Second Sight Medical Products, Inc. (NASDAQ:EYES) Q2 2018 Earnings Conference Call August 7, 2018 4:30 PM ET
Lisa Wilson - IR
Jonathan McGuire - CEO, President and Director
John Blake - CFO & Corporate Secretary
Amit Dayal - H.C. Wainwright & Co.
Dallas Salazar - Atlas Consulting
Ladies and gentlemen, thank you for standing by. Welcome to the Second Sight Q2 Results Call. [Operator Instructions]. As a reminder, this conference is being recorded, Tuesday, August 7, 2018.
And now, I would now like to turn the conference over to Lisa Wilson, Investor Relations for Second Sight. Please go ahead.
Thank you, Scott. Good afternoon and welcome to Second Sight's Second Quarter 2018 Earnings Call. This is Lisa Wilson of In-Site Communications, Investor Relations for Second Sight. With me on today's call are Will McGuire, President and Chief Executive Officer; and John Blake, Chief Financial Officer of Second Sight.
At the close of market, the company issued a press release detailing financial results for the three months ended June 30, 2018. 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 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 August 7, 2018. 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 CEO, Will McGuire.
Thank you, Lisa and thank you all for joining our call this afternoon. We made significant progress with our Orion program since the last investor call and our confidence in creating artificial vision via cortical stimulation continues to grow. Before reviewing the exciting details of Orion, let's review what happened in Q2 with our Argus business. We completed 17 Argus II implants during the quarter resulting in $1.9 million of revenue. This was disappointing given the momentum we were experiencing in Q2 when we held the last investor call. John will provide more details later.
On the U.S. reimbursement front, we were pleased with the 2019 preliminary Medicare average outpatient payment rate of approximately $137,500 for Argus and the associated surgical procedure proposed by CMS on July 25. We were also happy to see CMS propose a new methodology for setting the rate for extremely low volume procedures that considers up to four years of data for devices such as Argus.
We feel this new methodology will provide more stability in reimbursement rates for low volume devices and we will provide comments to CMS in the coming months and look forward to a final ruling later this year. We continue to have a dialogue with the FDA concerning a label expansion in the U.S. to include better vision RP patients. At this point, I believe additional clinical data will be required by the agency to support the expansion of our label.
Our U.S. patient database now totals 165 clinical coordinator cleared patients, which is basically flat from our last update. We continue to be excited about this database and recently changed our focus for the remainder of 2018 to moving qualified candidates through the funnel. In fact, 7 of 9 patients implanted in the U.S. during Q2 were from our database. Finally, our next gen externals, named Argus II-S, should start clinical validating testing this quarter. As a reminder, the Argus II-S features a new CPU and new eyewear, including a camera. In addition to being a more powerful and upgradable platform, the Argus II-S is designed to be more comfortable and aesthetically pleasing.
After completing clinical validation work at several U.S. locations, we expect to proceed with regulatory filings later this year. We believe the Argus II-S clinical validation and subsequent launch should be met with much enthusiasm amongst implanting centers and Argus users, and potentially inspire patients currently weighing when they will go ahead with the procedure, including those patients in our database. I'd like to now update you on our progress with Orion. At the end of May, we completed enrollment in our initial feasibility study with the fifth subject ahead of schedule. You'll recall that we were working with teams at UCLA in Los Angeles and Baylor in Houston to implant and test subjects.
Since 4 of our five subjects were implanted at UCLA, we submitted a request and received approval from the FDA to enroll a 6th subject at Baylor. Baylor is actively screening subjects and we expect the sixth subject to be implanted soon. We are diligently gathering clinical data to evaluate safety and efficacy of this breakthrough technology. All subjects are very enthusiastic about the technology and their participation I this trial. The first five subjects all have their devices activated and report seeing spots of light on virtually all electrodes. The creation of spatial maps is at various stages for the subjects and we have progressed to using real-time video input with 4 out of 5 subjects. One subject is very close to being cleared for home use, meaning they can start using the system at home without supervision.
Observations from our early testing include the following. Stimulation parameters are within expected ranges and are generally stable over time. Spatial maps vary by subject and are generally stable over time. As a reminder, spatial maps established the relationship between electrodes and where the subject sees a spot of light in their visual field when that electrode is activated. The field of view appears to be larger than Argus.
Several subjects are undergoing directional motion testing. In this testing, subjects identify the direction of motion of various lines on a computer screen. Early test results are very encouraging. Finally, device reliability has been good as has device performance. On the safety front, we have experienced one serious adverse event, or SAE. One subject experienced a seizure while in the clinic when we were evaluating a specific video stimulation algorithm. The seizure resolved quickly and the subject was released from the clinic without need for hospitalization. Seizures are listed as an anticipated adverse event in the clinical protocol and the subject was allowed to continue participating in the study after the event was reviewed by a safety committee for the study and a committee at the implanting institution.
The safety of our subjects is our top priority and we will continue to monitor each subject closely. Looking forward, we will soon start deploying representatives from our U.S. vision rehabilitation team to work with the Orion subjects in order to optimize the potential benefits in and around their home. This is a critical step to educate the subjects on how to use and interpret the system in their daily life. In the coming months, we will gather much more data and begin understanding what level of vision we can ultimately provide with the first gen Orion system. I look forward to providing updates as appropriate.
Our discussions with the FDA are proceeding nicely. As discussed in past calls, Orion is part of the expedited access pathway program, also referred to as the breakthrough device program. Our interactions with the FDA have been productive with very timely feedback or responses. We will provide more details on our expected commercialization timeline in upcoming calls as the certainty around the clinical and regulatory pathway increases.
Last year, we engaged a third party firm to help us assess the U.S. market potential for Orion. As expected, the market research suggests a robust market opportunity for Orion with over 500,000 individuals in the U.S. who are legally blind due to glaucoma, diabetic retinopathy, optic nerve disease, and eye trauma. The research estimates a potential U.S. addressable market of more than 70,000 individuals from this population with vision defined as bare light or no light perception. Again, this is only U.S. data and does not include patient populations in other regions of the world.
Moreover, at this stage of our analysis, the largest segment of the market appears to be the eye trauma population. Those experiencing trauma tend to be younger, with an average age in their 30s, and are not generally impacted by additional medical conditions that may limit their lifespan, as is the case with many older patients. These patients would represent a significantly larger and younger population than Argus, who could potentially benefit from the Orion technology over the course of their lives.
Based on these third party estimates, and utilizing conservative pricing assumptions, we believe the market for Orion is potentially a multibillion dollar opportunity. In the process of conducting the Orion market research, we also gained some valuable insights on the RP market. The research estimates approximately 1,500 patients in the U.S. with advanced RP that could be treated with the Argus II given the eligibility criteria of our label.
Prior to this research, there had been no published market data indicating the actual number of RP patients in the U.S. whose vision loss had progressed to bare light perception or worse. The market research also validated our believe that expanding our label in the U.S. to treat better vision individuals could expand the treatable population by three to five times the current population.
Next, I'd like to highlight some exciting research we are conducting internally or in some cases, in conjunction with research partners. These projects are still in the research phase, but we believe some efforts may become very important as we start treating large patient populations.
First, we have advanced efforts with our partner to develop and implement eye tracking technology with Argus and eventually, Orion. This technology enables us to move the implant field of view in conjunction with the movement of the user's eyes. This is important because the brain expects to see the objects in a different relative location when your eyes move. If a user's eyes move but the view from the Argus camera does not, a distortion is created. This technology would minimize or eliminate this distortion by helping the brain better integrate the visual information, thus improving the stability and quality of the vision provided.
Second, we are working with a partner to integrate thermal imaging technology with our systems and provide users with another option to create salient stimulation. Infrared imaging would allow users to visualize warm objects and could be especially useful in determining where people are in a room, regardless of lighting conditions.
Third, we're developing depth based de-cluttering capabilities with a partner. In short, this technology would allow users to filter out objects further than a defined distance. This eliminates excess stimulation from distant and possibly distracting objects so that the user can more easily focus on and identify objects of interest.
Fourth, we have a research project with a partner to develop customized object and facial recognition capabilities that will allow users to get additional auditory and/or haptic information integrated with the vision provided by their artificial vision system. This system also highlights the region in visual space where the object is located to allow the patient to accurately reach out and grasp or touch the object.
For example, a patient using Argus or eventually Orion, looking at a phone, would hear the word phone, or when looking at another individual would hear that person's name. As you know, this is a rapidly developing technology and we see great potential to integrate with artificial vision.
Finally, we have several additional efforts underway internally. One effort has been discussed several times in past calls and that is our continuing work to develop and evaluate various new stimulation strategies to improve the acuity of the vision provided. Another effort early in evaluation is the use of virtual reality in the artificial vision rehab process. We think this technology could increase engagement and usage during the rehab process and improve outcomes.
To be clear, these projects are still in the research phase and there's no assurance of moving to development or commercialization. With that being said, we believe that many of these technologies have great potential to improve the quality or usefulness of the artificial vision we provide, or in some cases, act as a complementary technology that significantly improves the overall user experience. All of the technologies described above would benefit Argus users as well as Orion users.
Before turning the call over to John, I'd like to speak to our focus and priorities moving forward. First, given the Orion market size, as well as our continued progress and confidence, Orion clinical and R&D efforts will remain the top priority for Second Sight. We are convinced a huge opportunity is in front of us and are committed to advancing the Orion technology with the necessary resources.
Second, given the continued challenges we have faced in the limited RP market, we made the decision to maximize capital efficiency with our Argus commercial and clinical activities. We think this is prudent given the need to apply maximum resources to our Orion clinical and R&D programs. Some implications of this strategy to our Argus business include a higher bar for entering new Argus markets or expanding geographically. In other words, we need to be convinced of a short-term financial payback and increased focus on our strongest markets and the top centers of excellence in those markets allowing for more efficient deployment of field resources and the continuation of our efforts to expand the U.S. label to include better vision RP patients without conducting a potentially costly U.S. IDE trial.
Third, we will continue advancing the exciting research projects described earlier. As the research progresses, we will prioritize the technologies, which hold the most promise and start moving them toward development and clinical evaluation. In closing, the goal of treating all forms of blindness with cortical stimulation has been a priority for the company since before the IPO. We now see an incredible opportunity ahead to transform the company as our confidence in the breakthrough Orion technology grows and the huge market opportunity materializes.
I want to thank my talented coworkers at Second Sight for the hard work and dedication and our shareholders for the continued support. With that, I'd like to now turn the call over to John to review our second quarter financial results. John?
Thank you, Will. Our implant volume during the second quarter of 2018 was 17 units compared to 19 during the prior year quarter. During the quarter, nine implants were performed in North America with the remaining eight in Europe, the Middle East, and Asia. As compared to prior quarters, we experienced a higher number of rescheduled surgeries during the last half of the quarter.
Net sales on a GAAP basis were $1.9 million for the second quarter of 2018 compared to $2.2 million in the second quarter of 2017. We will be reporting units and ASPs on a GAAP basis commencing with this call. Please note that the differences in our implant volume and the number of units for which we recognize revenue on a GAAP basis will differ based on the application of accounting rules such as ASC 606 and for the number of units that we record to sales and marketing expense as implants are used in marketing development activities for new sites or geographies.
Revenue was recognized for 17 units in the second quarter of 2018 as compared to 20 units in the prior year quarter. On a GAAP basis, revenue recognized per implant was approximately $112,000 in the second quarter of both 2018 and 2017. We expect our average revenue recognized per implant unit for the remainder of 2018 to be in the range of $100,000 to $120,000 depending on the geographic mix of implants.
Gross margin for both the second quarters of 2018 and 2017 was $1.1 million. We are making progress with our cost reduction efforts on a per unit basis. As a reminder, our overhead absorption rate for unit costs are subject to a higher degree of variability based on production volumes. We will continue to monitor our excess and obsolete inventory reserve as sales materialize this year.
Research and development expense net of funding received from grants were $1.9 million in the second quarter of 2017 compared to $2.4 million in the second quarter of 2018. The increase from the prior year was primarily due to increased headcount, outside services, and cost for internally produced prototypes for our next generation products. Clinical and regulatory expenses increased during the second quarter of 2018 to $1.1 million compared to $0.7 million in the prior year quarter. The increase primarily reflects cost associated with the Orion feasibility study.
Selling and marketing expenses were $2.9 million during the second quarter of 2018 compared to $2.4 million in the second quarter of 2017. The increase of $0.5 million is attributable to increased market development activities, including compensation expense. General, and administrative activities expenses were $2.6 million in the second quarter of 2018 compared to $2.9 million in the second quarter of 2017. The decrease of $0.3 million is primarily due to lower stock-based compensation charges due to executive transitions.
Net loss for the second quarter of 2018 was $8 million or a loss of $0.12 per share. This compares to a net loss of $6.8 million or a net loss of $0.12 per share in the second quarter of 2017. The non-GAAP net loss for the second quarter of 2018 excludes certain non-cash items and was $7.1 million or $0.11 per share compared to a non-GAAP net loss of $6.6 million or $0.12 per share in the second quarter of 2017. 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 onto the balance sheet. As of June 30, 2018, we had $7.5 million of cash and cash equivalents and we carry no debt.
With that, I will open the call for questions. Operator, please proceed with the instructions. Are you there?
[Operator Instructions]. We have a question from Amit Dayal with [Technical Difficulty]
... in terms of resources et cetera. Given this or these circumstances, how should we expect growth for Argus to lay out from here on. I know you are focusing on areas where you're getting the most of out of your efforts, but in terms of implant expectations and things along those lines, where do we go from here?
Good question, Amit. First of all, as far as the evolving or the change in strategy. There's still some work to be done there to implement that over time. But I think I would think about it this way, which is not much different than we've given guidance in the past on how to think about it. And that is I think we have the most developed team and strategy in the U.S. I certainly believe that as far as a return on investment, the U.S. organization probably offers the greatest return on the investment as it's such a large homogenous market.
So at this point, I would expect to see continued growth and strength in the U.S. And then outside the U.S., as I've said in the past, I would expect that could be a little more variable going forward, just because it's so many different markets and then also it's a mix between some small direct markets as well as some indirect markets. So again, from a modeling or just thinking about the business, I would expect good continued growth in the U.S. and then I would expect the business outside the U.S. or outside of North America, should I say, to be a little bit variable or more variable and up and down going forward.
So you're not really eliminating any resources or centers. You're just not maybe going to grow or expand in the new center as might have...
Yes, at this point, I think you should look at it that when we have resources out there now, we have resources dedicated to maintaining the business as well as growing the business and it's not even just sales people. We have a lot of work to do to develop new markets and to grow into additional markets.
So I think what we're saying is before we deploy resources to go into additional markets or to expand geographically, we're going to have a higher bar for that and really make sure that we're not just going after incremental units or incremental revenue, that we're going to get a solid return on the investment required in each of these markets or geographies.
In relation to this seizure event, your [indiscernible] efforts, has anything changed in the process because of this?
I don't think so. We're still going about it the same way that we had in the past. I would just say that we, again, it was listed in the clinical protocol as an expected or anticipated, shall I say, adverse event, meaning that we knew it could happen.
We of course don't want a lot of seizures and we would not by any stretch of the imagination want to create a situation where our patients are experiencing these seizures. But what we've done and what we'll continue to do is better understand the conditions in which a seizure could happen. And what we're doing for each patient, Amit, is we try to create kind of what we would call a safe zone of parameters in which we provide stimulation to that patient.
So we want to understand the various parameters, how we can change those parameters. We monitor the patients closely. We want the stimulation to be effective but we want it to be clearly in this safe zone. And so really, that's what we're doing right now for each patient is identifying that safe zone. And that's something that very clearly needs to be in place and understood, for example, before we would ever clear a patient for home use.
And as I said in the prepared remarks, we think we're very close to clearing our first patient for home use. So that means we're advancing to the point where we think we understand where that patient, how we can stimulate what the parameters are, and we're very comfortable sending them home and allowing them to use the system. Does that answer your question?
Yes, that's helpful.
It didn't change the protocol whatsoever. It just required a review by the safety committee, as I said, and to make sure we had an understanding of what happened and why it happened. The patient is still participating, still proceeding with the protocol.
And just to double check, this first patient for home use is for Orion, right?
That's right. When I'm talking about home use and moving someone to home use, it's to the - it would be the full Orion system. So a patient that has the eyewear, the camera, obviously, the implant and they're able to move out of what's been a pretty controlled laboratory setting right now at either East L.A. or at Baylor in Houston where we are there and the team from the institution is there and we're going through various stimulation protocols to where we can now say, okay, you're cleared for home use.
We're going to have the system set up so that you can use it home. We'll give them some guidance on maybe the amount of time that they should use it per day. But they'll be free to go home and start using it around their home and learning how to incorporate it into daily task.
And when they use it at home, is this on 24 hours or [indiscernible].
Think of it more as they will activate it and use it when they want to do certain tasks, Amit. So sleeping, for example, no. Maybe resting or not really doing anything that interesting around the house, maybe no. But if their grandchildren are over, if they've got the television on, or something like that, and they want to start understanding how to get visual input from the system, then they will turn it on.
It's probably closer to, like, putting on eyeglasses or something else like that for reading. They'll use it for certain activities and again, we'll give them some guidance on in the early days, you should only use it a certain amount of time per day.
And any additional color on what these patients are seeing or how these patients are doing in terms of the tests you're conducting with Orion?
It's still early, but we feel good. I'm going to make some comments. We feel good about the initial data and the progress to date. We're still learning. I mentioned the stimulation parameters. So we're still learning what the optimal stimulation parameters are. They're different for each patient and as I said, we want to get comfortable with each patient that the parameters are effective but they're also clearly in a safe zone. We're also learning more regarding each patient's spatial amount and we want to improve not only the accuracy of the spatial amount, but also the efficiency in which we can kind of build this spatial amount for each patient. And these spatial amounts, again, they translate - they draw the relationship between each electrode and where in a patient's visual field that electrode produces a spot of light. So they're very essential to converting a video input into scenes or objects for the patient.
With that said, we've made great progress. We still have quite a bit to learn. This is a - no one has done this before, certainly through cortical stimulation. So we realize that we're kind of on the cutting edge here and still learning a lot. As far as the specifics, how would we look at the quality of vision, we can't really predict that yet. As with Argus, we do have 60 electrodes or 60 pixels so you could expect a similar type of vision. Also, as I said though, we expect the visual field to be larger than Argus, which addresses a request from many of our users.
And we could have a potential advantage with Orion in that we're bypassing a very diseased retina to create vision. So maybe it leads to more consistency of results. Again, we don't have any data to support that. Just a hypothesis if you will. So looking forward to truly understand what type of vision we're going to provide, we're going to need to get all of the patients using real-time video stimulation. We'll probably need to get most of them cleared for home use and then start providing the artificial vision rehab, which really is key for teaching them how to interpret the signals and what they're getting from the system, and how to use it in their daily life. So still a little bit of work to do there but we're making progress and we're on schedule.
And my last questions is around your discussions with the FDA. Both for the RP or the better sighted opportunity and then for Orion as well, what are the next steps or in terms of any time related milestones coming up in regards to this [indiscernible]?
Let me take the Better Vision RP first. We've had several interactions or back and forth with the FDA concerning that and we were hoping to get a label expansion without collecting additional clinical data. And we haven't completely given up hope of doing that yet. We are going to put together a response to the agency's last round of questions and provide them some data that we do have and see if it will be acceptable for expanding. If not, then we're probably in a position of having to gather, prospectively gather some additional data to show how the Argus system performs in these patients with better vision. And I think what I said in the prepared remarks were, if possible, we'd like to do that without conducting a potentially expensive U.S. IDE study. So one option would be to go to markets outside the U.S. where we have a broader label and collect some data there, see what the performance is and share that with the FDA.
So right now, I would say probably a response back to the FDA in the next 30 to 60 days. We'll see what the response is then we'll be in a position to make a decision about how we go forward and how we collect data. For Orion, it's been a great process. This breakthrough device program is great. It's been very interactive, responses quickly from the agency. It's clear that they're responding to the information that we provide them and reviewing it in real-time. I think right now, the ball is kind of in our court, Amit, in that we need to first get a better feel for how we think our patients will perform. In other words, what kind of vision are we going to actually provide with Orion.
And then once we know that, then we will move to the next task of then trying to reach agreement with the FDA on what the appropriate endpoints are, but again we want to know what type of vision we have before we get into a final endpoint discussion. And then also, we'll need to finalize a discussion around the number of patients in the trial. But so far, again, it's been a very productive discussion with them. We found them to be very reasonable and again, it's in our court right now to get some additional data and then go back to them and propose to move this forward.
[Operator Instructions]. We have a question from Dallas Salazar with Atlas Consulting.
I just had a few quick questions here, the first one probably being the most important. Can you guys talk about how you guys plan to manage your cash position over the next handful of quarters?
Dallas, This is John Blake, I'll take that one. So first, let me share my commitment to creating shareholder value. As our confidence in the progress of the Orion feasibility study continues to grow and now that we have better market data for the Orion opportunity where we potentially have a multibillion dollar addressable market, we're working to develop an accretive business plan, one where any incremental dilution would be outweighed by the value we unlock with the Orion opportunity. So that's, as you know, just analyzed on a risk-adjusted, present value basis.
So with that said, I plan to share details with the investment community soon regarding potential timelines and cash requirements through key milestones of the Orion program. Of course, we're evaluating the best financing options with our board for the near term and cannot comment on the specifics of that, though we are confident we will be able to continue to fund the company.
No, I can appreciate that. And sort of in line with that, though, I'll press you a little bit on it. It seems like you're strategically moving away from Argus and maybe that's because you guys have this kind of a roadmap or a development map, mapped out, for the potential of the Orion and how to improve it in future generations. And you can correct me if I'm wrong, but can you just talk a little bit about maybe the strategic move or what's the apparent strategic move away from Argus and then how the Orion, if you guys, and you don't have to get into it specifically, but what that kind of product dev map looks like?
Sure, this is Will. Let me take that. We're not - first of all, I would say we're not moving away from Orion but given our commercial experience and the market data, we did decide to evaluate our strategy moving forward, both from a strategic but then also from a financial perspective. And the analysis clearly said we should not chase every implant, nor should we consider walking away from Argus. The right strategy is to be strategic and then very smart in the use of resources and capital with the Argus business.
So kind of as we outlined that means we'll focus in areas where we expect a meaningful return and consider not spending money where the return is lower or more risky. It's clear to us that Argus can contribute financially in some regions, especially with the label expansion one day. And then from a strategic perspective, our work with Argus also paves the path for an Orion launch, with customer relationships as well as the market development infrastructure required around patient outreach and artificial vision rehab, both of which will be essentially the same when we move into an Orion world.
As far as the roadmap for Orion, we've actually mapped out our first look at a roadmap that goes out about four years, 4 or 5 years. We see some really exciting opportunities to improve from where we are today. I'd say it's a little too early for us to share that. We obviously need some more experience ourselves to kind of validate some of our beliefs. But I do think it's really safe to say that the technology headroom is quite large, which means we see significant opportunity to improve Orion from here going forward.
And just looking at the array, for example, the sheer size of the array and the space that we're working with, with the brain means that we can add any more electrodes. In fact, we've already done some early work on the electronics here internally that would allow us to increase the electrode count from the array to over 160 electrodes. So lots of opportunities and I'd say differently from Argus, we'd like to be in a position when we do launch Orion that we have a nice roadmap laid out and that we're doing frequent iterations and improvements, which would allow us to expand the market and also increase adoption through time.
There are no further questions at this time. I will now turn the call back to Will.
Thank you for your participation on our call today. I look forward to speaking with you in the future. Have a great day.
Ladies and gentlemen, that concludes the call for today. We thank you for your participation and ask that you please disconnect your line.