Conformis, Inc.
Q1 2021 Earnings Call Transcript

Published: 9 May 2021

[Operator:]

Good afternoon, and welcome to the First Quarter 2021 earnings conference call for Conformis, Inc. My name is Valerie, and I will be your conference operator today . Before we begin, I would like to remind you that this call will include forward-looking statements within the meaning of federal security law, which are made pursuant to the safe harbor provision of the Private Securities Litigation Reform Act of 1995. Any statement made during the call that are not statements of historical facts should be considered forward-looking statements. These statements involve material with an uncertainty they 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 US Securities and Exchange Commission.

[Mark Augusti:]

Thank you, And welcome to our First Quarter 2021 Earnings Conference Call. With me on the call today is our CFO, Bob Howe. We appreciate you joining us. In short, the year is off to a good start. Conformis' revenue was right where we expected it to be as we continue to manage through COVID related headwinds. My thanks to the entire team, which continues to work relentlessly on our growth strategy. The healthcare industry continues to be impacted by COVID, resulting in hospitals operating at or near capacity and thus impacting inpatient elective procedures. In addition, we believe COVID has affected the demand for knee arthroplasty, but as vaccination rates continue to improve, we believe we will see patients feeling less anxiety and making office visits and undergoing elective procedures. Like others, we believe we should start to realize the transition back to normal demand levels in the second half of 2021. Of course, this assumes that we don't experience anything unforeseen or unexpected. Our current goal is to have fourth quarter product revenue match or exceed the product revenue we realized in the fourth quarter of 2019. It has only been a short time since our fourth quarter call, however I would like to take a moment to update you on our current growth strategy. Number one

[Bob Howe:]

Thank you, Mark. And good afternoon, everyone. Although Mark has already hit the highlights, I will start with our recent public offerings, since it was the most significant financial event of the first quarter. As a reminder, the offering was for just under 81 million shares at a price of $1.05 per share and closed on February 17. The net proceeds were $79.6 million. We believe this capital infusion positions us well to execute on our growth strategy and provides the runway needed to reach cashflow breakeven. On the Stryker development front, we recently announced the achievement of the last remaining milestone which was contingent on receiving FDA clearance. As a result of meeting this milestone, we now expect an $11 million payment from Stryker, which should be received in the second quarter. As a reminder, to date we have not yet recognized loyalty and licensing revenue in connection with the Stryker agreement. With the successful completion of the third milestone, we will recognize $25 million of royalty and licensing revenue in the second quarter of 2021. This final milestone is a testament to Conformis' significant development expertise and we are excited about the next phase in our relationship with Stryker, which plays to another area of our expertise, manufacturing high quality patient-specific instrumentation.

[Mark Augusti:]

Thank you, Bob. For the first time since the COVID pandemic began, I feel like we are starting to regain momentum. We have seen office visits, while still below 2019 levels, generally improve. We have been able to successfully work remotely, progress our product programs, and continue to engage with our key surgeons and we now have the capital to move forward with confidence. We achieved the goals of our Stryker development project and the new imprint knee targeting. The ASC market remains on track for launch in the second half of this year. Most importantly, the global vaccine rollout seems to be progressing. We're excited about what's in store for the rest of 2021 and for 2022.

[Operator:]

Our first question comes from the line of Josh Jennings with Cowen and Company.

[Eric Anderson:]

This is Eric on for Josh. Just thinking now that we're almost halfway through 2Q, is there anything you can share on volume trends that you've observed through April and early May? And then to that point, what sort of backlog do you think has accrued at this point? Would you be able to quantify that?

[Mark Augusti:]

So as we said, we've definitely seen an increase in scans for April. We're pretty pleased on the trajectory. And that's continued through the first few days of May here. It's still early May. So I think that goes to patient demand for knee arthroplasty coming back. I think that goes to the vaccines progressing, especially in the arthroplasty patient population, the age population. And again, as Bob alluded in his section, we need those office visits to come back. We need people to come in and be willing to be assessed for surgery and then go to CT scan. So that's sort of that early thing that we're seeing. As far as talking about quantifying a backlog, I don't know we're going to comment on quantifying it, but I think we can say that all along we've seen backlog get scheduled, a patient's return, because, as you recall, we will have built some cases and then surgeries were delayed and they came back. And we're continuing to see those trickle in. And we have seen a slight uptick in that category of business, but the real positive momentum is just an uptick in basically scan volumes. And that's what we need to drive our business. And so that's making us positive around Q2.

[Eric Anderson:]

And then you've previously set LRP targets with a few milestones for 2024 around revenue and margin. I'm just wondering, do you still expect to meet those? Or should we be anticipating a refresh of the LRP at some point? And just as one more question to that, what were your expectations for the Stryker partnership a few years down the road? Was that included in that initial LRP range? And I think you've previously said that the supply portion of the agreement could be 10% to 20% of the company's total revenue. Is that still an appropriate way that we should be thinking about it?

[Bob Howe:]

Yes, that's right, Eric. 10% to 20% is what we had signaled, and then that hasn't changed. And to your comment on the ranges, we're still sticking with those ranges. We still believe that's achievable and that's our goal to meet it. So that's still on.

[Mark Augusti:]

I mean, I think it's fair to say, look, when we published those, we had insight into the first part of the COVID, not a crystal ball in the second, but we gave some ranges on purpose. So we certainly, as part of our responsibility and stewards of the ship, so to speak, we'll always look at our LRP. And if we move off that stuff, we have an obligation to signal that, but we still believe that we're credibly in that range. So -- but I guess my point is obviously we had to take some hits in the fact of the slow start here in 2021, because that wasn't contemplated when we put that together. But we're still in those ranges. And we still see opportunity to drive business with these new product programs. And I think importantly, the other thing is, and that's why we will do a refresh and signal where that comes, but we're committed to those ranges. But we just talked about, in my comment adding, for instance, a partial knee with the funding and commitment and support from our shareholders, we have to be appropriately invest that money. And one of the exciting things it allows us to do now is continue to progress new product programs. So we'll signal more of that later, but as I said on this call, we've signaled we're going to be doing a partial knee program, which will happen within the 2024 timeline as well.

[Operator:]

Our next question comes from the line of Robbie Marcus with JPMorgan.

[Sarin Murlidar:]

Sarin on for Robbie here. So I saw your comments on 4Q reaching and coming in line with what you saw in 4Q '19. So I'm trying to get a sense of what that implies for 3Q. Does that mean that it's going to come in lower than '19? And so what needs to happen here in 2Q in terms of scans to make sure you're getting kind of close to that number in 3Q? And I understand you're not quantifying it, but how much do these new scans and office visits need to improve over the next month and a half or so to kind of ensure that that 3Q is in line with this trajectory?

[Mark Augusti:]

I think I could -- maybe Bob can add some color. But I think we're thinking if things continue to progress the way they are, and we hope they will and expect they will at this point, because we don't have anything to the contrary, that we might actually be able to do Q3 levels of '19 in Q3 here for 2021, which just is an expectation to see how that's going. So to answer your question, that's sort of the trajectory that we could see coming out of Q2 that sets us up for actually a nice Q3. And I think, again, in our comments, we said we expect to see sequential improvement in both Q3 and Q4.

[Bob Howe:]

I mean, we still need to see improvement. We've seen improvement through April, as we mentioned, and early May. But we're on our way to get to those levels in Q3. Still some work to do, but we're heading in the right direction.

[Sarin Murlidar:]

And with the upcoming ASC knee launch, what's being assumed right now in this guidance? Or what are your expectations for the contribution here in the back half of the year, both to the top-line, as well as the P&L? How does this affect your margins here?

[Mark Augusti:]

We're not breaking out that specifically. And part of the challenge is we don't know exactly when approval will happen. We have a limited release and we're going to launch it, but it's tough to predict the uptake. I think we've appropriately baked it in and we have opportunity for upside. Early days, it's not going to have huge margin improvement, because it's sort of the beginning of the production cycle. But as we said, longer term, it's going to have significant margin improvement. And longer term will be sort of after we get 4 or 5 quarters under our belt and driving value increases, as well as production efficiencies. So we don't see it being a huge gross margin mover beyond what we've talked about in the past here. And I think we've sort of indicated that in previous comments. Right, Bob?

[Bob Howe:]

It's more of a '22 impact than a '21.

[Operator:]

Our next question comes from the line of Steven Lichtman with Oppenheimer.

[Unidentified Analyst:]

This is Amir, on for Steve. So I just wanted to quickly ask another question on standard knee. Are there any metrics you can provide on how many AFCs you guys are hoping to target initially? And as a followup, will you be looking to create like a separate salesforce for the ASC?

[Mark Augusti:]

Let me answer in reverse order. We're not looking to create a separate salesforce. However, as I indicated in the comments, we have hired a person dedicated to ASC sales and marketing to support our existing salesforce and agents in the rollout of the product training and the project more importantly, lead identification execution. We actually see that as a model, where we'll probably add one or two more people around there as we get closer to the launch time. It's a little bit of a different twist, it's not a separate salesforce. We'll still use our local agents and the good relationships we have with them, but we're going to support them with the economic sell, as well as some other things on, around how we go to market, and on the focusing on the ASC. As far as metrics, that's a great question. I think if you could just defer that to later, let's get the product launch and then we've had some conversations ourselves about what metrics we may share about product adoption. You'll hear more from us after we get closer to the launch about what kind of insight we'll give you around that and we'll leave it at that.

[Unidentified Analyst:]

And then just last question on my side last, last quarter you mentioned difficulties in launching new products like the hip during COVID, any updates or progress on the training side?

[Mark Augusti:]

Yes, a little bit there. And I I think as you can see, even as the rest of industry reported, I think in my comments, and even in subsequent docs, I talked the fact that we had to understand that we're primarily a knee arthroplasty company and the knee arthroplasty US market, would be down in Q1. And I think as we're seeing, the reports come from our fellow competitors, the market was down. It's improving, but it was down and we're seeing monthly improvement. I want to reiterate that, March was better than January, February, April was better than March. And we're hoping that May is going to be better than April. We're seeing good movement here. So that's good. As far as training, it was hard to train in the first quarter because there was still a resistance to travel, but the good news is, most surgeons are vaccinated now because they got vaccinated early on as healthcare providers, they seem more willing to train into -- to travel, to train. For example, we just had a big course out west and we had sort of the most participation we've had in six quarters. So we're very excited. We were able to -- it was really interesting, we were able to do, I'm thinking out loud, about two third to three quarters of the people that got trained were live hands-on cadaver work, didactic sessions, both hip to knee. And then we were also then able to do about another 25% to 30% were available through a virtual training, so we actually had a session that was going on at the same time, so that the virtual people could drop in on the didactic session. And then we had a cadaver session set up with the right camera and IP equipment. So we could actually do a remote cadaver surgery by one of our proctors and that worked out well. I mean, that's gone well. I think that could be a model going forward for people that can travel. But the good news is we were able to actually get a really nice amount of participation. That's one of the reasons why I feel comfortable as I indicated my comments,, to add more med ed events here in, in the second half of the year, late Q2, but more importantly, early second half to help drive training towards our new product launches and specifically the ASC knee. But as long as the hip, we had good hip performance, we want to do better, but we're continuing to see interest in our hip. So yeah, that's a great question. Med ed is going to be a critical component of that through the remainder of the year.

[Operator:]

There are no further questions. Ladies and gentlemen, this concludes today's conference call. We thank you for your participation. You may now disconnect.

[Mark Augusti:]

Thank you, Valerie. Take care.