Second Sight Medical Products, Inc. (NASDAQ:EYES) Q3 2017 Earnings Conference Call November 2, 2017 4:30 PM ET
Lisa Wilson - IR
Robert Greenberg - Chairman
Tom Miller - CFO
Will McGuire - President and CEO
Ladies and gentlemen, thank you for standing by. Welcome to the Second Sight Q3 Results Call. [Operator Instructions]. As a reminder, this conference is being recorded, Thursday, November 2st, 2017.
I would now like to turn the conference over to Lisa Wilson, Investor Relations. Please go ahead ma'am.
Thank you, Kai. Good afternoon and welcome to Second Sight's third quarter 2017 earnings call. This is Lisa Wilson, Investor Relations for Second Sight.
With me on today's call are Dr. Robert Greenberg, Chairman of the Board of Directors; Will McGuire, President and Chief Executive Officer; and Tom Miller, Chief Financial Officer.
At the close of market, the company issued a press release detailing financial results for the three and nine months ended September 30, 2017. 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's 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 the 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 November 02, 2017. 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.
Thank you, Lisa and thank you all for joining our call this afternoon. I am very pleased to report that we continue to make good progress towards achieving our three key goals. First to validate our recently implemented centers of excellence commercial model, our success will be measured by increasing the number of senators performing at least one new implant on average per quarter. Second, to demonstrate our ability to treat better sighted individual's success there will be measured by clinical testing in humans which will give us confidence that we will be able to expand our addressable market. Finally, to implant the first Orion patient this year. With respect to our clinical and R&D progress to-date we continue to make significant strides. Our better sided RP initiatives remain on track. The better side at RP clinical study will begin shortly in Germany and we plan to pursue a similar expanded indication with the U.S. FDA in 2018.
We received conditional approval for the Orion feasibility study in August and this was moved to full approval as we announced earlier today. We anticipate implanting the first subject for the feasibility this year. We also submitted an application to the FDA to request that Orion receive official designation as a breakthrough device, with this designation Orion would be eligible for priority review and potentially allow us to get to market faster and at a lower cost. We continue to strengthen our management team as well with the appointment of Frank Vandeputte as VP and General Manager of our Europe and Asia Pacific regions and the transition of Gregoire Cosendai to his new role as VP of Clinical Affairs. Their depth of experience will be invaluable as we continue to build upon the momentum of the business.
With that I'd like to now turn the call over to Tom to review our third quarter financial results. Tom?
Thank you, Bob. For the third quarter of 2017 net sales were $1.6 million compared to $1.2 million in the third quarter of 2016. The company received higher revenue per implant due to the higher CMS reimbursement rates in 2017 and the collection of some deferred revenue. Our implant volume declined to 12 units compared to 19 during the immediately preceding second quarter of 2017 and 14 implants during the prior year quarter. This is largely due to decline in our European markets where we have historically seen a dip in implant volume during the summer months due to the difficulty in scheduling elective procedures during the European holidays. The average revenue per implant was $134,000 in the third quarter of 2017 compared to 84,000 in the third quarter of 2016 reflecting the benefit of higher CMS pricing, the higher mix of U.S. implants and the collection of $361,000 of deferred revenue. During the quarter seven implants were performed in North America compared to four during the same quarter of 2016. In Europe, the Middle East and Asia implant volume declined to five units compared to 10 in the prior year quarter. We generated a gross profit of $609,000 in the quarter compared to a gross loss of $1.4 million in the third quarter of 2016.
Gross profit in the third quarter of 2017 included a credit of $275,000 to partially reverse a previously established reserve for slow moving inventory as we continue to work down the balance of excess inventory units. The gross loss for the third quarter of 2016 included a reserve for slow moving inventory of $1 million. R&D costs including the offset due to grant revenue were $1.8 million during the third quarter of 2017 compared to $1.6 million in the prior year quarter, this 15% increase was primarily due to higher spending on staffing and outside consultants related to new product development efforts offset by lower spending on Orion prototype development as we completed the initial design. Grant revenue declined from $713,000 in the third quarter of 2016 to approximately $107,000 in the third quarter of 2017 due to a grant that was fully utilized by the end of the first quarter of 2017. We expect the grant revenue and overall R&D costs will remain at current levels during the fourth quarter.
Clinical and regulatory costs were essentially flat at $629,000 during the third quarter of 2017 compared to $609,000 in the prior year quarter. We expect to see clinical and regulatory costs increase over the next few quarters due to activity related to clinical trials for the Orion cortical implant Argus II better sighted patient trials in Germany and the testing of new software algorithms for our next generation externals.
Selling, general and administrative costs were flat at $4.9 million during both the third quarter of 2017 and the third quarter of 2017 and the third quarter of 2016. We expect to see some increase in SG&A over the next few quarters as we increase our commercial efforts related to the Argus II. Our net loss for the third quarter of 2017 was $6.7 million, or a loss of $0.12 per share. This compares to a net loss of $8.5 million or a loss of $0.20 per share in the prior year quarter. Our non-GAAP net loss for the third quarter was $0.11 per share compared to a non-GAAP net loss of $0.15 in the third quarter of 2016. 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.
Moving to the balance sheet, as of September 30, 2017 we have $13.3 million of cash in money market funds with no debt. We anticipate that we have sufficient cash to last through the first quarter of 2018. This week we filed a registration statement on Form S3 with an integrated at the market or ATM as one of our many financing options. We believe this sets free [ph] will provide us with added financial flexibility should we need it.
With that I'd like to turn the call over to Will to review our third quarter business results. Will?
Thanks, Tom. I'd like to begin with the changes to our management team. The team has become considerably stronger and we're positioned for a great close to 2017 and even stronger 2018. First Frank Vandeputte, a highly experienced commercial leader has been appointed VP and General Manager of our European and Asia Pacific operations. He has a three-decade long track record of launching innovative technologies and building new businesses. Frank will access our strategy in both direct and indirect markets and make the needed changes to ensure we're driving adoption and creating global centers of excellence. Next Gregoire Cosendai, formerly VP of European Operations has assumed the role of VP of Clinical Affairs. He will lead Second Sight's clinical efforts focusing on our market expanding trials with Orion and Better Sighted RP subjects. His first priorities will be the initiation of the Orion feasibility trial as well as the initiation of our Better Sighted RP patient trial in Germany.
I will now like to turn to our 2017 corporate goals. As Bob mentioned we are making great progress against all of our stated goals. First, we are getting traction with our centers of excellence model in North America and are seeing an increasing number of centers perform Argus cases on a regular schedule. Second our testing of innovative retina stimulation programs is proceeding with encouraging results and we are preparing to begin the German trial for Better Sighted RP patients. Finally, the company continues to execute against all R&D clinical and regulatory goals related to the Orion program and we're prepared to implant our first human subjects by the end of this year. Our goals are ambitious but with focus and execution we remain on track and expect to achieve them.
Let's now dive into a little more detail on some of our accomplishments. Q3 saw ongoing progress in North America with our refined centers of excellence strategy and expanded reimbursement coverage. At the end of Q3 we had six centers implanting at the rate of one per quarter or higher compared to zero centers implanting at this rate in 2016. In Q3 we added two new centers in New York which brings the total number of new centers to four in 2017 with an expectation that we will add another two centers in Q4. Each new center is carefully selected with clear mutual expectations and an agreement plan to perform as exclusive regional centers of excellence. In fact, the four new centers added in 2017 are in planning well above the targeted rate of one per quarter and have already contributed three new implants in Q4 with an additional three surgeries scheduled before year end.
Finally, before turning to our database, we began the fourth quarter with strong momentum in North America and look forward to delivering a strong fourth quarter. Our patient database which we discussed on the last few calls is another critical component of our strategy that serves as the most significant funnel of patients to our centers of excellence and it continues to grow, an important goal we adopted earlier in the year is to maintain a volume of at least four independently qualified patient candidates person per center of excellence. This has become a highly valuable asset for us allowing greater predictability and efficient planning for us, the site, our patients and our post-surgery rehab teams. Last quarter our database contains 65 patient candidates who have passed a telephone screen by an independent medical professional. As of the end of Q3 we grew that list to 89 patient candidates independently screened. We estimate that 2/3rds from this list will ultimately qualify for the Argus II and move forward with the surgery within 6 to 9 months from being qualified. Recall we have been aggressively investing in this database growth since December last year and can report we are now seeing the dominant number of patients being treated come from our database.
Before I move on I would also like also point out that a portion of the patients in our U.S. base that are not eligible for the Argus may be eligible for the Orion or an expanded label that includes Better Sighted RP patients. In fact, for every patient we are able to qualify for our Argus today there are many multiples of other patient candidates now in our database for consideration of expanded treatment options in the future. Outside of North America, our results were mixed as we had a challenging quarter in terms of implants. Q3 is typically a difficult quarter for elective implants in Europe given the summer holiday schedule in some countries. Fortunately, much like North America we're seeing significant momentum heading into the final quarter of the year and expect better results from our direct and indirect markets. With Frank on board, I'm confident we will soon be on a more predictable growth curve in those markets as well.
Turning now to reimbursement, as noted in our press release this morning CMS issued a final Medicare outpatient payment rate for 2018 of $122,500 for Argus II and the associated surgical implantation procedure. We are pleased with this outcome and the opportunity this provides to drive adoption with additional centers of excellence in 2018. Our Medicare coverage in the U.S. now includes approximately 200 million or 60% of the U.S. population. We have met with the medical directors of the three remaining MACs and we will continue our dialogue with them until we've addressed all of their concerns. In Canada I'd like to note that we've recently received tentative positive recommendations from the Ontario Health Technology Advisory Committee, OHTAC to reimburse Argus II procedures. OHTAC is renowned by organizations worldwide for its technology assessments. Not only does this decision serve as a bellwether for others in determining reimbursement for the Argus II, it demonstrates growing acceptance of the technology as this decision was a reversal of OHTAC's previous negative coverage policy. If confirmed coverage will be affected in the first half of 2018, we're making good progress with the NHS England commissioning through evaluation our RCTE program and based on our recent interactions with their team we expect the final decision to start this study will be made soon.
We are also making good progress in expanding our reimbursement in Italy and are waiting for final decisions in several regions. A reimbursement application in Turkey is still under review and we have recently submitted additional relevant clinical and economic information to the national reimbursement authority in Belgium. Now let's turn to our Indian clinical [ph] where we've made significant progress, German authorities approved the protocol we submitted for a clinical trial to treat Better Sighted RP patients with our Argus technology. This trial is significant because it's targeting a patient population that is approximately 3X larger than the current population of RP patients we treat. We also plan to pursue a similar expanded indication with FDA in 2018. As outlined during past calls we continue to develop and test advanced retinal stimulation programs, the most promising algorithms have been incorporated into an actual Argus system for clinical testing. The testing in current Argus patients has begun and we are ramping up patient testing in Q4. If successful these advanced retinal stimulation programs which require only software changes could improve the quality and usefulness of the artificial vision provided by our Argus, system. Simultaneously we have been developing our next generation externals specifically new eye wear, a new camera and a more powerful video processing unit. We're on track to begin human testing with these new externals early next year with regulatory submissions shortly thereafter.
Last but certainly not least the Orion program is moving forward with progress on all fronts, the technology is important because it has the potential to address blindness in a patient population many times larger than that which can be addressed with a retinal prosthesis. As outlined by Bob, the FDA has lifted conditions in their prior conditional approval announced by the company on August 28th. We are finalizing contracts in obtaining final IRB approvals at UCLA and Baylor Medical Center in Houston. We anticipate our first implant in the U.S. before the end of the year. We are also pursuing participation in the FDA's breakthrough devices program. As the name applies this program offers a streamlined regulatory process for innovative medical technologies that address unmet clinical needs, if accepted the time and cost to move from development to commercialization could be significantly reduced.
In closing we continue to meet our objectives for the year by focusing on the most important drivers and in executing. In North America the centers of excellence model has gained traction with adoption demonstrated by an increasing number of centers. We are growing our U.S. patient database to include an ever-increasing number of qualified patients and our reimbursement efforts have resulted in a large increase of the covered population in the U.S. by almost 80 million. Outside of North America we have entered promising new markets including Taiwan, South Korea and Russia. Our Better Vision RP clinical programs are moving forward as scheduled with the promise of significantly expanding our treatable population of RP patients. And lastly the Orion program is no longer something several years away, we are close to treating our first patient with this ground-breaking technology and we will soon begin discussions with regulatory agencies concerning the ultimate path to commercialization.
Finally, I want to thank my dedicated co-workers at Second Sight for their hard work and dedication to our mission of giving sight to the blind.
With that I will open the call for questions. Operator, please proceed with instructions.
[Operator Instructions]. And there are no questions at this time.
Thank you again to our investors for their continued support and thanks to everyone for their participation on our call today. Have a great day.
Ladies and gentlemen that does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your lines.