Glaukos Corp (GKOS) 2016 Q3 法說會逐字稿

Welcome to Glaukos Corporation's third-quarter 2016 financial results conference call. A copy of the Company's press release issued after the market closed today is available at www.Glaukos.com.

(Operator Instructions)

This call is being recorded. An archived replay will be available online in the investor section at www.Glaukos.com.

I will now turn the call over to Sheree Aronson, Vice President of Investor Relations.

Hello, everyone. Joining me today are President and CEO Tom Burns; Chief Financial Officer Rich Harrison; and Chief Commercial Officer Chris Calcaterra. Following prepared remarks by Tom and Rich, all three gentlemen will take your questions.

Before we begin, let me remind you that all statements other than statements of historical fact made on this call that address activities, events or developments we expect, believe, or anticipate will or may occur in the future, are forward-looking statements. These include statements about our plans, objectives, strategies and prospects regarding, among other things, our iStent product, our pipeline technology, our US and international commercialization efforts, the efficacy of our current and future products. And our competitive market position, financial condition and results of operations.

These statements are based on current expectations about future events affecting us, and are subject to the risks, uncertainties and factors relating to our operations and business environment, all of which are difficult to predict, and many of which are beyond our control. Therefore, they may cause our actual results to differ materially from those expressed or implied by forward-looking statements.

Please review today's press release and our recent SEC filings for more information about these risk factors. You'll find these documents in the investor section of our website at www.Glaukos.com.

With that, I'll turn the call over to President and CEO Tom Burns. Tom?

Thank you, Sheree, and good afternoon to everybody. Thanks for joining us today. Our third-quarter 2016 results reveal another quarter of really solid performance, with third-quarter net sales of $29.6 million, up $10.6 million or 56% versus the same period one year ago. So we've now delivered 13 consecutive quarters of at least 40% year-over-year sales growth. And in light of these results, we are raising our 2016 full-year net sales guidance to a range of $109 million to $111 million.

Our third-quarter results show that demand for iStent is robust and growing, fueled by a burgeoning number of trained surgeons and a heightened emphasis on the part of these surgeons to recommend iStent to their patients. We believe these surgeons are motivated by the abundance of real-world clinical data that continues to confirm not only iStent's exceptional safety record, but also its ability to consistently deliver sustained reductions in IOP.

We view the strong iStent adoption trends as a tangible indication of surgeons' interest in the longer-term potential of micro-invasive glaucoma surgery, or MIGS. We found the MIGS category to change the way glaucoma is treated and disrupt the $5 billion global glaucoma market.

So to accomplish this, our team is acutely focused on four core growth objectives. Which are, one, leveraging our seasoned sales team and clinical evidence to drive US iStent utilization in combination with cataract surgery. Two, fortifying our MIGS leadership position and expanding the market with next-generation iStent flow devises for combination cataract and standalone procedures. Three, advancing our iDose injectable drug delivery platform. And four, entering or expanding our presence in high-value international markets.

So let me touch briefly on progress against each of these objectives, beginning with driving US iStent utilization. So throughout the quarter we continued to grow the ranks of surgeons trained on the iStent procedure, which is performed in conjunction with cataract surgery. We finished the third quarter of 2016 with nearly 2,200 iStent-trained surgeons, representing a 38% increase over the roughly 1,600 trained surgeons at the end of 2015, and with an emphasis on high-volume cataract practices.

Importantly, we are also experiencing similar year-over-year growth rates in the numbers of surgeons currently working their way through the iStent training process. These trends make clear to us that surgeon interest in iStent is higher than ever, and that our team is making good progress towards our goal to train the approximately 5,500 surgeons who perform the vast majority of cataract surgeries in the United States. Trained surgeons are key to driving iStent purchasing demand among our actual customers -- the ASC and hospital outpatient departments where procedures are performed.

In the third quarter, we saw solid growth in both total number of facilities purchasing iStent and the average number of iStent units purchased per facility. During the third quarter, we also implemented our plan to establish a specialty sales group that will focus exclusively on introducing the iStent procedure into the US teaching hospitals. This group's efforts to build a presence in teaching hospitals is vital to our longer-term goal to make MIGS the standard of care for glaucoma, and will complement our MIGS residence and fellowship courses for young surgeons entering the practice of ophthalmology.

During quarter, we also continued to execute a range of initiatives aimed at increasing awareness among referring optometrists, prospective patients and those surgeons still on the sidelines with respect to MIGS. For example, at the American Academy of Ophthalmology meeting in Chicago last month, Glaukos hosted an educational MIGS symposium for surgeons considering iStent. Approximately 250 practitioners attended this symposium, which was led by some of the industry's most recognized anterior segment surgeons. The session provided attendees fresh insights on the latest clinical data, insertion tools and techniques, practice integration approaches, and the comprehensive reimbursement available for iStent through Medicare and private payers.

Reimbursement is, of course, a fundamental component to achieving widespread iStent utilization in the United States. We dedicate considerable time and resources to ensure that the reimbursement is broadly available and commensurate iStent's value to patients and surgeons.

Since our last quarterly earnings call, there have been several favorable developments. By now, many of you have seen that November 1 publication of the CMS final rule, which establishes the 2017 payment amounts for facilities for Medicare-reimbursed products and procedures. For 2017, 0191T CPT code that describes the insertion of MIGS device into the trabecular meshwork, rose $744 to $25,038 for procedures performed in ambulatory surgery centers for ASCs.

This change means that when surgeons implant their iStent in combination with cataract surgery in the ASC, the facility where the procedure is performed will be reimbursed 100% of the 0191T code, and 50% of the 66984 cataract code, or 50% of $977. On a net basis, ASCs will receive an average reimbursement in 2017 of approximately $3,027 for combined cataract iStent procedures, which is about $745, or 33% higher than the 2016 reimbursement. In light of this change, we are evaluating upward adjustments for both our ASC customer in reimbursement and device reimbursement.

So this change came about because 0191T code qualified for a device-intensive designation. CMS made this adjustment as part of a broader change to device-intensive calculation methodology. Under the new methodology, which is based on historical hospital claims data, CPT codes were eligible for an incremental reimbursement if the device portion of the ambulatory payment classification, or APC, was more than 40% of the total APC payment. In other words, if the cost of the device represented more than 40% of the total reimbursement to the facility.

Also included in the CMS final rule were 2017 reimbursement rates for iStent combo cataract procedures performed in hospital outpatient departments. These rates rose about 1% to $3,417. Overall, we are very pleased with the 2017 facility reimbursement levels, which we believe are an acknowledgment of iStent's value and benefit to the healthcare system.

Keep in mind that these Medicare facility fee payments are separate from the professional fee payments surgeons receive for performing the iStent procedure. For Category III codes, such as our 0191T, the rates for surgeon reimbursements are set by individual Medicare administrative contractors -- MACs -- where CMS sets facility payments. On average, we believe surgeons receive approximately $500 more for implanting iStent in combination with cataract surgery than they do for performing cataract surgery alone, or only.

Our reimbursement team has also continued to pursue expansion of US private payer coverage for iStent. During the quarter, we were successful in securing iStent coverage from Anthem, one of Americas largest health insurance plans. Just a few days ago, we received word that TRICARE, which provides healthcare coverage to US active and retired military and their families, has amended their policies to provide reimbursement for the iStent.

With these additions, Glaukos has secured reimbursement coverage for the iStent procedure from all national commercial, healthcare insurance providers. This expansive coverage represents years of painstaking efforts, and is due in large part to the strong and convincing body of published clinical iStent data.

To date, iStent technologies have been the subject of 55 articles published in clinical journals -- a remarkable number for a Company of our size. Several recent studies, in particular, have garnered significant attention, as they have further validated the sustained IOP-lowering capability of a single iStent in combination with cataract surgery in everyday clinical use. These include data published by Dr. Tobias Neuhann showing that 39 eyes receiving iStent in combination with cataract surgery achieved mean IOP -- baseline IOPs -- of 14.9 millimeters of mercury three years postoperatively while also experiencing an 86% reduction in the mean number of topical glaucoma medications used.

In addition, Dr. Mark Gallardo just published his results of 134 predominantly Hispanic eyes receiving a combo cataract-iStent procedures. He showed mean IOP of 12.9 millimeters of mercury, and a 61% decrease in mean medication [per] one year postoperatively. These results are especially noteworthy because people of Hispanic decent are at higher risk for developing glaucoma than the general population.

In another recently published case series, Dr. John Bernal provided a data readout of 350 patients who received iStent in combination with cataract surgery. In 107 eyes followed through two years, Dr. Bernal's published data revealed a 22% reduction in mean IOP through a postoperative baseline of 15.2 millimeters of mercury, and a 56% reduction in mean glaucoma medications.

Our iStent pipeline technologies are designed to build upon the excellent safety and efficacy profile of the first-generation iStent, while providing surgeons the ability to manage even lower IOP targets and address the needs of more patients. We're pursuing FDA approval for two versions of the iStent inject, which rely on the same fluidic method of action as the original iStent, but deploys two stents into separate trabecular meshwork locations with a straightforward click-and-release motion. Trial for the first version, designed for use in conjunction with cataract surgery, is fully enrolled, and the two-year follow-up period will be completed in mid-2017.

Just this week, we passed a major milestone in the trial for the second version of the iStent inject, which makes its own self-ceiling needle penetration for use as an injectable standalone procedure in phakic and pseudo-phakic eyes. We've completed enrollment of the necessary 75 patients in the initial phase of the trial to evaluate safety. We plan to submit the data to the FDA in the first half of 2017, and hope to move forward with a full pivotal trial of approximately 500 patients soon thereafter. Progress on the standalone version of iStent inject is important, because it will target the needs of a sizeable percentage of the roughly 3.6 million Americans who are affected by the open-angle glaucoma, but aren't undergoing cataract surgery.

Published clinical results for iStent inject make a compelling case for its potential to address these needs and to further influence the glaucoma treatment algorithm. In an article authored by Dr. Richard Lindstrom and just published in Advances in Therapy, 57 phakic eyes with open-angle glaucoma and unmedicated intraocular pressure of 22 millimeters of mercury to 38 millimeters of mercury, underwent implantation of iStent inject in a standalone procedure.

At one year postoperatively, all 57 subjects achieved IOPs of less than or equal to 18 millimeters of mercury without medications, and nearly 70% achieved intraocular pressures of less than or equal to 15 millimeters of mercury without medications. At one year, mean unmedicated IOP decreased by 42% to 14.2 millimeters of mercury, and this reduction was maintained throughout 18 months. Keep in mind, these iStent inject results were attained without the IOP-lowering benefit of concomitant cataract surgery.

In the most basic terms, iStent and iStent inject restores the eye's natural drainage system by creating a patent opening that allows aqueous humor to flow through the trabecular meshwork into Schlemm's canal. In healthy eyes, this route, known as the conventional pathway, is responsible for roughly 70% of fluid outflow. But in eyes with glaucoma, it is the greatest site of resistance to outflow, and the primary cause of elevated intraocular pressure. Reducing this resist is the physiologic way to treat glaucoma.

A second pathway for fluid outflow is through the suprachoroidal space, also known as the unconventional pathway. While reductions in intraocular pressure can be achieved by inserting a stent into this space, published clinical data from separate pivotal trials suggest that the IOP-lowering efficacy, in conjunction with cataract surgery, is approximately the same as a single trabecular stent in combination with cataract surgery. Moreover, much like its predicate psycho-dialysis plate procedure, placement of a stent into the vascular suprachoroidal space can lead to high incidence of hypotony, hythema, iritis, corneal edema and other adverse events that are reported in studies, or than are reported in studies with trabecular stenting.

These are important distinctions, especially for a comprehensive cataract surgeon who may be less accustomed or willing to manage these types of postoperative complications. In our estimation, a view continues to gain traction among surgeons that the highest efficacy and lowest risk is achieved by restoring conventional outflow first with trabecular bypass stents and that a suprachoroidal stent may be appropriate adjutant therapy for patients with more progressive glaucoma that need to achieve additional intraocular pressure reduction.

To provide surgeons a full suite of MIGS technologies to address such cases, we are pursuing FDA approval of the iStent Supra, which accesses this unconventional pathway. We are currently in the late stages of enrollment in the pivotal trial. We anticipate that a competing suprachoroidal device, the [side] pass, will fully enter the market sometime in early 2017. As I said in the call last quarter, we are confident in our competitive position, we're well-prepared, and we're ready for other players to enter the marketplace.

Touching briefly on iDose, our study investigators continue to enroll patients in the Phase 2b IND clinical trial, which began in earnest early in the second quarter of 2016. Our best case estimate is for data readout sometime in 2017. iDose is our novel micro-scale implant designed to be injected through a corneal incision and secured in the anterior chamber, where it eludes therapeutic levels of a special formulation of Travoprost for extended periods of time. When depleted, the iDose can be removed and replaced, providing potentially years of continuous IOP-lowering therapy.

We believe iDose, if ultimately FDA-approved, has the potential to overcome the ubiquitous and rampant non-compliance associated with topical medication use, and alleviate the side effects and ocular surface damage these medications can cause. Once an approved iDose enters the market, we envision a glaucoma treatment algorithm where surgeons could use iDose alone or in combination with iStent flow devises to manage intraocular pressure targets, based on each patient's individual disease stage and progression.

I'll turn now to our international expansion initiatives, where we've made significant strides in recent months. First, our existing international direct sales organizations continue to drive adoption of our iStent platform technologies in Germany, Australia and Canada. These regions were responsible for the bulk of our 189% year-over-year growth in our international net sales in the third quarter of 2016.

In Germany and Australia, we are adding more sales reps to meet growing demand. We also recently hired direct sales reps in France, Ireland, the Netherlands, Spain, Sweden, the United Kingdom and Brazil. And we're implementing a hybrid direct distributer model in Columbia, Argentina and Mexico. Onboarding of these new reps is now in full swing.

Since the end of the second-quarter 2016, we've more than doubled the size of our international salesforce, which currently stands at approximately 55 professionals. Our direct sales team in Japan is also gearing up for a commercial launch of the iStent in that country, where we secured regulatory approval earlier this year and have been conducting surgeon awareness, building and training in anticipation of a decision by Japanese officials regarding reimbursement. Which we continue to expect by year-end.

Overall, interest in iStent and MIGS within the international ophthalmic community continues to grow. This was apparent at the European Society of Cataract and Refractive Surgeons meeting held in Copenhagen late in the third quarter. There were numerous presentations of MIGS data, including 12 surgeon presentations and posters featuring Glaukos technologies -- far more than any other MIGS player.

So with that, I'll pass the call off to Rich for our summary of our third-quarter financial performance. Rich?

Thanks, Tom. Good afternoon, everybody. As Tom reported earlier, our net sales rose 56% to $29.6 million, versus $19 million in the same year-ago quarter. Growth was driven primarily by strong US sales, which provided 84% of our increase versus the year-ago quarter. US sales represented 91% of total net sales in the third quarter of 2016, compared to 95% in the year-ago quarter, this reflects the continuing progress we're making in expanding our international sales and market penetration.

Increased unit volume worldwide was primarily responsible for the rise in third-quarter net sales, driven by an increase in the number of trained surgeons and higher overall iStent utilization. For the third quarter of 2016, our gross margin was 87% of sales, versus 83% of sales in the third quarter of 2015. The increase reflects higher sales relative to our fixed manufacturing costs, and intangible asset amortization, as well as the suspension for 2016 and 2017 of the medical device excise tax, which was included in our 2015 cost of sales.

Turning now to operating expenses, they rose 42% to $24.7 million in the third quarter of 2016, versus $17.4 million in the year-ago quarter. Our operating expenses continued to increase, as we had foreign subsidiaries and domestic sales marketing and administrative personnel, and also increased our investment in worldwide marketing programs. So overall, we finished the third quarter of 2016 with net income of $1.2 million or $0.03 per diluted share, compared to a net loss of $2.1 million or a loss of $0.07 per diluted share in the third quarter of 2015.

I'd like to remind everyone, while our exceptional top-line performance led to profitability in the third quarter this year, it's important to remind you that we may not remain profitable, as our focus remains expanding the market penetration of iStent globally, and rapidly progressing our deep and diverse pipeline. On the balance sheet, at the end of the third quarter of 2016, our combined cash, cash equivalents and short-term investments stood at $93.6 million, compared to $91.1 million at the end of the year 2015. And lastly, just to repeat, as Tom indicated, we have revised our 2016 net sales guidance to a range of $109 million to $111 million, this implies a 2016 growth rate ranging from 52% to 55%.

I'd now like to turn the call back to Tom.

All right, thanks, Rich. To conclude our prepared remarks, we're pleased to deliver another quarter of solid growth to shareholders. Our results demonstrate the momentum that continues to build behind our flagship iStent technology. We believe that this strength is a reflection of the reliable and sustained IOP-lowering performance iStent provides glaucoma patients and the surgeons who care for them.

Our growing team continues to push our injectable micro-scale pipeline forward and expand our global footprint. We see tremendous opportunity for Glaukos to redefine the $5 billion global glaucoma market and truly transform glaucoma therapy.

With that, I'll open it up to questions, operator.

(Operator Instructions)

Your first question comes from the line of Mike Weinstein from JPMorgan.

Hi, this is Robbie in for Mike. Congrats on the great quarter.

Thanks, Robbie.

Maybe just to start out here, this is another great quarter in terms of growth in the US, on top of a pretty difficult comp. So maybe you could talk about some of the trends you're seeing in the market? Does it have anything to do with the great data presented at ASCRS in early May?

What's exactly driving the growth, and where is the incremental usage coming from? I know you're adding new doctors, up 48% year over year. But is it also the increased usage at each practice? Maybe just a little more color would be helpful.

I'd be happy to. Chris, will you take this one?

Sure. Hey, Robbie. I would say, yes, the data that was shown in New Orleans at the ASCRS, as well as data that was shown in Chicago at the AEO, has certainly helped stimulate the growth of iStent in the US. We continue to garner new customers. We continue to focus on high-volume cataract surgeons. And we continue to increase adoption within the customer base that we've already established. So all of those things have contributed to yet another solid quarter for sales in the US.

All right. Maybe a follow-up here. You know, the street coming into the quarter had you guys growing about 26% next year. A lot of that, I think, is conservatism around some of your new competitors entering the market. You touched on this in the prepared remarks, but with annualized [rep] productivity over $2 million now, without, I know you're not providing full guidance for next year. But maybe help us think about how we should consider current trends going into next year, and how sustainable are they? Thanks.

Hey, Robbie, this is Rich. I think, as you said, we're not prepared at this point to make any statement on our guidance for 2017. You can expect that from us sometime in early 2017, a date to be determined. But I will say that we don't have any expectation that our growth trends and some of the successes we're having would not continue. They will. We feel very positive about our performance, and expect it to continue to be strong. I'm just not, at this point, we're not at a place where we want to give you any percentage readout.

Okay. Maybe one quick housekeeping question, and then I'll drop off. How many reps did you end the quarter with? Thanks.

52, which is in line with where we were in the second quarter. And those do not include the additional teaching institution reps.

Your next question comes from the line of Bob Hopkins from Bank of America.

Good afternoon. Can you hear me okay?

Hey, Bob. How are you?

Good. Good afternoon. So congrats on another good quarter. Just a couple of things I'd love to touch on. First, I appreciate your commentary on iDose, and getting a look at the data in 2017. Maybe could you just give us a sense as to what needs to happen to make that more mid year versus end of year versus beginning of year. Just want to get a better sense as to when throughout the course of the year we might get to see the data.

Yes, so as we've said along, Bob, we expect to have, best case, we would have a readout of the three-month data in 2017. So we began enrolling the trial in earnest in second quarter of this year, as you know, several months in advance of where we thought we would initially be. So I'm really proud that we were able to get approval and move through the FDA with such rapidity. So that's very positive.

So we are currently enrolling. We'll have to have our last patient out. We'll have the three-month data, we'll unmask it, we'll prepare it and we'll make it available and disclose it. And if I'm going to give you any further guidance, it certainly would be toward the latter part of 2017 as a best case, more than toward the former, or towards the near part of 2017.

Okay, that's great. Thank you for that color. I appreciate it. A couple other little things. Again, congrats on the reimbursement decision being finalized. As we've thought about it in our model, we're thinking that somewhere in the neighborhood of $100 to $150 price increase was a reasonable way to think about it, when you go through all of the puts and takes and the amount of the magnitude of the increase.

I don't know if you're willing to comment at this point if that's a reasonable range to think about in terms of a price increase for 2017, but that's our early consideration in our model. Is there something flawed with that logic at this point?

Yes, I probably wouldn't comment on whether it's flawed or not, or how reasonable it is. What I would tell you is, you see what's in front of us, and there's an incremental opportunity here. And I think the challenge and the opportunity for us is to equitably address our customer, who we clearly want to have take advantage of this pricing adjustment. To understand the competitive landscape, to figure out how we can gain additional traction on the market, and then figure out what will be an appropriate upgrade, as well, for our device reimbursement.

So as you can imagine, we are thoughtfully preparing our approach and when we would execute that next year. And I'll ask you to stay tuned. We can get quite specific when we have that available.

Okay, that's fair. And then just one last one. I think I know the answer to this, as it's probably just a little conservatism on your part. But just to make sure I'll ask the question. On the Q4 guidance, at the midpoint, I think that has played a slight downtick from Q3 levels. Obviously every quarter for quite a long time, you've been increasing. I assume that's just a little conservatism on your part. Or maybe is there something unique about Q4? Just wanted to check. I assume it's just conservatism.

Yes, I mean, I think a little bit of both, Bob. So certainly, we are consistently conservative in our guidance. We have been all along. We're implying a 52% to 55% growth rate for the year. Now for quarter, it implies somewhere in the low- to mid-40% growth range. Which is not surprising, given a year ago, when we looked at our fourth quarter of 2015, we grew by about 44%.

So given that occurrence a year ago, we think it's appropriate to take that into account and be conservative in our guidance for the quarter and the end of the year. But it is certainly in no way any indication of any change in our optimism or our expectations of continued strong performance.

Perfect, thank you.

Your next question comes from the line of Brian Weinstein from William Blair.

Hey, guys, thanks for taking the questions. Tom, just so you know, we are still celebrating back home. So when you get back home, let me know, okay? (laughter)

I was wondering if that would come up.

Oh, yes. This is the last time I bring it up. (laughter) Question for you on OpEx here. You've had a lot of international markets going direct. How should we think about factoring in the incremental expense on a go-forward basis? I assume it's not in the numbers totally for the third quarter. And how do we think about what you guys would ideally like to target, US, OUS, in terms of a revenue split as you get further out, so over the next couple of years?

Okay. Yes, this is Rich. Hi, Brian. And congratulations on the Cubs. Had to throw that in there.

Thank you.

You know, I don't think that I'm going to put any brackets around any percent-increase ranges. I do want to continue to make the point that we have made for quite a few quarters now, that we are investing aggressively in our business. You heard the list of countries that Tom read off that we've hired sales reps in. We're continuing to pursue those, and we may even consider more.

So we will continue to add to our SG&A and continue to see some increases in our R&D spending as well. So watch for that to continue. I think there was a second part to your question?

Yes, longer term, where do you see the US, OUS?

Yes, I'm pretty pleased. We've already gotten to 9% international mix, and I expect that to continue to grow, to some degree, over the next year. We would like to get to, in the next year to two years to three years, maybe get down to an 85% US to 15% international. That's a target. It just remains to be seen how quickly we'll get there, and where our fastest growth trends are coming.

Got it. And Chris, for you. You guys targeted 150 [dock-eds] a quarter. It sounds like you guys are still well -- you're growing faster than that. Do you expect that you're going to be able to continue that? Or as you get competition in the market, do you expect that your current reps are going to have to go back and defend a little bit? Or they may not be able to see as much in terms of the new surgeons coming onboard? How do you think about that?

You know, Brian, I think that is a good assumption. And you are right, we're adding 50 to 60 per month. And we're quite pleased with that. But as we get deeper into it, and with competition, those numbers may change a bit.

Okay. And then last thing for me, and I know people are trying to talk about 2017. What I'm curious about is, the typical seasonality that we see, Q4 typically being a very strong quarter for procedures, Q1 being one where you historically have talked about a little bit of softness. You were able to grow through that last year.

But should we be thinking about typical seasonality? Or is there anything that you guys learned over the last year that may change the way you think about how seasonality impacts your business? Thank you.

I think we continue to expect, at some point, that the underlying seasonality in the IOL business will show up more than it has to date. If we look at seasonality, last year, our results we had in 2015, we had 20% of our sales in Q1. We had 25% and then 27% in Q1 and Q2, and 28% in Q4. So that was last year.

And so that really suggests that there was some seasonality there, but not quite as strong as we might have expected. And then this year, we had a very significant Q1. So I think the jury is still out on seasonality. We know it's going to happen at some point in time, but we're still growing so rapidly, it's really hard to pin seasonality directly to our sales trends.

Thanks for taking the questions.

Thanks, Brian.

Your next question comes from the line of Matthew O'Brien from Piper Jaffray.

Good afternoon, thanks for taking the questions. And I really do doubt that's the last time we will hear about the Cubs from Brian Weinstein. (laughter) As far as, I think I may have misheard this, Rich. But did you say international was about 9% of revenue, so about $2.7 million? Is that right?

Yes.

Is that entirely inject sales, or are there some traditional iStent sales in there?

No it's both.

And is it skewing one way or the other? Are they adopting inject faster than traditional iStent?

It's probably skewing more, as we continue to launch in these new areas, it's starting to trend more to the iStent inject.

Got it, okay. So, and I really don't want to split hairs here, because your performance has been fantastic. But just domestically, the two-year stack continues to come down quarter after quarter. And so my question is, are you getting -- have you picked a lot of the low hanging fruit, from a physician perspective? I know you're about 40% penetrated at this point, of all of the doctors you can go after. But have you picked a lot of low hanging fruit?

Or conversely, with the teaching-hospital focus, do you think that you can sustain this level of two-year stack growth as you access some of these teaching hospitals? Maybe it would be helpful to give a sense for the type of volume that some of these centers hold of the overall market, and what this new push accesses for you guys.

Hey, Matt, it's Chris, and let me try and address this. We're quite pleased with the growth that we continue to show. I think that third quarter was up over, what was it, 56%, versus, I think we're were in the 40%s last year. So we're feeling really good about that.

I want to address the teaching-institution portion of your question. Certainly that opens up additional potential revenue sources for us. But more than anything, I think it's a strategic play to get alignment with the teaching institutions, as well as with the people who are going through those programs. So as they come out into the ophthalmic world, they are familiar with MIGS, and they are ready to start utilizing the product as soon as they get placed into their practice.

I think it's a great situation, where we've created this category and we're able to do such a program, and that MIGS has really come to the forefront of these ophthalmic-teaching institutions. There's certainly going to be revenue associated with these, but I think it's more of a long-term play than a short-term play.

And what I would say, Matt, just to maybe take a little bit of a challenge to the stack-growth presumption you've taken, is, we saw 44% growth fourth quarter last year that rebounded into the mid-50%s and beyond, I think it was 60%-plus the second quarter. So we actually saw some rejuvenation and really some prolific growth subsequent to that fourth quarter of last year. I think the payoff is coming from these high-volume cataract surgeons we continue to bring into the mix that are fueling sustained growth. And we expect that to continue throughout this planning period.

If you look at where we are, we are still in the relative early innings of being able to convert these high-volume cataract surgeons to become ubiquitous iStent users. And so I think the promise for continued sustained growth, the fact that this is an embryonic marketplace, the fact that competitors are entering in, which are going to bring additional revenues and resources to build MIGS as a brand and a standard of care. All portend really substantial growth for us for the next several months and years.

Okay, I like to hear that. Just one more, on the standalone application. And forgive me, I'm going off of memory here, which is always scary. But I think you started enrolling the 75 patients; was it Q2 of last year? And you're just completing enrollment now. First of all, is that right? And then as you're broadening it out to the 425 patients in total, are you going to add a bunch of new centers? Or is this going to be a very long enrollment cycle that we shouldn't anticipate?

Yes, so that's a great question, and I think that I had the opportunity to address this previously with you. So what I would tell you is that this is normal course for the FDA. This is a brand new watershed indication in a new marketplace. And they haven't made it easy on us, when you look at the inclusion-exclusion criteria. And so it's always a herculean effort in the first phase of the trial while you establish safety, before you enter into a far more liberal pivotal phase, which will give you more open-field running.

So we experienced the same thing when we first started enrolling our combination cataract trial back in the mid-2000s. The FDA gave us some pretty herculean inclusion/exclusion criteria in the initial phase.

So what our challenge and our opportunity is, is to continue to liberalize by filing amendments to open up the criteria. When we have the three-month safety data in hand, Matt, then we'll approach the FDA, I think, with some substantive data and arguments to be able to fully liberalize the pivotal phase. Which should allow us to enroll at a far more rapid rate.

So that will be one key. The other key certainly will be investigators, right? So we will clearly have far more opportunity to have far more investigators available, eligible and selected for the expanded phase pivotal portion.

Very helpful, thank you.

Okay, you're welcome. Thanks.

Your next question comes from the line of Chris Lewis from Roth Capital Partners.

Hi, guys, good afternoon. Thanks for taking the questions.

Hi, Chris.

Wanted to start on just the number of surgeons coming onboard here. Obviously growth remains really strong, but less than half of your targeted 5,500 surgeons still out there. So I guess my question is really just, given the clinical and economic benefit, for those physicians that haven't adopted MIGS and iStent at this point, what do you see as the biggest barrier for adoption within that group?

Hey, Chris, it's Chris Calcaterra, how are you?

Doing well. How are you doing?

Good. So when it comes to devices, I think there's always a resistance to change and to adopt new technology. There's a vast majority of people out there that just want to wait and see, and don't want to jump on the bandwagon early. There's a variety of reasons, including the one I just gave you. It could be that it's a high-volume cataract surgeon who just doesn't want to change his course of action during the day to include another procedure.

There's a variety of reasons. And I would say that the adoption curve with this technology is not that dissimilar to other adoption curves with new device technologies. So I'm quite pleased with the pace that we're going at. It's what we expected, it's what we planned for. And getting 60 or so, 50 to 60 surgeons trained per month, that's very much in line with what we anticipated at this point.

Okay, great. And then Japan, sounds like you continue to expect the reimbursement by the end of this year. How should we think about the rollout there commercially in 2017? Any commentary just around number of surgeons trained, or cases? Or any expectations you can provide there would be helpful.

Sure. We will follow the same course of action that we did here in the United States with our three-step training process. What I would say is, I would expect that the adoption in Japan will be slower than it has been in the United States, just because of the way that they practice medicine there.

We're going to spend an extra amount of time with the glaucoma specialist there, before moving on to the comprehensive ophthalmologists. And that's just a cultural thing. And I think, therefore, while I plan on Japan being a very robust market for us, I think the uptick in sales will be a little bit slower there than what we've experienced in the United States.

Rich, maybe a question for you. Gross margins ticked up more than 200 basis points sequentially. Can you just talk about -- elaborate on the drivers of the margin expansion there? And then looking forward, is this a normal run rate to expect, and a sustainable level going forward?

Yes, I wouldn't read too much into the increased 87% versus the last couple quarters that have been around 85%, 86%. We're going to have some variability in our margins over time, based on product mix, geographic mix, maybe even operational factors.

Such as, everybody knows we moved into a new facility here in the fourth quarter in October, late September. And we've transitioned much of our manufacturing. There's still some at the old facility, but most of its moved here. And we're getting everything set up. There could be some inefficiencies in the fourth quarter. Don't be alarmed; I'm not expecting anything significant. But it could be enough to move the margin around a little bit.

So I'm still comfortable saying that you guys, for the foreseeable future, ought to be looking at the -- I've always said low- to mid-80%s. I still think that's right, more towards the mid-80%s. That's where we've been performing for the last few quarters.

Okay, guys. Congrats on a great quarter.

Thanks a lot.

Your next question comes from the line of Jon Block from Stifel.

Thanks, good afternoon, and I appreciate you taking the questions. I'll just ask two. Any thoughts about the timing of the price increase? In other words, I know you don't want to disclose what you're thinking in terms of the amount. But should we expect that to be in place for all of 2017, or do you need a little bit more time to see what CyPass is doing?

And then obviously with the price increase coming, anything in regards to the cadence of quarterly sales? In other words, should we expect a pull-forward into Q4 with some of your accounts ahead of that price increase?

What I would say, Jon, this is Tom, is, we currently are looking at this favorable CMS policy, and we're trying to figure out exactly when and how to implement. I probably will avoid giving you any specifics on timing, one, because we haven't formerly determined when that will be. And because of that, I can't give you any real insight or granular vision of what would happen with any load-in.

I would certainly expect that whatever month we choose to have a price adjustment, that there certainly will be some inclination for some customers to buy in at some level prior to the initiation of the price increase. But in terms of timing, in terms of disposition and distribution of that incremental value to the total amount for this HCPCS code, I can't give you anything granular.

Okay, that was very helpful. And maybe, Tom, just to stick with you for a moment. You mentioned for a whole host of reasons, many reasons why you are very confident in your embedded position. I'm curious, with CyPass approved and arguably coming to market some time soon, anything you guys are doing with your sales team proactively with your customers in terms of reaching out to them?

And as you said earlier, maybe equivalent efficacy as iStent, but from a safety profile, maybe inferior? Anything you guys are doing from an outreach to educate them, inform them of CyPass's shortcomings ahead of [initiating] the market? Thanks, guys.

Yes, I'd say the answer to that is, no. What we are doing is trying to build a marketplace, a marketplace we created and pioneered. We're interested in the overall evolution of this MIGS category to become a standard of care for use in combination with cataract surgery.

I think when Alcon broadly launches, which we expect in the early part of 2017, then I think that it's fair to say what we are doing now is educating our sales representatives as to the current availability of clinical studies, what those studies might mean and how we might educate surgeons. Particularly if there's any misleading information out there, how we might educate them on what the proper way to read the clinical trial data may be. And you can certainly expect that we'll be fully trained and ready for any competition when it presents itself.

Okay, perfect. That's it for me. Thanks, guys.

Thanks, Jon.

Our last question comes from the line of Larry Biegelsen from Wells Fargo Securities.

Hey, guys, it's Adam on for Larry. Thanks for taking the questions. I wanted to start with reimbursement. First, any insights or thoughts that you can share regarding the upcoming decision between pursuing a Category III code extension or transitioning to a Category I code? And any sense to what the physician rate would be under a permanent code?

Yes, so this is a good question. It's a question that I've addressed before. But what I would tell you, and just to refresh everyone's memory, is that we will have a decision to make certainly by mid next year or thereabouts, whether or not we petition to convert to a Category I code, or whether we look to extend the basis for our Category III code here in the United States.

As I've said all along, we think that the coverage and the current Category III payments have been favorably disposed and fairly disposed for professional fees for surgeons who are implanting iStent. So we're very happy with what's currently happening with the Category III code.

We will need to make a decision. If we do convert to Category I, what we said all along is, if you look at a study that I think, or as a procedure, that I think most clinicians that you reach out to through your channel checks will agree is most comparable to the iStent implantation, is goniotomy. And you can look up the current goniotomy code, which I think pays currently about $760.

And so when we do go finally to a RUC committee and get an RVS analysis, I would hope to be somewhere in that ballpark, within a bracketed range. And that would be my expectation when we do convert to Category I. We'll keep you posted. We'll continue to watch the marketplace, which will inform us the best way to approach this decision, which will happen mid next year.

Okay that's helpful, thank you. And then as a quick follow-up on reimbursement, do you have any update on what's going on with Novitas?

Yes, the only update that I have is what you probably are aware of, in that Novitas initially reported they were going to make a decision and re-look at the professional fee payments for iStent implantation, and publish that by September 6. They did not follow through with that, and we believe that they are currently reconsidering the code payment, which by the way, currently pays at about $1,000 for the implantation of the iStent. We have not heard anything since that pass of the September 6 decision that they passed on.

Okay. Thanks for taking the questions.

Okay, well, I want to thank everybody; thank our investors for being on this call, thank you for your continued support. Thanks to the analysts for, again, very good questions today, and we appreciate you joining us. Look forward to the next call. With that, I'll wish you good afternoon.

Thank you, ladies and gentlemen. This concludes this conference call. You may now disconnect.