Vivani Medical, Inc.
Q2 2017 Earnings Call Transcript

Published: 2 Aug 2017

[Operator:]

Ladies and gentlemen, thank you for standing by. Welcome to the Second Sight Q2 2017 Results Conference Call. During the presentation, all participants will be in a listen-only mode. Afterwards, we will conduct a question-and-answer session. [Operator Instructions] As a reminder, this conference is being recorded, Tuesday, August 1st, 2017. I will now turn the conference over to Lisa Wilson, Investor Relations. Please go ahead ma'am.

[Lisa Wilson:]

Thank you, George. Good afternoon and welcome to Second Sight’s second quarter 2017 earnings call. This is Lisa Wilson of Investor Relations for Second Sight. With me on today’s call are Dr. Robert Greenberg, Chairman of the Board; Will McGuire, President and Chief Executive Officer; and Tom Miller, Chief Financial Officer of Second Sight. At the close of market, the company issued a press release detailing financial results for the six months ended June 30, 2017. The press release can be accessed through the Investor Relations section of the Second Sight website at secondsight.com. You can also access the webcast of this call from there. Before we get started, I would like to remind everyone that any statements made on today’s conference call that express a belief, expectation, projection, forecast, anticipation, or intent regarding future events and the company’s future performance, may be considered forward-looking statements as defined by the Private Securities Litigation Reform Act. These forward-looking statements are based on information available to Second Sight’s management as of today and involve risks and uncertainties, including those noted in this afternoon’s press release and Second Sight’s filings with the SEC. Such forward-looking statements are not guarantees of future performance. Actual results may differ materially from those projected in the forward-looking statements. Second Sight specifically disclaims any intent or obligation to update these forward-looking statements except as required by law. A telephone replay of the call will be available shortly after completion of this call for the next two weeks. You’ll find a dial-in information in today’s press release. The archived webcast will be available for one month on the company’s website, secondsight.com. For the benefit of those who may be listening to the replay or archived webcast, this call was held and recorded on August 1, 2017. Since then, Second Sight may have made announcements related to the topics discussed. So, please reference the company’s most recent press releases and SEC filings. And with that, I'll turn the call over to Second Sight’s Chairman, Dr. Robert Greenberg.

[Robert Greenberg:]

Thank you, Lisa. And thank you all for joining the call this afternoon. We had a particularly strong second quarter and I'm excited to share the details with you. During the quarter, revenue was up sequentially and more than doubled year-over-year from $1.0 million to $2.2 million. We expanded reimbursement coverage with the addition of Novitas, the largest MAC in the U.S. This raises the total U.S. population living in covered states from a 120 million to over 200 million. The global reach of the Argus II also continues to grow. We expanded our footprint in Asia with two implants from South Korea and a second implant was completed in Taiwan where we just entered the market during the first quarter of this year. Additional implants were scheduled in these markets for later this year. And two weeks ago, we activated our first patient in Russia and will continue our efforts to develop this potentially significant market. In R&D, 14 Argus patients have been tested using a computer in a lab to assess the feasibility of advanced retinal stimulation techniques. Results so far are encouraging and we're now incorporating the most promising algorithms tested into the full Argus system and we will begin evaluating patient performance using these upgraded Argus systems later this year. Our test patient at UCLA with a wireless cortical stimulator continues to do well. And as a reminder, though this device is not the Orion, but a commercially available device that we use to collect initial human data and cortical stimulator provision. Also in mid-July, we submitted an Investigational Device Exemption application with the FDA to conduct a clinical feasibility study with the Orion Visual Cortical Prosthesis system with up to five blind human subjects. And we look forward to receive a response from the FDA and are very excited to reach this important milestone and believe this technology has the potential to dramatically increase our addressable market. We're encouraged by the momentum in the business and look forward to continue growth in Argus implants around the world. The total number of implants performed during the second quarter grew to 19 compared to 14 implants performed during the first quarter of this year. With expanded reimbursement coverage and new markets, we expect to see a continued growth in the business. Before I turn the call over to Tom to discuss the quarter's financials, I'd like to take a moment to thank Tom for all of his contributions to Second Sight. He was an integral part of our IPO process, pulling everything together on an incredibly short timeline. He has been a valued member of our management team and we wish him the best in his future endeavors. And as previously reported, Tom will stay on while we work through the transition. And with that, I'd now like to turn the call over to Tom Miller to review our second quarter results. Tom?

[Tom Miller:]

Hey, thank you, Bob. For the second quarter of 2017, net sales were $2.2 million compared to $1 million in the second quarter of 2016. Total implants increased to 19 during the second quarter, up from 14 implants during the prior quarter and 11 during the second quarter of 2016. The average revenue per implant was $118,000 in the second quarter of 2017 compared to $94,000 in the second quarter of 2016, reflecting the benefit of higher CMS pricing and volumes in the U.S. During the quarter, nine implants were performed in North America and 10 combined in Europe, the Middle East, and Asia. We generated a gross profit of $1.1 million in the quarter compared to a gross loss of $2.2 million in the second quarter of 2016. Goss profit in the second quarter of 2017 included a credit of $743,000 to partially reverse a previously established reserve for slow-moving inventory as implant volume rebounded. The gross loss for the second quarter of 2016 included a reserve for slow-moving inventory of $1.5 million. R&D costs including the offset due to grant revenue were $1.9 million during the second quarter of 2017 compared to $916,000 in the prior year quarter. This approximately $1 million increase was primarily due to higher spending on staffing and outside consultants related to new product development efforts and a decline of $682,000 in grant revenue due to a grant that was fully utilized by the end of first quarter of 2017. We expect that grant revenue and overall R&D cost will continue at approximately the second quarter spending levels for the remainder of the year. Clinical and regulatory costs were $684,000 during the second quarter of 2017 compared to $568,000 in the prior year quarter, primarily related to increase cost of preparing for the Orion IDE submission and a higher number of patients entering post-market studies for the Argus II due to the increase in implants. Selling, general, and administrative costs were $5.3 million during the second quarter of 2017 compared to $4.8 million in the second quarter of 2016, reflecting increased spending on staffing and consultant related costs as we work to build out our commercial efforts. Our net loss for the second quarter of 2017 was $6.8 million or a loss of $0.12 per share. This compares to a net loss of $8.5 million or a loss of $0.23 per share in the prior year quarter. Our non-GAAP net loss for the second quarter was $0.12 per share compared to non-GAAP net loss $0.17 in the second quarter of 2016. A full reconciliation of our GAAP, net loss, or non-GAAP net loss including the per-share reconciliation can be found at the tables at the end of our earnings release. Moving to the balance sheet, as of June 30, 2017, we had $18.1 million of cash and money market funds with no debt. Operating activities used about $6 million of cash during the second quarter of 2017, which is flat with Q2 of 2016 and represents a sequential improvement of about $600,000 from the first quarter of 2017. With that, I'll turn the call over to Will. Will?

[Will McGuire:]

Thank you, Tom. As you can see from our results, we've been focused on executing our business strategy and meeting our commitment. In the U.S., a revised Centers of Excellence strategy continues to gain traction. As a reference, in 2016, we had three accounts do two implants each in North America. These were our three highest volume accounts that year. During the first six months of 2017, we've had one account perform four implants, one account performed three implants, and one account performed two implants. This is exactly what we want to see as more accounts truly adopt Argus. As a reminder, our goal is that each Center of Excellence will be a high-quality surgical center that performs at least four implants per year, possesses the ability to do regular patient screening and surgery schedule, will provide accurate post-surgery programming, and is capable of managing the artificial vision rehabilitation process. We are now taking steps to aggressively expand our account base as we're confident that we have the understanding of resource requirements and expectations for a new center and as we have referenced with respect to expanded reimbursement and qualified patient candidates, we see account expansion as a primary execution lever to grow the business. Thus far, we have added two U.S. centers this year in Gainesville, Florida and most recently in Boston and remain on track with our 2017 goal of adding a total of five to 10 centers. The new center in Boston is significant because it's our first center in New England where already have Medicare coverage. Also the Northeast is a significant expansion opportunity for us going forward with a sizable target [Indiscernible] population. Regarding our patient database, we now have 65 patient candidates who have been telephonically screened by independent medical professionals; two-thirds of these screened candidates will typically pass the final physical screening at our sites and should go to be implanted with the Argus. We have an additional 113 patient candidates that have been preliminarily qualified by our customer service team for assignment with an independent medical professional. In total, we're confident that we now have at least 50 high probability implant candidates in our database. The growth in refinement of this data base is very exciting. As we gain more experience tracking patients from initial contact through surgery, the database will create more visibility regarding potential patient implants. As a final note, 13 of the 17 implants in the first half of this year came from our database. Now, turning to Argus II in the U.S. The Novitas coverage decision was a key milestone for us. Novitas is the largest MAC in U.S., covering 11 states and the District of Columbia with a total population of about 80 million people. Argus II can now be covered in five of the eight MACs. The total population living in the states covered by these five MACs is approximately 200 million people or 62% of the U.S. population. This decision by Novitas serves as a an important bellwether for other MACs across the U.S. We continue to engage with the remaining three MACs and help filed or will file additional reconsideration requests with all non-covered MACs before year-end. As previously disclosed in an 8-K filing, CMS issued a preliminary Medicare outpatient payment rate for 2018 of $122,000 for Argus and the associated surgical implantation procedure. In determining the proposed payment rate for 2018, CMS relied on three hospital claims submitted in calendar year 2016. In 2016, the average reimbursement rate was $95,000, resulting in a lower average hospital claims than would be expected using this year's average reimbursement rate of the $150,000. We expect more claims data from 2016 to become available between now and the final ruling in November. We will continue working with our customers to stress the importance of providing complete and accurate Argus claim submissions to CMS. We will also provide comments and recommendations to CMS regarding the proposed rate during the coming months and expect other organizations and customers accounting as well. We believe that $150,000 is an appropriate outpatient payment rate that allows hospitals to be fairly reimbursed for the implanting procedure and look forward to a final ruling from CMS later this year. In addition, the CMS postings also address calendar year 2018 payments for the recently created codes for the initial programming and the reprogramming services for the Argus. The proposed hospital outpatient payment rates for the initial programming and for the reprogramming are $253 and $111 respectively. With codes established and payment rates to be finalized this year, we will start working with our customers to procure coverage for these services. Outside the U.S., we're making good progress in Asia. Through distribution partners in South Korea and Taiwan, we completed three implants in Q2. All patients are starting the rehabilitation process post-surgery and additional patients are expected to be scheduled in both markets. We also completed our first implant in Russia at the end of June and expect a second surgery later this year. We continue to be excited about the long-term prospects for these markets and are working with authorities in each country to secure a full product registration along with funding and/or reimbursement. In the U.K., things are progressing with the NHS England Commissioning through Evaluation or CtE program. And our current expectation is that the first implant will not occur until early 2018. We remain confident the government will fund 10 implants. We also continue to pursue reimbursement for additional regions of Italy as well as national reimbursement decisions in Turkey and Belgium. On R&D front, 14 current Argus patients have been tested using advanced retinal stimulation techniques with promising results. Keep in mind, this testing is conducted in the lab using the computer to directly drive the implant and bypasses the current Argus Systems' glasses and much of its software. We are now incorporating the most promising algorithms into the actual Argus System via software changes and will begin testing of patients later this year. We have submitted a protocol to the authorities in Germany requesting approval to begin a clinical trial treating better-sighted RP patients with the Argus technology and hope to start enrolling patients before year-end. We are also awaiting a decision by the authorities in England for expanded testing of subjects in the company's dry AMD feasibility study. As a reminder, we want to test the advanced retinal stimulation techniques I just discussed with the AMD patients in order to measure benefit. As you can see, we have multiple shots on goal to significantly expand our addressable market. We remain on track with our Orion project. As previously discussed, we completed our IDE submission to the FDA last month and we will complete the Orion feasibility submission in Europe this week. This groundbreaking technology holds the potential to restore useful vision to millions of patients worldwide who are blinded by nearly all currently untreatable causes. We anticipate implanting our first Orion in human subject later this year. I'm very pleased with our R&D and clinical execution in the first half of 2017. We achieved all of our major internal milestones and look forward to continuing to execute in the second half of 2017. On the commercial front, our implant volumes are growing, we've expanded reimbursement coverage, and we've entered three new markets this year. With momentum continuing into Q3, we are confident that we will meet our objectives for the year and be well-positioned for 2018 and beyond. Before taking questions, I'd also like to thank Tom for his hard work and dedication to Second Sight's mission. Search for a new CFO is progressing nicely and we hope to have a replacement for Tom named in the near future. In the meantime, Tom remains actively engaged and is prepared to assist with the transition. With that, I'll open the call for questions. Operator, please proceed with the instructions.

[Operator:]

[Operator Instructions] And our first question comes from the line of the Dallas Salazar with Atlas Consulting. Please go ahead with your question.

[Dallas Salazar:]

Hey guys. Great progress made during the quarter. Hope to see it continue. Can you go ahead and stack rank U.S. and OUS markets, just -- I guess the order of expected strength over the next 12 months?

[Will McGuire:]

Sure. Yes, I think we've touched on this in the past. I mean overall I expect our trend to be one of increasing implant volumes, but given some of the recent developments and given just the potential, the U.S. market definitely has the highest potential for growth and is a big focus for us. And I'd say a couple of drivers there Dallas, first, we have the potential for continued geographic expansion where we've had Medicare coverage, but no implanting centers. Boston is an example of that where we just opened up. New York is another place where we're focused on opening a center or two. We don't have a center New York City; we don't have one in Upstate New York. The recent Medicare coverage expansion by Novitas that opens up a lot of other geographic areas. So, in that entire area therewith 80 million people, we only have three centers right now. So, we'll definitely be adding centers there in places such as such as Texas and New Jersey. We also are making, as I reference, really good progress with our patient database in the U.S. and this patient data base continues to grow as well and in numbers, but it also continues to improve as far as the quality of patients. So, what this database will allow us to do is really to have a have a more consistent flow of qualified patients to our centers in the U.S. And then as I also mentioned the centers that we have that have been in place for some period of time that are in a covered MAC, we're going to see a number of those start planning on a more regular basis, which will drive volume. And then finally, I guess the last piece, we still have three MACs that have not made a coverage decision and we're hopeful that we'll get additional positive coverage decision from these MACs either this year or sometime next year, which just again, just increases the geographic areas for us to open centers and to treat Medicare patients. Outside the U.S., I probably don't see as much opportunity for growth in the next 12 months, but in the long-term, I do think the trend will be positive there. This year -- certainly the first half of this year, we've experienced some incremental growth from our indirect markets and we may see some continued upside from the indirect markets later this year. But overall, keep in mind, that our volume is relatively small and it's still possible to see some up and down movements with implant volume in any of these markets and we're not necessarily -- even though we expect to be growing, we're not necessarily immune to any seasonal fluctuations that any other medical device company would experience with a product that's used in elective case.

[Dallas Salazar:]

Sure. Thank you for that. And you actually answered one of my two other questions there, so appreciate the color. The last question that I would have is -- it’s a two-part. So, first, is the CMS 2018 proposed rate of $122,000 for the Argus II likely to change? And two, what was sort material are you submitting to have this increased?

[Will McGuire:]

Sure. Yes, I'll take that, this is Will. It could change, I mean it could go up or it could go down. As I stated, the current rate proposed is based upon three claims from 2016. We know there's more than three, something closer to six, seven, or eight additional claims that could be submitted and reviewed by CMS to make a final decision. Now, we've seen the majority of those claims and at this point, we don't think any of those claims would have a significant impact on the rate either up or down, but there's also one or two claims that we haven't seen dollars. So, not having seen those, it's hard to say if the data would drive the final rate up or down. But, again, we are working with our accounts as closely as possible to make sure that they are accurately and fully submitting data to CMS, so that CMS can make an appropriate decision. Now, as far as what we're doing, we have talked about in the past, we've lobbied that we'd like to see the rate remain unchanged from where it is right now. We think $150,000 is an appropriate rate that allows our customers to get sufficient reimbursement for the device and for the procedure and we'll continue to make our case with CMS. So, there's a period now -- that's a comment, so during this comment, we will provide our comments to CMS about what we think is appropriate as well as any alternate ways that they could approach rate-setting for 2018. And then we also expect that some of our customers and other industry trade groups will provide comments to CMS during that time period as well. So, I mean I guess bottom-line, we're hopeful that it remains at least where it's at now, but it's hard for us to give you any more color or put any probabilities on what the final rate will be. Hope that helps.

[Dallas Salazar:]

Yes. No, that solves it out. I can appreciate that. That's all that I had for you guys. Look forward to chatting in a couple of months. Thank you.

[Will McGuire:]

Great. Thank you.

[Operator:]

[Operator Instructions] There are no further questions at this time. I'll now turn the call back to Will.

[Will McGuire:]

Great. Thank you. So, thanks to all of my coworkers at Second Sight for the hard work this year and thanks to our investors for their continued support. Have a great day.

[Operator:]

Ladies and gentlemen that does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your lines.