Entellus Medical's (ENTL) CEO Robert White on Q2 2016 Results - Earnings Call Transcript

| About: Entellus Medical (ENTL)

Entellus Medical (NASDAQ:ENTL)

Q2 2016 Earnings Conference Call

Aug 3, 2016 4:30 PM ET

Executives

Carrie Mendivil - Investor Relations

Robert White - President and Chief Executive Officer

Brent Moen - Chief Financial Officer

Analysts

Alexa Desai - William Blair

Kyle Rose - Canaccord Genuity

Ryan Zimmerman - BTIG

Operator

Welcome to Entellus Medical's 2016 Second Quarter Financial Results Conference Call. At this time, all participants are in a listen-only mode. Following management's prepared remarks, we will hold a Q&A session. [Operator Instructions] As a reminder, this conference call is being recorded today August 3, 2016.

I would now like to turn the conference call over to Carrie Mendivil, Investor Relations. Please go ahead.

Carrie Mendivil

Thank you. This is Carrie Mendivil with Gilmartin Group. Thanks for participating in today’s call. Joining me from Entellus Medical is President and Chief Executive Officer, Bob White; and Chief Financial Officer, Brent Moen.

Earlier today, Entellus released financial results for the quarter ended June 30, 2016. If you have not received this news release or if you would like to be added to the company’s distribution list, please send an email to ir@entellusmedical.com.

Before we begin, I would like to remind you that management will make statements during this call that our forward-looking statements within the meaning of the Federal Securities Laws such as our financial guidance. These statements involve material risks and uncertainties that could cause actual results or events to materially differ from those anticipated.

For a list and description of those risk and uncertainties please see the risk factors section of the company’s most recent Annual Report on Form 10-K and subsequent quarterly report on Form 10-Q with the Securities Exchange Commission.

Entellus disclaims any intention or obligation to update or revise any financial projections or forward-looking statements whether because of new information, future events, or otherwise. This conference call contains time-sensitive information and accurate only as of the live broadcast August 3, 2016.

I will now turn the call over to Bob White. Bob?

Robert White

Thanks, Carrie and good afternoon, everyone and thank you for joining us. I would like to begin by introducing our CFO, Brent Moen. Brent has over 25 years of financial experience and leadership roles at various organizations and I am delighted to welcome into the Entellus team. His proven public company experience and track record in high growth organizations will be invaluable to Entellus as we continue to advance our strategic objectives. I would also like to take this opportunity to thank Tom Griffin for his many contributions. And I look forward to his continued success with the company.

I will start today's call with a brief overview of our Q2 results followed by a general business update. I will then turn the call over to Brent who will provide further details on our financial results and outlook for 2016. After that I'll come back for some concluding remarks and then open it up for questions.

We produced solid revenue results this quarter and for the first half of 2016. As a result, we are updating our previous topline full year growth guidance. We now expect revenue growth in the range of 20% to 25% for 2016 versus previous expectations of 19% to 25%.

Turning to the quarter. Revenues reached $18.7 million, growing 23% compared to the second quarter of 2015. We continue to see strength in the office and sales to physicians for use of our products represented 57% of the quarter's total U.S. product revenue.

Gross margin came in at 76% in the second quarter, again driven by a continuation of healthy levels of revenue per procedure and our strong performance. The competitive landscape during the second quarter remain much the same as recent quarters.

During the quarter we observed a couple of product introductions from other companies which we would characterize as iterative improvement. Revenue per procedure was relatively flat versus Q1 in the prior year.

During the quarter we completed our first acquisition as a public company, acquired and entered into an exclusive license for XeroGel Nasal Dressing. Prior to this acquisition, we had been successful distributing XeroGel for several years and are very familiar with this product.

XeroGel uniquely balances hemostasis, stenting and calculated dissolution to provide the control physicians prefer and comfort patients deserve, allowing patients and learn physicians to complete sinus surgery with confidence.

This transaction delivers on Entellus promise to enable advanced office based treatment and to enhance experiences for both physicians and patients. We are pleased to secure ownership of this best-in-class nasal dressing technology, as well as solidify control of the supply chain and distribution to our physician customers.

This acquisition also provides Entellus absorbable materials and chemistry experience opening the door to future innovative product enhancements and therapeutic development efforts.

One of our key strategic objectives is to develop and commercialize a steady cadence of new products and technologies to facilitate office based procedures. In addition to the acquisition of XeroGel we are very excited to discuss our anticipated launch of several new products over the coming months. Each of these products supports our ongoing mission of enabling more physicians to confidently treat more patients in the office setting, delivering enhanced physician and patient experiences.

Let me take a minute to provide you with a little more detail on some of these exciting new products. The Cyclone sino-nasal suction and irrigation system is a new product to the Entellus portfolio and is now in the early stages of limited commercial release. This unique product provides ENT physicians with the ability to simultaneously irrigate with sailing while suctioning out the related discharge.

Irrigation is a valuable therapeutic tool in the ENT physicians' regimen. However, many physicians have avoided the procedure in the office due to the inability to control related drainage. With Cyclone the effluent is captured instantaneously, improving the patient experience while enabling physicians to confidently provide the therapy.

During the quarter we announced an expanded agreement with Fiagon which enables Entellus to be the exclusive distributor of Fiagon's Image Guidance Systems to hospitals in addition to offices and ambulatory surgery centers. This expanded agreement supports those ENTs who would like to utilize the same platform in hospitals where they practice.

Coincident with the expansion in the hospital settings Entellus plans to introduce the premium Fiagon Image Guidance Systems for hospital customers complete with more advanced ENT and cranium actual facial applications.

We are also now the early stages of commercializing a few devices which more deeply integrate Entellus products with Fiagon Image Guidance platform. These include a new image guidance wire which is uniquely compatible with our XprESS LoProfile multi-sinus dilation system, providing yet another level of confirmation to increase physician confidence in device placement.

We are also introducing an accessory that allows simultaneous use of both surgical navigation and light based navigation. This combines our PathAssist light and seeker with the Fiagon Image Guidance platform. These products are all in the early stages of limited commercial release and we plan to expand to full release during Q3.

The addition of Image Guidance to the Entellus portfolio has enabled more advanced procedures to be performed in the office setting through positive clinical experiences and reduce costs to both the patient and the healthcare system.

In addition to these exciting products at the upcoming meeting of the American Academy of Otolaryngology in September we plan to introduce our new MiniFESS shaver system, as well as our focus wireless high definition camera system.

The MiniFESS shaver system is a microcomputer designed to meet the needs of physicians performing advanced office procedures. The compact system is efficient, designed to minimize clogging and features both single use and reusable blades making it an ideal choice for the office setting. The focus high definition wireless camera system offers high-end image quality with the convenience of wireless technology.

The focus wireless camera transmit the image from the camera system to the monitor wirelessly designed to eliminate the hassle of additional cables in opia light sources to make procedures easier as well as saving valuable office space.

Our new product development efforts remain a core focus of the business, and we are very excited to be launching this exciting range of new products and technologies to facilitate office based procedures.

Our international expansion progressed nicely during the second quarter as we continue to broaden our presence outside of the U.S. where the market for balloon sinus base surgery remains largely undeveloped. We are now commercializing over 10 countries and we expect international sales to be in the mid single-digits as a percent of total revenue.

On the sales and marketing front we ended the second quarter with 143 people in our U.S. direct sales organization of whom 84 are full quota carrying reps up from 83 at the end of the first quarter.

Our full quota carrying reps sold at an annualized run rate of approximately $769,000 for the second quarter, and we remain on track to add 15 to 20 sales reps in 2016. We saw a steady addition of accounts throughout the quarter and are on track to reach our goal of adding 200 achieving approximately 1,800 accounts by the end of 2016.

Moving onto clinical update. We continue to be encouraged by the positive reception of our pediatric indication and remain confident that treatment with balloon sinus dilation is particularly appropriate in young patients as it enables the preservation of the sinus mucosa and anatomic structures in growing patients.

An abstract of our pediatric study was presented at COSM which is the Combined Otolaryngology Spring Meeting symposium in Chicago held in mid-May and the following include some highlights from the abstract.

157 sinus dilations were attempted and all 157 attempts were successful. There were no complications. Significant improvement in the sinus and nasal quality-of-life survey was seen between baseline in six months, with 92% of patients improved by the minimally critical important difference of one or more or adolescence mean overall Sino-Nasal Outcome Test-22 scores were also significantly improved at six months, and the revision rate was 0%.

Turning briefly to reimbursement. Anthem is updated their medical policy following their annual review and still considers balloon sinus dilation to be investigational. Minnesota Blue Cross Blue Shield updated their medical policy during the quarter removing restrictions for frontal and sphenoid sinuses and now cover all sinuses for standalone balloon dilation procedures.

Overall, we continue to see strong growth in both the OR and office settings during the second quarter, and we are particularly encouraged by the growing trend of office based procedures and continue to seek opportunities to support the shift, with the Board updating you on our progress throughout the year.

I will now turn the call over to Brent Moen to provide you more details on our financials. Brent?

Brent Moen

Thanks, Bob and good afternoon everyone. Our revenue for the second quarter of 2016 increased 23% to $18.7 million from $15.2 million during the same period of the prior year. The growth in revenue was primarily attributable to increasing market adoption of our XprESS family of products in both OR and the office, as well as from our new product lines.

Gross margin for the second quarter of 2016 came in at 76.2% compared to 78% for the same period in 2015. The current period gross margin was impacted by changes in the sales mix resulting from our new product lines, continued international expansion and investment in expanded capacity for anticipated future growth.

Our operating expenses for the second quarter of 2016 were $18.8 million, an increase of 32.4% compared to $14.2 million for the same period of the prior year. The increase in operating expenses was primarily due to increased compensation and other employee related expenses including stock-based compensation resulting from the expansion of the company's sales and finance staff.

The net loss for the quarter ended June 30, 2016 was $5 million or $0.27 per share compared with net loss of $2.9 million or $0.15 per share for the same period of the prior year.

As Bob mentioned earlier on June 29 we completed the XeroGel acquisition for $11 million in cash. We will continue to market and sell XeroGel to hospitals, offices and ASCs. However, going forward XeroGel revenue and cost of goods sold will be reported on a gross basis in our income statement. We finished the second quarter with $46.1 million in cash, cash equivalents and short-term investments.

Lastly, I'd like to update you on guidance for 2016. We expect full year 2016 revenue will be in the range of $74 million to $77 million, representing growth of 20% to 25% annually and the gross margin will continue to be in a range of 75% to 77% for 2016. This compares to our previous revenue expectation for 2016 of $73 million to $77 million.

Further, we expect operating expenses to be in the range of $77 million to $81 million. This compares to our previous operating expense expectation for 2016 of $78 million to $82 million.

Full year 2016 net loss is now expected to be in the range of $21 million to $28 million. This compares to our previous expectation for net loss in the range of $21 million to $29 million.

We expect our third quarter revenue will range from approximately $17.3 million to $18.3 million, representing the same quarter growth of 17% to 24% and that gross margin will be in the range of 75% to 77%. Third quarter net loss is expected to be in the range of $6.5 million to $8.5 million

At this point, I'd like to turn the call back to Bob for closing comments.

Robert White

Thanks, Brent. We continue to be excited about the future prospects for Entellus. We are incredibly excited about our many new product offerings and development pipeline which are largely into the Office segment. We expect our cadence of new product launches throughout 2016 to continue with the strong pace.

And finally I would like to thank our terrific team at Entellus for collectively driving our business forward and achieving our goals

With that, we will now open up to questions. Operator?

Question-and-Answer Session

Operator

Thank you. [Operator Instructions]

Our first question will come from the line of Matt O'Brien from Piper Jaffray. Your line is open.

Unidentified Analyst

Thanks. This is Mad [ph] for Matt today. Can you guys hear me okay?

Robert White

We can Matt. Thanks.

Unidentified Analyst

Great. So looking at guidance for the third quarter at the midpoint quarter-over-quarter looks like you guys are projecting down 5%. And if I look at that, you know, in 2015 you guys were down 3%, so you sort of chalk it up as seasonality or is there anything else that we should be looking at there.

Robert White

No, Mad, seasonal effect is what we consistently see. When you look at that Q3 similar to Q1 is sort of goes up and down in conjunction with holiday schedules of doctors. And so, you know, we strive for accuracy in our guidance setting and that's what we aim to do in Q3.

Unidentified Analyst

Okay. And how comfortable you guys -- Q4 is probably going to be a pretty big quarter than increasing your guidance for the full year by $1 million, how comfortable you guys there going in for Q3 to Q4.

Robert White

We, again, feel like it, you know, we shoot for our best sense of where we think the market is based on current conditions. And so we feel comfortable with the guidance we put forward. We recognize that Q4 is going to be a bigger quarter, it always is a bigger quarter again sort of same seasonal effect that you tend to see and, of course, Q4 being -- tends to be a very strong quarter for us.

Unidentified Analyst

Okay. Last one for me. XeroGel, how is that going to affect you guys gross margins heading into the back half of the year and into 2017. Thank you.

Brent Moen

Yeah, hi, Mad. It’s Brent. Actually as it relates to XeroGel we expect that XeroGel will actually fit nicely within our kind of guidance for gross margin, so still in that range of 75% to 77%.

Robert White

Thanks Mad.

Operator

Thank You. Our next question will come from the line of Ben Andrew from William Blair. Your line is open.

Alexa Desai

Hi, guys. This is actually Alexa in for Ben. How are you doing?

Robert White

Good, Alexa. How are you doing?

Alexa Desai

I am good. Thanks. Can you talk a little bit about the traction you're gaining in establishing relationships with and training pediatric doc? I know you said in the past that adult docs are a little bit stubborn and hard to convert, so are you seeing the same kind of issue with these docs.

Robert White

Well, so, we sort of look at the pediatric university doctors in two different categories. There's a number of generally entry use to treat. Pediatric patients tend to be older pediatric patients and that's where we're initially seen traction because these doctors are more familiar with balloons in general and if they've had good experiences with adults are much more inclined to begin to use that therapy on older adolescents. That's where our initial sort of focus has been where initial attraction is.

As we are able to get the data out into the marketplace, we will begin to get more and more traction with a pediatric focus doctors specialists that tend to be more the children's hospitals and associated with the academic medical centers. I didn't mention this during the call, but I -- we do and we are hopeful that sometime during the second half of the year the study that was presented an abstract form COSM will be published and that'll be good and very helpful when it comes to that universe of doctors. So it's a bit of a two-phase step here as we think about the pediatric market, but we are initially excited and feel like we've got, you know, reasonable traction on that to group of a patients.

Alexa Desai

Okay. That's helpful. Thanks. And do you know that what percentage of doc only deal with pediatric patients?

Robert White

We are estimated it’s on the order of call it around 500 doctors that are highly specialized in pediatric patients.

Alexa Desai

Okay. Then 2017 numbers, I guess, is around 93 million applying growth of 24% at the midpoint what you present. So what are the puts and takes on next year's revenue growth that would allow you to hit or maybe exceed that target.

Robert White

So I will talk maybe just a bit about sort of as we think about next year from a product standpoint and some of the growth initiatives, we're not at this point prepared to comment specifically about guidance for next year as we haven't yet said it and we likely won't until Q4. But I can tell you that as we think about the market there are several things that, you know, we anticipate being important growth drivers. One and most importantly is the fact that the office market is vastly under penetrated. Our estimate is that we're -- the market overall right now from a balloon standpoint is about 7% penetrated in the office, so there's a great deal of opportunity there.

The second is that as we have seen increasing numbers of procedures move to the office, the opportunity to garner revenues from these additional procedures is meaningful and albeit we are in the very early stages right now, but we do see some of these products that I mentioned, some of the other ones we've introduced over the past year and more will be contributing in meaningful way.

The third is these expanded indications. We just talked about pediatric, obviously that's going to, you know, continue to accelerate. We believe we are continuing to work in the future on our Eustachian tube clinical trial, that will likely not be a meaningful contributor for 2017, but certainly it's something that's in the pipeline.

And then finally, international. We are continuing to build that out. So we see a number of things that will be at play here, as we move into next year. But as I started off by saying, you know, we'll come back at some later date with more specific guidance in 2017.

Alexa Desai

Okay. And then last one for me just to follow-up on that international point. You talked a little bit about how you were putting some energy into the reimbursement dynamic last quarter. So you can you give us an update on what markets you are targeting first? You said 10 of locations that you're directing right now or have commercial operations in.

Robert White

Yeah, just to clarify. Yeah, we are commercialized in over 10 countries. We're only direct right now outside of the U.S. and the U.K. And the markets that we've been focusing on our are ones that where there's been some development that's already occurred and that have at least enough of a population that we believe we can sort of get things going without getting broad reimbursement from the various governments.

We are though beginning to do some work on that. We'll be back at later dates with more specifics around how those efforts are going. They are largely long hauls as you know, but we are optimistic that we'll have some success in certain markets, but stay tuned for more as we get better perspective on that.

Alexa Desai

All right. Thanks guys.

Robert White

Thank you.

Operator

Thank you. Our next question will come from the line of Kyle Rose from Canaccord. Your line is open.

Kyle Rose

Great. Thank you for taking the questions. Can you hear me all right?

Robert White

Yeah, Kyle. Thank you.

Kyle Rose

Great. So I just wanted -- just one housekeeping question on the XeroGel side there, when you think about you commented on the margin perspective there, but when you think about you're capturing the incremental revenue, I mean how should we think about that as a topline driver and moving to the back half and then sort of full year?

Robert White

Well, I guess from the standpoint of XeroGel, you know, previously as I believe you're aware because it was in the K we recognize revenues on a net basis. And so that the change that we're going to be experienced and we are now is that that it moves to a gross basis. Now recognize that the XeroGel product line overall is a relatively small contributor to the total, you know, P&L, but we do anticipate that growing. If you go back and look at the -- let's look at the K you'll see that the business was growing to the tune of about 40% prior to the acquisition on the years that we reported. So, we're hopeful and expect that will continue to grow at a nice pace and be very complementary to the business.

Kyle Rose

Okay. And then when you think about the guidance for the back half of the year and in particular into the Q4, does your guidance contemplate any contribution from some of the new products that are launching, or is it just continued your execution that we've seen over the first half of the year?

Robert White

It will be more on the execution side, Kyle. As we move into -- so some of the products that I mentioned we are going to be fully commercialized as we move into Q4. Cyclone being a great example of that. Couple of them though will be in limited release for a period of time, including the shaver system as well as the wireless camera. So those I would not expect will be meaningful contributors until next year. So it's a bit of a mixed bag.

Kyle Rose

Okay. And then when you think about, you know, the addition of bringing on all new instruments and then the new products outside of the balloon technologies over the course of the last 12 months and the plans moving forward. When you think about your customer base and you've got the goal of adding 200 accounts this year, getting to 1,800 accounts.

When you think about the utilization of the broader products, is it 10% of your physicians that are using some of these other products, is it 30% on the way to 50%. I mean how do we think about the momentum that’s building?

And I know it's early and I know that you're shifting procedures to the office from a market level. But when you think about where we are in the cadence of realizing some of the momentum from these product launches, just characterize that for us and then I'll hop back in the queue. Thank you.

Robert White

Yeah, you bet. So it’s a great question and it’s one we spend a lot of time thinking about. So our vision someday is to see the vast majority of patients getting treated in the office versus in the OR. In order for that to happen, we have to not only facilitate the chronic sinusitis patients being treated for just simply narrowing ostia and whatnot, but also many of these comorbidities that we can now begin to more aggressively address with the advent of these technologies.

Today the vast majority of doctors are at the low end of the spectrum, meaning that they're not really doing a great deal beyond balloon-based treatments of these patients. However, if you look at our more sophisticated users today, some of them are up north of 90% of all of their patients are being treated now in the office.

There's no reason for us to believe that we don't think that all patients will be at that level in the future, but we do think that a meaningful number will move that way as we facilitate their ability to do more things in the office, and because there are so many benefits for doing that versus in the OR. So it's a long-term aspiration, but we believe by bringing these technologies to the market, we facilitate that at a hopefully a quicker and quicker pace.

Kyle Rose

Great. Thank you very much.

Robert White

No problem. Thank you.

Operator

Thank you, again. [Operator Instructions] Our next question will come from the line of Sean Lavin from BTIG. Please go ahead.

Ryan Zimmerman

Hi, this is actually Ryan on for Sean. Can you hear me okay?

Robert White

Yeah, Ryan, how are you doing?

Ryan Zimmerman

Very good. Thank you. Nice to talk to you guys. So just want to ask a little bit about some of the products you've added in the portfolio. You've talked about a lot of products this quarter and a lot that's coming down the pipeline and I’m just curious how you think about that portfolio as a whole and is it filled out completely? Are there other products that you're looking to add and where does that go both in the office setting and the hospital given the expansion in the hospital? And then I have some follow-ups after that. Thank you.

Robert White

Yes, a good question. So there's always going to be opportunities on these different fronts and we do continue to see opportunities for more products. For us the primary goal is that we want to be able to facilitate these procedures that I described a moment ago and more of them being done and being able to address the comorbidities. But in addition to that we really would also like to be, to a reasonable degree, somewhat of a one-stop shop. We want to be that company that can provide ENTs with the products that they need to be successful in their offices. That doesn't mean everything, but in our eyes it does mean that there's a fair amount that we can do there.

So time will tell how the product portfolio evolves. We have now we feel a lot in the near-term pipeline to keep us busy for a while and to achieve our objectives, but that doesn't mean we'll stop looking by any means. We're going to keep working on more stuff.

Ryan Zimmerman

Great. Thank you. And just thinking about other companies in the space that have talked about this, and I'm just curious to get your take. I mean it sounds like fast [ph] seasonality is a bit more pronounced this year than maybe we've seen in the past and subsequently in the Q3 in light of the guidance that you provided, just want to get your thoughts on what you're seeing in the market as it relates to volume fluctuations quarterly. And is it more pronounced because of higher deductible insurance plans, other factors? That would be helpful.

Robert White

Yes. I don't think it's more pronounced from our perspective. We experienced 3% declines sequentially last year. Prior to that we've seen 5%. It does bounce around a little bit. I would say that our experience puts it more in the mid-single digits, and so we do, based on our estimates of where we think the market is primarily through internal forecast we try to peg it and that's where our guidance gets set. So I don't know if it's more pronounced. I wouldn't characterize it that way. We just try to do what we can to get an accurate prediction, but mid-single-digits has been our experience.

Ryan Zimmerman

Okay. Great. I'll hop back in the queue. Thanks for taking the questions.

Robert White

Sure.

Brent Moen

Thanks, Ryan.

Operator

Thank you. At this time, I'm showing no further questions. I would like to turn the call back over to CEO, Bob White for any closing remarks.

Robert White

Great. Well, thank you, everyone, for joining us this evening. We appreciate your ongoing interest in Entellus. Thank you.

Operator

Ladies and gentlemen, thank you for participating in today's conference. This concludes the program. You may now disconnect. Everyone have a great day.

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