Inari Medical, Inc.
Q3 2020 Earnings Call Transcript

Published: 12 Nov 2020

[Operator:]

Ladies and gentlemen, thank you for standing by. And welcome to Inari's Third Quarter 2020 Earnings Conference Call. At this time, all participants lines are in a listen-only mode. After the speakers' presentation, there will be question-and-answer session. . I would now like to hand the conference over to your speaker today, Ms. Caroline Corner. Please go ahead, ma'am.

[Caroline Corner:]

Thank you, operator. Welcome to Inari's third quarter 2020 earnings call. Joining me on today's call are Bill Hoffman, President and Chief Executive Officer, and Mitch Hill, Chief Financial Officer.

[Bill Hoffman:]

Thank you, Caroline. And thank you everyone for joining us today. We have enjoyed a busy and highly productive Q3, which we will review in a moment. But I'd like to start first with a story that might help remind you of who we are and what we do. Last quarter, I shared with you a story about a patient with a massive pulmonary embolism, who was in such poor condition that his wife was summoned to the cath lab to say goodbye. Moments later, the physician used our FlowTriever technology to extract several large blood clots from the patient's pulmonary arteries, leading to immediate improvement of symptoms and vital signs while the patient was still on the table, followed by a remarkable and rapid recovery.

[Mitch Hill:]

Thank you, Bill. And good afternoon, everyone. Inari revenues for the third quarter of 2020 were $38.7 million compared to $25.4 million for the prior quarter and up $24.5 million or 172% from $14.2 million for the same period of the prior year. This year-on-year increase was driven by the continued expansion of our sales force, the opening of new accounts and deeper penetration of our products in existing accounts. Revenue was split between our two products as follows. 37% of our revenue was derived from the sale of ClotTriever products during the third quarter of 2020 compared with 38% in the prior year and 63% was derived from the sale of FlowTriever during the third quarter of 2020 compared to 62% for the third quarter of 2019. Gross margin was 91.7% for the third quarter of 2020 compared with 89.4% in the third quarter of 2019. During 2020, the company has reported gross margins of 90% in Q1, 86.3% in Q2 and now 91.7% in Q3. As you recall, our Q2 margin was adversely affected by the write-off of idle capacity costs during the month of April. Had these costs not occurred, both our Q2 and Q3 margins would have been in the 90% range, or consistent with Q1. Operating expenses were $28.3 million in the third quarter of 2020 compared with $11.8 million in the same period of the prior year. R&D expense was $5.2 million in the third quarter compared with $1.7 million for the same period of 2019. That $3.5 million increase in R&D expense was primarily driven by an increase in headcount as well as product development and clinical evidence development costs. SG&A expense was $23.1 million in the third quarter of 2020 compared with $10.1 million for the same period last year. The increase was primarily due to personnel-related expenses as a result of increased headcount across our organization and increasing commissions due to higher revenue, higher facility costs and public company compliance costs. Net income for the third quarter of 2020 was $6.5 million compared with a net income of $0.4 million for the same period of the prior year. I'd like to make a quick comment on the company's positive net income during Q3, which we appreciate, by the way. As a reminder, we are not optimizing the company to produce net income. Rather, we are building Inari to deliver sustainable revenue growth and Inari's net income is a positive byproduct of the company's performance, and it allows us to invest more aggressively in the growth drivers reviewed by Bill rather than using the company's capital to cover operating losses. The basic and fully diluted net income per share for the third quarter were $0.13 and $0.12 respectively and the weighted average basic and diluted share counts were 48.3 million and 55.4 million respectively compared with a basic and fully diluted net income per share of $0.06 and $0.01, respectively, and a weighted average basic and diluted share counts of 6 million and 43.9 million respectively for the same period of the prior year. The number of shares last year is significantly lower because of the conversion of preferred stock and additional common shares issued as a result of the IPO. I'd like to move on to a few balance sheet updates. Our cash balance at the end of the third quarter was $168 million. During Q3, we repaid a $30 million term debt facility that existed at the time of the company's IPO back in May. Along with the repayment of the term debt facility, we established a new revolving credit facility with a capacity of $30 million. During the first nine months of 2020, our cash flows from operating and investing activities were $0.4 million compared to a negative $6.2 million during the first nine months of 2019. As demonstrated by these figures, Inari continues to operate with a relatively neutral cash flow profile. We believe our cash on hand is sufficient to fund our current operating plans for the foreseeable future. This includes the investment initiatives as outlined during our recent public offering. With that, I'd like to thank you for your attention. And I'll now turn the call back over to the operator for your questions.

[Operator:]

. Our first question comes from the line of Bob Hopkins with Bank of America.

[Bob Hopkins:]

My first question is really on the market. Because these extraordinary results that you've put up here clearly suggest that this market for treating venous clots with mechanical thrombectomy technologies is not only inflected, but inflected in the middle of a pandemic, which is just pretty amazing. So, what I'd love to get a better understanding from you, is there anything kind of one time in these results in your view? And maybe how much of the prothrombotic nature of COVID has played a role in increasing awareness of this problem and of your therapeutic option? Just the low level thoughts on the market.

[Bill Hoffman:]

Bob, you're seeing the same things that we're seeing. I think there's a self-evident nature of the clot that's been – it's very satisfying. Physicians say it's satisfying. Patients get better on the table and you can see why. You can even see the clot. And I do think there's an inflection that is not one time in nature. There's no reason to believe it's one time in nature. There's probably dozens, maybe even hundreds, peer-reviewed journal articles at this point showing the correlation or the causative effect of COVID on clotting disorders. And yet, we really haven't seen confirmed – a lot of confirmed COVID positive patients being treated. We've just not seen much of that. I suspect we've treated more than we know, some of them are probably positive yield, but not known at the moment of the procedure. But there is, as you suggest, a lasting impact. My mom knows that VTE, deep vein thrombosis and pulmonary embolism, is associated with COVID. So, there's a very common knowledge of this. And I don't think there's ever been that sort of knowledge and appreciation of the nature of this disease prior to COVID. So, I do think that's last thing. So, we'll see how this goes. But we don't anticipate – we're not seeing anything that suggests this is a one-time sort of phenomenon just based on COVID or any other variable.

[Bob Hopkins:]

I guess the other thing I wanted to ask you about is you mentioned a couple of technologies in the pipeline that could be TAM expanding. And I'm sure it's too early to go into much detail, but I was just curious if there's any more detail you'd be willing to provide on where you might be headed next.

[Bill Hoffman:]

Probably not yet. We're maybe another earnings call or two away from providing a little bit more color on that. But suffice to say that a clot management, the simple extraction – it's not simple, but the extraction of clot is not the only unmet need in the venous space. So, we've been very, very aggressive at really just trying to understand the unmet needs that overlap with our core competencies, which we believe are related to not just engineering, but also commercialization and knowledge of this disease state relationships in a commercial organization that's capable of being replicated. So, we're not quite ready yet. But we do like what we've seen. We think the unmet needs reflect just a real lack of attention that's been paid to the venous space until very, very recently. And so, we'll have more to say about that soon. But we are really excited about it.

[Operator:]

Our next question comes from the line of David Lewis with Morgan Stanley.

[David Lewis:]

I'll echo Bob's comments in the quarter. Congrats on a nice quarter. I wanted to just maybe follow-up on that last question, Bill, a little bit. In terms of the expansion that's happening in the marketplace, do you have a sense of whether the market's inflecting more in DVT relative to PE? And sort of related to that, I note that your sales force or commercial sales force theoretically could double this year based on your commentary you just provided. Where are they being deployed relative to DVT and PE?

[Bill Hoffman:]

The answer to the first question, we have not seen any differential uptake in DVT compared to PE or vice versa. It is happening at roughly the same pace. And I think the evidence for that is that our ratio of DVT to PE procedures has been very, very – remarkably consistent. Not even a noise since January, since really the beginning of our real commercial efforts in earnest, so to speak, about the beginning of last year. So, I don't think there's any uptake differential between the two. What was the second question, David?

[David Lewis:]

The sales force, 50 reps since the year. So, the rep count could double this year. I'm just curious where they're being deployed.

[Bill Hoffman:]

First of all, I'd say don't count on the doubling. We'll have more to say about that later. But I will say that our sales organization is – the same people selling DVT are selling PE. There's no bifurcated sales organization in that sense. We don't have any differential messaging or incentives or anything of that nature. So, we believe that every hospital that has a cath lab for an interventional suite is capable and probably will at some point be treating DVT and PE, right? These patients show up not in a hub and spoke or center of excellence sort of way that stroke may be characterized. These patients show up. Whatever catchment area they happen to be, they stumble into the ER, and they literally do stumble into the ER sometimes. So, we believe that our sales organization is going to continue to penetrate increasing number of these centers. We're probably in roughly 800 centers, maybe probably a little over half of those centers have both products. And that continues to increase as we sometimes get the – first, though, we get the DVT procedure installed and then PE. So, we think that will continue to grow. But there's no bifurcation. And we see just tons of running rooms, not just in expansion into new hospitals, but I think much more importantly, expansion into further adoption, deeper penetration into the patients who are showing up at hospitals we are already in. And I think there's a ton of runway in both.

[David Lewis:]

Just a couple of datasets came out here intra-quarter. Obviously, FLASH, your registry, as well as SUNSET and there are some other smaller datasets. I just wondered if you could what impact have these datasets had on the marketplace? Or do you think these datasets could have in the marketplace in the next couple of quarters?

[Bill Hoffman:]

I'll take that. And we have Tom Tu, our Chief Medical Officer, here as well if there's additional detail we can allow him to weigh in. So, were really, really excited about the FLASH data. Of course, it will be the 30-day follow-up tomorrow and be presented tomorrow at the AHA. We can't really comment much on that just yet. But the most important thing we're seeing here is safety. And conventionally or traditionally, the PE and DV treatments, mostly because their lytic based or have been conventionally lytic based, suffer from a fairly important harm signal. And what we're showing here is that – this is safe, right? We have now – FLASH showed 230 patients, FLARE showed 106 patients, Weibel has published with his own retrospective trial at 46 patients, Toma at 34 patients. High risk – these are the most sick PE patients, and we've seen one death in all of those. That's almost – a little over 400 patients. So that really matters. The FLASH showed no pulmonary injuries, no cardiac injuries, no intracranial hemorrhage, of course. And I suspect if you took 230 patients in almost any peripheral procedure, you'd see some harm signal stronger than what we're seeing. We believe this procedure is very, very safe. And that matters. Likewise, I think the impact on the clinical variables, the hemodynamic variables, pulmonary artery pressure decreasing, while cardiac index is increasing, heart rate decreasing, those things matter. And they correspond very closely to what we've seen anecdotally. The satisfaction of treating patients who feel better and tell you they feel better on the table. So, we think all that is very useful. That said, I think we've communicated this before, there is no inflection point anywhere in our product development cycle as we can see it right now. Nor in our clinical in our clinical cue, right. For better or for worse, our potential to grow is related to our ability to just execute the plan. So, all of these things are contributory. They're all very useful. We love the story that we're able to tell. There's been tremendous interest in this. We've had dedicated Clot Warrior Academy specifically to Flash. There's a lot of interest in it. But we don't see it necessarily as inflection points. It's just additive. And our success is determined by our ability to execute. If there's further questions, Tom can dive in here.

[Operator:]

Our next question comes from the line of Larry Biegelsen with Wells Fargo.

[Larry Biegelsen:]

Congratulations on hiring Kevin Strange. The name rings a bell. It's a nice pickup for you guys. So, just let me start with one short-term question just on Q4. I heard the comments on October. I think modestly higher than the run rate you exited Q3, if I heard correctly. Should we be thinking about Q4 sales similar or better than Q3. And I had a couple of follow-ups.

[Bill Hoffman:]

There's a reason why we're not delivering guidance. You're seeing the same things that we're seeing with the headlines, and they literally change every single day. And it's all negative. But I think we're in a little bit better spot this time. So, let me say this. In the third quarter, we saw momentum. Like, each month was significantly better, like an acceleration in the acceleration. We're very, very excited. Almost second derivative type stuff. We're very, very excited about that. Almost right from the very beginning of this quarter, we saw some increased headwinds, almost all related to COVID, just restrictions in ability to get into see our non-international stakeholders, things that just slow us down. Didn't stop the growth, but slowed things a little bit. We've seen the same sort of thing in November, a little bit better than October thus far. But I don't want to – I want to just make sure there's a bit of caution because just anecdotes piling every day. Tomorrow, we were supposed to do a live Clot Warrior Academy Live. And we just found out that the procedure was cancelled because of COVID. We see these sorts of things pop up on a on a fairly regular basis. So, that makes a difference. I will say that hospitals are in a much better condition, much better position this time to deal with COVID. As we've seen, there's more equipment, there's more ventilators, although maybe we don't need those. The pain is more distributed, it's not one or two centers. It's distributed over a much larger, much wider swath of hospitals. So, I want to be a little bit careful despite the fact that we have continued to grow thus far. I just want to be a little bit thoughtful and cautious about what might happen through the remainder of Q4. That said, our growth drivers remain intact. All of the things we talked about in the prepared remarks remain true. We have shown that we can execute in sub-optimal conditions. If there's even a modicum of constructive operating environment, we can execute. We found a toolbox that we did not have entering this COVID crisis. So, we feel good long term about our ability to execute a plan that is very, very aggressive. But again, a note of caution here for Q4 is in order.

[Larry Biegelsen:]

Two more for me. And I'll ask them both right now. On international, you're going to have at the beginning of next year approval for both of your devices in Europe. So, can you talk about what you're doing to plan for the international launches? And should we expect some revenues in 2021? And then, just lastly, Mitch, the P&L really stood out this quarter. I heard your color commentary. But a little more color on the gross margin, sustainability, and how we should think about OpEx going forward. Thanks for taking the questions, guys.

[Bill Hoffman:]

Regarding international markets, we were very, very excited up until about a few weeks ago, and Europe started to shut down. And that's going to create some challenges. So, again, the COVID impact is real. That said, we have a sales organization – the beginning of the sales organization, a real sales organization that's pretty fired up. We had lots and lots of discussions, both from the home office here and our new sales professionals with thought leaders and top physicians in the markets that we're targeting right now. We found a way to train. We can't obviously get on – we can't Tom or our top sales professionals here and go train in Europe. But we do have anatomic models. We've certainly learned how to use Zoom. We're super users. And so, we have found ways to be effective from afar. So, I like our chances of being able to execute this plan and as much as we are able to be in hospital. So, we'll stay tuned. We do expect revenue next year. Although I would say, at this point, it's measurable, but not meaningful, is the way we're thinking about this so far. I'll turn the other question over to Mitch.

[Mitch Hill:]

And what I was trying to get to in my prepared remarks are the kind of gross margin – I'd say normalized gross margins for 2020. And because we had some dislocation there in Q2 due to idle capacity, if you sort of factor that out and you follow that through to Q3, we're sort of looking in the 90% gross margin for the business throughout 2020. I think on a longer-term basis, as we've discussed before, we see this business, probably, in some part due to the international expansion that Bill just mentioned and some part due to the fact that we're still adding more tools, if you will, to the toolkit on the price per procedure basis for the FlowTriever device, we see the margin moderating a bit in the company. And we're still looking for a margin kind of in the low to mid 80s over the longer term for the business. But, clearly, in the near term, we feel like we're going to continue to have a very, very positive margin performance in the company. In terms of the operating expense, obviously, we've had some significant uptick compared to prior year and also compared to our sequential quarter. I think the best – the most exciting thing, I guess, is the growth in the R&D line. So, there, we're looking at the product development team, as well as the clinical evidence development group. And the opportunity to have there really is a result of the resources we acquired through the IPO to invest significantly in those two areas. And we see a tremendous opportunity to do that. We see ability, as Bill mentioned a couple of questions ago, to continue to improve the safety and effectiveness and performance of our devices as well, to look at some adjacent spaces in the venous anatomy, and to see what we can do there. So, the clinical evidence development side of the business is very – there's a very robust plan. We've added significantly to the headcount in both the R&D area and the clinical evidence development area. And I think we've talked before the wave that we are trying to create essentially has evidence and also a product performance. And basically, the kind of the gee-whiz of seeing the clock come out of people where more and more physicians will say, Hey, this is something that we have to do, it's the right way to treat these patients who are suffering from VTE.

[Operator:]

Our next question comes from the line of Bill Plovanic with Canaccord Genuity.

[William Plovanic:]

A couple of questions. How important is the 30-day FLASH data. What do you think is needed to really change the treatment guidelines for VTE?

[Bill Hoffman:]

As I said before, I think the FLASH data that we've seen thus far has been very favorably received without getting into any detail since the information is embargoed until tomorrow morning. We think the FLASH 30-day data will be useful as well. And yet, it's not guideline changing. It is additive. It's a terrific story. And it's contributory to the story that we have been telling with some evidence now. And it's all highly, highly favorable. But it's an execution story. And in order to change guidelines, it's almost a trailing indicator, right? It's something that occurs long after people kind of recognize the obviousness to some extent of the need to treat. I suspect it is level 1. Level 1 evidence is required to change guidelines. That's prospective multicenter randomized trial, New England Journal of Medicine quality sort of study that typically results in guideline changes. So, we're ways away from that. As we've discussed in the past, we are using information from FLASH and from CLOUT, which we haven't talked about in this call, to inform the ultimate kind of definitive trials that we think will be useful at changing guidelines. But for now, there is a ton of runway. And again, you cannot underestimate the self-evident nature of the clot. There's just never a time the clot comes out and someone says, well, I'm just not sure that really mattered. There's no chance that makes someone healthier, right? So, I think we've got a long, long runway. And we're even seeing some doubters, people that doubted the story, beginning to come around, especially with the safety data that's emerging from our trials.

[William Plovanic:]

Definitely evident at TCT, PERT and even VIVA. The second question is more for Mitch is just on -- 3x growth year-over-year is impressive. If you think about that, I think you mentioned over 800 accounts is – or facilities. As you look at the growth you're seeing, is this coming out of the expansion into new facilities? Or is this just getting that much deeper into where you are, or even if one out-balanced the other would be – just trying to understand a little.

[Mitch Hill:]

We're seeing it really as a kind of a balanced growth story for the company. We do continue through the horizontal footprint expansion of the business to add more folks to our sales team and to increase the number of territories. And we think we've got a pretty good growth path in front of us for that. So, there is some kind of net new accounts and net new territories that are involved in this story. But I think as or maybe even more important than that, they going deep idea, which is the second growth driver that Bill talked about earlier, is something we're seeing some great results out of that. And as kind of more and more institutions are interested in the idea of forming PERT teams and where the opportunity that we have to educate the referring physician community and to show them sometimes the evidence that the clot that Bill mentioned a minute ago that comes out of some of these patients, everyone recognizes that that matters. And so, we believe that we have a pretty balanced growth approach. And we're very focused in both of those areas to drive the company forward.

[William Plovanic:]

If I could, one last question. I think, Bill, your commentary was, the calling card has historically been DVT. And then kind of you educate them on the PE side of things kind of once you're in there. But given COVID, has that started to transition more toward PE first, leading with PE?

[Bill Hoffman:]

Yeah. I may have misspoke. I was maybe using that as an example. Sometimes it's DVT first. Sometimes, it's PE first. I think it's equally likely that PE is the driver and DVT is the follow up. Sometimes they're both introduced together, depending on which operators are targeted and which ones are kind of driving the introduction of the devices. So, I don't really think that DVT has been the driver in the past. I'm not sure that PE is the driver now. I think the real benefit or the real impact – I shouldn't say benefit. It's been an awful disease for all the reasons we know. But the real impact on VTE is the simple awareness of VTE generally, not just PE. And in fact – well, I'll leave it there. That's the nature of COVID. So, no, I don't think that PE is now being introduced first more than it has in the past.

[Operator:]

Our next question comes from the line of Danielle Antalffy with SVB Leerink.

[Danielle Antalffy:]

Congrats on a really strong quarter. Just a question on the go deep concept. And I guess I'm just trying to get a sense of sort of – if you look at the total market and where we are from a penetration perspective for interventions in DVT, especially PE, it's still very low. So, at your centers that have readily adopted this technology who you would maybe characterize as high volume users, where have those numbers ticked to? I guess I'm asking the question in the context of trying to get at, like, what's a reasonable assumption for where penetration, for example, in PE can go 10% today? Are you seeing centers already getting that number up to 25% higher? Any color you can give there?

[Bill Hoffman:]

Yeah, I think so. I think what you're asking is how well have we been able to penetrate the market on a more local level, rather than these global numbers that we've been sharing. If that's the question…

[Danielle Antalffy:]

Yeah, that's it.

[Bill Hoffman:]

Okay. The answer is, we have seen a handful, maybe even smaller than a handful of customers nearly maximized. And the way we talked about penetration, we think there's a ratio of PEs per bed per year, right? And that ratio determines kind of how many patients a given hospital of a given size is likely to see. So, that's the way we measure. There's a little bit of noise in that, but we've seen a handful of hospitals, smaller than a handful, penetrate very, very close to the levels that we might think of as full penetration, but that's rare. Most of them are in the very, very low single digits or teens in terms of penetration. What we're really excited about, however, is we have been able to increase it, right? We have been able in hospitals in which we focus on communicating with non-interventional stakeholders, pulmonologists, hospitalists, ER physicians, for example, we have been able to increase the number of patients being referred and that's very, very encouraging in the long haul. Eventually, what we'd like to do is get to a point where this is systematized. If you stumble into an ER with chest pain, the first thing that happens, you'll get an EKG, right? There's very low chance that someone's going to miss your MI, if you're unfortunate enough to have one. There's also no chance that once it's identified, they know exactly what to do with that patient. These things are all protocolized. We know who's going to treat, we know how the follow-up goes, we know how long the patient's going to be in the hospital and who follows up with the patient after they leave the hospital and so forth. And none of those things are true right now in DVT and PE treatment. So, I think there's opportunities not only just in the conventional sort of education of all of the non-interventional stakeholders, but there's also really, really important upside potential for us to systematize this process over time. So, that's going to take a little bit longer, but we are really encouraged to see our ability to impact this at the local level.

[Mitch Hill:]

Danielle, just one other idea to sort of put some numbers to what Bill was saying is, as you know, we believe over approximately 440,000 people present or could be eligible for these interventional procedures each year. So, if you think about that on a quarterly basis, call it 110,000 people and we did 3,700 procedures in Q3, you can see that we're still – this is a sub 5% type of penetration at the moment. And so, we have some institutions that are very well penetrated, but for the most part, across the market, we're just getting started.

[Danielle Antalffy:]

Just a question on the competitive landscape. You guys put up such a strong quarter. Are you seeing competition out there? Or is this not even the right way to look at it and this is not a zero sum game? That's my bent, but I don't want to bias your answer. So, yeah, I guess, just any comment you can make on the competitive landscape would be helpful. Thanks so much.

[Bill Hoffman:]

So, yes, I think you're right. It's clearly not a zero sum game. We've communicated about competition in the past. And I think I'll reiterate that now that it's been highly, highly net positive. Anybody bringing a thrombectomy catheter – and there's a number of new competitors. There'll be other ones coming down the pike as well. They are communicating – high quality rivals communicating a story that is about 80% the same as ours, right? The clot is bad. The clot should come out. Here's a way to get the clot out, eliminate thrombolytic drugs, eliminate the consequent ICU stay and the potential for bleeding. That's about 80% similar to our story. So, it's been highly, highly valued. I can't emphasize enough. The net positive impact of competition entering the space, the awareness and the communication of these stories is an all-time high and it's probably going to increase and that's been really terrific. And I think you can see that from the growth numbers. So, that said, our products are differentiated. We like our chances head to head. We are as aggressive as you might expect head to head because there's a patient on the other end of that catheter. And these aren't just whimsical sort of trials. And we're very serious about that. And we'll continue to be. But net positive overall and the more the merrier for all these things. Really good for patients.

[Operator:]

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