Nuvectra's (NVTR) CEO Scott Drees on Q3 2017 Results - Earnings Call Transcript

Nuvectra Corporation (NASDAQ:NVTR) Q3 2017 Earnings Conference Call November 1, 2017 4:30 PM ET

Executives

Zack Kubow - The Ruth Group, IR

Scott Drees - Chief Executive Officer

Walter Berger - Chief Operating Officer and CFO

Analysts

Matthew O’Brien - Piper Jaffray

Cathy Reese - Empire Asset Management

Operator

Good day, ladies and gentlemen. And welcome to the Q3 2017 Nuvectra Financial Results Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session, and instructions will follow at that time. [Operator Instructions]

As a reminder, this conference call maybe recorded. I would now like to introduce your host for today’s conference call, Mr. Zack Kubow of The Ruth Group. Sir, you may begin.

Zack Kubow

Thanks, Operator. And thanks, everyone, for participating in today’s call. Joining me from the company are Scott Drees, Chief Executive Officer; and Walter Berger, Chief Operating Officer and Chief Financial Officer.

This call is also being broadcast live over the Internet at www.nuvectramed.com, and a replay of the call will be available on the company’s website for 90 days.

Before we begin, I would like to caution listeners that comments made by management during this conference call may include forward-looking statements within the meaning of Federal Securities Laws. These forward-looking statements involve material risks and uncertainties.

Such forward-looking statements are not guarantees of future performance and actual results and outcomes could differ materially from our current expectations. For a discussion of risk factors, I encourage you to review the Nuvectra Form 10-Q, 10-K and other reports filed or to be filed with the Securities and Exchange Commission.

Furthermore, the content of this conference call contains time-sensitive information that is accurate only as of the date of the live broadcast, November 1, 2017. Nuvectra undertakes no obligation to revise or update any statements to reflect events or circumstances after the date of this call.

With that said, I’d now like to turn the call over to Scott Drees.

Scott Drees

Thanks, Zack, and good afternoon, everyone. I’d like to thank you for joining us today and welcome you to our third quarter 2017 earnings call. The key topics for today’s call will be; the continued commercial and clinical momentum of our U.S. Algovita business, updates on our regulatory submissions for Algovita MRI conditional approval and for our Virtis Sacral Neuromodulation System for the treatment of overactive bladder, the reacceleration of our deep brain stimulation development project with Aleva Neurotherapeutics, our financial performance for the third quarter of 2017 and the strengthening of our balance sheet with an additional $12.5 million draw from our credit facility, and finally, a Q&A session following our prepared remarks.

In the third quarter, we delivered record consolidated revenues of $7.6 million, including total Algovita sales of $6.3 million, driven by U.S. Algovita sequential revenue growth of 25%. More specifically, we drove deeper penetration in existing accounts and furthered our acquisition of new revenue generating accounts. We grew both the number of new revenue generating accounts and trial procedures by approximately 32% sequentially.

We increased productivity with average daily sales increasing 27% sequentially. We tripled the number of case ready accounts in the first nine months of the year, which we define as hospitals, ambulatory surgery centers and physician offices that our team is contracted to sell into. And we achieve these results despite the fact that sales in Texas, Louisiana and Florida, three of our more successful markets were impacted by hurricanes in the quarter.

We continue to attract high caliber reps in key markets, while separating with certain reps that were not tracking to their quotas. We ended the quarter with a total of 44 active territories and continue to see improvement of sales productivity metrics.

I am positive about the competitive capability of our commercial team and we expect to return to approximately 50 active territories in the short-term. With all of these factors in mind, we are encouraged by the continued ramp of our Algovita SCS business.

I’d now like to provide an update on both our Algovita MRI and Virtis FDA and CE Mark regulatory submissions. First, as we announced previously, we filed our Algovita MRI full-body conditional submission with the FDA in June. Subsequently, the FDA came back to us with questions and we are currently working through our responses.

During this period the 180-day review calendar is on pause. Given our estimates for the time required to adequately respond to the agency, we now believe MRI conditional approval may occur sometime in the first half of 2018.

Upon approval from the FDA, we believe this MRI capability will add another compelling feature for the physicians and patients who utilize the Algovita SCS system. In the short-term, we do not anticipate this delay will significantly impact our commercial progress as evidenced by our commercial ramp and the clear advantages of the Algovita system.

Secondly, we continue to move forward with European and U.S. regulatory processes for the Virtis Sacral Neuromodulation System, which addresses the treatment of chronic urinary retention and the symptoms of overactive bladder.

For Europe, our Notified Body TUVSUD responded to our submission with questions and we are in the process of submitting our responses. As a result, we now anticipate that CE Mark Virtis may occur in the first quarter of 2018, with initial commercial implants expected shortly thereafter. We remain confident in our submission and we are building product ahead of the approval to support our OUS distributor orders.

In the U.S. we have requested and have been granted an extension of our FDA submission and are in process of completing our response. We remain on track for FDA approval, an entry into the U.S. Sacral Neuromodulation market in the second half of 2018.

Clinical trials, we continue to move our post-market clinical trial studies forward. We expect the outcome of our studies to highlight the efficacy of the four different stimulation waveforms that our unique Algovita system is capable of, which includes high fidelity tonic, first modes, high pulse width and high frequency. In Q4 we will finalize protocol details and start establishing clinical sites with the goal of clinically validating the positive feedback that we are receiving from physicians and patients.

I’ll now turn to an update on our strategic development agreement with Aleva Neurotherapeutics in the field of deep brain stimulation for the treatment of Parkinson’s disease, an essential tremor. In the third quarter, Aleva completed a Series D financing round of $13 million USD. This new funding allows Nuvectra and Aleva to resume full development activities once again under our amended development agreement.

With that, I’ll now turn the call over to Walter.

Walter Berger

Thanks, Scott, and good afternoon, everybody. I’d now like to provide an overview of our third quarter 2017 financial results. As Scott mentioned, we generated consolidated revenue of $7.6 million in the third quarter of 2017, an increase of 102% from $3.8 million in the third quarter of 2016.

Algovita sales increased 441% to $6.3 million, compared to $1.2 million in the third quarter of 2016. Our neural interface components and systems revenue, which comes from our wholly-owned subsidiary NeuroNexus, decreased 21% to $1.1 million in the third quarter 2017, as compared to $1.4 million in the third quarter of 2016.

Our deep brain stimulation system development agreement with Aleva generated $186,000 of revenue in the third quarter of 2017, as compared to $1.2 million in the third quarter 2016. And as Scott just mentioned, Aleva has successfully raised sufficient capital that will allow us to continue our development work with them, which we expect to continue to contribute to our revenue through the balance of 2017 and into 2018.

Gross margin was 45.5% in the third quarter of 2017, compared to 56.8% in the third quarter of 2016. The decrease in gross margin is primarily due to shift in mix. In the third quarter of 2017, Algovita [ph] reached out (9:55) historically had lower margins than our other product lines, in fact contributed more revenue and at a higher margin compared to the third quarter of 2016. Whereas both our NeuroNexus product, as well as Aleva services, which have historically had higher margins experienced lower margins and lower revenues in the third quarter of 2017 as compared to the third quarter of 2016.

As we have shared in the past our gross margin has been and will contribute to be affected by variety of factors, including but not limited to our revenue mix as margins vary across each of our product line, as I just explained. The cost to have our product manufactured for us, inventory related charges and write-downs, the ratio of trial for permanent implant and the average selling price of our product to the extent they were successful in reducing our manufacturing costs as we move forward and as our revenue mix continues to shift towards Algovita and Virtis, we expect our gross margin to improved over time.

Moving on to operating expenses, in the third quarter of 2017, they were $14.5 million, a 30% increase from $11.1 million in the third quarter of 2016. Specifically, selling, general and administrative expenses increased $11.4 million in the third quarter of 2017, up from $8 million in the third quarter of 2016. The increase reflects continue investment to scale the company’s sales and marketing team, and corporate infrastructure.

Research, development and engineering costs were flat at $3.1 million for the third quarter of 2017 and the third quarter of 2016. Net loss for the third quarter of 2017 was $11.6 million or a loss of $1.07 per share, compared to a net loss of $9.5 million or a loss of $0.92 per share for the third quarter of 2016.

Turning to the balance sheet, total cash and cash equivalents were $37.5 million as of September 30, 2017. This balance reflects the recent draw down of $12.5 million from our existing credit facility, which now has a remaining balance of $17.5 million, including a $500 -- excuse me, including a $5 million revolver.

We remain focused on wherever liquidity needs and we will continue to assess our cash resources moving forward, particularly as we execute on our strategic growth plan and prepare for the launch of the Virtis system. With that said, we recently filed an S-3/4, a shelf registration that will allows us flexibility to access various equity options to provide additional equity.

Now, with that, I would like to turn the call back over to Scott for closing comments.

Scott Drees

Thanks, Walter. Now let me move on to our key areas of focus through the rest of the year and into 2018. First, to continue expansion of SCS market share by increasing sales rep productivity, while further penetrating existing accounts and selling into new accounts; second, to advance our regulatory submissions for Algovita MRI conditional approval and Virtis with FDA and CE Mark regulatory agencies to ensure approval as quickly as possible; third, to accelerate post-market clinical studies focused on the clinical effectiveness of the four stimulation waveforms that our Algovita system is capable of; and lastly, to continue to remain good stewards of available cash, while working to supplement our cash position for near-term and long-term strategic execution, including the commercialization of the Virtis system.

Before turning over the call to Q&A I would like to thank all Nuvectra employees, as well as our Board of Directors for their hard work, dedication and loyalty as we continue to advance the company and deliver our life-changing technology to a growing number of patients.

With that, I’d now like to turn the call over to Zack to open the Q&A session.

Zack Kubow

Thank you, Scott. Please note that after the call any analysts or investors have additional questions, management will be available in the coming days. If you would like to arrange a call, please reach out to The Ruth Group.

I will now turn the call over to the operator to begin the Q&A

Question-and-Answer Session

Operator

Thank you. [Operator Instructions] And our first question comes from Matthew O’Brien from Piper Jaffray. Your line is open.

Matthew O’Brien

Great. Thanks for taking the questions. Few for me if I can, just, I guess, right up front, can you quantify the revenue impact in the quarter from the hurricanes?

Scott Drees

The -- we are not going to qualify it, Matt, from a dollar perspective. It affected the movement of permanent cases in a number of accounts and as you know that’s our primary revenue source. And we also had a number of trial cases either drop or pushed out and just a lot of accounts were put in a difficult scenario or a decent number of weeks, but we are not going to quantify to a dollar perspective.

Matthew O’Brien

Okay. Fair enough. As far as the sales force goes, I was a little surprised to hear the numbers down this quarter. Can you talk about what happened there specifically, was that something that you generated, was it -- was it the employees deciding to leave, was it some of the more 10-year graphs that have been around a while and not necessarily ones that are about to come up or not compete?

Scott Drees

No. Fair questions all, thank you. Well, first of all, I would like to say that we are pleased by the increase productivity despite the fact that our numbers were down by a handful from Q2 to Q3. And I am -- we are also pleased the productivity and account penetration continues to grow.

As for -- I think I said in my statements that the reason for the decline is the fact that we had a number of territory managers which is simply not on their core objectives, they were behind and we let them go. So they were turnovers driven by us, not necessarily the territory managers.

I’d also like to add that we also had a few add that were significant. We also had some significant competitive reps joined the company, which we are very excited about. So, anyway, I hope I answered that question.

Matthew O’Brien

No. That’s helpful. That kind of ducktails into the next question was on the productivity side, in the quarter it looks like it was up pretty dramatically in Q3 even when you are including the impact of the hurricane. So we would love to hear about where that came from specifically, be it new, new accounts be it, existing ones kind of may be same-store kind of performance that you saw in the quarter, any kind of color you can provide there, I think, would be real helpful?

Scott Drees

Sure. Sure. So in the comments we mentioned a couple of things. So, number one, productivity is up. Number two is, we continue to grow our penetration into existing accounts, where we are getting a greater percentage of the business in existing accounts, as well as penetrating new accounts, which is what we obviously like to see.

The metrics were also positive in the fact that, if you look at the industry, overall, we were pretty pleased with 25% sequential growth, while if you look at kind of the rest of the industry, it was pretty flat in Q3.

And then, lastly, I’d also like to just remind people that, in the business year of spinal cord stimulation, the Q3 is traditionally the slowest of the quarters from a growth perspective. This has a lot to do with the fact that all of our procedures are elected and the fact that vacation schedules both for the clinicians, as well as the patients kind of upsets the normal flow of patients chain. So with all those things in mind, as well as the scenario with Texas, Louisiana and Florida, we feel real good about the growth that we have shown.

Matthew O’Brien

Okay. And last one for me and I will get out of the way, but pushes that we are seeing here on MRI and with Virtis, specifically on MRI, can you just frame up a little bit as far as some of the questions that came back from the agency, how significant they were versus your expectations? And then, on Virtis, the push into Q1 and we are only about three months, but just what was the main driver there?

Scott Drees

Sure. Sure. So why don’t I try to tackle the MRI one first. So, first of all, I think, it’s important to know that both FDA and TUV were both, quite frankly, pretty complementary of our 3,300 pages of extensive testing that we’ve provided in our MRI submission. And from the TUV perspective, we’ve been asked nothing. They did ask no questions and basically accepted the submission today.

And the FDA in particular wants to see what’s called modeling data and modeling data is expenses to just a computer modeling, which is driven by ISO 10974 standards. We believe that this final stage is something we just need to work through. We know we need to provide some additional modeling data.

The good news is that our -- in our phantom testing on MRI, we prove to ourselves that this product is a totally MRI capable. And so we’ve got to get this modeling question answered and we’ve got it sort through what those responses are going to look like and once we do that we are confident in our MRI capability. So before I go to Virtis, does that answer your question, do you have any other follow-ups on MRI?

Matthew O’Brien

No. That’s perfect.

Scott Drees

Okay. From the Virtis perspective, I think, there’s two different stories, from the Virtis with TUVSUD, the TUVSUD asked us some questions about our submission. The questions are in the process of being finalized. We anticipate the response to TUV to be, I am going to call it eminent, let’s call it between now and Thanksgiving. And we weren’t surprised by the questions and we are in the process of answering them. So I don’t think it’s a big push out quite frankly.

From an FDA perspective, the FDA also had the questions for us. The questions from FDA were specifically around biocompatibility, IPG, Cybersecurity, if you recall the St. Jude issues, they have Abbott’ issues they had recently with Pacemakers in the last year, MRI modeling and the overall equivalency with predicate devices.

And these are all logical questions and the one that required some significant time work was the biocompatibility on some of our accessories and that pushed us out a little bit. But, overall, the FDA submission for Virtis, we see it on track from an overall perspective. We still see ourselves on track for back half of 2018.

Matthew O’Brien

Very helpful. Thank you.

Operator

Thank you. [Operator Instructions] And our next question comes from Cathy Reese from Empire Asset Management. Your line is open.

Cathy Reese

Hi. Good afternoon and congratulations on another quarter of accomplishments.

Scott Drees

Thank you, Cathy.

Cathy Reese

Most of my questions have been answered -- most of my questions have been answered, but going back and touching on Virtis in the EU.

Scott Drees

Yeah.

Cathy Reese

So at this point, there’s no additional request anticipated for the Virtis filing, correct, because I just wondering about why the delay…

Scott Drees

So…

Cathy Reese

… actually did occur?

Scott Drees

Yeah. So the -- between the last call and this fall, TUV came back to us…

Cathy Reese

Yes.

Scott Drees

… with some questions. We are in the process to just finalizing those questions and getting those back to them. And as I kind of said about the FDA submission, one of them was also around biocompatibility. That took us some time to do some additional biocompatibility testing on some of our accessories. And we are pretty much done with that and we look forward to answering this. So wouldn’t be pushed out a little bit, but we don’t see it as a big time change.

Cathy Reese

Okay.

Scott Drees

Yeah.

Cathy Reese

And then, are there any expectable notable differences in the approval in Europe for the Virtis device compared to those of Medtronic and Axonics. And what I’m trying to ask here is that Virtis will it have an MRI label advantage protect -- perhaps over Axonics which only seem to have an MRI head label?

Scott Drees

So from a Virtis TUV perspective, we were not asked any questions around our MRI component of our submission. So, again, we don’t have an approval. However, we were very encouraged by the fact that we were not challenged in the MRI section of our submission.

Cathy Reese

Okay. So that sounds positive.

Scott Drees

Thank you. I think -- Cathy I am holding back on you a little bit, because I don’t want to get into regulatory hell with the TUVSUD who is doing a very good job of working with us through this process.

Cathy Reese

Absolutely. Okay. I understand that. And then, just to verify on the MRI approval in the U.S…

Scott Drees

Yes.

Cathy Reese

Nuvectra is still aiming for a total body indication for Algovita, correct, that’s still the goal?

Scott Drees

Yes. That is the goal.

Cathy Reese

Okay.

Scott Drees

That is the goal. And right now we’re in the process of trying to analyze what different options are and what the best timing is for that. So we just received fairly recently the response from FDA. We are in the process of analyzing the modeling requirements that FDA has asked for, the timeframes of that and the best path of action -- fastest path of action towards ultimately full-body MRI approval, so…

Cathy Reese

Okay.

Scott Drees

We are grinding and stay tuned.

Cathy Reese

Okay. And I don’t mean to be jumping around here that I’m going to a little bit, with the NANS Conference coming up and the forearms study really just, it seems like getting underway, because, obviously, we are already into the fourth quarter?

Scott Drees

Right.

Cathy Reese

Do you think that there will be any type of a presentation at NANS or should we just anticipate that there will not be?

Scott Drees

Well, I think, there will be some presentation at NANS. I think there will be some noise around Nuvectra. However, I don’t think we will have anything of substance that we can provide in the forearm clinical study for NANS. It’s just too soon.

Cathy Reese

Okay.

Scott Drees

So, basically, we will be finalizing sites here in the fourth quarter with the goal of enrolling patients as fast as we can either around year end or at the start of the first quarter. So it would be premature.

Cathy Reese

Okay. And yeah, I just didn’t want to think there was going to be something than not sometimes that’s worse than if you know going into an event that there is not.

Scott Drees

Thank you for asking the question.

Cathy Reese

Okay. And then, on the sales ramp and then I’ll get out of your way too. On the sales ramp you have $1.5 million to $3 million revenue levels. Is that typically back ended and now, of course, realizing that Algovita U.S. launch was in the second quarter last year. But are you expecting that to be more on the backend of that 24-month to 36-month goal or is that more of a -- you’re expecting that to be more gradual…

Scott Drees

I am a little…

Cathy Reese

Just trying to get a handle little bit better on that?

Scott Drees

…question, are you talking about -- a sales rep…

Cathy Reese

A territory.

Scott Drees

… managers. Okay. So, the territory ramp. Yeah. If you were to refer to our slide deck that we use with investors, we would show basically a three-year ramp to get to the $1 million to $1.5 million sweet spot that we are trying to get through with all territories, okay. So it’s kind of three-step process, one, two and three.

However, what I would like to add is that, currently, we actually have a number of territories performing ahead of normal schedule that are on track to achieve greater than a $1 million of sales in 2017. So, that being said, we have territories tracking above that. We have territories tracking online. We also had territories tracking well below our expectations. And as I said earlier, we parted with some of those reps, because we just weren’t pleased with the -- with their performance.

Cathy Reese

And that was a reason for my question, obviously, I think, was the fact that you have to be gauging something for these people to not live up to correct. So, that’s why I was thinking then, it was more, I was thinking that might have been more back ended, but it seems that it’s -- you’re expecting more of a gradual?

Scott Drees

But we gauge a lot of things.

Cathy Reese

Okay.

Scott Drees

We gauge our accounts penetrated. We track number of physicians doing trials. We track number of accounts and growing from trials to permanent implants. We track metrics around overall penetration and dollars. So believe me we were metric driven, especially Mr. Berger here, so we are tracking everything.

Cathy Reese

Perfect. Okay. Thank you.

Walter Berger

Thanks, Cath.

Scott Drees

You’re welcome. Thanks, Cathy.

Operator

Thank you. And that does conclude our question-and-answer session for today’s conference. I would now like to turn the call back over to management for any closing remarks.

Scott Drees

Operator, thank you. We’d like to thank everyone for participating today, for your support of Nuvectra and have a great evening and good evening. Bye-bye.

Operator

Ladies and gentlemen, thank you for participating in today’s conference. This does conclude the program and you may all disconnect. Everyone have a wonderful day.