Intersect ENT's (XENT) CEO Lisa Earnhardt on Q1 2018 Results - Earnings Call Transcript

Intersect ENT Inc. (XENT) Q1 2018 Earnings Conference Call May 1, 2018 4:30 PM ET

Executives

Jeri Hilleman - Chief Financial Officer

Lisa Earnhardt - President and Chief Executive Officer

Analysts

Chris Pasquale - Guggenheim

Kristen Stewart - Deutsche Bank

Ravi Misra - Barenberg Capital Markets

Kristen Stewart - Deutsche Bank

Operator

Good afternoon, and welcome to the Intersect ENT First Quarter 2018 Earnings Conference Call. All participants will be in a listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. Please note that this event is being recorded.

At this time, I’d now like to turn the conference call over to Jeri Hilleman, Chief Financial Officer. Please go ahead.

Jeri Hilleman

Thank you, Jeremy, and thank you all for participating on today’s call. Joining me today is Lisa Earnhardt, President and CEO.

Before we begin, I’d like to remind you that we will make forward-looking statements within the meaning of federal securities laws. Actual results and timing of events could differ materially from those anticipated in such forward-looking statements as a result of these risks and uncertainties, which include, without limitation, our outlook for financial performance, sales force growth, clinical studies, approval of new products and indications and procurement of reimbursement codes and coverage, which are based upon our current estimates and assumptions as well as other risks detailed from time-to-time in the reports we file with the SEC. We disclaim any obligation or undertaking to update or revise any forward-looking statements contained herein.

I’ll now turn the call over to Lisa Earnhardt. Lisa?

Lisa Earnhardt

Extraordinarily have been busy and exciting start to the year for our team delivering 21% topline growth and commencing the commercial launch of SINUVA. There were no surprises in our first quarter PROPEL in the result. We continue to deliver strong growth with advantage product portfolio, our newest PROPEL product Contour continues to represent about a quarter of our sales with a balance led between PROPEL and [many]. New account growth was also consistent was about 50 new accounts acquired in the quarter. We also continue to roll our Contour into our existing account base.

Finally, we successfully implemented a modest price increase consistent with prior year. We are grateful for the physician support and confidence represented by these results with now over 230,000 patients having received the benefit of PROPEL. We are also very proud of our sales force for delivering on the quarter while simultaneously preparing diligently for the SINUVA launch including copious trading on the product itself and on market access. We had 113 sales representatives on board at the end of Q1, with 82 Territory Managers and 31 Sales Consultants up slightly from the start of the year.

Finally, the team initiated the first SINUVA outreach to target the physicians with warm reception. Our launch preparation, launch timing and early commercial experience has all been in line with our expectations. We work with a focused group of physicians to identify their first patients SINUVA and it starts the process of payer approval. A small number of patients were treated in March was about 50 physicians receiving SINUVA in their offices. Initial feedback from both physicians and their patients have been positive. The enthusiasm is well founded especially considering that the first patient treated that had undergone over 10 prior sinus surgeries.

In addition, as further preparation for launch we initiated work to transition SINUVA production from small clinical lots to the large commercial scale needed to support product introduction. This process involved considerable learnings as we navigated commercial production of our first [drug] product. These learnings let us to use our initial production solely in validation units resulting in a onetime charge that negatively impacted our gross margin which Jeri will describe in more detail. Since the initial experience we have completed production of multiple SINUVA lots and have built a strong core inventory position.

With only a month experience from the start of our official launch, it is early to draw conclusions on SINUVA, that said, we like to share a little color to give you a flavor for how everything is going. First, starting with the physician experience. [Indiscernible] have been pleased with the ease of the procedure. The time to prep the patient for SINUVA placement is similar to that required for other office procedures and the placement of SINUVA is relatively straight forward. Patient have tolerated the procedure well and have expressed enthusiasm over having the option of an in-office procedure versus returning to the operating room. An encouraging endorsement is the number of patients from our results studies who have expressed interest in having SINUVA again.

Our XENT reimbursement hub and our market access partners are working actively with physicians and both our specialty pharmacies and specialties distributor with our shipping products. As a reminder, there are two channels through which physicians can access SINUVA. In some cases, they may purchase from a specialty distributor and built to the product settle that’s called buy and bill. In other cases, they may utilize its specialty pharmacy with [indiscernible] patients insurance provided for preapproval and once this preapproval is secured collects the patient co-pay and the sends the [indiscernible] on a per patient paper. Regardless of the method physicians have access to our XENT service which verifies patient benefit and provides information to practice as related to coverage. We believe that our multichannel approach supported by our XENT reimbursement hub is critical to ensure full patient access. If claim volume increases through the payer process we expect payers to clarify their approach to coverage of SINUVA. we have seen a few policies established today but we do expect it will take 6 to 12 months for most payers to have formal decisions in place and a quantifiable picture of covered lives. We continue to expect that the majority of payer policies will be affirmative that the payer will cover SINUVA while recognizing that some payers may compute SINUVA with PROPEL requiring further education and discussions.

At this point many cases are going through preapproval patiently and others as anticipated take time to work through the process due to the learning curve of market access a dynamic comment to the early introduction of other physician administered drugs into the office settings. Overall while still very early our experience today with payer physician remains in line with our prelaunch expectations.

In addition to working with payers we are also engaged in the process of securing in a signed change code for SINUVA, as mentioned on the previous calls we submitted J code application to CMS in December and continue to expect to have a product specific J code for SINUVA effective January 1, 2019. The preliminary decision from CMS will be released any day and the final decision will be made in November. Until the product specific J code is the sign not unlike other new physician administered drugs providers will use the unlisted code J 3490.

As the final takeaway of on our launch this far we remain convinced that SINUVA has the potential to be a meaningful treatment option for patients who suffer from [Indiscernible] and will be an important addition to the E&Gs toolkit as they manage this challenging disease. We are enthusiastic about our progress with our targeted launch and look forward to future updates.

Let me now turn the call over to Jeri to take you through our financial results and outlook.

Jeri Hilleman

Thank you, Lisa. Our first quarter revenue of $24.7 million reflected a 21% growth in our PROPEL product business and de minimis SINUVA revenue. This aggregate revenue is ahead of our guidance midpoint of 23.5 million but still in line with our year guidance of 111 to 116 million. We are therefore reaffirming our 2018 guidance as we work through the early days of the SINUVA launch.

For the second quarter our revenue outlook of 27.7 million to 28.2 million. This forecast anticipates that the launch phase of SINUVA will be time intensive for our sales force as they make product and market access introductions to physician and to tend initial procedures. Still we are continuing to expect PROPEL to grow over the second quarter of last year in low double-digits which combined with the initial SINUVA revenue enables us to target growth over Q2 last year in the range of 15% to 18% while navigating the early launch.

Moving to gross margin as Lisa explained we recognize a onetime charge and our cost of goods associated with our decision to not commercialize initial SINUVA production. Excluding this non-recurring charge our gross margin would have been 82% in line with recent quarters and reflecting the early overhead had and to commence SINUVA production. To help balance out Q1 we are working to accelerate our planned manufacturing capacity expansion from Q3 into Q2. This step should both improve counter production efficiencies and facilitate the expansion of SINUVA production. As a result of this change we expect our Q2 margin to be approximately 80% and thereafter we expect to see gross margins continue to improve each quarter as we ramp volume into the expanded overhead overall adjusting for this one-time charge taken in the first quarter we are updating our gross margin and outlook to 80% to 81%. Our Q1 operating expenses were on track at $25.8 million reflecting early spending on the ramp of SINUVA; we’re restating our 2018 OpEx guidance of $113 million to $115 million. Finally, we ended the quarter with a balance of cash, cash equivalents and short-term investments of $103.2 million just above our quarter starting balance.

I will now turn the call back to you Lisa.

Lisa Earnhardt

Thank you, Jeri. It is an exciting time for Intersect ENT as we interview SINUVA to select positions this quarter. It is also a bit better sweet as Rich Kaufman, our Chief Operating Officer, who leads R&D, manufacturing and related functions has decided to retire early next year. Rich has been with Intersect ENT since 2007 as one of our first employees and his contributions have been extraordinary. Fortunately, we have plenty of time to [affect] his new transition and have begun a search for his replacement.

Moving forward, our focus is clear, continuing to drive PROPEL growth while executing on our targeted launch of SINUVA, we’re off to a positive start with SINUVA based on several measures most importantly affirmative physician and patient feedback. To share a couple of anecdotes, one early adaptor physician Illinois chose to treat a patient with SINUVA even though he was concerned that surgery might ultimately be needed given the patients disease severity. At a first checkup however, the physician was quite pleased to see the sinuses were dramatically improved. Another patient in Texas gained an appreciation for the meaningful benefits of the simple office procedure. Following treatment with SINUVA, she found she was able to smell for the first time in years stating quote, "I was able to walk into my doctor’s office and walk out with a better quality of life". It’s rewarding to hear that early feedback illustrating exactly what we aspire to deliver at Intersect ENT.

We greatly appreciate your support as we embark on this important chapter of our journey to make localized drug delivery the standard care for chronic sinusitis. Thank you so much for participating in this call and Jerry and I will remain on the line for the rest of your questions. Jane, would you please open up the lines.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question today comes from Robert Marcus from JPMorgan. Please go ahead with your question.

Robert Marcus

Maybe I could just start with the guidance outlook. You guys did 21% in the first quarter, and if I take the midpoint of the range, and I back out the $8 million -- the high single digit $1 million implied for SINUVA guidance, I'm getting to something like 10% growth in the base business for the balance of the year. So maybe you could help us understand how much is conservatism, or what other items we should be factoring in thinking about guidance?

Jeri Hilleman

So, Rob it’s a good question and I think we will be learning a lot more about that as we prove this first full quarter of launch because we did have a great track record with PROPEL in Q1 continuing our growth. We recognize that SINUVA is going to be a time and energy intensive launch for our sales force as we go through the first couple of quarters and our guidance really anticipates the impact that that could have on the overall business. As we go through Q2 and Q3 we would be able to give a much clear picture of whether that's the right outlook or whether there are opportunities for changing that as we gain experience.

Unidentified Analyst

Okay so fair to say it's more conservative point of view ahead of barely make a product launch for the company.

Jeri Hilleman

Yes, I think it really is, reflecting as a need to learn and trying to set guidance appropriately given that learning curve.

Unidentified Analyst

Maybe just as a follow-up I know you said it early and you give us some helpful commentary around the SINUVA launch maybe you could just help us understand what the physician reaction is so far, dealing with specialty pharmacy as a necessarily an everyday occurrence for them so what's been the reception so far to the specialty pharmacy, the necessary paperwork and hoops that are involved to jump through and do you think this is something that will take time for physicians to adopt or do you think based on the adoption you've seen so far that it could well receive?

Lisa Earnhardt

I think the interest in SINUVA itself and that is an option for those patients. It's very strong and I think we've heard that even prior to launch with its product and it's certainly playing out with space [ph] that way but what is new issue as you correctly pointed out is that use of specialty pharmacy or even specialty distributor for the E&P, the use of a physician administered drug in the office setting is new for them so it's really just a simple learning curve. Fortunately, that's exactly why we have the Infrastructure we put in place both with the specialty pharmacy, the distributor and in particular the [indiscernible] reimbursement which has been a great resource not just for the physician but it tends to be a member of their staff or their team who tends to be the point person, so there is learning there but just as we anticipated almost identical to what we would have anticipated going into it. So, I think it's early stage as positive but with some learning.

Operator

Our next question comes from Robert Hopkins from Bank of America Merrill Lynch. Please go ahead with your question.

Unidentified Analyst

Hey, this is Vishnu on for Bob. I just had one quick question on the SINUVA launch tagging on to Ravi's [ph] question. Just curious if you could just comment on understanding that the launch is only a month in, I'm curious if you would comment on what you see as a main pathway going forward for procuring SINUVA, whether that's specialty pharmacies are directly and why you think that and what the implication so there might be?

Lisa Earnhardt

As much as we anticipated going into this as we do things specialty pharmacy will be the preferred route of acquiring the product at least in the near term and so physicians get comfortable with using a physician administered drug in their office setting but we do think it's important to have both of those channels open and we do believe both will and have been and will continue to be utilized over the course of the launch.

Operator

Our next question comes from Richard Newitter from Leerink Partners. Please go ahead with your question.

Unidentified Analyst

This is Jamie on for Rich. A quick to on the gross margin. Obviously, you guys are reducing your guidance a little bit. Can you talk through the cadence that we should kind of be expecting over the next year in 2018? I know initially it could be more of the counter inefficiency but then how much also, should we be thinking about attributed to the SINUVA launch?

Jeri Hilleman

In terms of gross margin we are looking at this in aggregate it is obviously SINUVA does get produced right along side of PROPEL and mini and Contour they’re all in the same location so they -- we’ve added overhead both for the need for additional supervision and process with SINUVA, we’re also adding capacity which will make our production a little bit more efficient as we ramp our products, so our expectation is that for Q2 we gave guidance of 80% and we also come in and that we’ll expect to see gross margin increasing as we ramp volume into that now established overhead. So, I hope that gives you some color and addresses your question.

Unidentified Analyst

And then one other quick follow-up. I guess looking at I think if I heard you guys correctly you said that right now in the initial phase of launch, it’s a bit time intensive for dedication to SINUVA, so could you kind of talk a little bit about your expectations around what the productivity ramp will be like for reps over the rest of 2018 and potentially forward looking how we should be thinking about that?

Jeri Hilleman

There’s a couple of pieces of information that can help you, what we’ve said overall that is we expect that while we will be introduced in the product and raising revenue, we’re also expanding the sales force by about 10% to 15%, so a pro-rep [ph] productivity under our guidance would stay relatively flat with last year as we introduce SINUVA.

Operator

Our next question comes from Matt O’Brien from Piper Jaffray. Please go ahead with your question.

Unidentified Analyst

Thanks for taking the question, this is Kevin [indiscernible] on for Matt today actually, wanted to I am sorry if I missed this, but on the margin side, I definitely understand why it’s going down for the year, I guess I was curious that the 80% to 81% for the year was on an adjusted basis, just bringing down -- removing the number from COGS for Q1 or if there was something else?

Jeri Hilleman

It’s really reflecting the GAAP gross margin that we reported, 78% and now rolling that into our remaining quarters of the year which led to a downward adjustment of 1% on the high and low ends of the range.

Unidentified Analyst

And then just as a quick follow-up was just curious on the -- should we be thinking about if that’s going up in the one to two-year timeframe, something like 83% to 85% something in that area?

Jeri Hilleman

We’ve guided consistently that we would expect margins as low as 80s, for the company, we have achieved a little higher than that as we’ve kind of perfected the balance of production and overhead with PROPEL and mini but as we add more products with the international and so forth we would expect in the low to mid 80s range for our gross margin.

Operator

Our next question comes from Chris Pasquale from Guggenheim. Please go ahead with your question.

Chris Pasquale

Lisa, I want to follow-up on two points you raised in your prepared remarks about SINUVA have any of the payer policies established today been negative or restricted access and you mentioned you experienced with the RESOLVE patients as an encouraging early indicator, what percentage of those patients have come back and requested SINUVA again?

Lisa Earnhardt

I’ll address the second question first, I don’t have the quantifiable numbers with regards to how many of the RESOLVE patients have come back, it is just an anecdotal finding at this point but I would anticipate given that it’s a chronic disease that we do hope those patients become SINUVA patients for life, Chris. With regards to the first question, you would ask are there any specific payers that have put in policies? And I would say on one side Anthem for example has put forth a policy the group SINUVA with PROPEL and put it as investigational experimental which is consistent with their policy what it has been for PROPEL, so we have some further education and discussions to happen [ph] with them on the other side we've had for example, which put forward the positive and so once again early for us I don’t want to take any of these for what they are we do expect to pick another probably 6 to 12 months before we have a wholistic picture of where we are with coverage but that just gives you a flavor for some of the larger payers and where they are.

Chris Pasquale

And then what are you targeting in terms of the number of physicians, you'd like to have access to SINUVA by the end of the year do you have a metrics you are shooting for there?

Lisa Earnhardt

We have a [indiscernible] Chris, as you know we work with probably around 2700 or so E&Ps across the country that's about one in three of those and will be going to a subset of them this year and as we go to the launch we look forward to providing additional metrics but really this year is all about going deep with a targeted group of physicians and really establishing that as a basis for a full launch in the fourth quarter into 2019.

Operator

Our next question comes from Kaila Krum from William Blair. Please go ahead with your question.

Unidentified Analyst

This is Anna in for Kaila. Moving [ph] away from SINUVA a little bit and towards your 21% growth in the quarter, could you just tell us kind of what you’ve been seeing in regards to the momentum of Contour and I think you said it's in about one fourth of your accounts today? Thank you.

Lisa Earnhardt

Real quick just to clarify Contour represents about one quarter or 25% of our overall PROPEL sales, it's actually over a half of our I think and about half our account today with PROPEL with all of our PROPEL accounts so it's continues the introduction of Contour goes very well as sometimes it's gated by the need to go through committee processes that in given institution but the feedback on the product continues to be very strong given it's unique outlast design and the slower profile. Physicians have really found an important role for that and particular with your frontal sinus patients, so we've really been encouraging and do believe that we will continue to be a meaningful driver of growth for us this year.

Unidentified Analyst

And as a follow-up question in terms of the initial launch of SINUVA and the targeted accounts, are these all existing PROPEL users today or there any of those early adopters that are new customers to the business.

Lisa Earnhardt

Our focus has really been on physician who have already found a role for our localize drug delivery and their practice and so we won't focus on the big schools [indiscernible] others have an express interest, we just want to make sure as we go through this learning phase we are really working with physicians who we already have close working relationships and we are able to learn together.

Operator

Our next question comes from Kyle Rose from Canaccord Genuity. Please go ahead with your question.

Unidentified Analyst

In your initial experience with SINUVA just wanted to kind of dive into what the repeat opportunity is there and can you just maybe go over anecdotally are doctors willing or they are asking to be able to use SINUVA on a repeat basis and can you just remind us of the incremental opportunity with repeat usage.

Lisa Earnhardt

It is clear this patient population is the population with a chronic disease and so even with a treatment like SINUVA which can provide symptom relief for a period of time, we do see all of these patients as potential candidates and that has been affirmed with physicians in their practice, I don’t see they are really a focus of physicians today because might obviously all these physicians are getting their first additional experience with SINUVA but I do think that could expand over time and I will let Jeri talk a little bit that market opportunity.

Jeri Hilleman

For the repeat use we have 635,000 patients that have had previous surgery and continue to see the ENT with repeat symptoms and about 50% to 60% of those present with recurrent [health], which is the target for the use of SINUVA. So, we think for all of those patients they have the potential to benefit from SINUVA through repeat usage overtime.

Unidentified Analyst

Thank you and if I could ask one more just on the distribution channel that you have mentioned earlier, so there is a specialty distributor, specialty pharma and it sounds like for the doctor side this specialty pharma is going to be an easier route, is there may be on the company side, on Intersect side are one of those more beneficial to you from maybe margins or ASPs.

Jeri Hilleman

Not really, the goal of this is to find the best way for the physician to secure to product to get to their patients, many of those will be in a position where they want to buy and build particularly over time and that will be new preference and we want to provide that, if they want to order through specialty pharmacy and just have the product deliver and we want to provide that. The difference at this point for us is really not material what matters more if just facilitating sufficient usage.

Operator

Our next question comes from Kristen Stewart from Deutsche Bank. Please go ahead with your question.

Kristen Stewart

I just wanted to go over, I think you mentioned in your prepared remarks that you’re able to take a price increase if you could quantify that and then maybe just talk about how pricing is turning for SINUVA as well.

Jeri Hilleman

The price increase with just a couple of percent that quite difficult for us to do which brings us to well number called 810, 815 in that range per unit. On the SINUVA side, our list price is the 1275 and then of course as this the case and with pharmaceutical products there are certain discounts and fees that need to be offset against that, so we recognize that and we said that roughly we would expect a recognizable portion of that ASP to be around the same price as PROPEL, but our list price is set and established.

Kristen Stewart

Okay and have you had any push back at all or has that been fairly well received in the market place and are the discounts roughly in line with what you’re thinking as well.

Jeri Hilleman

Yes, it's been well received, there has been no commentary around it and yes, it is in line with our expectations.

Kristen Stewart

Okay perfect and then just to go back to the gross margins, I just want to make sure that I completely understand the change in the gross margins was just simply a function of the onetime charge in the first quarter and nothing else.

Jeri Hilleman

Correct.

Operator

[Operator Instructions] Our next question comes from Ravi Misra from Barenberg Capital Markets. Please go ahead with your question.

Ravi Misra

So I had two I guess one on just publications and pipeline and I would like to tie that into maybe just a bigger picture management strategy question with now Rich retiring, so maybe if I could start with that latter one, he was kind of -- he’s doing VP of R&D, COO, like to hear your thoughts on kind of how you see the next person that’s going to be coming in, I mean do you need to hire both or are you looking for someone who is going to be still combining that role? And then secondly, there’re a couple of questions on multiple SINUVA usage, love to get an update on the ENCORE study and what you kind are looking to strategically from an R&D perspective given the transitions and the -- new product launches that are on the way here?

Lisa Earnhardt

So, Ravi you’re correct in that, Rich has been core to our innovation strategy having did one of our first and fully and that is obviously a big area of contribution for us, so as we’ve looked to develop the leadership team we’ll continue to focus on individuals who continue to work our agenda which is really innovation clinical evidence combined as being our two pillars of our success today. So, I am not going to provide any specifics around that, but we do think we have a really strong throughput seasoned leaders in our organization, R&D and we do believe that’s critically important to our feature as well.

So, his departure is just more of a normal, it will be almost dozen years by the time he steps down and we’re excited for now, but as I said that if we -- in terms of ENCORE, that study has -- was enrolled early -- earlier this year and we expensed some of the repeat implementation, we would expect a readout of that data, and about the second quarter of 2019, so we do have a number of publications forthcoming this year, so once again consistent with our focus on clinical evidence, but that specific trial that data will be available and we’ll share more details about that in the second quarter of 2019.

Ravi Misra

And then maybe one more on the data, do you think as you kind of make the argument towards repeat use, that you might be facing some additional pushback from insurers until you can demonstrate that positive publication before…

Lisa Earnhardt

I think that publication there was less about for the payers and a little bit more for the FDA because right now in the label it says repeat use hasn’t been studied and we obviously have conviction that’s based and we think from a payer's perspective they’re really going to look at medical necessity, and so -- and that’s really where the focus will be. We also have the economic data that’s coming on the pipe, we think will be supplementary in that discussions with the payers as well which will help demonstrate that SINUVA not only improves clinical outcomes but it also does do so in a cost-effective cash in, so look forward to seeing that publication later this year.

Operator

And our next question is a follow-up from Kristen Stewart from Deutsche Bank. Please go ahead with your follow-up.

Kristen Stewart

I just wanted to go back to ask what your expectations are, I know you had said in terms of the different channels that you expect and most of those who are I think it was a specialty pharmacy line but to what extent we potentially see any stocking in the second quarter and is that built into any of your guidance?

Jeri Hilleman

We don’t really have stocking as much of a consideration, we do ship to the specialty pharmacies and distributors on a weekly basis, we track inventory very closely usage so we're not building up inventory, so that's really not part of the revenue stream that we are managing.

Operator

And ladies and gentlemen, at this time I'm showing no additional questions. I would like to turn the conference call back over for any closing remarks.

Lisa Earnhardt

Great, well thank you all for joining us today. We certainly appreciate your interest and support and look forward to staying in touch with you all. Have a great afternoon.

Operator

And ladies and gentlemen that does conclude today's conference call. We thank you for attending. You may now disconnect your lines.