SI-BONE Inc (SIBN) 2018 Q3 法說會逐字稿

Welcome to SI-BONE's Third Quarter 2018 Earnings Conference Call.

(Operator Instructions)

As a reminder, this call is being recorded for replay purposes.

I would now like to turn the call over to Lynn Lewis from the Gilmartin Group for a few introductory comments.

Thank you. Thank you all for participating in today's call. Joining me are Jeff Dunn, President and Chief Executive Officer; and Laura Francis, Chief Financial Officer.

Earlier today, SI-BONE released financial results for the quarter ended September 30, 2018. A copy of the press release is available on the Company's Web Site.

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 federal securities laws which remain pursuant to the safe harbor provision of the Private Securities Litigation Reform Act of 1995.

Any statements contained in this call that relate to expectations or predictions of future events, results or performance are forward-looking statements. All forward-looking statements, including without limitation, our examination of operating trends and our future financial expectations, which includes expectations for hiring, growth in our organization and reimbursement, guidance for revenue, gross margins and operating expenses in 2018 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 undue reliance on these statements.

For a list and description of the risks and uncertainties associated with our business, please refer to the risk factor section of the most recently quarterly report on Form 10-Q with the Securities and Exchange Commission.

SI-BONE disclaims any intention or obligation except if required by law to update or revise any financial projections or forward-looking statements whether because of new information, future events of otherwise. This conference call contains time-sensitive information and accurate only as of the live broadcast today, November 29th, 2018.

And with that, I'll turn the call over to Jeff.

Thanks, Lynn. Good afternoon everyone, and thank you for joining us. I'm pleased to welcome you to SI-BONE's first earnings call to review our third quarter 2018 results. As many of you know, we completed our initial public offering in October, raising approximately $114 million in net proceeds. I'd like to express my thanks to all the investors who participated in the offering and continue to support us today.

Since this is our first call as a public Company, I'd like to use the next few minutes to provide an overview of our business and our progress during the third quarter. I'll then turn the call over to Laura Francis, our Chief Financial Officer, to review our financial results, then I'll wrap up and open the call for questions.

For those of you less familiar with SI-BONE, we are a commercial-stage medical device Company that has pioneered a proprietary minimally invasive surgical implant system which we call iFuse, to fuse the sacroiliac joint to treat sacroiliac joint dysfunction which often causes severe lower back pain. Published clinical studies have shown that 15% to 30% of all chronic lower back pain is attributed to the SI joint.

Since we introduced iFuse in 2009, more than 35,000 procedures have been performed by over 1,700 surgeons in the United States and 33 other countries. We are the market leader, as iFuse is currently used in the majority of minimally invasive surgical fusions of the sacroiliac joint in the United States. But what's really exciting is that we are just at the beginning of this journey.

Even with over 35,000 procedures performed to date, we still have just scratched the surface. There are 279,000 eligible patients each year, translating to a $2.7 billion annual market in the United States alone. Yet in 2017, approximately 4,300 procedures were performed by our surgeon customers in the US, so there's lots of opportunity in front of us to penetrate this market and help the hundreds of thousands of patients suffering from lower back pain caused by SI joint dysfunction.

With that, let me summarize our results for the third quarter of 2018. Revenue for the quarter was $13.4 million, up approximately 15% compared to the third quarter of 2017. US revenue was $12.2 million, up 16% over the prior year period. International revenue was $1.2 million, relatively unchanged from the prior year period. Based on these results, we expect revenue for 2018 to be in the range of $55 million to $55.4 million, representing growth of 15% over full year 2017.

Looking ahead, increased commercial traction in the US will be driven by a few key factors -- sales force expansion, surgeon training, and incremental reimbursement coverage supported by clinical evidence.

Starting with our sales force, we finished the third quarter with 46 US direct sales reps. Nearly all of these reps have been with us for a year or more. Our sales reps are highly technical in their skill set, with meaningful spine and interventional pain experience. Our direct reps are further supported by clinical support specialists who assist in case coverage as well as by field marketing specialists.

In the coming quarters, we plan to further increase our direct field sales organization as we both broaden and deepen our footprint in the US. We are also leveraging our organization through the addition of support reps who will assist in case coverage. We expect these efforts will, in combination, enable us to both expand our rep coverage base and increase rep productivity from where it is today.

In the United States, our direct sales reps have an average run-rate of about a million dollars. However, in time, we expect a tenured rep to ramp towards $1.5 million of sales. And with the support of case coverage people, our territory could grow to over 2 million.

In addition to our sales force expansion, our medical affairs team is focused on training, educating, and supporting new surgeons. Our educational programs focus on anatomy, diagnosis, and the treatment of SI joint dysfunction.

There are 7,500 spine surgeons in the US, which includes orthopedic spine surgeons and neurosurgeons. We are also focused on educating nurse practitioners and physician assistants who are often the first providers to see patients suffering from back pain and SI joint dysfunction. Today, we have about 400 active surgeons, which is defined as a surgeon who has performed the procedure in the past three months.

Turning to clinical studies, SI-BONE has always been a Company grounded in robust data and investment in high quality, long-term evidence. We are continuing to build on our vast body of superior of clinical evidence. Two important clinical studies were recently published in medical journals, adding to the over 60 peer-reviewed papers already published.

First, four-year follow-up results were published on August 29th in Medical Devices: Evidence and Research, from a follow-on study called LOIS that included 103 patients at 12 different sites in our two US prospective trials. At four years mean SI joint pain scores on average decreased by 54 points from baseline, and disability as measured by the Oswestry Disability Index score, decreased on average by 26 points.

Additionally, the Optum Economic Study was published on October 17th in ClinicoEconomics and Outcomes Research, using the UnitedHealthcare patient's claims database which includes information on both healthcare claims and their associated cost. The study demonstrated a positive return on investment and low post-surgery payer costs for patients undergoing minimally invasive surgical fusions of the sacroiliac joint in the outpatient setting.

Our robust clinical evidence is continuing to drive positive support from the clinical evaluation organizations and garner payer wins. On September 9th, Blue Cross Blue Shield North Carolina published a triangle-only, SI-BONE-only coverage policy.

On October 22nd, eviCore, the clinical evaluation and patient management organization that supports payers covering 107 million US lives published a coverage recommendation exclusive to iFuse. This was followed by HealthPartners, one of the three large payers in Minnesota, publishing a positive coverage policy on November 1, and Neighborhood Health which published an exclusive policy also on November 1st. With these additions, we now have over 254 million covered lives in United States, with 24 payers that cover our product exclusively. We're confident that the reimbursement environment will continue to improve.

With that, I will now turn the call over to Laura Francis, our Chief Financial Officer, then we'll return with closing comments.

Thanks, Jeff. For the third quarter of 2018, revenue increased 15% to $13.4 million, compared to $11.7 million for the third quarter of 2017. US revenues for the three months ended September 30th, 2018 were $12.2 million, representing 16% growth. The majority of the increase was driven by higher sales force productivity and improved US reimbursement coverage.

International revenue was $1.2 million, representing 1% growth. The relatively flat international sales are primarily due to softness in our European markets during the quarter, due to constricted investment over the last 12 months.

Gross margin for the third quarter of 2018 was 91%, as compared to 89% in the corresponding prior year period. Operating expenses decreased 1% to $15.2 million for the third quarter 2018, as compared to $15.4 million in the corresponding prior year period. The decrease was driven by cost controls in R&D and G&A expenses, partially offset by increased spending in sales and marketing for commissions on higher sales.

The operating loss was $3 million in the third quarter of 2018, as compared to $5 million in the corresponding prior year period. Our net loss was $4.8 million or $1.29 per diluted share for the third quarter of 2018, as compared to $5.7 million or $1.64 per diluted share in the corresponding prior year period. The pro forma net loss per share was $0.30 for the three months ended September 30th, 2018. The pro forma net loss calculation assumes the conversion of preferred stock and warrants outstanding into common stock. The pro forma weighted-average shares used to compute net loss per share was $16.1 million shares for the three months ended September 30th, 2018. We ended the quarter of 2018 with $14 million of cash and cash equivalents.

As Jeff mentioned, we were pleased to close out our initial public offering on October 17th, which generated net proceeds of approximately $114 million. We intend to use the proceeds from the offering primarily for sales and marketing activities. These will include expansion of our US sales force, additional surgeon education efforts, and expansion of our international sales presence. We will also use the proceeds for additional R&D and clinical studies to bring new enhancements to the existing product offering.

Turning to our outlook for 2018, we expect revenue to be in the range of $55 million to $55.4 million, representing 15% growth over the full year 2017.

At this point, I'd like to turn the call back to Jeff for closing comments.

Thank you, Laura. In closing, I'm pleased by our solid financial progress this quarter. We made headway on the reimbursement and clinical fronts, further validating our position as the market leader for providing differentiated, minimally invasive solutions for the sacroiliac joint.

Since our IPO in mid October, we're laser-focused on expanding our commercial team in the US and overseas, ramping up training and education efforts, and continuing discussions on the reimbursement front.

We are well positioned for growth and look forward to what is ahead. I want to thank the growing team of SI-BONE employees for their enthusiasm and hard work. We look forward to updating you on our progress.

With that, we'll now open it up to questions. Operator, could you open up the lines please?

(Operator Instructions)

David Lewis, Morgan Stanley.

Jeff, guidance obviously brackets consensus, consistent with our view, but investors are clearly focused on acceleration moving forward. Can you share with us what you're seeing from a channel perspective now?

We are, as I said, adding people out there into the market, into our field organization. This quarter we expect to put at least 10 case covers to help the field sales force out there. We are obviously experiencing better reimbursement dynamics, although some of these policies went in place recently.

Looking into next year, we certainly expect more of these policies to go in place and potentially some of the big guys. And so we certainly feel confident that the real growth will come in 2019. And I'd be happy to answer any specific questions when you talk about - when you're talking about the channel.

To be more specific, so as you already pointed out, your fourth quarter obviously implies slower growth which references the sales investment issues that Laura pointed out. So it sounds like you're not having trouble adding incremental reps. Can you share with us, given the greater IPO proceeds, how you're thinking about reps? Clin support specialists? How many you think you can add here over the next 12 months? And, (inaudible) your visibility and confidence in that hiring?

So David, I can answer a little bit of that and Jeff can provide some additional coverage. You're absolutely correct that we had raised more than we had intended. We originally were seeking around $84 million of proceeds. We ended up in gross at $124 million. And what that's going to allow us to do is to up the amount of investment that we're making to drive faster growth.

The areas of focus are going to be hiring additional sales reps. In particular, we're hiring clinical support specialists to support the current territory managers because it's easier to ramp up an existing territory more quickly with that case support. And then, in addition, we are also focusing on more surgeons' training as well. So all of those things are going to be a part of our plan, and when we talk in the early part of 2019, we'll give more guidance on that earnings call.

The only thing I'd add is we are certainly not having trouble finding people who want to come to work for the Company. So we feel very confident that with the additional proceeds, we are going to be spending a little bit more money than we had originally forecasted and thought and have discussed in the past.

So we are going to be investing some of those additional proceeds. So hopefully, that would translate into good growth next year. It may translate into some additional spending as well as I've mentioned.

Can you update us on where we sit with large third party commercial payer contracts? And as you think about next year, should investors be thinking about acceleration next year, more tethered to the payer side of the equation or more tied to the commercial sales expansion?

Yes, so let me answer your last question, I think it's more the commercial side. We have more than 250 million lives and I'll address the payers in just a second, but I think there's plenty of running room. If we put in lots more people into the field, we think that equation of these case covers who helped sales rep productivity go up.

Some number of additional reps as well as increased productivity, we think - as I said, we're confident that we could put those people in place. We're already doing that right now. As I mentioned, we'll have at least 10 case covers this quarter that come on to support those reps. So we feel pretty good about it.

Let me address the big payers. I think I've talked on the IPO road show about CareFirst. They'll make a decision next week. But I'm sure you're interested in Anthem, Aetna, Cigna and Humana.

Anthem is still experimental. In October, they did not change that. We are working on that as well. Aetna will post a new coverage policy in January. I candidly don't have a great feel on that one in a sense. I'm not negative, I'm not positive -- they just don't communicate a lot. Cigna is really looking quite positive. And Humana, we are getting more than 80% of the wins. And that is dramatically up, and so that is a positive signal as well. So I don't think all of them are going to in place, but I certainly think that we could get some wins in Q1 on the big payer side.

Bob Hopkins, Bank of America.

So obviously, the IPO just closed here. I look at 2018 as a year where you made nice progress in stabilizing the business, put up solid growth rates over the course of the year and on a comp-adjusted basis, it was pretty stable throughout the year. So in terms of setting big picture expectations, Jeff, how confident are you that given all that you got in place now that 2019 can be a meaningful growth inflection year? Is that a reasonable expectation that you think we should have? Or, are there still a lot of progress that you need to make on some of these big payers before you can really see that growth inflection?

No, we're confident, Bob, that we're going to see a really positive 2019. We'll get into the actual guidance in the March call, but we feel very bullish around -- David's question around channel -- the interaction in the field with the doctors, the interest, the number of surgeons that are coming to training. The training courses, for instance, at [NAS] were sold out, so there's a tremendous amount of activity in the field.

It's very, very encouraging from a surgeon training/surgeon engagement, interest in the Company; academic centers getting involved with us much more aggressively across the United States. So we think that with those academic centers, that will pay dividends, because there's that trickle-down effect from the academic centers. So the engagement level is very, very high.

From a big picture perspective, are there any specific metrics on physician training [to give you] a sense of the pipeline of doctors to be trained as we look forward into the early part of the year?

What we'll do on our earnings call in March is we will talk about what we anticipate for the number of active surgeons for 2019. We won't necessarily give numbers of surgeons trained, we'll just give that active surgeon number, which should help. And we did also provide the number of active surgeons in Q3 as well being 400.

But obviously that's going to be a measure that we're going to want to grow significantly through a combination of the training activities that our medical affairs group will be executing and already are executing, as well as just the additional reach that we're going to have with our sales force through all of these new hires.

Yes, and it goes back to raising more money. And so we can tell you in a general way, we have put more money in the field organization. We put more money into the budget for the field training and the number of surgeons. We'll give you the numbers, but obviously we haven't gone through board approvals of the final budgets for next year. But we absolutely believe that we will spend more money on, and train more surgeons next year because we did raise this additional money. All those plans are in high gear at this point.

Are you seeing anything interesting out there from a competitive response perspective, given how visible you guys have been obviously in the last six months or so? Anything you've seen going on in the competitive front either product-wise or pricing-wise or anything worth commenting on?

Well, I think if anything, from the competitors, no. From us, we think we're going to have some very interesting things that are going on [out] from us. I will share with you that we mentioned on the IPO road show, the Decorticator, we did our first case yesterday. We do expect to launch that in Q1 in full form. It's not something for every single surgeon. But there are, call it, 3% to 5% of the surgeons out there on the marketplace that might use that and we think we've got a tremendous solution there. That was yesterday.

And then also yesterday, we had a 510(k) approved by the FDA around a surgical technique which will help us move more into the adult deformity space and you'll hear more about that in 2019. It's something we're going to roll out relatively slowly in 2019, but we did get that approval just midday, yesterday, that I think sets us up for some interesting product expansion opportunities for the Company.

But it's not going to be overnight because it's a specialized, very academic kind of group, but we think it will be pretty powerful against all competitors. And I had a question the other day about the competitors, what do they do about our exclusives, and I do think we'll get more of those exclusives and I think that's going to be difficult for some of those folks to compete with us.

So I think it's all moving in the right direction in that sense from a product, a field, a surgeon training, surgeon recruitment standpoint and that should translate into productivity from the field.

Kyle Rose, Canaccord.

I wanted to kind of talk a little bit more about some of the productivity assumptions you talked about earlier at a million dollars now, eventually going to 1.5 million with case support reps. What kind of assumptions are lumped in there? Over what time period do you think that it takes to get to that 1.5 million?

And when you think about the reimbursement backdrop where those assumptions are driven on, are there any of the major private payers that you're assuming that flow through there? Frame out how we should think about the ramp from 1 million to 1.5 million and eventually 2 million?

I think we talked in the past about, first of all, getting to the place where any rep that's doing more than a million or two that we would put in a clinical support specialist. So we certainly see a scenario where lots of sales reps, by the end of next year would have clinical support specialists. We're hiring lots of those right now.

As to the productivity assumptions around more of these payers, we really haven't baked much of that in there. We think the sales reps in most of the territories can get up to a million dollars in a year. It will probably take two years for someone to get to the $2 million range if you're starting from scratch, and somewhere in between to get that $1.5 million kind of range.

And then you talked about OUS being flat year-over-year and part of that just because less investment, or soft markets over there. I just wanted to see with some of the positive reimbursement news that's come out, the nice recommendation, the exclusive reimbursement in France, just wondering how we should think about OUS over the medium term as far as the focus, particularly given the upside of the IPO proceeds?

Well, we did constrain spending. We are in a hiring mode. Actually, Tony Recupero is going over there, Tuesday. So we have just begun the hiring effort. We've been faster to hire over here. So it's not going to happen that Europe is going to all of a sudden jump up to 20% growth rates. So I think it's going to take us a little bit of time into 2019 to get Europe back on track.

That said, in France, things are going very well. But we were down a couple of reps in Germany. We're just putting those people back, because we constrained spending in Germany, but we think France will do very well next year. It's a little early to tell how fast France will ramp. I don't remember the exact number, I think we're up to either four or six people in France, but they're all pretty new. But I'm quite optimistic about the French and the UK opportunities and then reinvigorating the German situation because we have constrained that so much.

Dave Turkaly, JMP Securities.

To follow up on that 510(k) you mentioned about a surgical technique, you said adult deformity. I know we're mostly thinking of you as a sacropelvic Company, but that would lead me to believe that it could be quasi more spine. Any color there on exactly what that is? And you said sort of a limited launch next year, but I guess any color you'd be willing to give on what you think that could be, down the line a bit?

We are squarely staying in the pelvic area, if you do go online and see the 510(k) when it gets published out there. I'd rather talk about it next year. We've got a whole bunch of market development work to do around this thing. It's been in the works for some period of time now. We think it has some modest revenue potential. We think it's going to do tremendous things for us in the academic centers and we are already working in many academic centers out in front of this thing, who are very interested in this area.

But we certainly don't have plans just to put a fine point on it, to go into the spine business and that kind of thing. This is more adjunct to what we're doing. And I'd prefer not to get into it too deep, but I mentioned it because if you happen to come across it, I'd figure someone did, they'd probably wonder what the heck it is. But we think we have a very interesting strategy around that area. And if you'll bear with us, we'll maybe talk about it more in Q1 and Q2.

We're looking at the 46 reps you mentioned, all with over a year, and then the 10 assistants that you'll bring on this quarter. Can you give us any color, again, given that you're not a spine Company, where these folks are coming from? Are you getting primarily spine reps given what's happened in that world of late with a couple of other public companies getting acquired? I'd be curious to see where you're hiring a lot of these people from?

It's really a combination of people coming from pain companies, stimulator companies and that kind of space, and spine companies where they've been successful clinically in sales.

I think we're an attractive place to go to work. I think everyone recognizes this is a very important space. And as we teach more surgeons how to diagnose this and we move toward that 20% of lower back pain, there's lots of people that says, Should I sell this old commodity thing against everyone else with non-exclusive coverage or should I go to work for a Company where it's intellectually fun, where I can make a bunch of money and there are exclusive coverage policies, and I can be a very aggressive sales rep?

I think, Tony, and Troy Wahlenmaier, and [Andrea] in Europe are going to be quite successful in their hiring plans and getting not just the numbers, but really high quality people that are coming onboard. I am hyper impressed with the quality of the people that have come on board in the last 60 days.

This eviCore recommendation that you talked about 107 million lives. I want to say our recollection was that you were at something like 40 million - 30 to 40 exclusive coverage lives in the US. Any color you'd like to give us about the size of that recommendation? What it could mean to you? Obviously, you've got other exclusive ones, but that seems like a big one.

It is, David. I should be clear that eviCore manages musculoskeletal which is the area we're talking about for many companies. They go to their customers which are companies like Cigna and say, We've evaluated all the evidence, all the SI-BONE evidence, all the competitors' evidence. We think, in writing, you should only use this product from SI-BONE. That doesn't mean that it automagically gets transferred to the payer. The payer has to say yes.

So the companies that publicly one can find on the Internet that use eviCore, as an example is Cigna who uses them for musculoskeletal, they still have to say, Okay, we're going to use this recommendation around sacroiliac joint. It is directionally super positive, but there's still another step to go through to take what they've done -- they manage all those lives -- and then get the checkbox from the particular payer like a Cigna.

Do we think that's helping us? Yes, because when we do the selling, that's good. When the surgeons do the selling, that's even better. When individual independent advisors -- like Blue Cross Association, or eviCore, or AIM Specialty Health -- when they make independent decisions, that's even better, and I think more credible because every Company has their own interests at heart.

But I think they've looked at it carefully and I think that they will help us with some of these payers that use them. And we'll have to see exactly how it develops. But we're - we think it's obviously a very good thing. And it was in draft form as you know until October 22nd, and then they pushed it out the door in final form on that date.

At this time, I'm showing no further questions.

I would now like to turn the call back over to Jeff Dunn for closing remarks.

Okay, well, just thank you everyone for joining. As I said, we feel really good about where the business is. We think 2019 is going to be a very intense but very enjoyable and exciting year.

The team is hyper energized at the Company. As you know we've been through some ups and downs in the past years, but, directionally and emotionally, the Company is in terrific, terrific shape. And so I'm excited about every single day and what we're doing. So thank you very much.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program, you may all disconnect.