Conformis, Inc.
Q4 2020 Earnings Call Transcript

Published: 3 Mar 2021

[Operator:]

Good afternoon. My name is Josh and I will be your conference operator today. At this time, I would like to welcome everyone to the Conformis fourth quarter 2020 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. Before we begin, I would like to remind you that this call will include forward-looking statements within the meaning of the federal securities laws, which are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Any statements made during this call that are not statements of historical facts should be considered to forward-looking statements.

[Mark Augusti:]

Thank you and welcome everyone to our fourth quarter and full year 2020 earnings conference call. With me on the call today is our CFO, Bob Howe. Like many other medical device companies, Conformis was materially impacted by the effects of COVID-19 in 2020. We were hardest hit from last March through the second quarter, tipping to our lowest quarterly revenue number as a public company in the second quarter of 2020. We saw reason for optimism through the third quarter as elective procedures resumed fairly rapidly and this carried into the start of fourth quarter. However midway through November, we experienced a resurgence of the negative impacts of COVID across our business. Although hospitals were better prepared to handle the volumes of sick patients, elective procedures slowed again as hospitals redlined at near capacities with COVID patients and patients requiring emergency care. The number of CT scans slowed as did the number of booked procedures. Though this pronounced impact was not as severe as it was in the second quarter of 2020, we again saw knee and hip procedures slow down for us dramatically. And this has continued into Q1. Although COVID infection rates have begun to subside, hospitals are still dealing with limited bed capacity and procedure volumes have not returned to 2019 levels. We believe that another COVID-related headwind has been orthopedic surgeons looking for shorter lead times between appointment booking and surgery since they have less overall demand for procedures right now. The result is that the lead time for personalizing has worked against us as surgeons have been more likely to use another solution to fill up openings in their near term schedules. In addition, it has been increasingly challenging to gain new surgeons because we believe that many have been deferring testing new technologies and products during this time. This has particularly made training new surgeons on our Conformis hip harder than usual. Notwithstanding the effects of COVID, one thing that we believe has been reinforced over the past year is that we have the right strategy for growth. I would like to take a moment and update you on each of the elements of our current growth strategy.

[Bob Howe:]

Thank you Mark and good afternoon everyone. There are a few financial topics I would like hit on and I will start with the recent updates to our capital structure and cash management. We finished the year with $28.7 million of cash and cash equivalents which was up from the $26.4 million at the end of last year. As Mark mentioned, we are pleased with our $85 million of gross proceeds from our public offering in February. The offering was for just under 81 million shares at a price of $1.05 per share. We believe that this infusion eliminates any financing overhang that had been present. This is especially important due to the continuing unpredictable nature of the pandemic and how long it will continue to negatively affect our business.

[Mark Augusti:]

Thank you Bob. Without a doubt, 2020 was a challenging year. However as I take a step back, I realize we have reason for optimism as we head into 2021 and beyond. First and foremost, we have a great team at Conformis that stood together through a very challenging year. We continued to work together positively and respectively and to support each other personally and professionally. We are battle hardened and ready to win. We believe that we have the best and most differentiated knee and hip replacement portfolio in the world and that our personalized products to deliver optimal results for doctors and their patients. Our pipeline of new products is strong, including our new standard knee offering, which we believe will be a game changer for us, as I said before and it will help us evolve our business model. Lastly, with the close of our stock offering a few weeks ago, we now have the capital flexibility to drive this growth strategy. We would like to acknowledge and thank all of the Conformis employees, consultants, advisors, customers and shareholders. You help make Conformis great. We believe that what we do is important and could be life-changing for patients. There is no value you can put on being able to be active without paying. We never take for granted and work hard everyday. Our patients and our doctors, thank you. With that, Bob and I are happy to take questions. I will turn it back over to the operator.

[Operator:]

. Our first question comes from Robbie Marcus with JPMorgan. You may proceed with your question.

[Robbie Marcus:]

Thank you for taking the question. Hello. So I just wanted to try and pin down the commentary on second quarter as well. We hear a lot of other medtech companies that ranges from a conservative to a more optimistic outlook and I think it's appropriate to stay conservative at this point. But do you think you could grow sequentially off of first quarter and by what sort of magnitude? And then second, how are you thinking about expenses going into 2021? I realize you probably held back on a lot of expenses you want to invest in growth. How should we think about that, maybe in first, second and if you could, opine on the year at this point? Thanks.

[Mark Augusti:]

Why don't I take the expense piece? And then you can, I think because I do think there is a chance for Q2 sequentially. I will let you look at the numbers, Bob.

[Bob Howe:]

Yes.

[Mark Augusti:]

So Rob, it's a really good question. And we are taking them in reverse order. We plan on giving more color on our thoughts about expenses and opportunities for growth going forward, especially probably on the first quarter call, but potentially even before that. So we are still in the throes of doing that. We do not materially expect to change our expenses just at this point. But we are going to look for targeted opportunities to support the sales and marketing efforts to our product launches. So we are starting to put those plans together which this capital infusion allows for as well as we are pretty excited about some projects that were sort of on the drawing board that we can bring in and potentially bring in more revenue into our long range plan. But we want to be able to answer that with more color for you. And so we need a little bit of time to be more thoughtful about how that's going to rollout. So we expect that there will be some potential for incremental spend, especially starting sort of in second quarter and through the half. But we haven't started spending those money certainly right now and don't expect to change that immediately. Bob, why don't you talk about the first part?

[Bob Howe:]

Yes. Like Mark mentioned, I think there is opportunity because we still have time. As you know, we have got a lead time with scans. So as scans start returning, I think there is the opportunity to grow sequentially. Right now, our guidance is, it's going to be similar. It all depends how quickly things kind of turnaround with scans.

[Mark Augusti:]

Clearly, growth rate, right. Because the comparison is versus 2Q, Rob, just to make sure we are all talking the same thing. But I think your question implicit, I want to make sure, was that the dollar volume would grow from Q1 to Q2. And we do sort of see that. There is no doubt that there has been a decline in procedure volumes. And let's just all remember that January and February 2020 were actually strong months for us and I think for the industry overall. So we have seen sort of a flattening, if you will, of where procedure volumes are at. And as we get into the second quarter, I do think there will be opportunity for sequential dollar volume growth and clearly the growth rate will be improved over prior year for sure.

[Robbie Marcus:]

Yes. No, I definitely meant dollars. I certainly hope the year-over-year growth rate is a positive number.

[Mark Augusti:]

Yes. Just had to make sure.

[Robbie Marcus:]

Maybe just to put a finer point on it. You did $15.5 million in OpEx in fourth quarter. How do we think about what that looks like in first quarter? And then last for me, with the new knee product, how do we think about that layering in to 2021 sales? Thanks.

[Bob Howe:]

Why don't you do the knee one?

[Mark Augusti:]

Yes. So I am not sure how much guidance but let me give you some general thoughts about the OpEx. But look, the knee is critical for us. And obviously we have to get the clearance and then we have to execute and do that. But I think that the biggest opportunity for unknown, if we sail into good procedure volumes, vaccines are out there and things are good and we don't have hiccups obviously in execution, I think that will materially change what we call our orders rate and where we are at. Because it's targeted and we think we have got the right value proposition for the growing ASC space. I can tell you that there is a lot of excitement in activity. We are working every day with surgeons in anticipation of this launch and where we want to go. So I don't know that we are ready to tell you exactly how much color and detail we will give for you but that is the key source of growth for us. And the real thing is, like anything else with any new product is the execution rate and the ability to penetrate and train and get people up and running. And that's going to be a little unknown for us because there's variables there in the second half like when can the traction start like I think implicit in your question is, can we see it in Q3 or is it more of Q4. And it just depends, right, on where we execute those things and I think we definitely should start to see stuff in Q4. There is a chance for some Q3. And what I like is that we are, as we just disclosed, we are in front of the agency now. So that gives us the opportunity to be at the leading edge of the second half timeframe that we have given, which gives us more of 2020 to get traction with the new product, Robbie, if we can, again, it's all about execution. But until we have that clearance and we get to the market, it's still a little uncertain.

[Robbie Marcus:]

Great. Thanks for taking the questions.

[Mark Augusti:]

Thank you.

[Operator:]

Thank you. Our next question comes from Josh Jennings with Cowen. You may proceed with your question.

[Eric Anderson:]

Hi. Thank you. This is Eric, on for Josh. I just wanted to touch on your announcement from January around the supply and development agreement with SITES Medical. I was just wondering when we could hear updates on development progress from that partnership? And also, I just want to make sure that incorporating the technology from SITES isn't impacting your timelines for the cementless knee offering?

[Mark Augusti:]

Eric, hi and thank you for the question. We just wanted to clarify that as well. We have been working with SITES for a while. It just wasn't until we reached certain milestones or retired certain technical risk that we felt comfortable it was time to make more of a public announcement around that. So that's been the lead technology that we had been working on for a while. And so to be clear, everything was consistent about announcing that and consistent with what we were saying about cementless launching by Q1 of 2022. So nothing changes there. And as we progress that program, certainly we will provide more updates. We recognize as we have been very transparent that cementless is an important and growing segment in total knee arthroplasty. And then I think about capital raise as it sort of shores up and reinforces our ability to continue to pursue that and potentially works for potentially if there is opportunities to increase that timeline. But we just are now working on that. We are also in the throes of finalizing obviously the ASC knee. So more to come on that. But I just want to clarify that there was nothing new or you shouldn't take anything into interjecting any risk in that announcement. We have been working with SITES all along and that was always part of the program.

[Eric Anderson:]

Understood. Thanks for clarifying that. And then looking at your opportunity internationally, we saw your recent iTotal approval in Australia. Are there any other markets that you think we could see regulatory progress or approvals in the near term?

[Mark Augusti:]

Yes. We are we are actively pursuing a couple other markets. We have talked about that, particularly some of the larger markets in Asia. So I would think you will see those announcements as they happen. We put a goal out there to improve the growth rate of our international business. Unfortunately, due to the reimbursement changes, it have been a headwind for a while and for people that follow us, we have talked about that. So the key to getting international growth turned around is COVID to settle down but then it is get these new markets opened up. And what I like about the Australian announcement is it just shows that we are actively pursuing this in the target markets we have targeted, we are going after. So, yes, you can expect more to come.

[Eric Anderson:]

Great. Thank your for the questions.

[Operator:]

Thank you. Our next question comes from Steven Lichtman with Oppenheimer & Co. You may proceed with your question.

[Steven Lichtman:]

Thanks. Hi guys. Mark, with the Stryker launch expected to come here in the coming months, what are your thoughts as to what percent of Stryker's U. S. knees could potentially be used in conformance with PSI as we look out over the next few years?

[Mark Augusti:]

Well, first off, Steve, let me be clear. Hopefully and we expect that we should be able to get FDA clearance in the coming months. But I just want to reiterate, it's up to our partner to decide the commercial execution. And I don't ever want to speak for them. So that's up to them. But I am very much willing to talk about percentage. This model, we think we have got a best-in-class surgery-in-a-box model for total knee arthroplasty. We have got the best jigs that execute this and the best software. As I have said publicly, I think the partnership with Stryker, a quality company, validates that. And we are excited to be able to help them achieve a vision of that for their Triathlon implant. You are asking a really good question, what percentage? There's models out there that suggests by 2024, 40% of total knee arthroplasty could be done in an outpatient setting. So you tell me, I don't know what that penetration will be in Stryker's hands and with their marketing effort. I would like to think they will put as much effort behind it as they have done with robotic surgery and everything else. The other thing, Steve, that I would like people to recognize is, nothing about the agreement limits the triathlon-in-a-box to the outpatient surgery center. Clearly, it's most effective there because of all the issues we have talked about with sterility resources and space resources but this absolutely could be done in-patient as well. And I think in the environment we are in, all of us that are players in this are looking for validated and efficient delivery models and solutions that take cost of the system, help make a more predictable procedure and those types of things. And that's what our software and knee-in-a-box does. So it depends on the assumptions you make about penetration for and ramp rate of outpatient knee surgery, the penetration of PSI to that side of care as well as assumption around the penetration of that delivery model into the inpatient side of care. So I don't want to hazard a guess, but I would be disappointed if it wasn't more than 5% or 10%, let's say, if I had to put something out there. And I think we have put some ideas out there of what we think it could mean for us for revenue by 2024.

[Steven Lichtman:]

Got it. That's helpful color. Thanks Mark. You mentioned the difficulties in launching a new product like hip during COVID. Just wondering what you are hearing on the ground in terms of receptivity of the product and your thoughts in terms of sequential ramp once COVID obviously hopefully starts moving into the rear view mirror?

[Mark Augusti:]

Yes. So it really has put a crimp on the willingness and ability to do these things. But having said that, we have adopted some virtual technologies and we have done virtual trainings and webinars. I can say that we are very excited. We just did a Florida-based medical education in-person course with also virtual attendees and we trained north of 20 surgeons in that which is pretty good in-person numbers for this environment. We are actually having discussion with our advisors later this week to really sort of think about when can we turn the gas on. And now that, because you have got to remember, actually many of our physicians have now gotten their vaccines, right. So the vaccines are permeating. We are seeing travel restrictions, people are getting more comfortable. So the question for us is, what's going to be the level playing field as where are things going to level out? Certainly, there is some type of virtual education or something more local enough to travel or are we going to get back to the tried and true method of peer-to-peer in where we are at. And unfortunately, for new products, we think the peer-to-peer thing is really important and so we really have got to make that happen and continue to support that, but then have the ability to supplement with virtual. So we will do that. And I think we will, once procedures level and this gets out, I really do think we can get back to sequential growth in our hip. As I said in my prepared comments, it's a critical component of growth for the company and we love the model that we have. We love that the plan to add more stem options so that we can continue to increase our addressable market within the hip replacement market. But this headwind of training is a real thing that we have to just push though.

[Steven Lichtman:]

Got it. Just lastly, Bob, gross margin in 2021, just directionally if you could, how should we be thinking about as 1Q and then for full year relative to what you guys did in the back half of 2020, so I guess 46%, 47% range?

[Bob Howe:]

Yes. I mean I wouldn't and I am probably not comfortable at this point for full year, kind of like the revenue pieces. But for Q1, I can give you some color, right, not that we have the numbers. But I would say, we came in at 40% total gross margin, product gross margin was 46% for the fourth quarter. Given that decrease in volume sequentially, that will pull that number down. I would have to say, it's probably 43% to 45%, 46%, in that range, all depending on we have cancelled cases inventory, that's a little hard to predict. But it's probably in that range based on that volume. That's the color I can give you on that.

[Steven Lichtman:]

Got it. Makes sense. Thanks guys.

[Operator:]

Thank you. Our next question comes from Kyle Rose with Canaccord. You may proceed with your question.

[Kyle Rose:]

Great. Thank you for taking the question. So I just wanted to ask a little bit more about what you are seeing with respect to the market in the Q1? I understand the commentary with respect to guidance. I appreciate that. But you do have a lead time as far as scans coming in. So maybe just help us understand maybe how the scan trends have trended through the first eight weeks, first two months of the quarter? And what that's kind of telling you on a week-over-week, month-over-month basis when you think about entering the Q2? Just trying to understand how we should think about that quarter-over-quarter dynamic here?

[Mark Augusti:]

Right. So well, I will give you more my thoughts around Q1. And I think Q2, you are giving us a little too much credit about, our scans aren't that far out, little crystal ball. And so there's couple things going on. First off is, what we have seen and while it's been harder to truly predict our business through our old models is that the pace of rescheduling is serious. And you think about reschedule, it's not as easy as it used to be because these patients are cleared, they are COVID cleared, they have got the negative test, they have got the other stuff. And then all of a sudden, they go to reschedule and it puts more burden on the healthcare teams. It's different. It's not as easy as it used to be. So the pace of rescheduling has changed. So what that means, Kyle, is usually our scheduled backlog, which we do have, as you point out, visibility to, is very, very predictable. And it's gotten, not crazy, crazy, but less predictable on the margins. So it's been harder. What I will tell you is, we have been pretty active like, I am sure, everybody and you guys as well looking at volume of elective surgery, not just some of the peaks, but elective surgery across healthcare, we looked at office visits and tried to look at in-person visits versus telehealth. And the problem for orthopedics is, you can't really do a surgery without an in-person visit because they have to assess the knee and assess the patient physically. So it's possible but not it's tried and true and many surgeons don't feel comfortable. So when we look at those numbers, right, they are down versus Q1 2020 because don't people forget January and February were actually pretty good months. They were for us and they were with the industry volumes. So the simple fact is, we fundamentally have a position that actual knee arthroplasty volumes in the U. S. are certainly not back at 2019 levels in Q1 because they are just not. We have got through the first eight weeks of 2021, all the reports are suggesting those metrics on visits and elective procedures are down 15% to 20% pegged for the quarter. I see it as kind of 20% to 25%. March is unclear to us, but it looks like March is going to continue. There is no doubt, as we talk to our surgeons that their schedules and their backlogs are reduced and lighter because plenty of patients have put off surgery and particularly new patients. The new patient volume is down. They put off surgery and they are waiting. So Q1 is going to be challenged and thus what you see our stuff and I think it's going to be an industry thing, personal view. As far as Q2, it's still uncertain. I haven't seen anything to suggest and it's not like we have a great crystal ball to say that it will materially change. But I do think that the opportunity to execute stronger than we go into Q2 because you have got the summer months, you have got vaccines continue to grow. We just heard the administration talk about having every adult vaccinated by May, right. So those types of things start to happen and we can get the wary patients back, then we have a chance to come up off this floor that I think we are at in procedure levels and continue to get growth back in new patient demand. So that's what we are seeing. And I think if you track our performance, we have been slightly worse because we talked about primary only in our portfolio is more at risk then we don't have revision and we don't have other stuff like that. But we haven't been that far off the market. But you just do the analysis of where the market stands and I think that that's what we are seeing for Q1 as well. And don't forget Q1 also was impacted by, what, like at least three days but potentially a whole week of weather-related stuff. And it goes back to reschedule there. It's hard to reschedule all that business in the COVID environment. So that's really an impact from an industry perspective for Q1 arthroplasty.

[Kyle Rose:]

Okay. I appreciate that. And I want to ask a follow-up to Robbie's question. When you think about new products this year, you launched Cordera Match towards the end of last year. You have got the ASC knee coming in the second half. You have got the Stryker relationship at some point this year. How should we think about contribution from new products in 2021? And then I will ask my second question now as well. You talked about robotics and exploring opportunities there. Can you just let us know what that means? Are you going to launch your own robots? Are you looking to partner with others? Like what does that mean?

[Mark Augusti:]

Yes. Let me, I will spend more time on that because that's the fun stuff. But look, the first thing is, I don't think we are prepared to tell you exactly where that is. Give us a chance to get some of these FDA clearances and move forward. And I think we owe you some thoughts about how we will talk about that and how we will talk about uptake of new products and we will come back to you on that with a more thoughtful answer. We certainly have it modeled. But I don't think we are ready to give that level of detail color. And as you know, we have got a wide target here. I am very, very bullish about what we are doing with our ASC knee. I hope the fact that we have submitted the dossier to the FDA gives you the sort of proof points that, well, they really have made progress on this and it's real. So there's a lot of good stuff there. But we still have to execute. We still have to get the clearance and get going commercially. And don't forget, for conformance this is the world change, like our surgeons are really, really excited. We know that we are on the right track because there is growth in the ASC. But surgeons need to see and touch and feel and they want, they are asking a lot of good and interesting questions. And we have to execute on that. Robotics is a really interesting question to me. Clearly, as a smaller company, the idea of conformance and frankly, perhaps we are certainly even more capital constrained smaller company, the idea that we could be a leader on robotics, I think wouldn't have made sense. And so we didn't choose to pursue that. I have said publicly that we want to be, at best a fast follower and see how it plays out. As I said in my prepared remarks, it's not clear to me that there is a clinical and health economic rationale here. I mean I understand the hypotheticals but they are not there yet. There's no doubt that hay has been made with the marketing of it but we are about the ASC and we are about outpatient. And my view is, at least today, other than certain places that can afford it, most of the robotics is being targeted to in-patient. So the question for us and what now this capital raise will allow us to do, there's a lot of different technologies and potential partners out there, there's a lot of advancement. So the question we are asking ourselves is, what is the right way to think about how we can complement our approach and pursue robotics likely through partnerships and development opportunities. And so we are going to proactively look at that. I mean, we have always thought and felt that a really neat solution would be a robotic personalized solution. So we could replace jigs and the cost associated with that and have real-time inter-operate planning and whatnot. So we are going to use the capital that we have got on hand now to actually explore that. And so as always as we think about what that program might look like, if we are going to change our R&D spend in any material way, we will talk about that. We are going to be prudent and as soon as we are thinking about some or ready to discuss something, we will put it out there as part of our new product roadmap.

[Kyle Rose:]

Great. Thank you for taking the question.

[Mark Augusti:]

Thanks Kyle. Good questions. I appreciate it.

[Operator:]

Thank you. And I am not showing any further questions at this time. I would now like to turn the call back over to Mark Augusti for any further remarks.

[Mark Augusti:]

Okay. No further remarks. I just want to appreciate everybody for attending the call. I appreciate the questions. Thank you operator. That concludes our call.

[Operator:]

Thank you. Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.