Cogentix Medical's (CGNT) CEO Darin Hammers on Q2 2016 Results - Earnings Call Transcript

| About: Cogentix Medical, (CGNT)

Cogentix Medical, Inc. (NASDAQ:CGNT)

Q2 2016 Earnings Conference Call

August 2, 2016 4:30 PM ET

Executives

Doug Sherk – EVC Group

Darin Hammers – President and Chief Executive Officer

Brett Reynolds – Chief Financial Officer

Analysts

Chris Lewis – ROTH Capital Partners

Larry Haimovitch – HMTC

Operator

Good day, ladies and gentlemen, and welcome to the Cogentix Medical’s Second Quarter Fiscal Results Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instruction will follow at that time. As a reminder, today’s call is being recorded.

At this time, I would now like to introduce your host for today’s conference, Mr. Doug Sherk of EVC Group. Please go ahead, sir.

Doug Sherk

Thank you, Latoya, and good afternoon everyone. Thank you for joining us for Cogentix Medical’s conference call to review financial results for the second quarter of 2016, which ended on June 30, 2016. The news release announcing the results crossed the wire shortly after the market closed and is currently available on the Cogentix Medical website. We have arranged for a taped replay of this call, which can be accessed by phone. And this call is also being streamed live on the Investor Relations section of our website at ir.cogentixmedical.com and it will also be archived there.

Before we get started, we’d like to remind you that during the course of this conference call, management will make projections and other forward-looking statements regarding future events that are subject to risks and uncertainties that could cause actual results to differ materially from anticipated results, such risks and uncertainties are more fully discussed in the company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2015 and other periodic filing with the SEC. Further such statements are made only as of today August 2, 2016 and the company assumes no obligation to and does not intend to update these projections and forward-looking statements to reflect future events or actual outcomes.

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

Darin Hammers

Thank you, Doug. Good afternoon everyone and thank you for joining our call today. With me on the call is Brett Reynolds, our Chief Financial Officer. I will begin with some opening remarks before Brett provides a more detailed walk through of our financial performance, which was exceptionally strong during the second quarter. I will then return with some additional closing comments before we open the call up to your questions.

The results we reported today for the second quarter show a significant acceleration in our revenue growth and ongoing cost discipline, illustrating a high level of execution by our team. Our performance was generated during an usual period for the company where we successfully managed through issues at the corporate level as well as faced the second quarter of new competition for one of our core product lines, Urgent PC for the treatment of overactive bladder.

I’m particularly proud of the team’s dedication, execution and of course the financial performance during the period. And we are focused on continuing our momentum during the remainder of the year. For the second quarter, we reported 17% revenue growth. Our strong revenue growth coupled with an ongoing operating cost discipline helped us to generate our third consecutive quarter of cash operating profit, which Brett will discuss in more detail shortly. But overall, our top-line results reflect our emergence in the past year as a more meaningful partner to our urology physician customers.

In addition, we have continued to maintain our large Urgent PC customer base and have significantly expanded our PrimeSight footprint in urology. I continue to be impressed by the sales teams’ execution of our Urgent PC strategy in light of the competitive challenge that emerged earlier this year. As we’ve mentioned several times, we have welcomed the presence of this new entrant and helping to serve the large and growing market of more than 40 million Americans, who suffer from overactive bladder and its symptoms.

OAB patients are typically prescribed medications to treat their condition, but nearly 90% of those patients discontinue taking those drugs within one year, primarily due to their horrendous side effects. After these drugs, the next line of therapy includes Urgent PC, BOTOX and InterStim. Urgent PC is the least invasive of the three with a significantly lower risk profile for potential adverse events, as well as being a lower cost treatment option. By our estimates less than 5% of those, who are seeking treatment and made the decisions to stop taking meds, are being served by the available third-line therapies.

So as you can see, this is a significantly underserved market. And we are well positioned to continue to grow in this space and we believe the presence of a well capitalized competitor will only help expand the market. As we discussed back in early May, our focus has been to put walls around our base Urgent PC business that the team has worked so hard to develop. We had some help in building these walls given our competitor spent much of the last five years telling our customers that Urgent PC was not an effective therapy to treat overactive bladder. And now, they’re using our three primary clinical studies in their literature in an effort to sell the device because they have no data of their own. In fact, over 50 studies of Urgent PC have been published over the last 10 years, all demonstrating the products of clinical benefits.

The grand total of studies for the competitive entered amount to zero and we thus far have seen no evidence in the marketplace that the competition is funding any study of their own. And as I mentioned on our last call, the competition has tried using price discounting as it means to attract our current users. But to date, the vast majority of our current customers have committed to stay with Urgent PC and the proven results that it delivers.

In the second quarter, our average selling price for Urgent PC was not materially different than the first quarter of the year, which was on par with the average selling price over the last three years. The feedback that we are consistently hearing from our current customers, who have been approached is that they see no advantages to the new device compared to Urgent PC. In fact, the early indications from several users, who have tried the device cite concern over the fact that the stimulators required to attach to the patient’s foot. The level of stimulation can’t be adjusted once the treatment cycle begins and the process to setup and download credits is cumbersome, just to name a few.

So have we kept every customer? No. But we have kept the vast majority of them, have increased our utilization with many of them and grew Urgent PC revenue 15% this quarter. The number of boxes of Urgent PC we sold in the U.S. in the second quarter was nearly 6,000 and an increase of 18% over the second quarter of 2015 and an increase of 6% over the quarter of this year.

When we last talked to you in May, we walked through an example of how our team worked together to return an Urgent PC customer to active status after trying the new competitive offer. During the second quarter, we repeat that scenario multiple times and continue to do so in the third quarter as well. We are a long way from declaring victory in this battle, but we have made a strong stand and the organization continues to fight to keep every customer as well as continuing to add new accounts.

At this point, I would like to comment about our active account metric as one of the items we’ve changed in order to paint what we believe is a truer picture of the Urgent PC business. In the past, we counted an active customer as one who ordered at least once during the quarter. What we have found over the last year plus is that many of our customers preferred to buy in larger quantities and not always every quarter. By the old measurement, we had 992 customers during the second quarter versus 1,012 in the first quarter.

These 992 customers ordered on average of six boxes of lead sets during the quarter, up by healthy 15% from the first quarter level of 5.2 boxes. However, because doctors with an established Urgent PC patient base, oftentimes placed a large order that provides them with their per procedure supply for periods extending beyond the quarter. We are changing how we look at an active customer to one who has ordered within the last 12 months. Using this measurement, we had 1,770 customers during the quarter as compared to 1,783 in the first quarter of the year. Going forward, any reference we have to active customers will refer to a customer, who purchased Urgent PC in the previous 12 months, which again we believe is a truer estimate of our user base.

So, now, let’s turn to our PrimeSight Technology platform, which grew an impressive 25% in the second quarter. The focus of our PrimeSight Technology is our urology customers as PrimeSight meets the needs of those urologist for always sterile, always ready, flexible endoscopy solutions. It has been clinically proven to reduce the risks of cross-contamination associated with the reuse of reprocessing of difficult to clean conventional endoscopes and is also reduced the typical 45 minute reprocessing time to less than 10 minutes allowing for greater patient throughput, increased physician productivity and ultimately an economic benefit to their customers.

Our PrimeSight Technology has been used in over 5 million procedures with zero reported cases of cross-contamination. In the U.S., our PrimeSight urology business grew 20% in the second quarter. Our sales organization continues to become more proficient with this technology and we are bullish about our growth opportunities in urology market for PrimeSight. Through the first seven months of this year, we’ve conducted over 150 evaluations in urology practices including several large well known hospital systems.

These opportunities represent significant growth potential in capital sales in the near-term. And as an example in the last month, we closed a cystoscopy order for the large hospital based urology practice on the West Coast. This customer had been a longstanding user of our Urgent PC product and had expressed frustration to our representative around the inability to keep up with their busy cystoscopy schedule due to cumbersome scope reprocessing.

Our territory manager presented the PrimeSight Technology and explained how the integrated scope and sheath platform could dramatically reduce their turnover time between cases. After successful evaluation in five of their office, the system placed the capital order for approximately $300,000, which will result in the annual sheath revenue of $75,000. We expect to see many more similar outcomes in other urology practices in the back half of this year.

So, in summary, the sales organization continues to execute extremely well and we are fighting for every customer both existing and new. The team has rallied around our mission and I would like to thank each and every one of them for their contribution during the quarter.

I would now like to turn over the call to Brett for a financial review.

Brett Reynolds

Thank you, Darin, and good afternoon everyone. As Darin mentioned earlier, revenue for the second quarter ended June 30, 2016 totaled $13 million, an increase of 17% over the prior year. Revenue growth was even more significant 22% when excluding the revenue from the discontinued distribution agreement with Stryker that we had in the prior period. This unprofitable distribution agreement was terminated at the end of December 2015.

Our revenue growth this quarter was broad-based both by product line and by geography. Growth for our Urgent PC product line was 15% globally with Q2 revenue of $5.4 million. Our endoscopy business grew 25% to $5.3 million in revenue in Q2. Macroplastique, our Injectable Bulking Agent for stress urinary incontinence had revenue of $2 million in the second quarter representing an increase of 2% compared to the year ago quarter.

Looking at revenue by geography, total U.S. revenue in the quarter was $9.6 million, an increase of 60% compared to the year ago quarter, while international revenue totaled $3.4 million in the quarter, up 20% from a year ago Taking a deeper look at second quarter revenue contribution by product line, Urgent PC achieved year-over-year growth of 15% globally and again that represented $5.4 million of total revenue. U.S. Urgent PC revenue was $4.5 million, up approximately $600,000, or 15% from the year ago period.

In the second quarter, we sold nearly 6,000 lead set boxes in the United States, representing year-over-year unit growth of 18% and sequential quarterly growth of 6%. This growth was driven primarily by higher utilization per account. Total endoscopy revenue for the quarter was $5.3 million, up approximately 25% from the year ago period. Revenue from urology applications totaled $3.4 million, which was an increase of 15% over the year ago period. The U.S. urology business had revenue of $2.2 million, an increase of 20% over the prior period. We also had significant growth in our industrial endoscopy business as revenue totaled $1.1 million in the quarter, an increase of approximately $590,000 compared to the prior year.

Each of these items contributed to the overall 25% growth rate for our endoscopy business in Q2. The company’s gross margin for the second quarter was 68.6%, up 140 basis points from the 67.2% gross margin in the year ago quarter. The year-over-year improvement in gross margin was primarily due to our decision not to renew the unprofitable distribution agreement we had with Stryker for the sales of our ureteroscopes.

Operating expenses in the quarter totaled $11.2 million, compared to $10.7 million in the same period of the prior year. In the second quarter of 2016, the company incurred $2.2 million of expanse related to the company’s 2016 proxy contest and the resulting settlement agreement, which includes severance. Excluding these one-time proxy settlement costs, operating expense in the second quarter totaled $9 million, a decrease of $1.2 million from the level of operating expense a year ago, excluding one-time merger related costs.

We continue to realize the benefits and lower operating costs that resulted from the merger of Uroplasty and Vision Sciences, which formed Cogentix. In fact, over the last three quarters, operating expenses have ranged from approximately $9 million to $9.5 million each quarter, which is well below the historical run rate of operating expenses for the predecessor companies.

Cash operating profit, which we defined as operating income excluding non-cash charges and one-time costs, totaled $827,000 in the quarter compared to a cash operating loss of $1.7 million in the year ago quarter. As Darin mentioned, the cash operating profit we achieved in the second quarter represents the third consecutive quarter of cash operating profit for Cogentix, a significant achievement that is in line with our stated goals.

Turning now to the balance sheet; our cash balance as of June 30th was $2.9 million, up approximately $700,000 from the end of the first quarter. We had no borrowings outstanding under our $7 million line of credit. Now let’s turn to our outlook for 2016. We continue to expect strong growth from our endoscopy product lines, especially in urology. Macroplastique revenue is expected to be approximately flat with 2015 levels. With regard to Urgent PC, we are encouraged by our growth for this product line in the second quarter, but we will continue to assess the competitive environment before providing a revenue outlook.

We still expect to generate a cash operating profit excluding one-time charges for the full year of 2016, a result that would be a significant improvement over the calendar year 2015 pro forma cash operating loss of $3.7 million and the calendar year 2014 pro forma cash operating loss of $9.1 million.

I would like to now turn the call back to Darin. Darin?

Darin Hammers

Sure, thank you, Brett. Well, before we open the line for your questions, I would like to say what an honored is to lead Cogentix Medical, continuing the great work our team has done over the past several years. In my time in this new role as President and CEO, the question I most often asked in one form or the other is what would you do differently. And as the results today illustrate, we are firmly on the right track looking forward. We have three excellent product lines, but we also know that to realize the full potential of Cogentix Medical and enhance shareholder value, we need to grow the company larger. To that end, I do intend to work very closely and in a productive way with the company’s board to bring new innovative technologies into our organization.

Latoya, please open the line for questions.

Question-and-Answer Session

Operator

Thank you. [Operator Instructions] We have a question from Chris Lewis of ROTH Capital Partners. Your line is open.

Chris Lewis

Good afternoon. Thanks for taking the questions.

Darin Hammers

Hi, Chris.

Chris Lewis

You’ve had two quarters now here Medtronic in the market, obviously it looks like your strategies are working, so congrats on that so far.

Darin Hammers

Thanks.

Chris Lewis

Trying to get a sense of just how many customers you’re seeing in trailing the narrowed product and then perhaps coming back to Urgent PC.

Darin Hammers

Sure, it’s a – so, I think, I mentioned on the last call, Chris, we’ve tracked our top 300 accounts and I would say the vast majority of those accounts have been approached in one form or the other by competitor. To date in those top 300 accounts, we’ve lost 12.

Chris Lewis

Okay, great. What surprised you in the most just, just in terms of – and that’s a very low percentage of customers you’ve lost, has that surprised you to the upside? Or are there other kind of market developments out there that that have surprised you since that that launch?

Darin Hammers

Sure, I think, I said something similar in the last call. We’re not surprised that we held on to the number of customers that we held on to. We’ve talked repeatedly. It’s a huge under-served market. So there’s plenty of opportunity for a competitive entrant. We also know the heavy lifting that’s required to make sure that we develop these customers and bring them into the – bring them on with Urgent PC and then keep them.

And that haven’t gone unrecognized by our physician customers. I mean, basically, they’re rewarding the territory managers for helping them to develop the Urgent PC and their practice and they’ve showed a lot of loyalty. And like I said the last time as well we expected this launch, we prepared for it. And we think we brought tremendous value to these customers over the last several years.

Chris Lewis

And with Medtronic out there using your clinical studies and obviously vast marketing efforts to build awareness around the PTNS space and technologies. Have you seen – I know it’s early, but have you seen any windfall of potentially new customers coming to you to explore Urgent PC for the first time?

Darin Hammers

Yes, I think, we track new customers. And I wouldn’t say it’s radically different than what we’ve seen in the past, we continue to bring on similar levels of new customers quarter-over-quarter. I think the difference is we don’t have that competitive headwind with someone claiming that PTNF doesn’t work. Now, our main competitor has a similar product. And so quite frankly, there’s – as I mentioned before, there’s plenty of opportunity. And we’re just in a fraction of the – we’re treating a fraction of the patients that are out there. And so I anticipate that’s going to continue and will continue to grow at similar rates that we’ve grown in the past.

Chris Lewis

And on pricing, it sounds like your pricing has stayed stable. I guess can you elaborate on how aggressive Medtronic is being on pricing? And as it do get some share and do build that business. How do you think about kind of pricing sustainability here over the longer-term?

Darin Hammers

Well, I think that pricing will stay stable over the long-term because I think there is general knowledge in this space that reimbursement is obviously affected by pricing. And so Medtronic historically has not been one to compete on price. So, I don’t anticipate that you’ll see this dramatic price decrease. You would expect with the competitive device that doesn’t have a lot of ability to differentiate itself from us that there might be some price pressures. But again that’s not – we don’t anticipate that’s going to be a significant effect on our business.

Chris Lewis

And obviously, there’s been some changes at the top-tier. First congrats on your new role and Brett welcome back to the company.

Brett Reynolds

Thanks, Chris.

Chris Lewis

I was hoping if you could just speak to the general sentiment an attitude within the company, particularly in the sales force. I guess have you seen any sales force turnover changes over the first couple of quarters here?

Darin Hammers

No, we really haven’t. I think you know that – you talked about change, but my role hasn’t changed that dramatically. I was Head of Sales and Marketing for the last 3.5 years and the team that we put in place is still the team that’s there today. So, yes, there has been some change at the top. We have some distraction around the proxy contest, but we’re very pleased by the fact that there hasn’t been turnover at the TM and sales management level. And I think they’re happy to have this behind them and focus on building this business.

Chris Lewis

How big is the urology sales force now?

Darin Hammers

We have 41 territory managers and six regional sales directors.

Chris Lewis

Okay, great. And then just a few more and I’ll hop back in queue. PrimeSight Urology continues to outperform. Can you elaborate on what’s driving that growth? You talked about 150 evaluations expanding the footprint. What do you think those evaluations could materialize in the sales and how should we think about that in near-term revenue opportunity?

Darin Hammers

Well, you know, I think what we’ve seen over the past 15 months is we anticipate there was going to be a ramp to become productive in this space and the team was essentially starting from ground zero. Every quarter the team becomes more proficient. But what really driving is, it’s a great product for a urology practice. They struggle with efficiencies around cystoscopy and reprocessing of scopes, the integrated sheath scope technology allows them to a) turnover the rooms much faster, perform more procedures and it’s an economic benefit. So not only does it work, it helps to save the practice, money and time.

Now as far as what you can expect ideally I’d love to have the crystal ball. I’m sure you’re familiar with the capital sales process. We don’t anticipate it going backwards. We definitely see improvement quarter-over-quarter and we expect that to continue. Outside of that I think again we’ve resisted giving guidance just because we want to make sure that we have a better understanding of what the ramp looks like.

Chris Lewis

Okay, great. And then Darin, you talked about bringing the new technologies into the organization, something we’ve heard about since the merger and not much has been done on the M&A front. So I guess one kind of how did your strategy differ from prior leadership? And two, how do you bring those technologies into an organization with kind of the state of your balance sheet at this point?

Darin Hammers

Well, I think, the real key for us is we have alignment between management and the board and one of our largest debt holders. So I think that together working closely with the board and management looking at these opportunities, I think we’ll have the ability to execute on them in a easier way than maybe we did over the last 12 to 15 months.

Chris Lewis

Okay, great. Thanks for the time.

Darin Hammers

Thank you, Chris.

Operator

Thank you. The next question is from Larry Haimovitch of HMTC. Your line is open.

Larry Haimovitch

Good afternoon gentlemen.

Darin Hammers

Hi, Larry.

Brett Reynolds

Hi, Larry.

Larry Haimovitch

Congrats, Darin, on your appointment of CEO.

Darin Hammers

Thank you.

Larry Haimovitch

I am utterly in all of your quarter and I’m not here to pander, I’m not here to make you guys feel good when you don’t need to be, but I’m just amazed that the quarter giving all the turmoil that went on. Now, I understand the sales forces is out in the field and I understand that you probably did everything you could insulate people from the craziness over the past three months, but I must say I’m in off. I don’t know whether you can answer how you did it because you’d tried you before, but it’s truly amazing. This is a dramatic step up in your growth rate and given everything that went on I’m just astounded.

Darin Hammers

Well, thank you for the kind words.

Larry Haimovitch

Sales force, let’s talk about that. You mentioned the size of the sales force 41 plus, I think you said six.

Darin Hammers

Yes.

Larry Haimovitch

Is the sales force is productive as you see it becoming over time, Darin? I know you’ve run the sales force for quite a while. I know that’s one of your great core strength. Is the sales force is productive as you hope? It would be, it can be or do you see more opportunities?

Darin Hammers

I think there’s two ways to look at it. They’re absolutely as productive as we expected them to be at this point. Are we always looking for ways to help them be more productive? Yes, absolutely. So the marketing and sales leadership teams have developed training. We’re looking at different tools that make it easier for the practices to recognize how we can implement the system into their particular practice. And then we’ll grow responsibly over time as we continue to build revenue. We’ll see opportunities to expand the sales forces’ footprint. And we’ll do that in a responsible way that drives growth and controls costs.

Larry Haimovitch

Okay. And then who has replaced you? Have you had replacement for heading up the sales force?

Darin Hammers

Yes, so, about I guess a year and a half ago, we have hired a Vice President of the Sales, U.S. sales. And he’ll be stepping into a Global Vice President’s role to pick up that side of it. So I’m just moving him up and to take a more of that responsibility. And then I have a Director of Marketing to run the marketing function.

Larry Haimovitch

And those people are people you handpicked?

Darin Hammers

Yes.

Larry Haimovitch

Tell us a little bit about the Director of Sales or the Head of Global Sales because to me that’s such an important part of the future success of this company.

Darin Hammers

Sure, his name is Chris Arnold, is someone that I’ve worked with that I did worked with for 13 years at Boston Scientific. He has a lot of sales – senior sales leadership experience. He spent three, four years at Greatbatch between his times at Boston Scientific. And actually was a Regional Vice President for Smith & Nephew for a time as well. So it’s someone who I have known for a long time, who I’ve seen execute for a long time and have a lot of confidence in his ability to continue the momentum that they’ve built on the sales organization.

Larry Haimovitch

And how much timer – are you spending much time in the sales part now? Or how are you dividing your time? Obviously, you have a different – you are wearing a different hat today than you did a few months ago?

Darin Hammers

I have spent a lot less time on the sales side. As a matter of fact, Chris has been around for a year and a half and doing a lot of the heavy lifting, driving the sales execution. So, my time has spent doing much bigger things, trying to find opportunities to help the company grow.

Larry Haimovitch

Okay, great. Congrats on [indiscernible]. I was in Minneapolis a couple of weeks ago and unfortunately you’re in the office. I am sorry. I didn’t get a chance to see, but hopefully…

Darin Hammers

Yes, I think I was in Orangeburg. All right, thanks, Larry.

Larry Haimovitch

Thank you very much.

Operator

Thank you. And at this time, I’d like to turn the call back over for closing remarks.

Darin Hammers

Thank you, Latoya, and thanks everyone for participating today. We appreciate your interest and we look forward to updating you on our progress. Take care.

Operator

Thank you. Ladies and gentlemen, this concludes today’s program. You may now disconnect. Good day.

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