Ra Medical Systems, Inc.
Q3 2018 Earnings Call Transcript

Published: 14 Nov 2018

[Operator:]

Greetings and welcome to the Ra Medical Systems, Inc. Third Quarter 2018 Earnings Results Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to Allison Soss. Thank you. Please begin.

[Allison Soss:]

Thank you for participating in today’s call. Joining me from Ra Medical is CEO and Chairman Dean Irwin; and CFO, Andrew Jackson. Earlier today, Ra Medical released financial results for the third quarter of 2018. This earnings release and Ra Medical’s corporate presentation are currently available in the Investor Relations section of the Company’s website. Before we begin, we would like to remind you that we will be making forward-looking statements on this call, such as statements related to our go-to-market strategy, hiring expectations and our long-term product development plan. These forward-looking statements are subject to a number of risks and uncertainties that could cause actual events or results to differ materially. Information on these and additional risks, uncertainties and other information affecting Ra Medical’s business and operating results is contained in Ra Medical’s final prospectus filed with the Securities and Exchange Commission on September 27, 2018, and subsequent reports on Form 10-Q and Form 8-K. Forward-looking statements made during this call are made only as of the date hereof. And the Company undertakes no obligation to update or revise the forward-looking statements whether as a result of new information, future events or otherwise, except as required by law. In addition, during the course of this call, you may refer to non-GAAP financial measures that are not prepared in concordance with the U.S. Generally Accepted Accounting Principles and may be different from non-GAAP financial measures used by other companies. Investors are encouraged to review Ra Medical’s press release announcing its full 2018 third quarter financial results for the Company’s reasons for including those non-GAAP financial measures and its financial results announcement. The reconciliation of non-GAAP financial measures to the most directly comparable GAAP financial measures is also contained in the Company’s earnings release, issued earlier today. With that I will now turn the call over to Dean Irwin. Dean?

[Dean Irwin:]

Thank you, Allison. I’m pleased to welcome everyone and thank you for joining today’s earnings call. On these calls, we plan to provide you with an overview of our business, update you on the status of our commercialization efforts and other noteworthy items, and summarize our financial performance, and then open the call up for questions. This has been an eventful year for Ra Medical Systems, including the successful completion of our initial public offering, in which we raised the net proceeds of approximately $67.3 million. Andrew will provide more detail on the IPO later. Since this is our first earnings call, I want to take the opportunity to provide a brief overview of our Company and our business. Ra Medical Systems was founded over 16 years ago to design, develop and commercialize excimer lasers for the treatment of vascular and dermatological diseases. DABRA is our minimally invasive excimer laser and disposable catheter system that is used by physicians as a tool in the endovascular treatment of vascular blockages resulting from lower extremity vascular disease, a form of peripheral artery disease or PAD, both above and below the knee. If vascular blockages are left untreated, they can increase the risk of heart attack, stroke, amputation or death. There are up to 180,000 amputations performed annually in the United States as a result of PAD. And there are approximately 17.5 million PAD sufferers in the U.S. alone. And only 20% to 30% of these PAD patients are currently being actively treated. We focused our solution on safety, ease-of-use, versatility, and reducing healthcare costs. Our DABRA system photochemically breaks down plaque to its fundamental chemistry, eliminating blockages by essentially dissolving them without generating potentially harmful particulates. Our tool can cross and de-bulk a wide variety of plaque from soft thrombus to hard calcium. Unlike many treatments for PAD with mechanical and thermal components that may damage the arterial wall, our photochemical mechanism of action is designed to result in minimal vascular trauma. We currently have four patents issued and eight pending, covering several aspects of the laser system and delivery device, and we believe that our intellectual property is well protected. In May 2017, we received FDA 510(k) clearance to market the DABRA laser system and disposable DAPRA catheter in the U.S. for crossing chronic total occlusions in patients with symptomatic infrainguinal lower extremity vascular disease and with an intended use for ablating that channel in occlusive peripheral vascular disease. It is estimated that the annual U.S. total addressable market for PAD is over $1 billion and is growing. In September of 2016, the DABRA was granted CE mark clearance for the endovascular treatment of infrainguinal arteries via atherectomy and for crossing chronic total occlusions. We intend to pursue other indications including coronary artery disease and other vascular atherectomy indications including in-stent restenosis and improving luminal gain. Physicians using the DABRA in the United States are being reimbursed today. The safety and efficacy of the DABRA system is supported by our 2017 pivotal study, which was conducted to evaluate plaque photo ablation using DABRA in the endovascular treatment of vascular blockages resulting from lower extremity vascular disease. The study enrolled 64 patients at four sites with both above the knee and below the knee lesions. The final study results demonstrated 94% effectiveness at the time of the procedure with no reported serious adverse events. Additionally, our patients had no target lesion revascularization or TLR in their six-month follow-up. We have just commenced a longer-term registry where we will follow patients for up to two years to measure the benefits and the safety profile of the DABRA over this longer timeframe. We have case reports of patients with extended freedom from restenosis even out over four years, and this has prompted us to study this more closely. Our experience since our commercial has shown that the DABRA is performing as expected from both the safety and efficacy standpoint, able to treat both soft as well as hard plaques. Following a temporary placement period for the DABRA system and once customers decide to continue using the DABRA in their facilities, we typically enter into a laser usage agreement. The usage agreement provides for specific terms of the continued use of the DABRA, including a periodic maintenance fee. As of September 30, 2018, we had 34 signed usage agreements, up from at 8, at June 30, 2018. We then recognize the recurring revenue from single use catheter purchases. Our go-to-market strategy for DABRA is to initially focus our experienced and growing U.S. sales force on placing DABRA units in high-volume outpatient based catheterization laboratories or cath labs. Longer term, we will also be focused on selling to hospitals, expanding our geographic footprint, as well as securing new indications and acquiring or developing a suite of ancillary endovascular devices. I’m pleased to report that hospitals are being more receptive to bringing the DABRA in than we had initially thought. In the third quarter of 2018, we expanded our vascular team from 15 at the end of June to 24 by the end of September. Our strategy includes continuing to hire experienced medical device sales personnel, expanding our penetration into the market for the remainder of this year and into 2019. With recent consolidation in the endovascular space, we find that these experienced sales reps are available and we are capitalizing on that trend. Today, we announced that we have received approval for the prospective long-term revascularization study of DABRA, titled RESULTS. This registry is being conducted to measure that benefit and the safety profile of the DABRA over a longer time frame and with many where patients than our pivotal trial. We intend to provide periodic updates for the registry results. Our dermatology product is called Pharos. We have shipped over 1,000 Pharos excimer laser systems globally since we commercialized in 2004, and have received regulatory clearances or approvals in the U.S., Europe, China and South Korea. Pharos is used in the treatment of immunologically modulated disorders including psoriasis, vitiligo, atopic dermatitis, leukoderma. Psoriasis is the second most common skin disorder behind acne. Our Pharos product differs significantly from other products and offers benefits to patients. Among them is that the targeted nature of the Pharos treatment allows the operator to spare healthy tissue from exposure, making the treatment faster and safer than other forms of photo therapy or light therapy. Additionally, Pharos treatments are generally painless and are reimbursed by Medicare and nearly all major insurance companies under 3 CPT codes in the United States. We operate out of over 32,000 square foot facilities in Carlsbad, California with three controlled environments to manufacture our products. We believe that our existing facilities are capable of manufacturing over 400 lasers a year and 140,000 catheters a year. We are ISO 13485 certified and FDA and California State inspected. With that overview complete, allow me to turn the call over to our CFO, Andrew Jackson, to discuss our financial results. Andrew?

[Andrew Jackson:]

Thanks, Dean. In October, of this year, we successfully completed our IPO, selling 4,485,000 shares of Ra Medical’s common stock including the full exercise of the underwriters over-allotment at $17 per share. Total net proceeds to Ra Medical were approximately $67.3 million, including the underwriters exercise of the over-allotment and after deducting underwriting fees and other expenses. Turning to our results. For the third quarter ended September 30, 2018, total Revenue was $2.1 million, up 67% sequentially from $1.2 million in the previous quarter, and up 60% from $1.3 million in the third quarter of 2017. Vascular revenue grew to $789,000 from $94,000 in the previous quarter and from $43,000 in the third quarter of 2017. Dermatology revenue was $1.3 million, up from $1.1 million in the previous quarter and from $1.2 million in the third quarter of 2017. For the nine months ended September 30, 2018, total revenue grew to $4.3 million an increase of 9% year-over-year. During that period, the vascular revenue grew to $973,000 from $68,000 year-over-year and dermatology revenue decreased to $3.3 million from $3.9 million year-over-year. Gross margin for the third quarter of 2018 was 38.0% compared to the gross margin of 46.3% for the third quarter of 2017. Operating expenses for the third quarter of 2018 were approximately $5.6 million compared to approximately $2.3 million for the third quarter of 2017. This increase was primarily due to expanding our sales force and hiring administrative staff as we prepared to operate as a public company, an increase in stock-based compensation and an increase in travel and trade show expenditures. GAAP net loss attributable to common stockholders for the third quarter of 2018 was approximately $4.8 million or $0.59 per share compared to net loss of approximately $1.7 million or $0.23 per share for the third quarter of 2017. Cash and cash equivalents as of September 30, 2018 were $4.9 million. On October 1, we received the $67.3 million in net proceeds from the IPO. Net cash used in operating activities was approximately $10.1 million for the nine months ending September 30, 2018.

[Dean Irwin:]

Thanks, Andrew. In summary, we are executing on our plan. The device is performing as expected with no serious adverse events, and our physicians are reporting they’re finding even greater utility for the device. We are onboarding experienced and talented reps and our physicians are submitting for reimbursement and being paid for the procedure. This brings us to the end of our formal remarks. Operator, would you please open the call to questions.

[Operator:]

[Operator instructions] Our first question comes from the line of Matthew O’Brien with Piper Jaffray. Please proceed.

[Matthew O’Brien:]

Thanks so much for taking my questions. And good afternoon. I think just for starters, it might be helpful, talk a little bit about the number of systems kind of placed, sold, and then the usages number was 26, so up pretty meaningfully here versus Q2. So, I’d love to hear about the usage, uptick and how that affected the vascular number that you put up for the quarter, which is quite a bit higher than what I was modeling?

[Andrew Jackson:]

Yes. Thank you, Matt. So, 26 was actually the increase, not the total usage agreement that we had out there. There’s 34 usage agreements out there. So, it’s up 26 from the second quarter of 2018. We were very pleased with that. We believe that that’s the driver that’s delivering the catheter recurring sales. And for right now, we’re not guiding or giving the total number of lasers out there as we believe that’s not a meaningful predictor of our future revenue.

[Matthew O’Brien:]

Okay. But, Andrew, so just to be clear though, when you start to get those usage agreements, you can start recognizing the catheter revenue, is that right? So, what I’m asking is did you get a big bolus of revenue here in Q3 because you can recognize so much more revenue which is obviously a good thing as you’re turning all these guys on?

[Dean Irwin:]

Hi, Matt, it’s Dean. So, we recognize revenue whenever catheters are sold. What the usage agreement indicates is a level of commitment from that site. So, really, what we’re looking for is long-term commitments and not just individual catheter sales. So, when we place a laser into a facility, we start off training the physician, and of course they purchase catheters from us during that process. As they become comfortable and begin to see the benefits of the DABRA system, they execute a usage agreement, and then we continue supplying them these DABRA -- single use DABRA catheters on a recurring basis. So, the usage agreements are really a confirmation that the site has adopted the system as opposed to being able to recognize the revenue.

[Matthew O’Brien:]

So, then, -- it’s helpful, Dean, as far as the revenue on the vascular side goes, about $800,000, you went into the quarter with about 15 reps. So, that’s about $53,000 per rep, and I know it’s early days. Can you give us any details on some of your more experienced reps and how they’re trending on a quarterly basis in terms of revenue? And I understand, again, Q3 is seasonal quarter?

[Andrew Jackson:]

Early on in our launch, Matt, it’s really hard to come up with a metric per rep. Some reps are hitting the ground right away; they’re all very experienced reps when you hire them. At the end of Q2, the number of 15, we had just hired a bunch of them at the end of Q2. So, there were only getting trained and launching in Q3, ending with 24 reps. So, we had nice growth there, but right now it’s too early for us to predict the metric for revenue per rep.

[Matthew O’Brien:]

Two more for me. The SG&A spend was higher than -- I was modeling -- I know TCC [ph] fell in Q3 this year. So, how do we think about the SG&A spend in Q4 and then as we head into ‘19?

[Andrew Jackson:]

If you take out stock compensation, our SG&A was about $4 million. We expect SG&A to continue to be high as we hire people to comply the public company and also if we hire our sales force and spend marketing dollars commercializing the DABRA system.

[Matthew O’Brien:]

So, maybe take that $4 million number and ramp it a little bit here in Q4 and then maybe a little bit more in 2019 per quarter, is that fair?

[Andrew Jackson:]

That would be fair, and as our revenues grow, we expect that to be a decrease in percentage of revenue as revenue grows.

[Matthew O’Brien:]

And then, last one for me just on the pipeline here, there’s a lot going on. Any update as far as when we might expect some progress on the specific atherectomy indications or claim for DABRA first half of ‘19, second half of ‘19? And then everything on the international side as well as when you may push more aggressively from the vascular side of the business?

[Dean Irwin:]

So, as far as the additional indications are concerned, we expect to have the indication for that, certainly in 2019, it’s difficult to predict the precise quarter. Again, that particular study involves 180-day follow-up. But we will keep you posted on upcoming conference calls as to the status of both our registry as well as the study. Also, if you remember, we are actually cleared for atherectomy in Europe today. So, we’re going to be leveraging off of that and also opening up new geographical locations, perhaps as early as the end of 2019 in Asia.

[Matthew O’Brien:]

Super helpful. Thanks so much.

[Dean Irwin:]

Thanks, Matt.

[Operator:]

Thank you. Our next question comes from the line of Bruce Nudell with SunTrust. Please proceed.

[Bruce Nudell:]

Thank you, gentlemen, and nice start out of the gate. Just thinking about, now that you have a little broader clinical experience, has there been any learnings with regards to the suitability of DABRA for type of plaque, size of lesion, questions about -- any issues with deliverability, given the fact that it doesn’t have a guide wire? Let’s just start there, any learnings that you’ve kind of gleaned in the broader clinical experience?

[Dean Irwin:]

Sure. Hi, Bruce. We’ve actually learned a great deal. As you know, we’ve been commercial with this product for a few years and treated our first patient in 2012. What we’re hearing from physicians are that they’re finding additional utility of the device. Of course, the device treats all different types of plaque as well as its ability to cross, but we’re noticing that some of the physicians are using at a different access, styles as well as 4/5 [indiscernible] with buddy wires and a variety of other indications, many off label that aren’t surprising to us, but are certainly pushing the envelope. As far as adverse event, you still don’t have a single reportable adverse event and our success rate remains as high as it did during our pivotal study.

[Bruce Nudell:]

That’s great. And just turning back to the label again. You noted in the S-1 that some competitor read news saying, you’re encouraging off label use. Just comment generally on, is that an impediment where people are afraid they may not reimbursed for atherectomy? And just as a footnote to that question, it just sounds like the FDA is actually working collaboratively with you regarding this new study, basically help you with the label in place, or am I miss misreading that?

[Dean Irwin:]

No, I think, I tell the story, I was at the conference not too long ago, not this year, but previously, and one of the office of device evaluation people from the FDA came to me and we were talking about additional indications, and I mentioned atherectomy, and she told me, but that’s all you do, and you do that now. Atherectomy is a medical term used to denote the removal of plaque. And that’s really all our system does. We essentially dissolve plaque into its fundamental chemistry. As far as the reimbursement, the FDA doesn’t control reimbursement. That’s largely the payers and Medicare. So, if the physicians are actually performing the procedure, they should get reimbursed for it. And in our case, they submit for reimbursement and they are getting paid. And we don’t have a single report of any instance where that’s not true.

[Bruce Nudell:]

That’s very helpful. And my final question pertains to the price point. One of the great things -- one of the great selling points story’s been that even if it’s equivalent to other de-bulking tools is at a much lower price point. And, the question is, how’s that message been received, how stable is the pricing, and what’s the competitive response?

[Dean Irwin:]

Well, the new reimbursement numbers are out and they look good. Obviously, we are an arterio [ph] ablation or photoablation device. What we like to say -- and one of the real advantages of the Ra Medical story here is that we’re better medicine for the patients, and the doctors make more money while reducing overall health care cost. And that’s a terrific formula. As far as the competitive response, look, we have competitors saying all sorts of things, many of them not true, but our sales force is experienced. These are people who’ve been in the industry for years. We have a terrific product and it stands on its own merits, and that’s how we’re proceeding. So, we’re tackling all of those aggressions and tactics from our competitors.

[Bruce Nudell:]

Thanks so much and congratulations.

[Operator:]

Our next question comes from line of Craig Bijou with Cantor Fitzgerald. Please proceed.

[Craig Bijou:]

Thanks guys, thanks for taking the questions and good afternoon. I wanted to start with maybe follow-up on the sales reps. It looks like you guys added nine during the quarter. So, I just wanted to know, is that a good -- or how should we think about the run rate, or maybe potential adds for Q4, and then maybe in 2019? How are you guys thinking about expanding your sales force?

[Andrew Jackson:]

Yes. So, we’re planning on continuing to expand our sales force through 2018 and ‘19, Bruce -- Craig.

[Craig Bijou:]

Okay. Any numbers there? I mean, any way to think about it? And then, I guess, maybe just what kind of level of interest are you seeing from -- and I know you guys are targeting experienced reps, but what kind of interest are you seeing from those reps?

[Dean Irwin:]

Well, sales reps come in all sorts of flavors, and we certainly had our taste of them. But, we have a very experienced group of professional, atherectomy endovascular sales reps. We intend to continue bringing them on at a rate of perhaps as many as half a dozen per month, moving forward. And we expect our 2018 number to double by the end of 2019. Now, that being said, we expect some attrition from that group, but that gives you an idea of how aggressively we’re expanding our sales force. Additionally, we plan to give our sales force additional products in their bag. So, we’ll have more for them to sell and approach some of these endovascular specialists.

[Craig Bijou:]

Thanks, Dean. And maybe a follow-up specifically on your last point there. I mean, what’s the -- how should we think about the timing of potentially adding those ancillary products? Is that something that could be a 2018 event or is it more likely 2019?

[Dean Irwin:]

We’re working very diligently on getting this -- getting some of these new products into their bag as early as this year, the end of this year. So, this is imminent.

[Craig Bijou:]

Okay. Thanks for that. And on the results registry, just was hoping maybe you can expand a little upon at what point in time we might be able to provide that periodic update? And then, maybe what the specific outcomes that the registry is going to be looking at specifically?

[Dean Irwin:]

I mentioned earlier that we think we’re better medicine. One of the goals and efforts over the past 20 years has been to develop a device to unblock these clogged arteries without trauma to the patient. Less traumatic the treatment is, the longer the treatment lasts; that is there’s freedom from target lesion revascularization, and as you don’t have to bring the patients back over and over again, as you might have to do with some of these high pressure balloons, stents, and other atherectomy tools. We’ve been hearing from our physicians that patients that kept coming back for treatment seemed to remain symptom-free and freedom from target lesion revascularization much longer than after having been treated with other devices. So, this is what the result study is designed to show. What we’re going to do is produce interim results at 6 -- 6 months, 12 months, 18 months and 2 years to show the benefits of the DABRA system from a long-term standpoint. Of course, we’re going to be looking at adverse events as well, and to-date, we don’t have a single reportable adverse event.

[Craig Bijou:]

And maybe last one for me. I know you gave a little bit of color on the potential for atherectomy indication. But maybe just beyond that, in-stent restenosis, may be coronary, I mean any way we should think about the timing or maybe the steps that you need to do to get those indications?

[Dean Irwin:]

As far as in-stent restenosis, we know that our physicians are doing this on a daily basis around the world today. It would give us bragging rights, but physicians look at this tool, use it for a few times and realize it’s a great tool for in-stent restenosis. It really is. And since there’s no separate reimbursement for that, we might hope that in-stent restenosis adjunct to some other study. As far as coronary goes, I’ve been in discussions with some world-famous interventional cardiologists, and they are eager to start the coronary studies. So, I think we can expect a pilot study within the next few quarters.

[Operator:]

Thank you. Our next question comes from the line of Anthony Vendetti with Maxim Group. Please proceed.

[Anthony Vendetti:]

Just a follow-up also on atherectomy. So, you’re looking at starting some pilot studies and then there’s 100-day follow-up. Once those are done -- and assuming results are very positive and continue to get no serious adverse events, what would be the process with the FDA? Would that be a clearance filing -- a 510 (k) clearance filing or you get that approval?

[Dean Irwin:]

That would be a pretty basic 510(k) clearance filing. Again, our last study had 64 patients, which is a pretty significant number. We also had 180-day follow-up that had outstanding results, again no adverse events. The FDA is pretty familiar and comfortable with our device now. And obviously, we’ve been in discussions with them about the precise wording of the protocol, so that we don’t experience difficulties as we did with our initial pivotal study. So, that’s underway and we expect that to be a fairly simple and straightforward process.

[Anthony Vendetti:]

And would you be using any of the results from the European trial because you already have CE mark for it?

[Dean Irwin:]

No, we would not, and in fact, we would not even use results from our pivotal study. So, this would be a new set of patients, the new patient cohort, but not a significant number of patients, possibly as many as 100.

[Anthony Vendetti:]

And I know you said, the physicians are already using it for in-stent restenosis as well. Is getting those labels important or as you said, some of the physicians are using it already for that, but it certainly helps with the marketing, correct?

[Dean Irwin:]

Well, physicians speak to each other. As I said, when a physician tries the DABRA in our initial trial period, they remarked to us that it would be a great tool for in-stent restenosis, and of course, they proceed to use it in that manner. It’s a very safe device, it’s very effective for that, unlike a wire or other devices, it won’t get caught on the on the struts of the stent or won’t pierce the vessel and travel through the stent. So, from that standpoint, it really is an ideal device for in-stent restenosis. As far as how valuable the labels are for this, again, there is no reimbursement, for in-stent restenosis. So, it would really just give us bragging rights as opposed to any significant marketing effort. I think everyone -- all the physicians look at it and understand it’s a great tool for that and proceed to use it that way. So, it really won’t result in any significant economic benefit to Ra Medical other than being able to brag about it.

[Anthony Vendetti:]

Okay. And then, last on the sales and then just one quick question on gross margin. So, the number of sales people, I think you said is up to up to 24 and you’re looking at higher 6 per month. How many of the current sales people are dedicated to Pharos at this time? And I know that’s not where you’re doing the hiring, but I was just curious as to what that number is for Pharos?

[Dean Irwin:]

Okay. So, that number was entirely for DABRA for the vascular team. For the Pharos team, we currently have 4 sales people, and we’re expanding that sales force today. So, we can expect to see a significant expansion in both the Pharos sales force as well as the DABRA sales force. And I think you’re going to see that reflect in additional Pharos revenue.

[Anthony Vendetti:]

Okay. And then, lastly on the gross margin, I know it’s early, so it’s probably going to fluctuate quarter-by-quarter. 38%, is that -- maybe Andrew, is that a good number to think about going forward or when should that number start to tick up?

[Andrew Jackson:]

So, 38%, we are pleased with the increase from 20% from the previous quarter. And we think that as the excess capacity in our facility gets used up by increased unit production, in our vascular line, we’ll see that margin improve. So, we’re expecting the margin to increase in 2019.

[Anthony Vendetti:]

Okay. What would be a normalized -- like I said, there will be fluctuation, what’s your best estimate at a normalized rate?

[Andrew Jackson:]

As we grow, we’re going to be putting in new systems, but we see the long-term rate above 80% for vascular within two years.

[Anthony Vendetti:]

Okay, great. Thank you very much. I’ll hop back in the queue.

[Operator:]

Thank you. We have reached the end of our Q&A session. Allow me to hand the floor back over to closing remarks.

[Dean Irwin:]

Terrific. Well, thank you very much for joining us on our third quarter conference call. It was a very exciting time for us with both the IPO and significant vascular revenues. We look forward to keeping you posted as to not only our revenue increase but as well as our additional indications, additional products and results of our ramp-up in sales. Again, the DABRA is being very well received in the marketplace; we’re getting some additional excitement from some of the hospitals and larger facilities. And we believe that’s because we have an outstanding product that’s better medicine and lowers healthcare cost. Thank you very much.

[Andrew Jackson:]

Thank you.

[Operator:]

Thank you. This concludes today’s teleconference. You may disconnect your lines at time. And thank you for your participation.