most would report it’s a fail in a matter of months. However, in this week’s The Telegraph they reported that this Germany company’s recent – one of their recent patient devices failed and had to be removed after only six months. Neither company has begun clinical trials in United States, so we continue to believe that it will be a long time before any of these devices brought to the U.S. market.

In a moment you will hear from Will, who is going to review our progress to-date in more detail. But first I’m going to turn the call over to Tom Miller, our CFO, to review our first quarter financial results. Tom?

Tom Miller

Thanks, Bob. For the first quarter of 2016, net sales were $1.1 million, compared to $1.7 million in the first quarter of 2015. This decrease was driven by lower implant volume in the U.S. compared to prior quarters. A total of 10 implants were performed in Q1 2016 of which 2 were in North America and 8 were in EMEA. This compares to 7 implants in North America and 12 in EMEA in the first quarter of 2015.

Our gross margins in Q1 were 13% compared to 24% in the prior year quarter reflecting the lower level of sales and production activity in the current quarter. R&D costs after applying grant revenue were $762,000 compared to $1 million in the prior year quarter. This change represents an increase in spending of $263,000 offset by $549,000 of additional grant revenue in the current year.

Clinical and regulatory cost increased to $778,000 compared to $666,000 of the prior year quarter, due to higher clinical costs associated with our post-market studies and AMD study. Selling, general and administrative costs increased from $3.7 million in the first quarter of 2015 to $4.4 million in the first quarter of 2016. Approximately $500,000 of this increase related to higher stock based compensation cost.

Excluding these non-cash charges, SG&A expense increased by 8% in the first quarter of 2016, compared to a year-ago from $3.4 million to $3.7 million. Our net loss for the first quarter of 2016 was $5.8 million or $0.16 per share. This compares to a net loss of $5 million or $0.14 per share for the first quarter of 2015.

We recorded non-cash charges of $1 million, consisting of stock-based compensation during the first quarter. This compares to non-cash charges of $568,000 in the first quarter of 2015, which was also for stock based compensation. Excluding this stock based compensation, our non-GAAP net loss for the first quarter of 2016 was $0.13 per share, compared to a non-GAAP net loss of $0.12 per share in the first quarter of 2015. A full reconciliation of our GAAP net loss to our non-GAAP net loss, including a per share reconciliation can be found in the tables at the end of our earnings release.

Turning to the balance sheet, as of March 31, 2016, we had $10.2 million of cash and money market funds with no debt. To give everyone an update on our rights offering, we filed our S1 last Friday 22 and hope to launch the offering shortly. If fully subscribed, this offering will raise up to approximately $20 million. We expect to complete the offering later this quarter.

With that said, I’ll turn the call over to Will.

Will McGuire

Thanks Tom. As previously discussed, Q1 was a challenging quarter for implant volume and revenue driven primarily by our U.S. business. Results included one implant in the U.S., one in Canada, and eight in EMEA during Q1 of 2016. The low implant total in the U.S. was expected, given the delta between our selling price and the reduced Medicare outpatient payment rate that became effective on January 1. 2016.

As discussed in our previous earnings call, we were hesitant to discount our selling price, while engaging in active discussions with CMS regarding the 2016 reimbursement rate. But it became clear that our 2016 rate would not be adjusted, we made the decision in late February to temporarily discount the Argus II in order to continue providing access to this life changing treatment and to alleviate the consent of hospitals and surgery centers that they would not be able to cover their cost on Argus II cases.

After we made that decision, we had to modify some purchase agreements and encourage customers to restart the process of assessing potential patients for Argus II eligibility. Unfortunately, there was not sufficient time to get patients assessed and scheduled for surgery before the end of the quarter. Temporarily discounting the Argus II is the appropriate strategy and we expect that implanting volumes will rebound with continued growth over time.

In fact I have visibility into our U.S. based accounts and I’m pleased with the renewed level of activity we are seeing with customers that are currently assessing patients and scheduling surgeries. While we weren’t able to secure the Medicare payment rate adjustment for 2016, we believe CMS payment rates will improve in future years. We expect that 2017 Medicare payment rate will be based on claims data from 2015.

We continue to work with our accounts to educate them on the proper methodology for preparing and submitting accurate claims for Argus II cases. Our goal is to ensure that the cost used by CMS to set payment rates accurately reflects the actual cost of our device and the associated implantation procedure.

In February, CMS posted preliminary outpatients perspective payment system or OPPS cost data that showed the geometric mean cost of Argus cases to be 165,000 based upon the 2015 data available at that time. CMS is expected to publish updated cost data and 2017 proposed Medicare hospital outpatient rules in July of this year.

As a reminder, this is the data set that will be used to set rates for 2017. We also remain in discussions with CMS concerning an alternate methodology for determining the payment rate for high cost low volume devices such as the Argus II. These discussions are ongoing and we will provide updates as appropriate. To date, 5 of the 12 Medicare administrative contractors or MAC jurisdictions are covering and reimbursing Argus II procedures for traditional Medicare fee-for-service patients in the U.S.

Our most recent MAC success, which was discussed last quarter, was a decision by First Coast Service Options, which includes Florida, Puerto Rico and the U.S. Virgin Islands, to cover Medicare patients on a case-by-case basis. We now enjoy Medicare coverage in 16 states covering almost 40% of the Medicare beneficiary population We continue to work with the remaining seven MAC jurisdictions who have not made an affirmative decision regarding Argus II and our optimistic that we will obtain additional positive coverage decisions.

We are also working our facilitating pre-authorizations for Medicare Advantage and commercial patients. In 2015, our success rate was approximately 90%. Since Argus II was commercialized, 26 different private insurance or Medicare Advantage plans have provided prior authorizations and covered the Argus II in the United States.

In Europe, Argus II is reimbursed in France, Germany and in two regions of Italy. We have also made progress toward obtaining reimbursement in the U.K. A positive recommendation was recently made by health professionals who advices the U.K. governments healthcare funding authority to reimburse Argus II through the commissioning through evaluation or CTE program. This is usually recommended when National Health Service, England believes a treatment can offer clinical benefits but wants to collect more evidence on the best way to realize those benefits.

CTE funding is allocated for a define period and evolves collecting more detailed data on the outcomes of treatment. Following the 30-day consultation period, the dropped policy will be formulated and a final decision on Argus II reimbursement will be made. We have no assurance that Argus II will receive reimbursement but are encouraged with this development. Other countries have similar funding programs under which a new promising technology is made available to patients while being further evaluated such as France’s national innovation funding program under which Argus II has been reimbursed since 2014.

Turning to our commercial activities, I like to again welcome Steve Okland as Commercial Vice President of U.S. and Canada. Steve brings a solid track record of sales and marketing leadership for high growth medical device firms. Steve will our lead our commercialization activities for North America including sales, marketing and customer service. I’ve worked with Steve at Spectranetics and have tremendous confidence in his ability to recruit top talent, identify new eligible patients and intelligently grow the business by adding the right implanting centers and improving the productivity of our current centers.

The key element of our sales and marketing strategy is our patient outreach programs to identify new qualified patients. We have started conducting these programs in the U.S. and Europe by targeting geographic areas where we have implanting centers with established reimbursement. A typical program consists of radio ads to generate phone enquiries from perpetual patients or their families. Once an enquiry is received, a Second Sight employee will conduct a phone screen to access the patient’s eligibility for Argus II. After successfully passing of phone screen, patient information is provided to a local implanting center which in turn will follow up and if appropriate schedule a more thorough in-person assessment. In the U.S. alone, we have approximately 160 candidates that have passed a phone screen from a Second Sight employee. We expect this number to grow as our local marketing efforts are beginning to show positive results.

Finally, we continue to extend our reach with the addition of a center in Milan, a second center in Istanbul along with the signing of a contract with Kisantech in South Korea during Q1. Overall, I am very pleased with our momentum in solidifying the foundation of our business. Awareness is building and our ability to provide Argus II to those in need will multiply as we expand our footprint and secure broader reimbursement coverage. As we maintain flexibility in our short term strategy to meet the immediate needs of the business, our long term strategy for the success of the business remains intact.

I’d like to now turn to our research and development efforts. As tested above, our two primary goals are: one; to increase patient satisfaction, improve outcomes while expanding the population we serve in outer retinal degenerations such as RP and AMD. We will accomplish this by enhancements to our Argus II technology and through additional clinical work; and then two, to expand into direct cortical stimulation with the development of the Orion I. We are investing in Argus II enhancements that we believe will allow current and future RP patients to perform better functional task, be more independent and enjoy a better quality of life.

We also believe the potential exist for expanding into a larger patient pool that includes better sided individuals if our efforts are successful. Most of our attention in the past year on this front has been dedicated to improving the externals. This includes the eyewear, the camera and the video processing unit or VPU. We expect the new VPU will deliver 25x processing power of today’s VPU allowing more sophisticated software enhancements in retinal stimulation techniques. We plan to file for FDA approval and CE mark regulatory clearance for our next generation externals before year end. This will allow us to begin testing these new software algorithms in patients in 2017 with expected commercial rollout of these software upgrades later in 2017 or early 2018.

We are also evaluating Argus II in new populations of low vision patients such as those with dry-AMD. All five subjects have been enrolled in our dry-AMD pilot study in Manchester. The fifth and final implant was performed on April 12. All subjects will be evaluated over the next six months and we will finalize our go-forward strategy after patient performance is more fully known and in consultation with our physician and scientific advisors.

Finally, as Bob pointed out, we continue to make progress with the Orion program which allows us to leverage our Argus technology and expand into direct cortical stimulation. We remain on track to submit an IDE before year end requesting approval to start a U.S. human feasibility study in 2017. Overall, we are very encouraged by our progress toward our goals and interest in our technology. We’ve built a strong foundation based on more than 16 years of ongoing technological investment, growing evidence of the safety, reliability, and longevity of our technology and a very extensive patent portfolio protecting our work. These factors taken together support our position as the dominant industry player for the foreseeable future.

With that, I’d like to open the call for questions. Operator, please go ahead with the instructions.

Question-and-Answer Session

Operator

Ladies and gentlemen, thank you. [Operator Instructions] And we have our first question coming from the line of Jeanne Wong with Granite Investment Partners. Please go ahead.

Jeanne Wong

Hi, good afternoon. Thanks for the update and so maybe R&D update was exciting. I just like to request for a little bit more granularity in terms of timing for your dry-AMD trial in terms of when data readout and what are the timelines in terms of catalysts that we can look forward to?

Robert Greenberg

Sure, Jeanne. This is Bob. So as we said we’ve now implanted the five patients that we had planned to implant in the feasibility study. What we’ll be doing over the next six months is about working with those patients and evaluating them, and looking at the responses both on safety and performance. And probably we would be publicly making a data available at the end of that period. So over the - I figure on the next six months would be the next time that we would be publicly talking about that specific data read out from that trial. And then, in terms of catalyst, at the end of that period, our intention is to also describe our plans going forward. So that’s when you next will be hearing about that particular word.

Jeanne Wong

Sure. That’s great. Thanks a lot. And I think you briefly mentioned about the reimbursement landscape in the United Kingdom and would you be able to kind of talk in terms again timing reimbursement level and again I know that you mentioned that it’s really hard to handicap outcome, but what’s the likelihood of the positive coverage position there?

Will McGuire

Okay. Jean, this is Will. I’ll take that one. Yeah. So, first we’re in the middle of the 30 day commit period now and throughout that period, physician patients, potential patients anyone else who would like to provide commentary to the organization in the U.K. will be able to – at the end of that period there will be kind of a meeting if you will to look at some of the preliminary recommendations in June and our expectation is by the end of July, we would hope to know if Argus II will be funded or not by NHS England.

The actual reimbursement level that’s a decision that we think we’ll be kind of a commercial negotiation if you will between second sight and NHS. So that negotiation will probably include what will the reimbursement level be, and what will the volume of implants per year be and over what period of time. We kind of expected to be a two-year program, very similar to what we have in France right now, but the reimbursement, it’s meant to cover the cost of the device. The cost of the procedure and then also any follow-up work required by the site.

So, their intend is to cover all of the cost. The likelihood of the coverage decision, I mean we’re optimistic we’ve made it this far. We feel pretty good about our chances. We really can’t handicap it much more than that. We know that the committee that evaluated our technology early on feels positive about it, but the NHS budget in the UK is like probably every other country in the world and then they’ve got budget pressures.

So they will just have to wait the benefits and cost of Argus versus benefits and cost of other technologies that maybe proposed for reimbursement, but we’re very optimistic.

Jeanne Wong

Sure. Will they take data points from what’s happening in the U.S. into their considerations in the decision making?

Will McGuire

I think they are probably free to take data points from whoever they would like. I do know there is - I don’t know specifically in this case, if they will or they will not, but it is not uncommon for agencies such as this to share data amongst countries or to reach out and understand what’s happening in other countries, but again, we - I’m not quite sure if they will or will not in this case.

Jeanne Wong

Yeah. I was just wondering whether anything from the CMS at least in terms of the reimbursement landscape here, obviously we are operating in a different jurisdiction, will that positively or negatively kind of lead to that decision? Just kind of thinking on that.

Will McGuire

I think, yeah it’s a great question. I think if you look at what’s happened in the U.S., I think as a whole it will be very positive. I mean CMS is already established codes, we’ve already got established rates and we’re in a process of gaining coverage. So if I look at the U.S., the U.S. is actually well ahead of what has been done in the UK so far and they’ve established reimbursement rate, just codes in place and we’re covering 40% of the Medicare beneficiary population. So I think, they should take some confidence in their ability to move forward in the UK.

Jeanne Wong

Great. That sounds great.

Tom Miller

And it looks positive home in France. So it would be the exact model, if they’re considering.

Will McGuire

That’s right. So, yeah Paul’s referenced in the program in France that we’ve been getting reimbursed under as well. So very similar program to the UK program and they did an assessment there and made the decision to go forward in France.

Jeanne Wong

Great thing. It sounds good. Great, thank you so much.

Will McGuire

Thank you.

Operator

Thank you. [Operator Instructions] Our next question comes from the line of Amit Dayal with Rodman & Renshaw. Please go ahead.

Amit Dayal

Thank you and good afternoon everyone. You used to phrase temporarily discounted, could you assume these things will - I mean the pricing will potentially comeback to 2015 levels in 2016 or should we assume this is more of 2017 sort of a play over here?

Will McGuire

Yeah. It’s a good question Amit. At this point we don’t think there is no reason to expect reimbursement rates to change in 2016. We would expect two things to happen in 2017. We’d expect reimbursement rates to go back up to a higher level and we’d also expect to be launching our next gen externals. So there is a couple of things that happened in 2017, Amit I think give us a good opportunity to reevaluate whether or not we continue the discounting. So I mean to give you a short answer, I would not expect us to stop the discounting in 2016, but I would expect it to stop at some point in 2017.

Amit Dayal

Got it. And in relation to the implants in the first quarter, you mentioned there was some delays, should we look at these as delays or cancellations? I mean in terms of your internal targets, do you think if any of these implants were delayed, would there be some catch up for you in the coming quarters?

Will McGuire

I don’t know if I’d phrase it as catch up. I think our expectation is that we are back – our expectation right now is that we’ll be moving back to the levels that we’d recently seen. We still have - I would say there is a certain capability of our size to do so many procedures over a set period of time. So, my expectation is not that in Q2 that we have sites do what they would have done in Q2 plus what they would have done in Q1. I did expect them to start screening and scheduling surgeries back at a pace that we were seeing towards the end of last year.

It does take some time Amit, I mean it’s not that they just didn’t do the surgeries. In many cases, they start the process of actually screening patients, which can take some time as well. So, when we restarted, if you will after adjusting our price, we restarted the whole process from the beginning of okay. Now you shouldn’t have any concerns about losing money on this case. Let’s go take a look at the patient pool that’s out there and any potential patients that you would considering doing, let’s work them into the routine here to get phone call scheduled, potential in person screens done and then schedule them for a surgery.

Amit Dayal

Do you think the discounted price potentially creates a little bit of a catalyst for more patients to maybe sign for this or more doctors do pursue these implants?

Will McGuire

I don’t see it having much impact on the patient desire. We’ve got patients who are interested. I think what it does, if you compare the position we’re in right now certainly compared to January and February, the accounts - we probably have physicians who wanted to do cases, but we have administration telling them that we’re not comfortable with you doing a case in which our expected reimbursement is 95,000 and Second Sight is charging us 143,000 or 144,000. So I think in those cases, probably the administration that was putting the brakes on it.

And maybe if you go back and compare to where we were at the end of last year, even though we were fortunate to have pass-through, I still think there was a lot of uncertainty with what the actual reimbursement was going to be post surgery. And so, we probably or we know that we had accounts that were hesitant to do additional cases or do many more cases until they got reimbursed for their past cases. So, I guess the shorter answer, where we are at now, we have certainty of what the payment rate is and now we’ve eliminated the delta between that payment rate and what they’re going to pay us. So the administration should feel much better about proceeding with the implants and allowing the physicians to implant the patients in need.

Amit Dayal

Got it. And in markets outside the U.S., are prices due to holding up to your 2015 levels, 110 to 120 type?

Will McGuire

Yeah. I’ve not really seen any changes in pricing outside the U.S. Most of our prices are set when we get reimbursement and so they’re not necessarily subject to some of the annual durations [ph] that we may see in the U.S. So there are usually pretty set.

Tom Miller

If I could just add to that, this is Tom. Will is right, they are set through negotiation with the payers, which are generally the government health systems and they’re fixed. The only reason it changes is because of the mix between countries, where we have slightly different pricing in different countries but it’s the prices themselves are the same.

Will McGuire

Good point.

Amit Dayal

Great. I was trying to see if the discounted pricing in the U.S. is impacting any of our efforts in the markets outside the U.S.?

Will McGuire

We have not seen that. We have not added on.

Amit Dayal

Got it. That’s all I have guys. I’ll follow-up with you after the call. Thank you.

Will McGuire

Okay, great. Thank you.

Operator

Thank you and we have a follow-up question coming from the line of Jeanne Wong with Granite Investment Partners. Please go ahead. Ms. Wong, your line is open. And it appears that we have no further questions at this time. Please proceed with your presentation or closing remarks. Thank you.

Will McGuire

Thank you all again for joining us today and thank you to our shareholders for helping us make the dream of sight a reality for blind individuals worldwide. Have a great day.

Operator

Thank you. Ladies and gentlemen, that does conclude today’s conference call. We thank you for your participation and ask that you please disconnect. Have a great day.

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