IRIDEX Corporation (NASDAQ:IRIX) Q4 2021 Earnings Conference Call March 9, 2022 5:00 PM ET
Hunter Cabi - IR
Dave Bruce - CEO
Fuad Ahmad - Interim CFO
Conference Call Participants
Tom Stephan - Stifel
Scott Henry - ROTH Capital
Thank you for standing by, and welcome to the IRIDEX Fourth Quarter 2021 Earnings Conference Call. [Operator Instructions]
I would now like to hand the call over to Hunter Cabi, Investor Relations.
Thank you, and thank you for participating in today's call. Joining me are David Bruce, Chief Executive Officer; and Fuad Ahmad, Interim Chief Financial Officer. Earlier today, IRIDEX released financial results for the quarter ended January 1, 2022. A copy of the press release is available on the company's website.
Before we begin, I'd like to remind you that management will make statements during this call that include forward-looking statements within the meaning of the federal securities laws, which are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Any statements made during this call that are not statements of historical fact, including, but not limited to, statements concerning our strategic goals and priorities, product development matters, sales trends and the markets in which we operate.
All forward-looking statements are based upon our 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.
Accordingly, you should not place reliance on these statements. For a discussion of the risks and uncertainties issued with our business, please see our most recent Form 10-K and Form 10-Q filings with the SEC. IRIDEX disclaims any intention or obligation, except as required by law, to update or revise any financial projections or forward-looking statements, whether because of new information, future events or otherwise.
This conference call contains time-sensitive information and is accurate only as of today, March 10, 2022.
And with that, I'll turn the call over to Dave.
Good afternoon, and thank you all for joining us.
To quickly recap 2021, the IRIDEX team significantly advanced the company as we navigated and adapted to pandemic-driven global challenges. Our achievements included a transformational collaboration with Topcon, a leading market participant, that strengthened our balance sheet, improved our competitive positioning, expanded our product portfolio and enhanced our global distribution network.
We also significantly increased utilization of our Cyclo G6 platform for the treatment of glaucoma which yielded a 27% year-over-year increase in probe sales. Our retina business was revitalized in both U.S. and international markets through the acquisition of a new product platform, a retina-focused U.S. sales team, and new OUS distribution network. So for the full year, retina revenue grew 72% over 2020, and we employed judicious cash management that's going to enable us to securely pursue our growth plans in '22 and beyond. We're highly confident in our ability to continue delivering valuable execution with progress in both of our key ophthalmic markets.
Turning to recap our recent results. In our glaucoma business, we continue to prioritize investments in clinical evidence, developing key opinion leader proof statements and expanding clinical physician-to-physician messaging around the benefits of our MicroPulse TLT treatment. In addition, while in-person training and industry trade shows return late in the year, we also successfully hosted virtual training sessions and showcased several new clinical papers.
As we had preannounced in January, our fourth quarter Cyclo G6 probe sales increased 13% year-over-year. Despite facing headwinds due to the Omicron spike in the latter half of the quarter, we still achieved the guidance set back in March for the full year. Cyclo G6 system placements in the fourth quarter increased 58% year-over-year, bringing our total global installed base to more than 2,100 systems at year-end.
In addition, our international sales teams had initial success bundling offerings with our collaboration partner, Topcon, that allowed us to win a significant joint tender contract and we expect this bundling model to yield more opportunities in the future.
On our last call, we announced IRIDEX's support of an independent assessment of our MicroPulse TLT product by 10 key opinion leaders from around the world with the goal of determining proper dosing levels and settings to optimize clinical results. These KOLs presented their conclusions prior to the AAO conference and have submitted the findings for peer-reviewed publication. A follow-on session occurred at the recent American Glaucoma Society meeting and more sessions are planned at the upcoming ASCRS as well as in additional smaller meetings around the country.
We expect to have this data and key users drive procedure optimization and lead to greater adoption. As a result, we achieved success in increasing awareness of our MicroPulse technology in treating moderate severity glaucoma prior to surgical incision-based procedures that resulted in increased usage throughout the year. The Cyclo G6 product family achieved 24% revenue growth for the - over the full year of 2020.
Turning to our retina business. 2021 marked a significant turning point in what had been a slowly declining market for IRIDEX. As anticipated, our investment in the PASCAL line acquired from Topcon is delivering revenue growth and scale efficiencies. Fourth quarter revenue grew 31% year-over-year, of which 17% came from sales of PASCAL products. For the full year 2021, total retina revenue grew 72% year-over-year, which included 22% contribution from PASCAL products.
This large move upward in 2021 was primarily driven by two unique events: PASCAL acquisition and recovery from the 2020 COVID trough. We believe our retina business has been significantly strengthened and can grow at or above the 3% worldwide retina laser market rate compared to the slow decline we had experienced in prior years.
In 2022, our focus is on accelerating the momentum gained in 2021 in each of the markets we serve. This includes further supporting our global commercial team with increased clinical data and education programs aimed at consistent strong outcomes, combined with continued key opinion leader support, and peer-to-peer training, plus podium presentations, all expected to drive continued physician adoption. In addition, our KOL consensus group recommended a broad TLT patient profile, including use as a key nonincision tool for treating moderate stage glaucoma patients, thereby creating an opportunity to expand market penetration and utilization in our growing installed base.
In the U.S., we will invest in selectively expanding territories and sales rep headcount. And internationally, we will expand opportunities such as glaucoma product regulatory clearance in China as well as bundled tender programs in collaboration with Topcon. Lastly, we expect to see our increased product development investments bear fruit as we introduce enhanced performance and cost-reduced platform laser systems across our product line. In order to achieve our goals for the year, we plan to leverage revenue growth and the resulting gross profit to just viciously expand our investments while still maintaining our secure capital position and multiyear operating runway.
In terms of guidance for the full year 2022. We anticipate Cyclo G6 probe unit sales of 67,000 to 70,000, which represents growth of approximately 18% over the prior year at the midpoint. Cyclo G6 systems installed base is expected to expand by 225 to 250 units. Total revenue for the full year is expected to be $57 million to $59 million.
So far in 2022, we've been successful navigating the challenges of our supply chain and set our guidance based on continuing success sourcing components and products. We also note that the worldwide impact of Omicron continue to exhibit softness in glaucoma procedure volumes. But we see a shift to increasing traction as capacity limits and mandates are lifted and anticipation of solid growth is reflected in our guidance for 2022.
With that, I'd like to turn the call over to Fuad.
Thank you, and good afternoon, everyone.
I will review our financial performance for the fourth quarter and full year of fiscal 2021. Starting with revenue. Total revenue for the fourth quarter was $15.3 million, up 24% from $12.3 million in the fourth quarter of last year. Total revenue was up 48% to $53.9 million from $36.4 million in 2020.
We sold 15,200 Cyclo G6 probes in the quarter, up 13% from the prior year period. We note that the Omicron surge that started in Q4 somewhat affected staffing capacity and patient appetite in the surgery center sites during the period. We sold 90 Cyclo G6 systems in the quarter compared to 57% in the prior year period, representing a return to more normal buying patterns for the capital equipment.
Consistent with our sales focus for fiscal 2021, we have continued to maintain good pricing discipline and saw a steady uptick of our system ASP. Overall product revenue from Cyclo G6 product family was $3.9 million, up 11% compared to the fourth quarter of 2020. Total glaucoma product revenue for 2021 was $13.9 million, up 23% from 2020. Our retina product revenue improved significantly in the fourth quarter to $9.1 million and an increase of 31% compared to the prior year period.
Fourth quarter included $1.6 million of PASCAL revenue. After adjusting for PASCAL revenue, our retina product revenues still grew 9% period-over-period. For the full year 2021, our retina product revenue was $31.1 million and grew nearly 72% compared to 2020. After adjusting for PASCAL revenue, full year retina revenue was still up 35%.
Other revenue, which includes royalties, services and other legacy products, increased 20% to $2.3 million in the fourth quarter of '21 compared to the same period in 2020. The substantial increase resulted from inclusion of PASCAL service revenue and amortized revenue recognition from the sale of distribution rights to Topcon.
For the full year 2021, other revenue was $8.8 million compared to $7 million in 2020. Gross profit of $6 million in the quarter was up 8% from the same period last year. Gross margin percentage for the period was 39.3% compared to 45.4% in the fourth quarter of 2020. The decrease in gross margin percentage is attributable to product mix and a onetime inventory adjustment in the fourth quarter. Without such adjustments, our gross margin percentage would have been 41%.
Operating expenses for the fourth quarter were $8.4 million compared to $5.9 million in the same period of the prior year. The increase was a result of increased R&D spend from the acquisition of the PASCAL product line and our planned increases in product development initiatives, sales and marketing activities, including additional headcount in the sales organization. Total operating expenses for 2021 were $30.4 million compared to $22.1 million in 2020.
Net loss in the fourth quarter of 2021 was $2.4 million or a net loss of $0.15 per share compared to a loss of $0.01 per share for the same period in 2020. For the year, we recorded a net loss of $5.2 million or $0.34 per share compared to a net loss of $6.3 million or $0.46 per share in 2020. Note that 2021 included a onetime gain of $2.5 million from PPP loan forgiveness.
We ended the year with cash and cash equivalents of $23.9 million, an increase of $12.2 million from the end of 2020. The increase was due to the Topcon transaction that yielded $17.5 million of cash in 2021. In addition, $1.9 million was received in January of 2022. The additional liquidity from the Topcon transaction has given us increased investments capability, which we have deployed to expand our sales teams in the U.S. and make investments in the product development, clinical and marketing programs to accelerate our growth in periods to come.
In conclusion, I'll reiterate our guidance for 2022. We expect total revenue for fiscal '22 to be $57 million to $59 million. G6 program to range from 67,000 to 70,000 and Cyclo G6 glaucoma laser system installed base to expand from 225 to 250 units.
With that, David and I would like to turn the call over to the operator for questions. Operator?
[Operator Instructions] Our first question comes from the line of Tom Stephan of Stifel. Your line is open.
If I can start on G6. 2022 guidance in the business looks solid, came in above our estimates. Dave, can you start off by talking about maybe the most important drivers we should be thinking about with probe growth specifically in '22? And then longer term, what are the growth aspirations for the G6 business? Do you think this can become a consistent 20%-plus growth business? And if so, what gets you there?
Tom, thanks for the question. So we think the couple of things that help us accelerate from here, and we're forecasting about 18% at the midpoint for 2022 in terms of growth on Cyclo G6 probes, are a couple of areas where we are moving clinicians who may be happy with our products but using them in later-stage patients.
As you remember, this product came to market as an outgrowth from the late-stage treatment of cyclophotocoagulation. This one is intended for a more moderate-stage patient. And as people get familiar and comfortable in the later-stage patients, they move toward the moderate-stage patients. A lot of our clinical evidence and key opinion leader, training sessions and otherwise are highlighting the combination of efficacy and safety profile that makes it appropriate for that stage patient.
And I think as people get experience moving toward the milder stage, not into the milder stage, but towards the moderate stage that, that will be a growth leg for us. There are also quite a large number of sites where we have one, two, three users that a surgery center may have eight or nine potential users for us. And so bringing more users in the same sites onboard is another growth vehicle.
And then the third growth vehicle is additional site placement and new users in a greenfield site. And we think all those things will combine. The enhancements to dosing and very precise technique has also demonstrated anecdotally, and papers are coming, that efficacy is more consistently achieved and the safety profile is preserved. And we think as that evidence and experience gets out, more people will broaden the patient profile for which they're recommending our TLT procedure.
Longer term, we think that we're kind of on that classic S-curve of penetration and still on that lower leg that's growth but a flatter growth curve and more efforts, both selling and experience building with users. And we will hit that critical mass and accelerate at a faster rate.
We see the opportunity to be somewhat equivalent to the early-stage treatment that's been around for about 20 years called SLT, selective laser trabeculoplasty. And that has about a 20% penetration into the mild stage patients. And we are still very low penetration, a couple of percentage points into the moderate stage patients.
So we think there's a big growth opportunity both in the U.S. and outside the U.S., where the simplicity of our procedure and the attractive economics of our procedure compared to other implants or device-related incisional surgeries really should shine in more cost-sensitive environments.
We believe that we should be in the 20% to 30% growth range as we mature these various growth levers, and people start to recognize the role in that long-term continuum of caring for a glaucoma patient.
Got it. That was really helpful. And maybe just as a quick follow-up. You mentioned the moderate stage patient population as a growth driver for '22. Have you or are you seeing that in the field now? And if so, any numbers you can put around that in terms of percentage of procedures that are in that patient population?
There's macro data, and there's kind of the analytic that we get from patient cases that we support. I would say we're probably achieving, in our experience as we support cases physician by physician, probably in the 20% range of our cases are, what we would call, pre-incisional. Meaning as they progress in the severity of their glaucoma, at some point, there's a need to do something more than drops or multiple drops, and they start to consider incisional surgeries. And we believe TLT belongs before you do those incisional procedures and can be repeated and generate multiple years of runway before you have to do the more severe procedures. And that's really what we're investing around, is that change in the treatment continuum and paradigm.
In terms of the number of moderate-stage patients. There's about 6 million total glaucoma diagnosed patients in the U.S. and - but half of those are in the mild stage. Most of the rest are in the moderate stage, 2 million to 2.5 million. So the simple math of applying the same 20% penetration of SLT in the early-stage patients, we could generate several hundred thousand procedures. We just completed a year where we did almost 60,000 procedures, roughly split even, internationally and domestically. So we see that as a 20-fold growth opportunity in really capturing significant penetration into the moderate stage patients. I don't know if that answers your question.
Certainly does. So yes, let me pivot to retina. Working through the guidance, we're riding at implied growth in 2022 of sort of low to mid-single digit. And I think you talked about maybe growing above the 3% market growth, if I heard you correctly. But maybe just for retina, can you help us with the pushes and pulls in that business for 2022? And as a tack on, can you remind us just of the different product launches and enhancements coming up and kind of the timing around those as well?
Sure. So we did a couple of things through '20 and '21 that really allowed us to improve our competitive positioning of, I'll call, the prior IRIDEX products. And then we acquired the PASCAL product line which, when combined, puts us in a much better competitive position. We've done some things to reduce costs so we can be more aggressive in our pricing.
And so we think we have moved from a slow decliner to a grower at the market or better. That said, the retina capital equipment segment of the market is relatively mature, primarily replacement or expansion if a center has satellite offices and wants to replicate the same laser equipment in those satellite offices as the physicians go out and support patients in those areas. So it's a relatively mature marketplace in that sense. And so the - just the growth opportunities for the market itself are relatively low single digits. And we think we can start to gain share as the breadth of our offering and the quality of our competitiveness has improved.
To that end, later in the year, we'll be introducing a new platform across our stand-alone lasers, the 532-nanometer and 577-nanometer laser systems. So we have a commonality in the platform and just essentially different frequencies of the laser systems. So the cost is spread over a broader base. And obviously, we've focused on some cost reduction areas there as well.
Exact timing is going to be, I'll call it, the second half of the year. We want to be sensitive to the competitive nature in the marketplace as well as not freezing up our customer base with kind of imminent announcement of a product. So we're going to kind of keep the details of that closer to the vest here. I think you understand that. But longer term, we think we have the opportunity to gain share. We have the premium place in the marketplace in terms of feature offering as well as reputation. And we want to continue to build on that.
Got it. Helpful. Last couple for me. Just on margins, Fuad, this might be for you. But for 2022 at a high level, how should we be thinking about gross margin? Obviously, a lot of moving parts this quarter. Maybe if you can help us with the cadence and directionally, what should it look like versus 2021?
Yes. So as you saw Q4, which was unusually low for the period, and as we mentioned in our prepared remarks, it had everything to do with the product mix and one small adjustment. But looking forward, assuming a product mix comes out the way just Dave talked about, we get the growth in that glaucoma business, which is a high-margin product as well as the retina growth at the levels that we're talking about. We are - we feel like gross margin in the mid-40s is reasonable expectation.
Now having said that, there are supply chain issues. There are inflationary issues on stuff. We've been able to manage that fairly well. We will continue to do that and strive towards it. But I think realistically, mid-40s is a good way of looking at it in aggregate.
Great. Got it. Got it. And then last one just on pricing. How should we be thinking about pricing across the portfolio for 2022? Can that be an incremental tailwind or - general thoughts there?
Yes. That's a tough one, Tom, because we are seeing pressure on the cost side. And as I think all manufacturers are and not just in our industry and our segment. So we feel that to preserve margin, we need to make those increases. And our hope is that essentially, that the market is receptive to that seeing the pressures that are across the economies and are in the headlines in terms of inflation today.
So we do think in terms of revenue that, that is a helper for us. We factored some of that into our guidance. But like I said, I think it's tough to know how much sticks, what the competition does, particularly in the more price competitive segments. And so we don't see it as a major revenue driver. We think successfully competing for the business and winning market share is going to be our primary revenue driver. That - sorry, that and adoption from - in the glaucoma front with physicians just using on a broader, broader range of patients, as I described.
Our next question comes from Scott Henry of ROTH Capital. Your line is open.
A couple of questions. I will start on the revenue side. Staying with pricing, not going forward, but in Q4. When I look at the G6 business, it seemed like pricing was a little lower than the past couple of quarters. Am I seeing that correct? And any comments on that?
So there's two components to the G6 pricing, right? The probe disposable price and then the laser systems price. So Fuad was referring to a steady increase in the ASP of the system. The value of that capital equipment piece is quite strong when you look at potential procedure volume and the reimbursement that the facility and the physician receive that the payback period can be relatively short with any reasonable volume of procedures.
And so we have been cognizant of that and trying to move up the average selling price of those laser systems. Probes has been relatively stable. I would say we're creeping it up as we have discontinued some of the bulk purchase discounting that's happened to a greater degree in the past. So the general trend has been up, but very slightly in the probe side of the business, much more substantially in the capital equipment side of the business.
Okay. And then looking at PASCAL through the quarters, it looks like Q4 is a little lighter than Q3 and Q2. Is there seasonality there? Or just curious how - if that business is performing as expected and how we should think about it going forward? Is it still - is it a growing business or a declining business?
No, it's performing very well. If you remember, when we talked about the second and the third quarters, we talked about the strength in the PASCAL business and some of the potential shifting of revenue in the distributor network from one quarter to another quarter. And one example that we used, which is relevant in this case, was that in regulatory approvals as it switched to an IRIDEX product - - sorry, as it switched from a Topcon product to an IRIDEX product, there are registration blackout periods that, for example, in Japan, when you file, you can't sell until you get the approval. And that can be a full quarter.
So in anticipation of that, we built and Topcon bought inventory for those market segments in the second and third quarter. And obviously, we did not sell units to them for that segment in the fourth quarter. So I think that accounted - I don't know the percentages off hand, but that accounted for part of the shift that occurred in the PASCAL line specifically between, say, stronger third quarter and second quarter and a weaker fourth quarter.
Typically, the fourth quarter is going to be the strongest capital equipment quarter of the year. PASCAL is a key part of our investment going forward and developing that platform and consolidating with the IRIDEX product. So as we look into '22 and beyond, we will consolidate it in a single platform with a full feature set.
And we think that will be very strong competitively. The result is that it will shift revenue from potentially our IRIDEX or older IRIDEX TxCell scanning laser platform onto the PASCAL platform, for example. We'll talk about the net number of sales or net revenue of sales as opposed to continuing to break out the IRIDEX and the PASCAL product line.
But no, we're very pleased with the performance of the business and continuation of strong selling by Topcon in their regions around the world.
Okay. Great. And shifting to the income statement. R&D, little higher in Q4 than in Q3, which was higher than Q2 and Q1. Should we expect R&D to continue at that sort of fourth quarter level going forward? Is that a kind of deliberate focus to use KOLs more to get involved? Or do you think it might pull back a little from that level going forward?
No. No, actually, you're actually pretty right. Q4 is a kind of a more representative quarter where we expect to be for 2022, not just for R&D, but I think that's more of a representative of other line items in the OpEx as well. So the OpEx of $8.4 million is what you expect 2022 to be going forward.
Okay. Great. And maybe keeping it right there with you. That mid-40 gross margin, do you think we'll see that climb throughout the year? Or do you think you're going to get there right away and kind of more of a steady number?
The mid-40s is going to be incremental over the course of the year. And a lot is dependent on revenue. So more revenue in the later - in the Q4 means more overhead absorption so higher gross margin. So - but it will be incremental. The 40 - the mid-40s is a kind of normalized number over the course of the year, and that's how we should be thinking about it. So earlier in the period, it should be less than going to be over 45 averaging to approximately 45 for the quarter - for the year.
At this time, I'd like to turn the call back over to David Bruce for closing remarks. Sir?
Okay. Thank you, operator, and thank you all for joining the call. We look forward to reporting strong performance next time. Thanks again.
This concludes today's conference call. Thank you for participating. You may now disconnect.