Conformis Inc (CFMS) 2020 Q1 法說會逐字稿

Good afternoon. My name is Kevin, and I'll be your conference operator today. At this time, I'd like to welcome everyone to the Conformis First Quarter 2020 Earnings Conference Call. (Operator Instructions)

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 the federal securities laws, 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 fact should be considered forward-looking statements. All forward-looking statements, including without limitation statements about Conformis' strategy, future operations and expectations, the anticipated impact of the novel coronavirus pandemic and the actions Conformis is taking and planning in response, whether or when restrictions or -- on elective surgeries will be relaxed and demand for procedures will increase, future financial position and results, gross margin, product margin, operating trends, financial guidance, market growth, total revenue mix by product and geography, the anticipated timing of Conformis product launches, the potential impact and advantages of using personalized 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 is accurate only as of the live broadcast today, May 11, 2020.

I would now turn the call over to Mark Augusti, Conformis President and Chief Executive Officer. Mark?

Thank you, operator. And welcome, everyone, to Conformis' First Quarter 2020 Earnings Conference Call. With me on the call today is our CFO, Bob Howe. During the call, we will share prepared remarks on a variety of topics, including our first quarter financial and operating performance as well as comments related to the COVID-19 pandemic's impact on our operations. Following the prepared remarks, we look forward to answering your questions.

On March 23, 2020, we withdrew our full year growth targets and noted that it was due to the COVID-19 pandemic and its impact on orthopedic scheduled surgeries. This was disappointing because 2020 had gotten off to a solid start. We note in our release that while these estimates are no longer accurate or reliable as of March 12, 2020, our best leading estimates had indicated that for Q1, our global product revenue could have been approximately 3% lower than revenue in Q1 2019, an improvement from the 10% decline in the prior quarter. Additionally, leading indicators for Q2 2020 had projected a return to positive growth, with global product revenue growth estimated to increase 8% versus prior year.

And we put forth these numbers again to place the first quarter actual performance in context of the pandemic impact. Our first quarter revenue decline of around 20% was clearly due to the drop-off in elective surgeries in March of this year. Prior to the March reduction in scheduled orthopedic procedures, we had been experiencing an uptick in our order rate. This was, I believe, due to 2 positive trends: positive feedback and uptake in our new hip franchise but even more due to the positive feedback and interest in our new Identity knee launch. The Identity product team delivered a great product concept and rollout. The timing of this has been unfortunate.

This pandemic and the response by national and local governments across the globe is unprecedented in our lifetimes. I'm so proud of the Conformis team and the way our colleagues have responded. From a leadership perspective, we have sought to protect our employees and their families, protect our production capability, protect and support our patients and customers and communicate, communicate, communicate. To that end, we have allowed those employees who are able to do so to work remotely. For our production employees who cannot work remotely, we have, among other actions, implemented enhanced cleaning, encouraged employees to practice social distancing in common areas, erected physical barriers where possible and limited visitors. In addition, we have continued to monitor our supply channel, and they're not currently aware of any potential concerns.

As we reported on March 23, however, we were forced to make the difficult decision to furlough roughly 1/3 of our workforce and substantially all of our temporary workforce. Subsequent to this and as a result of great efforts by our finance team and outside advisers, on April 17, we were able to secure a Paycheck Protection Program, a.k.a. PPP, loan of approximately $4.7 million. This government relief allowed us to bring back almost all of our furloughed employees.

I'm sure there will be many questions about the ramp-up of scheduled surgery. While we are pleased to see the beginnings of the resumption of scheduled surgery, we will not be providing any new guidance for 2020 due to the continuing uncertainty in the ramp-up as a result of different policies across multiple states and counties and, of course, concern about possible false spikes in COVID-19 infections that would potentially lead to renewed surgical interruption.

We can relate that our April revenue decline was approximately 90% to 95% over prior year. I would like to note that Conformis does not have any revision, oncology or trauma orthopedic products that would have been acute or considered essential surgery. As such, among orthopedic companies, we are likely one of the most heavily weighted towards pure primary elective total joint replacement. Happily, as indicated earlier, I can say that we have started to see the uptick in both orders and surgeries the last week of April and this first week in May.

Before I provide further comment and thoughts, which I will do later on, about the remainder of the year, let me now turn the call over to Bob for a more detailed financial review of Q1. Bob?

Thank you, Mark. And thank you, everyone, for joining us.

Before I begin the financial review, I want to share a change in the level of detail we'll be reporting on our revenue results. Going forward, we will be recording revenue at the total knee and hip level. While we will continue to provide business updates on new products, we will no longer be providing chronic-level revenue details. As you know, with the launch of our hip product, we are now no longer just a knee company. And as such, we believe it is appropriate to migrate our reporting to align with these 2 major product categories. And it will also be consistent with how our major competitors report their orthopedic results.

I'll now move on to the financial review. We reported first quarter revenue of $16.5 million, representing a decrease of 20% or $4.2 million year-over-year on a reported basis. Excluding the negative impact of changes in foreign currency exchange rate of $32,000, revenue decreased 20% on a constant currency basis. Revenue in the first quarter of 2020 and 2019 includes royalty revenue of $185,000 and $175,000, respectively, related to patent license agreements.

First quarter product revenue was $16.3 million, representing a decrease of $4.2 million or 20% year-over-year on a reported and constant currency basis. Sales of our new products declined $4.1 million to $15.8 million or 21% year-over-year on a reported and constant currency basis. Sales of our Conformis Hip System were $441,000, a decrease of 10% year-over-year on both a reported and constant currency basis.

U.S. product revenue decreased $3.8 million to $13.8 million or 21% year-over-year. U.S. sales of our knee product declined $3.7 million to $13.4 million or 22% year-over-year. First quarter U.S. product revenue represented 85% of total product revenue compared to 86% for the same quarter last year.

Rest of World product revenue was $2.5 million, a decrease of $406,000 or 14% year-over-year on a reported basis and 13% on a constant currency basis. Product sales in new countries as well as growth in the U.K. helped partially offset the negative impact of the COVID-19 global pandemic.

With that, I'll now move to a review of results across the rest of the P&L. First quarter gross margin was 44% of revenue compared to 48% of revenue for the same quarter last year, a 380 basis point decrease. The decrease in gross margin was driven primarily by lower volumes and an increase in inventory reserves for unused product. The increase in reserves factors in the higher-than-normal delayed surgery as a result of the COVID-19 pandemic.

Total operating expenses decreased $1.1 million to $15.3 million or 7% year-over-year. This decrease was driven by a 20% reduction in our sales and marketing expenses primarily as a result of lower variable costs due to the decrease in revenue.

Net loss was $9.4 million or $0.14 per share compared to net loss of $7.6 million or $0.12 per share for the same period last year. Net loss per share calculations assume weighted average shares outstanding of 67.3 million shares for the first quarter of 2020 compared to 62.8 million shares for the same period last year. Net loss in the first quarter included foreign currency exchange expense of $714,000 compared to foreign currency expense of $653,000 in the same period last year.

We had cash and cash equivalents totaling $21.5 million as of March 31, 2020, compared to $26.4 million as of December 31, 2019.

Lastly, I want to close with a brief discussion on liquidity. As a result of the COVID-19's impact on elective procedures, we do not expect to satisfy the trailing 6 months revenue covenant at the end of June 2020, which may be an event of default under the 2019 secured loan agreement with Innovatus and East West Bank unless the parties agree to a new financial plan within 60 days after June 30, 2020. We have already begun discussions with Innovatus about the new plan. And although we are still early in the stages of discussions, we believe we will be able to work with Innovatus and successfully resolve any issues that may arise. Under that assumption and with the $4.7 million PPP loan and a combination of Stryker milestone payments and other non-dilutive financing, we believe we can finance the company into Q2 2021. We will, of course, continue to review expenses closely and look for opportunities to reduce discretionary spending.

With that, let me turn the call back over to Mark to add additional color.

Thanks, Bob. While this global pandemic has been a challenge for people all over the world, I want to acknowledge and thank the incredible employees of Conformis. Through their efforts, we've continued to move the company forward and are ready to support the resumption of scheduled hip and knee replacement. Some of the specific actions we have undertaken are as follows. During the selling of products, we have proactively offered numerous virtual medical education sessions for our surgeons both domestically and internationally. We've held a number of professional education events for our sales agents. In addition, as noted in our March 23 release, we maintained our development activities and, as a result, have continued to progress our new product development programs. This includes activities related to our Stryker partnership.

While on the subject of our work with Stryker, let me pause to provide a little more color on this partnership. As we all know, there's a significant shift in total knee arthroplasty to lower-cost site-of-care facilities such as hospital outpatient centers and ambulatory care centers. Of the 800,000 or so primary knees performed annually in the United States, some reports indicate that more than 50% might be performed on an outpatient basis in the next 3 to 5 years. We think the COVID-19 pandemic will accelerate the shift to ASC. In order to capitalize on this trend, Conformis and Stryker entered into a strategic collaboration whereby Conformis business is designing and supplying PSI guides to create a knee-in-a-box solution for their market-leading Triathlon Total Knee System. We expect the Triathlon knee in a box to be available in mid-2021. But of course, actual commercial availability will be up to Stryker.

Continuing on, other actions we have undertaken include our operations team has continued to produce implants for substantially all of the orders we had in-house before the pause in elective surgeries. To date, approximately 43% of those have already been implanted or scheduled to be implanted. We currently expect to see almost all of the remaining cases, 90% or more, to be rescheduled.

Perhaps most importantly, we continued to receive Identity instrument parts and were able to build over 60 new sets during this pause. We now have more than 100 Identity sets to deploy to the field immediately. And we anticipate to achieve our goal of 500 new Identity sets being available before year-end. While we cannot predict exactly how revenue will ramp during the resumption of orthopedic procedures, we are prepared to serve our customers and patients as we have in the past. We have seen our leading indicators climb since the week ending on April 11, which appears to have been our low point.

As we model various ramp scenarios, here's a list of some of the current working assumptions we have. The remainder of Q2 and most of Q3 will be difficult to predict but with a bumpy but clear upward trend in the resumption of joint replacement procedures. Elective surgeries will normalize in Q4 at 90% or more across the United States assuming there's no second pause in elective surgeries due to an uptick of COVID-19 infection rates. Elective surgeries will come back quicker in the U.S. than in Europe. We think, as I've said, the trend towards ASC surgery will accelerate, which is a good sign for Conformis given our efficient inventory model. We also think that reps will still be required for procedure support even though credentialing, testing and personal protection equipment requirements will become more rigorous. As Bob indicated, we will continue to manage our business closely through this difficult time and adjust accordingly as circumstances dictate. Importantly, in all scenarios we are looking at, we believe we'll be ready to support our customers across all geographies as they resume their surgical schedule.

Once again, I would like to acknowledge and thank all the Conformis employees, consultants, advisers and customers that continue to soldier on with us through this challenging time. All of your efforts and goodwill are greatly appreciated. Thank you.

With that, I'll turn the call back to the operator, and Bob and I are happy to take questions.

(Operator Instructions) Our first question comes from Josh Jennings with Cowen.

Mark, I was hoping to just touch on the new product launches, primarily the Identity knee and the hip. How would you have us think about those launches in the setting of this COVID crisis? I mean as you see a recovery, will you be marketing those 2 platforms as aggressively as you would have been pre-COVID? And how should we think about the ramp of those 2 products?

Yes. Absolutely, Josh. Like I said, we had good headway going into this, going certainly into March on both those franchises. We continue to build hip inventory. So we're going to be able to go after that new franchise as aggressively as we anticipated. We actually did a number of virtual teach-ins with new surgeons. We've gotten new surgeons interested in the hip, so we're excited about that. And the Identity was doing well, as I mentioned. And the fact that we're able to continue to build sets, I think, is a big deal because now we had pent-up demand anyway, and now we're going to be able to satisfy that demand with new sets. And we're seeing that -- as I indicated, we're seeing an uptick in our early indicators in orders for Identity and for hip.

(inaudible)

We're getting some feedback, Josh. I don't know if that's your phone or something on the call.

(technical difficulty)

Josh, I would say, if you could just queue back up for your question -- to finish your questions out?

Thanks. Thanks, operator.

You're welcome. Our next question comes from Steven Lichtman with Oppenheimer.

Mark, you mentioned the number 90% a couple of times. I just want to clarify. So I think you were saying sort of your going assumption right now is that 4Q would be at sort of 90%, so in other words, like 10% down from last year. Is that right? And then you also mentioned 90% of deferred procedures will come back. So if you can talk a little bit about where you're getting the -- sort of that latter assumption as well as that from your talks with -- talks in the field or anything else, that would be helpful.

Right. Not to confuse, so you're right, I mentioned 90% twice, one negatively and one positively. So don't confuse them. And just to be clear, on the negative one, it was really only for the month of April, which we provided color on. And as I said, we're already seeing upticks here in the early part of May. As far as Q4, we're -- obviously, we're modeling a lot of different scenarios. And at the end of the day, you kind of have to take a view. But based on the surgeons I've talked to, based on our field checks -- also, you have to remember, we're a little more sort of Northeast and mid-Atlantic heavy, if you will, on our business as a smaller market share player, Steve. But I kind of feel like our best modeling suggests we're going to be sort of 90% to 100% of normal rate as a base case in Q4. I think there's a scenario that says it could be higher. Okay, with pent-up demand, there's obviously scenarios that say, with maybe some of the restrictions in capacity, it could be challenging to do that. But I think that Q4 will be sort of base case in that 90% to 100% of normalized demand.

And then what about the procedures that are being deferred today, is that also sort of you think that almost 90% or so of those could ultimately get done?

Yes. We think they're going to get done. And so we believe that they're going to pepper in over the coming months. I've seen -- this is probably the biggest debate, right, people monitoring, Steve, about are certain patients going to go away, are they not going to actually want to get their hip and knee done whatsoever. I believe OA is a disease that progresses. I believe eventually, they'll get done. So what we're seeing from a Conformis perspective is a lot of interest in scheduling those patients, a lot of interest in getting them back on the surgical calendar and getting them up and ready to go quickly.

And so as we indicated, of the cases, we felt 43% already have been completed at surgery dates. So we expect another 47% to 50% to get in, so we'll -- of the stuff we've built, we expect we'll do at least 90% of those, so of the inventory we've built. So yes, there's the 90% number again. But it's really -- we don't expect -- I've seen numbers of like 20% dropout. And I wanted to put our stake in the ground. I don't think we're going to -- again, I could be wrong, but I don't think we're going to see that. I think in the Conformis world, we're going to see at most a 10% dropout.

Okay. And then just lastly, Mark, on your ASC comments, obviously, there's been a lot of talk about a potential acceleration in that shift and their ability to get up and running quicker. Are you seeing that yet? Or is it just too early? I mean your business model does lend itself there more. I mean are you seeing that -- I know it's kind of in the theory, but are you seeing that in actuality and any signs of that?

So I would say we're seeing the discussion. And yes, I can certainly point off to 1 or 2 customers that have absolutely indicated they're starting in their ASCs first, and we've seen some of those scheduled cases move to the ASC or to the outpatient. And I've seen physicians talk about they want to do the healthier, younger patients first, if you will, younger relatively for OA patients. And they -- and Steve, they want to, in some cases, move them to the ASC or to the outpatient center.

I will tell you that our discussions have drastically picked up. Our contracts, our discussion with customers around that, we are seeing a market increase in those discussions and that ability. And that's part of what is making the modeling challenging. I think if you talk to the historic players, they think there's not enough bandwidth, there's not enough capacity in the ASC center. And I think that's true if you're stuck in the old mindset. But Conformis customers know they can do more capacity with the Conformis model. And I think that's why we're seeing more interesting discussion.

So the question for us is will those discussions translate into actual cases for us and the ramp-up for that. That's certainly, again, one of the models that we looked at, and that certainly would be in our upside scenario.

Our next question comes from Robbie Marcus from JPMorgan.

This is actually Lilia on for Robbie. Given the current economic environment, how are you thinking about the impact of economic downturn on the business? And to what extent is this contemplated in your expectation for getting back to 90% in the fourth quarter?

Yes. I think that's a great question. That's -- we look at a bunch of demand drivers, and then we look at things that would be sort of demand breaks, if you will. And it's -- this part about unemployment and the concern around that has come up a lot recently about will people have insurance coverage or not, will the demand be there, they won't take off work. And I think that's a fair point. Really, I think it's a fair point. But I look at it and say, at least half the demand is Medicare, so I think that's going to be okay. Then you look at the unemployment in commercial. Then you look at will they have insurance coverage or not insurance, what will that be like, and will they get it done. And so it's really a tough one.

But I sort of believe that there's enough other positive things driving it, that it won't be that much of a drag. I would say I'm actually probably a little more worried about people just feeling like they want to get back to -- the hospital is going to be safe. But I'm really starting to see a lot of the communications from hospitals. I mean people are adjusting. I've seen a lot of prerecorded video messages and calls with surgeons about how they're reassuring their patients about their journey to have the procedure and the testing in COVID-free environments. Again, I think there's another reason why it'll point towards outpatient and ASC because they can control things better there.

So while it's a concern, that's one of the reasons why I'm -- I kind of said the 90% to 100%. I think there's a scenario where it could be more than 100% if unemployment is better than anticipated in the fourth quarter.

Great. And one quick follow-up. You implemented fairly aggressive cost-cutting initiatives. How do you think these steps could impact your ability to ramp up and be competitive in the second half of the year and in 2021?

Well, I'd like to say that due to the loan that we received, and I know we were fortunate to be able to get that as a small company, it's actually not as bad as we probably would have had to get to because we're able to bring employees back and then work down -- work on not only our backlog but also continue to -- so let's get a little detailed. But as we had said on our March 23 announcement, we continued on our manufacturing development from an R&D standpoint, but many of our programs now are moving to what we call manufacturing validation and development. We needed operational employee support to do those. So being able to bring some of those people back to work on a couple of our programs, like for instance, our cementless and whatnot, where it's a nice juncture. So that allowed us to keep those schedules moving forward. So I feel good about that.

I think there will be some cost-cutting around travel. And I think there's going to be less in-person meetings. So those -- I think they're going to be well tolerated and understood because of the nature of the environment actually. But we'll -- as we said, we're going to look at all things as we see the different scenarios play out, and we'll adjust then our expenses and support activities around those scenarios as they happen.

(Operator Instructions) And I'm not showing any further questions at this time. I'd like to turn the call back over to our host.

Okay. All right. Well, thank you. Appreciate it, operator. And thank you, everybody.

Ladies and gentlemen, this does conclude today's presentation. You may now disconnect. And have a wonderful day.