Conformis, Inc. (NASDAQ:CFMS) Q4 2019 Earnings Conference Call March 2, 2020 4:30 PM ET
Mark Augusti - President and CEO
Bob Howe - CFO
Fred Driscoll - Interim CFO
Conference Call Participants
Lilia-Celine Breton Lozada - JPMorgan
Kyle Rose - Canaccord
Ryan Zimmerman - BTIG
Steven Lichtman - Oppenheimer & Company
Good afternoon. My name is Sara, I will be your conference operator today. At this time, I would like to welcome everyone to Conformis Fourth Quarter and Full-Year 2019 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session.
Before we begin, I would like to remind you that Conformis' management will make statements during this call that include forward-looking statements within the meaning of federal securities law, which are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Any statements contained in this call that are not statements of historical facts should be considered to be forward-looking statements.
All forward-looking statements, including without limitation, statements about Conformis' strategy, future operations, future financial position and results, gross margin, product margin, operating trends, financial guidance, market growth, total revenue and revenue mix by product and geography, the anticipated timing of the limited launch of our hip product offering, the potential impact and advantages of using customized implants, business initiatives and transitions in our commercial operations are based upon current estimates and various assumptions.
These statements involve material risks and uncertainties that could cause actual results or events to materially differ from those anticipated or implied by these forward-looking statements, including those discussed in the risk factors section of Conformis public filings with the U.S. Securities and Exchange Commission. Accordingly, you should not place undue reliance on these forward-looking statements. While Conformis may elect to update these forward-looking statements at some point in the future, Conformis disclaims any obligation except as required by law to update or revise any financial projections and forward-looking statements, whether because of new information, future events or otherwise. This conference call contains time sensitive information. And it's accurate only as of this live broadcast today, March 2, 2020.
I will now turn the call over to Mark Augusti, Conformis' President and Chief Executive Officer. Mark?
Thank you, Sara and welcome everyone to Conformis' fourth quarter and year-end 2019 earnings conference call.
With me on the call today is our new CFO, Bob Howe, and our Former Interim CFO, Fred Driscoll. During the call, we will share prepared remarks on a variety of topics, including our fourth quarter financial and operating performance. Following the prepared remarks, as always we look forward to answering your questions.
Just a quick reminder to note that on January 14, 2020, we pre-announced our revenue numbers for Q4 and 2019 full-year. Those revenue results remain the same and unchanged in our formal announcement today.
From a commercial perspective, we had a challenging fourth quarter and 2019 as anticipated. Our U.S. business was impacted by Aetna coverage denials among our surgeon user base and challenges within our product portfolio, U.S. headwinds that we have discussed in the past. However, I am pleased to report that our international business return to positive growth in the quarter. This was due to the continued success we've had in opening new markets and targeting the higher-end private segment in those markets.
Operationally, we had another good quarter of expense management as we balanced overall expenses while maintaining our commitment to new product development programs and though our gross margin was flat versus prior-year, we did realize a sequential quarterly improvement of 450 basis points.
I want to take a moment to highlight a few of the significant events, we had in Q4 before we turn to the more detailed Financial Review. First, we’re pleased to welcome Bob Howe, our new Chief Financial Officer. Bob comes to us with more than 20 years of progressive experience of public medical device companies and roles that encompass financial planning and analysis, financial reporting and business strategy. Most recently, he spent nearly five years at NxStage Medical as VP of Finance and Corporate Controller responsible for corporate FP&A, external financial reporting, manufacturing, finance, shared service functions, tax and Treasury. He also led all aspects of financial controls and external audit activities.
I'm confident that Bob’s experience including 17 years at Boston Scientific and various finance roles has prepared him well to succeed in this role here at Conformis. Second, we hired a new Senior Vice President of Operations, Gary Maingot. Gary Maingot is the Senior Executive with more than 25 years of progressive experience within the medical device industry. Immediately, prior to joining Conformis, Gary served at Spinal Elements for three years as Executive Vice President of Operations responsible for manufacturing, supply chain, distribution and customer service.
Gary also served in various operational roles at BioMed, J&J and Boston Scientific. Lastly, we received FDA clearance of our Conformis Hip System, which positions us well for a full-year of revenue growth in this large market segment. As we made and continue to make good progress on our strategic development partnership with Stryker including achieving the first development milestone that included the $2 million payment.
Let me now turn the call over to Bob for a more detailed financial review. Bob?
Thanks Mark, and thank you everyone for joining us.
We reported fourth quarter revenue of $19.9 million representing a decrease of 10% or $2.2 million year-over-year on a reported basis. Excluding the negative impact of foreign currency exchange rates of $86,000, revenue decreased 9% on a constant currency basis.
Revenue in the fourth quarter of 2019 and 2018 includes royalty revenue of $158,000 and $145,000 respectively related to patent license payments. Fourth quarter product revenue was $19.7 million, representing a decrease of $2.2 million or 10% year-over-year on a reported and constant currency basis.
Sales of iTotal CR, iDuo and iUni decreased $1.7 million to $11.8 million or 13% year-over-year on a reported basis and 12% on a constant currency basis. Sales of iTotal PS decreased $0.5 million to $7.3 million or 6% year-over-year on a reported and constant currency basis.
iTotal PS represented approximately 37% of total product revenue in the fourth quarter of 2019 compared to approximately 36% for the same quarter last year. Sales of our Conformis Hip System were $617,000, an increase of 11% year-over-year on both reported and constant currency basis.
U.S. product revenue decreased $2.2 million to $17.2 million or 11% year-over-year. U.S. sales of our iTotal PS decreased 8% year-over-year and the base business product lines decreased 14% year-over-year. These declines were partially offset by an increase in sales of our hip system. Fourth quarter U.S. product revenue represented 87% of total product revenue compared to 89% for the same quarter last year.
Rest of world product revenue increased $12,000 to $2.5 million were flat year-over-year on a reported basis and up 4% on a constant currency basis. Product sales in several new countries contributed to the growth and helped offset continued reimbursement challenges in Germany.
I’ll now move to a review of results across the rest of the P&L. Fourth quarter gross margin was 49% of revenue, which was flat to prior-year. This was a sequential improvement from Q3 of 450 basis points. Total operating expenses decreased $3.8 million to $15.5 million, or 20% year-over-year.
This decrease in expense was driven by reductions in personnel costs and marketing programs as a part of a plan announced at the end of 2018 to reduce cash burn in 2019. In addition, selling costs were lower due to the decrease in revenue.
Net loss was $5.4 million or $0.08 per share compared to net loss of $9.9 million or $0.16 per share for the same period last year. Net loss per basic share calculations assume weighted average basic shares outstanding of $65.5 million for the fourth quarter of 2019 compared to $60.8 million for the same period last year.
Net loss in the fourth quarter include foreign currency exchange income of $876,000 compared to foreign currency exchange expense of $630,000 in the same period last year. Full-year 2019, for the full-year of 2019, we reported revenue of $77.4 million, representing a decrease of 14% or $12.4 million year-over-year on a reported basis and 13% on a constant currency basis. Total revenue includes royalty revenue of $0.8 million in 2019 and $11.2 million in 2018, of which $10.5 million came from the royalty settlement with Smith & Nephew in the third quarter.
Full-year 2019 gross margin was 47% of revenue, compared to 54% of revenue for 2018, a 700 basis point decrease, driven primarily by the non-recurring $10.5 million royalty settlement in the third quarter of 2018.
Net loss was $28.5 million or $0.44 per share for 2019 compared to $43.4 million, or $0.74 per share for 2018. As of December 31, 2019, we had cash and cash equivalents and investments totaling $26.4 million, compared to $23.6 million as of December 31, 2018. Turning to expectations for 2020, we have previously announced in our January 14 pre-release 2020 product revenue growth to be in the range of 3% to 6%. We anticipate that the Q1 revenue growth rates will approximate that of our fourth quarter.
However, we expect that revenue growth will improve throughout the year as we gain momentum with the full launch of our Hip System and anticipated full launch of our identity knee system in the second half of 2020. Additionally, we expect full-year gross margin to improve to be between 50% and 52%.
With that, let me turn the call back over to Mark.
Thank you, Bob.
Turning towards further comments, meaningful items in the quarter, let me first start with the Aetna coverage. As disclosed previously, although Aetna updated its coverage policy in December of 19 chose not to modify its position with respect to Conformis custom products. We will continue to take steps to convince Aetna to change its position with respect to Conformis products, but it assume no change in their policy for our 2020 plans. We have the other 90% to 95% of the joint replacement market to go after and we'll be focused on just that. Regarding our team here at Conformis, I mentioned earlier the additions of Bob Howe and Gary Maingot to the executive team.
We previously announced Eric Rickenbach as our SVP of Sales. I’m pleased to say that Eric has quickly come up to speed and has already relocated his family from Southern California to the Boston area. I'm also pleased to report that we successfully recruited the first three third-party distributors who were the recipients of the first grant from our shareholder 2019 sales incentive plan. Eric has been laser focused on the recruitment of new distribution talent and is quickly building a pipeline of potential additions.
It's early days but the trend is certainly in the right direction. Regarding our new product pipeline, a couple of comments there, there were a few significant milestones to report. First regarding our hip system, as we mentioned, we received FDA clearance, we are now fully launched in the U.S. and actively training new surgeons. With this launch, Conformis is now fully operating as both a knee and hip company.
The entire Conformis team remains excited about participating in the approximate $4 billion U.S. total hip market. Second, we have continued to engage more surgeons with the limited release of our iTotal identity total knee system. The early feedback is fantastic. We are on track to achieve full commercial launch of our identity knee system in the second half, including the PS version of identity. This system represents a significant upgrade on our existing system as it provides new and improved instrumentation, extended tibia stem options and more poly insert flexibility.
We also continue to make progress on our cementless knee offering with a successful validation labs being conducted over the last few months. Finally on our product pipeline, with the continued move towards outpatient settings, we view our partnership with Stryker as being even more valuable and are pleased with our progress to-date. Indeed, as mentioned earlier, we are pleased to report that we successfully achieved our first milestone and that strategic development program. We believe that all of these additional product offerings will help propel our revenue growth in 2020 and beyond.
Additionally, I would like to note that we recently announced our 100,000 knee as well as we achieved an ODEP 5A rating in the U.K. We’re very proud of both of these accomplishments. At this time, on behalf of our board, our shareholders and employees, I would like to acknowledge and thank Fred Driscoll for his services as Interim CFO, his leadership of our Finance, IT and HR teams allow the time to conduct a proper search and to successfully add our new CFO, Bob Howe to the team. Thank you, Fred, for your help.
With that, I'll turn the call back over to Sara, our operator and will take any questions.
[Operator Instructions] Our first question comes from the line of Robbie Marcus with JPMorgan. Your line is now open.
Q - Lilia-Celine Breton Lozada
This is actually Lili on for Robbie, thanks for taking the question. Can you talk a little bit about the impact you've seen so far from Coronavirus? And to what extent it is contemplated in your guidance for 2020?
Yes, great question. Thank you, Lily. Hi, this is Mark and as we anticipated, we might get some questions around that. So couple of things to point out first off is, as you know, our business is more highly concentrated in the U.S. than most of our competitors. So I don't think we're as exposed from a revenue standpoint as far as surgeries and whatnot. So we're not seeing anything at least in our signals at this point.
That being said, it's too early to say with complete confidence what the impact could be because there could be a turn for the worst for sure. But obviously not having revenue in China, the biggest impact of country at this point, it's not much of an issue for us. Obviously, time will tell as we know how the U.S. will play out.
The last, the next piece on this is to think about the supplier piece because we all know we have long supply times we've been doing questions to our suppliers and doing checks with all of them. Right now we don't see any risk as far as we can tell to our raw materials and some of our supplies in-house, we little bit longer lead times coming out on consumables like masks and gowns that are part of our clean process, but nothing that should pose a huge risk for our business at this point.
So I hope that answers the question but at this point, I say the risk is minimal, but we're being highly diligent and continue to monitor the situation.
Lilia-Celine Breton Lozada
Great, thanks. And one more quick one. Do you think this is a second quarter in a row, it's been a slowdown in iTotal PS sales. What's the main driver of this? Is it Aetna and some of the other challenges that the whole business has been facing or is there something specific here that cause these results and what's your outlook for this in 2020?
Yes, no. So on that, it's the headwinds, I think you're right. We've seen, certainly a slowdown and but it's really just those headwinds we talked about in the business. So it's there's more interest in cementless. We don't have that offering that tends to be more of a CR offering and some of our PS surgeons would move to that. There's obviously the robotic trialing that's going on, it's not having the stem extensions, identity not having PS. So unfortunately, PS will be a little delayed as we come out with identity, like we said in the second half, but we expect to get growth back in PS but there's nothing product performance related. It's just really about the market in the portfolio, which are headwinds I've discussed in the past.
Our next question comes from the line of Kyle Rose with Canaccord. Your line is now open.
I just wondered if we could talk a little bit more about guidance and just maybe, what it assumes with respect to the performance in the underlying business unit. I know you talked about in the first quarter should look similar with the growth rate we saw in the fourth quarter, but maybe just help us understand how you're thinking and contemplating the hip launch or full commercialization in 2020. And then how we should think about the other two knee business units trending from a revenue growth or market share loss perspective?
Sure. Hey, Kyle, this is Mark. So this is fanatically how I think about it, as you know there is going to be a little bit of a range here, but I think right now like we said, we're looking to make a slow march to improve. And I think the Q1 we feel, we're looking and we feel good about sort of flat, maybe slightly improved growth and performance. So Q1 is going to be like it is. But as we get more identity sets out there in the knee business, as we get limited launch of cementless cover coming in, we're going to see an improvement of our knee business.
And it's tough to say exactly what the range is. But the way I'm thinking about it is, we'll see a sequential growth improvement quarter-to-quarter with obviously a back half improvement. And then -- and so though we’re starting -- so in the sense that we started the gate a little slow, we're going to finish strong, so I'm feeling kind of on balance kind of maybe full-year sort of flattish on the knee.
The real wild card is the hip, we just did 11% growth on the hip granted some small numbers. But we're training surgeons significantly as we said in the commentary at start, we're putting new onto the hip, we fully launched. So yes, we have some more instruments raise and stuff to get out there, but it's fully launched and available for sale and the hips the wild card, if the hip is higher than and better than expected, that puts us over the top to the higher end of that range, Kyle, and if we have sort of a more modest sort of growth, but certainly growth on a full-year basis from hip, that puts us shades us towards the lower-end of that rage. That's our best thinking but that hopefully helps you with the phasing.
Very helpful. And then similar question just for Bob on the P&L. I mean how do you think about operating guidance and understanding gross margins, but when we think about cash burn and just operating spend for the year, what are your expectations there?
Yes, so we're not specifically guiding on operating expense as a line-item, but maybe I can help on a cash burn basis. So from a quarterly cash burn, obviously that will vary based on activity and events. But on average, we're anticipating a range of about $5 million to $7 million a quarter, the first quarter is expected to be a little bit higher of that range, mainly due to support of full launch of our Hip System, some trade show timing and some capital expenditures for kind of the iTotal identity full market release.
And then we'd expect it to kind of come back down in the first quarter. Again, there's a timing element in there, but that's kind of directionally what we're thinking from a cash burn standpoint.
Our next question comes from the line of Ryan Zimmerman with BTIG. Your line is now open.
So just the housekeeping question. Is there a press release associated with the quarter, I didn't see it on the website or in like Factset or any of those third-party aggregators, they are coming up?
There absolutely is, I'm looking at in front of me and Bob's going to walk out of the room right now and going to ask, our friend is going to ask people where that should have went out.
I'm not crazy. I asked a few people. Okay.
You thought that is fine.
Okay, well, now unfortunately, Bob is (inaudible) who's first and all of this in the press release is.
Sorry about that, Ryan.
We have one absolutely Ryan and we're waiting, we’re waiting on it. It was there guys. Thank you. All right, perfect. So let me ask a real question now. Maybe just talk a little bit about the milestones associated with the Stryker transaction. You got through the first one and there's certainly I think around $10 million or $15 million, maybe a little more associated with the deal. So, what are the milestones you need to achieve to get that rest of that capital or rest of those dollars? And if you could just kind of talk through that for a second and the follow-up?
Yes, unfortunately, we're not going to really be in the business of predicting that because we've got, we've got a very important partner that we kind of stay aligned with I think from as we hit stuff, it becomes material to us, so there's and we want to disclose it, so we do but I'm not going to get into unfortunately at this point, there's some things maybe as I said as we go down, down the road, as we might be able to give you some more color, but we've done pretty much in disclosing stuff in the 8-K and in the filings and you're right, it is significant source of financing for us meaningful.
I think the main thing I can leave you with is, we feel really good about the status of the partnership. And we feel really good about the status of the program, the trajectory of the program and things we're working on. So if I didn't feel that way, obviously, I'd be talking differently about it. So I can't really give you a lot more color, at least at this time, in the year on that, okay, Ryan?
It’s fair. So let me ask about OUS. It was a little bit better than you've seen in a long-time, right, starting to turn the corner that you said you had some new countries. So just help us understand kind of in your guidance for the year what is contemplated internationally. It sounds like you're moving in a few new countries, how much should we think about international revenue for the rest of the year, or maybe what the right run rate is, as we think about international? Thanks for taking the questions guys.
Yes, so fair point. I mean, it's been a long slog, right, since I've been here with some of that stuff, and it's taken some time, but we finally turn the corner, as you said slightly. And that's good for us. I think in our plan for the year, we expect to continue to build on that momentum through the quarters coming. I don't think we're ready to sort of provide a lot of guidance around that. But you can expect that, if I was thinking around it probably getting back to kind of mid to high single digit sort of growth through the quarters as we go, if we think about phasing.
Okay, and then just last one for me, and I'll hop back in queue. You talked about the sales force a little bit, you have some new leadership in place. What's the status of your sales force today or the distribution partners they're using. I mean they have now a full recon product line to go for, maybe just to kind of help us understand kind of where you're at. And what do you feel you need to continue to build on from a distribution standpoint? Thank you.
Yes, I'll comment on that. I think that's a great question. I mean for the first time now, we've got all the levers to pull. I've got and the team here, we've got a hip offering fully launched to and granted again, set expectations, it’s Cry type stem, we don't have revision, all this stuff is very good, primary hip offering, and we're very pleased with the way we're offering that and what we have to offer and we just, we just haven't had that. So it's nice to finally be a hip company. You combine that with the shareholder plan that was approved by shareholders the sales equity incentive plan. And then you combine that with a great leader like Eric.
Now we've got the pieces of the puzzle to frankly go after a different level of talent and fill out some areas where frankly, we haven't been able to do and it doesn't happen overnight, as you might imagine. But I'm pleased because as I said, we're not disclosing how many but we did more than one of our first, sales grants and competitive teams that come over where people with experience that maybe had been on the sideline for a while, and we've got a number of others in the pipeline.
And I'm really pleased to see the energy around that. So sales, talent additions, sales distribution growth is a key lever for us. But most importantly, we think it's about the quality of those people now, and the excitement around that. So more to come, we'll continue to talk through that. But that clearly is a big part of our commercial strategy that complements our product portfolio strategy. Okay.
Our next question comes from the line of Steven Lichtman with Oppenheimer & Company. Your line is now open.
Mark, I was wondering if you could put any numbers around the training program for surgeons on hips, how many would you hope to train this year and so far about what percent of the surgeons trained are new to Conformis?
That's a really insightful question. And it's something that I expected that I would get asked. And it pains me to divert to answer it at this point, but and I'm being serious we have, I think I gave a number In the past, where I said roughly in the limited release about 20% of the surgeons were non-knee users that came in from us. And it's a little early to report on that because we're literally, what it's March, we're only two months in and don't forget, we have a lead time.
So I've got to have some time to analyze and see how things are going to shake out on that, Steve. But I wouldn't see any reason why we couldn't do that or better. We certainly have our good surgeon relationships we will go after, but there's no doubt that we’re getting new surgeons as well. And I see that all day long.
So that's, that's why the hip is a very important growth opportunity for us and that's why I talk about this range of expectations as what we see.
We've had a number of classes in the first quarter, which is one of the reasons why we'll see a little bit of an expense bubble in the first quarter and it's not huge, but it's important. We talk about it. And we wanted to do that, we wanted to front load some of that training. So we could have the longest, largest impact for the full-year.
But again, we've never reported on number of train surgeons when we're in the knee. And I think it's a little early for us to think about doing that on the hip, okay.
Okay, fair enough. And then shifting to International, obviously, as you mentioned, Germany still remains a challenge offset by some of the new countries, but within Germany, can you characterize where we're at with respect to the state of your business, sequentially is it stable or is it still going down, any color on that front?
Yes, I'm just trying to see, let me just -- let me think through here because we don't get Germany directly, but I would characterize it more as sort of stable than not I mean, it's tough to say we've bottomed out and again I want to despair is probably worth repeating. There's no like anniversarying out of this because this is not like a one-time change, the way it was with a one-time reimbursement cut, if you will that happened in our unis.
This continues to be continued pressure on medical necessity. And as it rolls out, different states interpreted differently and whatnot. It's a bit of a challenge therefore. So I think it's more or less stable, but it's really about the new countries that we add and new distribution that we put in. So I'm not in our plan to be clear, our plan sort of has Germany being sort of stable-ish, and the growth is coming from other countries and adding new revenue streams.
Got it. Okay, great. And then lastly just on the knee business, obviously press fit been a missing piece for you guys so far. Can you talk a little bit more about what identity is going to do for you on the core knee business and how it can potentially reaccelerate that business in the interim as you await press fit?
Yes, so again, I'm very excited about identity. I mean the first number of users is the feedbacks been fantastic. We've got our core physicians calling us and wanting it because it's a couple of little things. First off, it’s new instruments that are upgraded and nicer than the additional -- I mean, I’m talking reusable instruments. On top of that are patient specific cutting guides, the jigs have the metal block that snaps in, so now the tactile feel for pinning the guides through metal instead of plastic for the sable going from metal set of plastic is a big deal. There is the TV extension. So we can do high BMI patients, also on for CR surgeons, now they can, they can request and get a one piece poly versus two piece.
And for some surgeons, they like that. And so we can do that. Also, in rolling this out, we rolled out flexibility where surgeons can now custom tailor their poly ordering. So based on their own preferences, they can decide what poly will come ship to them on a customized basis, which they really like.
And it sets us up for cementless because the cementless platform will be the identity platform. And I'm pleased to say again, as I said in my prepared comments, we've had a couple of validations live as most recently within the last two weeks and this hadn't happened to me sort of ever two of the surgeons that were involved in lab and there were only four in the lab that did the cadaver work texted me right away home run, this thing is going to be awesome type thing, they're very excited about our cementless offering.
So, we still have work to do, we still have to do the manufacturing work and do some of the validations and readiness to get that thing to launch. But my best information right now says it's mid-year, maybe a little bit, kind of to mid third quarter, but that's going to add and be an important part to our product portfolio, obviously.
Thank you. This concludes today's question-and-answer session. I would now like to turn the call back to Mark Augusti for closing remarks.
All right, so thank you for those who’re still on, we tracked down the press release. Apparently the press release service was having a formatting or operational issue. Our people are on it and they're trying to get it to go out and I can expect it little go out in short order. And then we'll go from there, but we definitely have one and it should get posted shortly. Thank you. Thank you, operator.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.