Intersect ENT, Inc.
Q2 2020 Earnings Call Transcript

Published: 9 Aug 2020

[Operator:]

Good morning, and welcome to the Intersect ENT Second Quarter 2020 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. Please note, this event is being recorded. I would now like to turn the conference call over to Intersect ENT's CFO, Randy Meier. Please go ahead.

[Richard Meier:]

Thank you. And welcome, everyone, and thank you for participating in today's call. Joining me today is Tom West, President and CEO of Intersect ENT. Before we begin, I would like to remind you that we will be making forward-looking statements within the meaning of the federal securities law. Actual results and timing of the events could differ materially from those anticipated in such forward-looking statements as a result of those risks and uncertainties, which include, without limitation, our outlook for financial performance, sales force growth, clinical studies, approval of new products and indications and procurement of reimbursement codes and coverage, which are based upon our current estimates and assumptions as well as other risk details from time to time in the reports which we file with the SEC. We disclaim any obligation or undertaking to update or revise any forward-looking statements contained herein. Now I'll turn the call over to Tom.

[Thomas West:]

Thanks, Randy, and thank you all for joining the Intersect ENT Q2 2020 earnings call today. Entering the second quarter, the COVID-19 pandemic was unfolding across the nation, resulting in hospitals suspending elective surgical procedures and significantly reducing ENT office visits. At the beginning of the quarter, we estimated and shared our view that the second quarter revenues for Intersect ENT would be lower by approximately 85% to 90% relative to same period a year ago. As a result, we undertook significant action to reposition Intersect ENT in the face of these uncertainties, while determining a path forward, and in the challenges of pandemic. While our business was meaningfully impacted by the unprecedented conditions, we achieved stronger than expected second quarter revenues of $9.8 million, down 63% compared to the prior year period as elective procedures gradually resumed during the quarter. Importantly, Q2 witnessed progressive month-to-month revenue improvement that is carried into Q3 and through July. After working remotely for much of the quarter, we have returned, motivated and better trained. We are capitalizing on our unique clinically proven portfolio building upon our previous commercial and market access momentum while benefiting from pent-up sinus surgery demand attributable to the COVID-related suspension of elective surgical procedures. We believe we are on sound footing, and we are confident in our future. On today's call, I will first provide an overview of how the quarter evolved before discussing our continuing market development strategies and outlook. Then I will turn the call over to Randy, who will deliver our financial overview. The pandemic began to impact demand for our products in the latter half of March with a modest adverse effect in our Q1 results. April was the first full month that our company, like much of the rest of the country began working remotely under shelter-in-place rules. It was a very difficult month from a surgical procedure and revenue perspective. We focused on protecting the health and safety of our employees, maintaining our customer focus and preserving our capital and liquidity. We continue to take the necessary precautions to ensure that all members of the Intersect family are safe, and the company remains fully committed to helping patients who suffer from chronic sinusitis and its physician customers who care for them. Additionally, in April, we proactively took action to reduce costs, maintain our liquidity and preserve our cash to enable us to navigate any revenue shortfall resulting from the impact of the COVID pandemic through the remainder of the year and into next year. As we stated previously, in April, we implemented a plan to reduce our cost for the remainder of 2020 by approximately $40 million. In keeping and slightly ahead of that plan in the second quarter, we realized cash savings of approximately $15 million. In May, we began to see meaningful change in the business environment with select areas of the country beginning to open as sinus surgeries and office procedures returned. Revenue began to pick up with an incremental uptick in elective procedures in each successive week. Most of the incremental business was related to PROPEL and a rebound in the hospital market, our core business. By the end of May, SINUVA referrals which constitute physicians seeking to understand patient coverage for a SINUVA procedure, a leading indicator for use were also starting to rebound. While SINUVA referrals lagged PROPEL sales, these were the green shoots we had hoped to see. From a financing standpoint, in May, we successfully raised $65 million in convertible notes from Deerfield Management Group, our largest shareholder. Deerfield shared our confidence that we will emerge as a market leader in the ENT space. With their support, we now have the financial capacity to drive our business by focusing resources on commercial execution, market development, innovation and other growth initiatives, while ensuring our liquidity through at least 2022. As the company transitioned to working virtually, we implemented a set of targeted activities designed to strengthen sales force execution and to allow our team to pivot quickly to maximize interactions with customers in the new COVID environment. We developed a rigorous daily curriculum, our so-called XENT University to improve field sales clinical knowledge and enhanced selling skills while elevating our analytic rigor to improve physician targeting and tailor messaging in the field. In addition, the company hosted regular well-attended webinars and teach-ins for our physician customers and their staff, leveraging our virtual meeting platform to support education and procedure excellence. This helped us maintain contact and focus in the face of access and travel restrictions that prevented in person connections. We continue to support our physician customers, leverage our leading market access and payer team, build our brand recognition and remain comfortable with how we repositioned our sales and marketing organization to support commercial execution. As the calendar turned to June, revenue momentum for PROPEL in the hospital increased as well as activity with PROPEL Mini and PROPEL Contour in office-based procedures. At the time, this gave us the confidence to publicly raise our full quarter Q2 revenue outlook from an 85% to 90% decline to a 70% to 75% decrease year-on-year. Also in June, we generated a further and significant uptick in our SINUVA referral pipeline. Our PROPEL and SINUVA prospects continue to improve week-to-week throughout June. Total company revenue in April was only $700,000, May followed with revenues of $3.1 million and we closed the quarter with June revenues of $6 million, completing the quarter with strong revenue recovery growth trend. For the second quarter, we delivered total revenue of $9.8 million, still down 63% versus year ago, but considerably better than we had initially foreseen. Importantly, the positive monthly growth trend has continued into Q3 with preliminary July sales of approximately $8.2 million, up plus 16% versus July a year ago. While we are continually monitoring the increase of COVID cases across various regions of the U.S. and around the world, we are encouraged with current demand trends at the start of the third quarter as hospitals are better prepared to manage potential COVID spikes and are using outpatient sinus surgery as a vehicle to rebuild hospital revenue. With a marked increase in sinus surgery procedure demand and an easing of restrictions in many areas of the country, we also reopened our MENLO PARK facilities in June for select activities, primarily in manufacturing, distribution and R&D. Because of incremental demand beyond our original forecast, we restarted manufacturing earlier than expected with our first production run in early July rather than September, as previously shared. You may recall that we sought to use our strong inventory position at the beginning of the second quarter and the beginning of the pandemic as a strategic asset, enabling us to utilize inventory to generate cash. We will return manufacturing to scale quickly given earlier and more significant demand than was previously anticipated by incrementally returning formerly furloughed employees and selectively adding others as needed. Our ongoing commercial actions to further develop our market and infrastructure are yielding positive results. We increased the capability and efficiency of our SINUVA patient hub to better support physicians seeking to determine the nature of their patient SINUVA coverage. Our specialty pharmacy partners are expanding use among various payers via an authorization of benefit or AOB, to reduce physician dependency on buy-and-bill. At the same time, our field-based reimbursement team is better educating physicians and their office staff on the benefits of buy-and-bill to both the physician and to the payer. Work with McKesson and Besse, two leading specialty distributors are creating and expanding opportunities with buy-and-bill. We are seeing an increase in physicians embrace of buy-and-bill that is indicative of the prospect for buy-and-bill acceptance seen in other therapeutic categories, such as ophthalmology, rheumatology and oncology. Importantly, in the last 6 months, a number of large commercial payers have expanded their use of the J code for office-based coverage of SINUVA and PROPEL, clarifying, streamlining and economically strengthening the buy-and-bill opportunity. For example, recent fee schedule additions utilizing our unique J code, J7401, have been put in place with UnitedHealthcare, Aetna, Humana, various Blue Cross Blue Shields and Highmark, among others. We are pleased with the progress made to date and look to expand on our commercial and market access strategies for both PROPEL and SINUVA. A further highlight of the quarter was our announcement last month that the centers for Medicare and Medicaid Services, or CMS, approved SINUVA sinus implant for transitional pass-through payment status for reimbursement under the hospital outpatient prospective payment system, OPS, an ambulatory surgery center payment system. We are pleased that CMS has recognized SINUVA as a novel treatment worthy of pass-through status by granting a new C code, C9122. The new code took effect July 1 and pass-through status lasts for 3 years to July 2023. The C code will incrementally expand the market for covered Medicare patients for SINUVA in the U.S. by covering an additional 40 million Medicare lives. In effect, physicians can now use SINUVA with their Medicare population with no risk on coverage for the implant and with a modest incremental return beyond the existing billing codes associated with a sinus procedure visit. Also in June, we announced the results of a U.K.-based independent analysis measuring cost and patient outcomes of our PROPEL steroid releasing sinus implant compared to a non drug-eluting spacer following endoscopic sinus surgery for patients with chronic sinusitis. The independent study demonstrated that the use of PROPEL following surgery resulted in fewer postoperative complications and created overall cost savings. This supports effectiveness of the PROPEL family of sinus implants as well as highlighting the potential economic and quality of life benefits associated with PROPEL products. While intended to support our expanding efforts in Europe, this type of health economic analysis is indicative of our intention to continue to strengthen evidence-based and health economic rationale to support greater coverage and use for PROPEL implants across all markets globally. And while on the topic of international, European markets are recovering faster than the U.S. and have rebounded nicely in our relatively small, largely German and U.K.-based business. With regard to our clinical product pipeline, during the quarter, we met again with FDA this time virtually and received positive and instructive feedback regarding our drug-coated balloon program. We now have clarity on study design and endpoints as well as safety requirements to support our eventual PMA submission. We are confident in our path forward based upon the results we achieved in our 2019 ASCEND 1 pilot trial, our experience with mometasone furoate in the sinus cavity and our direct FDA in their interactions in January and June specific to our drug-coated balloon program. At present, we are delaying the start of our clinical trial so that we can complete final development of our commercial delivery device for use in the pivotal trial, and to ensure we fully understand the risks and constraints of the trial due to the ongoing pandemic. We expect to begin final clinical work on the drug-coated balloon no later than early 2021. And based on the current time line, our goal would be to commercially launch in the second half of 2023. Despite the many challenges that the pandemic created, we are advancing our mission to make Intersect ENT a more comprehensive and integrated player in the ENT space. Our goal is to leverage our experience across multiple sites of care, hospitals, ASCs and offices. And to recognize that we uniquely treat sinusitis patients with both devices and drugs. Based on our current outlook and subject to risks related to length and depth of the pandemic, we expect to achieve sound revenue growth in 2021 relative to 2019 revenues as well as quarter-to-quarter sequential growth in the second half of 2020. While the global situation, particularly in the US, remains dynamic, based on the clinical and business trends we have been experiencing over the past quarter and into the third quarter, we are confident in the strength of the PROPEL business and in the acceleration of activity with SINUVA. At this time, I will now turn the call over to Randy to take through our financial results.

[Richard Meier:]

Thanks, Tom, and good morning, everyone. I'd like to start the financial overview with a summary of our top line results and then provide a little more detail on our income statement. In the second quarter of 2020, Intersect ENT reported net sales of $9.8 million compared to $26.7 million in the same period of 2019, a decrease of 63% from the prior period, but well above our original outlook. As Tom noted, we were particularly pleased with the revenue trend line as sales in April were only $700,000, May were $3.1 million and June were $6 million. And on a preliminary basis, July sales were approximately $8.2 million. Net sales for the first 6 months 2020 were $29.6 million, a decrease of 44% over the $53.3 million in the same period of 2019. These decreases resulted from the impact of hospitals suspending elective procedures and reduced ENT office visits related to COVID-19 pandemic. For the second quarter of 2020, PROPEL product family revenues were $9.5 million, a 63% decrease compared to Q2 of 2019. And SINUVA revenue was $0.3 million, representing a 73% decrease from Q2 of 2019. Product mix for PROPEL was similar in recent quarters with PROPEL at 33%, PROPEL Mini at 35%, PROPEL Contour at 32%. Sales in the quarter were positively impacted by a 2% price increase. Overall, ASP in the second quarter of 2020 was $851, slightly ahead of a year ago. Gross margin for the second quarter of 2020 was 25% compared to 81% in the period a year ago. For the 6 months of 2020, gross margin was 53% compared to 52% -- excuse me, 82% in the first 6 months of 2019. The decrease for both periods was driven by our decision to idle our manufacturing facility due to the COVID-19 pandemic, which resulted in us incurring approximately $4.4 million in charges in the second quarter and approximately $6.3 million for the first half of 2020. These charges adversely impacted gross margins in the second quarter by approximately 45% and in the first 6 months of 2020 by approximately 21%. Excluding the impact of COVID-19 in both second quarter and first half of 2020, gross margin was consistent with our original 2020 guidance in the low to mid-70% range. Here again, we expect gross margin to steadily improve in the second half of 2020 as and to the extent production volumes improve, enabling us to achieve better margin levels in the mid-70% range by year-end. Total operating expenses for the second quarter of 2020 were $23.5 million versus $33.7 million in the same period of 2019, a decrease of 30%. Operating expenses in the first 6 months of 2020 were $54.9 million, a decrease of 18% over the $67.1 million for the same period a year ago. The reduction in operating expenses in the second quarter were a direct result of our actions in response to the COVID-19 pandemic and the shelter-in-place orders. As we discussed in our last conference call, we targeted approximately $40 million in cost reductions for 2020, which included furloughing and reducing our workforce, freezing new hiring, suspending near-term production, reducing discretionary operating expenses and capital expenditures and delaying clinical research products. In the second quarter of 2020, we realized approximately $17 million in expense reductions, of which about $15 million were cash savings. For the second quarter of 2020, we recorded net operating loss of $21.1 million, a loss of $23.1 million or a per diluted share loss of $0.71, compared to a net loss of $11.4 million or a per diluted share loss of $0.36 in the second quarter of 2019. The adjusted net loss, excluding the impact of fair value of embedded derivatives and restructuring costs in which the details are included in the reconciliation table of our press release is $21.1 million or $0.65 per share. For the first half of 2020, we recorded a net operating loss of $39 million, a net loss of $40.7 million or a per diluted share loss of $1.25 compared to a net loss of $22.2 million or a per diluted share loss of $0.71 in the first half of 2019. Adjusted net loss for the first half of 2020 was $38.6 million or $1.19 per share. Now turning to our balance sheet. Cash, cash equivalents and short-term investments at the end of the second quarter totaled $135.8 million compared to $90.6 million at the end of 2019. Our cash balances benefited from the cost reduction actions we took early in the second quarter. And as we announced in May, we raised $65 million in additional capital through the issuance of a convertible note. In doing so, we significantly increased our cash position and believe we have sufficient liquidity to maintain operating flexibility through 2022. In association with the convertible note, certain features were concluded to be embedded derivatives that are valued and accounted for separately from the notes. These changes in the fair value estimates were recorded in the income statement. These fair value adjustments are non-operating items and are included in a reconciliation between GAAP and non-GAAP net loss and a net loss per common share each quarter. Looking ahead and on elective procedure volumes and referral trends, we expect meaningful sequential revenue growth during the second half of 2020 and the second -- from second quarter levels. We also expect gross margins to steadily improve in the second half of 2020, returning to more normal levels in the mid-70% range. While we do not predict the extent or duration of the impact of COVID-19 pandemic on our financial and operating results, we believe that the recovery in procedures has begun and will continue in the second half of 2020 and that most patients will return for treatment. Looking further out, we believe that 2021 revenue should return to or exceed 2019 levels. Now I'll turn the call back to Tom.

[Thomas West:]

Thank you, Randy. Before opening the call for questions, I would like to comment on our outlook for the market as it relates to Intersect ENT. We are seeing an incremental rise in business in third quarter-to-date, supported by our commercial and market access execution strength, an increase in office-based procedures for both PROPEL and SINUVA and the pent-up demand for hospital and ASC-based procedures with PROPEL. Outpatient procedures are taking on a greater role at hospitals in response to both patient need and the financial challenges COVID poses to the hospitals themselves. We are also encouraged with a broad increase in office-based procedures across both of our product lines as our payer coverage position improves and price procedures migrate away from surgical centers over time. We expect to achieve sequential revenue growth during the second half of 2020 and growth in 2021 revenues relative to 2019, all subject to the risks related to the length and depth of the pandemic. The company is in a strong financial position, but will remain prudent in managing costs. Our early and decisive actions helped us navigate through an unprecedented environment and has the company taking advantage of the market rebound. We believe we are on down footing and are confident in our future. I would like to thank all employees, patients, customers and frontline workers and our shareholders during this time. Your commitment and resilience are inspiring and laudable. Now I'd like to turn the call back over to the operator and open the call for questions. Operator, would you please open the lines?

[Operator:]

Sure, sir. Thank you. [Operator Instructions] The first question comes from Richard Newitter from SVB Leering. Please go ahead.

[Unidentified Analyst:]

Hi, guys. This is Jaime on for Rich. Thanks for taking my question. Just wanted to start on the July preliminary revenue, I believe you said it trended at 16% year-over-year growth. So a, I just wanted to make sure that I heard that correctly. And then b, if that is correct, just kind of help calibrate us on how we should be actually thinking about that month-to-month improvement? C, going forward into the second half of the year is it reasonable to say you could see some acceleration off of that sort of year-over-year growth rate or potentially moderation, but on a dollar basis higher, as you said, sequential improvement? Just trying to gauge what's the reasonable way to think about it? And potentially, if you could share some color between the two businesses?

[Thomas West:]

Sure. Thanks, Jaime. Randy, I'll take a first crack at that and let you jump in. Yes, you did hear correctly. July results are up 16% versus the same period a year ago. I think you've got a couple of things at work there. Certainly one element of it is pent-up demand that we know that a number of procedures were missed in April, May time frame. And obviously, as a chronic need state, rhinosinusitis does require treatment. So we're seeing patients return on that basis. I think that's driving a fair level of volume that you see in the PROPEL hospital side of the business. I think the second thing that's at work is that you see hospitals coming back to outpatient procedures quickly in that they don't occupy bed space, and they've become accustomed to how to now manage with the COVID pandemic. But I think the other piece that is going to be more durable in our long-term growth is the acceleration that we're seeing in the office setting. And that's true for both PROPEL, often used in combination with balloon sinuplasty as well as what we're now starting to see in terms of revenue pickup on the SINUVA side of the business. So going forward, it would be presumptuous for me to say that we're going to have 16% growth from now through the remainder of the year. But what I will say is, I think you're going to see strong sequential growth as Q3 will be much stronger than Q2, and we would expect to get closer to normalized levels with modest growth relative to a year ago as we enter into Q4. Obviously, all subject to the pandemic and the environment as it unfolds. Maybe the last comment I would make is I find the 16% growth in July, particularly encouraging when you consider the continued impact to about a third of the population in the states of Florida, Texas, Arizona and Southern California. But again, we've got more to work out there.

[Unidentified Analyst:]

Thank you for that. That was super helpful. And then I guess just as my follow-up, can you talk a little bit about the sustainability of the higher favorable reimbursement rates that you discussed with some of these payers like UNH and some of the Blue Crosse's in light of the C code, what's the potential risk that these payment levels eventually could converge more towards the C code level of ASP plus 6%? Thanks for taking the questions.

[Thomas West:]

Yeah. Any time in health care, there's always the risk of reimbursement rates being re-evaluated and re-looked. But I think our value proposition is quite strong for the products that we have, particularly those falling under the J code. But you consider the SINUVA as an alternative to either revision FESS surgery or use of a monoclonal antibody, clearly, there is a strong payer incentive to continue to motivate the use of SINUVA as an alternative to those other much more expensive treatment paradigm. In addition, what we continue to focus on, and I highlighted briefly in my comment around the UK cost effectiveness study is continuing to add to our armamentarium of health economic data to demonstrate the value that we provide and, again, reducing the likelihood of folks returning for surgery. I think that's going to continue to strengthen our position and our dialogue with the payer community enable - and to enable us to maintain our reimbursement in current ASP environment.

[Operator:]

Thank you. The next question is from the line of Robbie Marcus from JPMorgan. Please go ahead.

[Unidentified Analyst:]

Hey, guys. This is actually Allen on for Robbie. I had one quick question on the sales force. So I know on the first quarter call, you called out like kind of a 25% cut in headcount. And I know that you also followed up by saying that the sales rep base wasn't impacted by as much. But I guess, given like the stronger return to form that you guys are seeing, even if some of that is pent-up demand. How should we think about your plans for the sales force going forward, is whether or not you plan to bring back some of those people on so you can better go on the offensive in 4Q and 2021?

[Thomas West:]

Yes. Thanks, Allen. Good question. We feel really good about where our sales force is right now. I think the thing that I would highlight is under normal circumstances, as a general manager, you kind of ring your hands when you have to take your field force out for a week for your annual sales meeting in order to have training. We've just been afforded the luxury of eight weeks of training to really get our sales force to a new level of performance, really by focusing on what I said the XENT University daily curriculum, getting people much tighter on their clinical knowledge, their selling skills, their comfort in selling buy-and-bill and adding to the analytic rigor that enables them to do a better job of targeting and tailoring their message to the needs of an individual doctor. We've probably never been better able to go out and have an impact in the field than we are right now with the talent we have. In addition, and you touched on it, while we did cut back on heads overall. What we tried to do is take out layers of management as opposed to the number of field facing folks that we have. So our territory, structure and our sales consultants and our availability of specialty players like our regional reimbursement directors and strategic account managers, remains very robust, and we feel good about where we are. Of course, we are going to look at key opportunities. In fact, I was just on a call about the need to strengthen our coverage in East Houston and in Tampa, just the other day with my sales lead. So we're going to make those kind of incremental adjustments as demand and opportunity continue to grow. But I don't see us doing a large wholesale sales force change in the immediate future. Though, obviously, as demand is there and opportunity is there, we will continue to think about how we go on offense, as you said.

[Unidentified Analyst:]

Got it. And I guess, like looking to the back half of the year when it comes to gross margins. I believe you guys highlighted that you guys are expecting to return to that kind of like mid-70% range in the back half of the year. And I understand that this quarter was a little bit special because you had that $4.4 million idle facility charge. But I was under the impression that until you get like your manufacturing back up to 100%, which to be fair, you said you would do pretty quickly. There will still be some cost capitalized into inventory. Is that the correct way to think about it? So should we think about getting to like that mid-70s range this year? And then once you work through some of those costs next year, we can maybe get back to that 80% range that we saw last year?

[Richard Meier:]

Yes, Allen, this is Randy. From a gross profit margin perspective, I think it will be sort of incremental change on a monthly basis and improving through the end of the year. As we get back up to full production, we will stop having the period expenses that we've experienced predominantly in the second quarter, which led to the depressed values in gross profit margin. So as that occurs, the run rate and the capitalized costs that go into your inventory will improve. I think that will probably take a gradual improvement throughout the rest of this year, but ending the year, we'll probably be in the mid-70s. And so we get back into the next year and depending on where volumes are as confident as we are with the trends. I think as we look out to next year, it gives us more confidence about our ability to get to higher revenues and sustainable levels. That's when we'll start to really see what the opportunities are to get back to 80% gross margin. I think right now, I think we're comfortable with sort of that mid- to high 70s range as we get towards the end of the year.

[Unidentified Analyst:]

Thanks, guys.

[Richard Meier:]

Thank you.

[Operator:]

Thank you. The third question comes from Matthew O'Brien from Piper Sandler. Please go ahead.

[Unidentified Analyst:]

Good morning, guys. This is Patrick on for Matt. Thank you for taking our questions we really appreciate it. I just wanted to start more broadly on SINUVA itself. The commentary on patient referrals is really encouraging and with COVID-19 and all the work you're doing on the specialty pharmacy side, I'd love to hear your thoughts on the longer term shift in the makeup of SINUVA channels. I know you've characterized this previously at 80% DME and about 20% pharmacy. So I'm curious to see your thoughts on how that kind of changes over time, given COVID and some of the work you're doing with the specialty players? Thank you.

[Thomas West:]

Yeah. First off, let me say this. We have high hopes for SINUVA. And while the company has struggled over the last couple of years, begin to get traction and momentum, we really feel that in a very authentic way right now. In fact, in January, February, we saw referrals at an all-time high before we hit the pandemic, and a lot of those procedures did not come to fruition. We now see a return of the same with the referrals back to that same high level as we came out through June and into July. So we're very encouraged by it. I think in terms of the channel mix, the piece that is evolving right now, is a early days green shoots pattern of docs feeling more comfortable with buy-and-bill. And the recognition that given the reimbursement levels that we have that it is an attractive alternative for them to actually participate. Whereas before, there was a lot of uncertainty whether or not there was adequate coverage because of the J code and because of the commercial payer coverage against that. Buy-and-bill is now increasingly attractive and with the analytics targeting that I mentioned a moment ago, we're able to identify those docs that have good coverage in terms of composition of their patient universe, and that's where we're focusing in. So in some respects, we're driving some of that channel mix by calling on and targeting physicians who have attractive opportunities to be able to use SINUVA and who have developed a level of comfort that they will get covered and paid appropriately. So we're beginning to peel - peel the onion and open up the business. And we think that, that's a pattern that will continue into the future. And then specific to your comment on COVID. With the COVID environment, the ability to be able to do a procedure in lieu of revision surgery in the office setting should be doubly attractive to both the patient and to the physician. And again, we think that's going to be a catalyst for growth over time.

[Unidentified Analyst:]

Thanks. That's really helpful color. On that point, for my follow-up, I'd be really curious to hear. An encouraging element you've been having is shifting PROPEL into the office setting. And we've seen increased flare-ups in cases in Texas, which I know is a state you've called out previously as one of those big advocates or early adopters of that shift. Were there any impacts to some of the momentum you were building in that movement due to some of these more regional flare ups? Or is there anything else we should be thinking about in the back half of the year when it comes to PROPEL into the office setting? Thank you for the taking the questions.

[Thomas West:]

Yeah. It's an insightful question around PROPEL in the office. And our July results, which are still preliminary, but we saw a marked uptick in PROPEL in the office environment. Again, likely a function of COVID to some degree as folks are looking for procedure activity outside of a traditional surgical suite. I think the most encouraging part about that, and you're spot on, historically, our office-based PROPEL business had largely been in the state of Texas with relatively little reach elsewhere. But in July, we saw significant increase in PROPEL office business. But it was on a broader national basis. So it really is the realization of the J code opportunity, coupled with the desire for procedures in the office setting that is giving us an extra boost on the PROPEL office piece. And as I said before, a principal driver behind that is the complementary use of PROPEL with a balloon sinuplasty where you're placing PROPEL after you've done the dilation in order to hold the sinus cavity open and allow for greater healing. That combination is a source of, we think, renewed growth and opportunity for PROPEL.

[Operator:]

Thank you. [Operator Instructions] The next question is from the line of Chris Pasquale from Guggenheim. Please go ahead.

[Chris Pasquale:]

Thanks. A couple of questions from me. First, a little surprising that it hasn't been asked yet, but are you willing to comment at all on recent news reports indicating that Medtronic submitted a takeover proposal to the Board? Has there been an offer?

[Thomas West:]

You know, Chris, we can't comment on that.

[Chris Pasquale:]

Okay. So not -- you won't say anything one way or the other?

[Thomas West:]

No.

[Chris Pasquale:]

Okay. And then I just wanted to circle back on this office dynamic a little bit more. I would have thought if this was a really significant move, considering the fact that these are often being done in combination with sinuplasty that we would have seen the mix with maybe Mini and Contour stepping up a bit relative to what we've seen previously. So I just want to try and quantify the scale of what you're seeing there. Can you give us sort of the percentage of procedures in the base business that were office-based relative to pre COVID levels, relative to a year ago, whatever the best comparison is?

[Thomas West:]

Yeah. So where we saw the uptick in PROPEL office activity, was very significantly in the month of July. So that the numbers that Randy and I reported a moment ago were predominantly Q2 for the full period of the second quarter. And therefore, PROPEL was largely reflected in the rebound and recovery in the hospital setting, as noted. We did not break out the individual numbers for PROPEL. I would say, again, it's not the dominant element, but it is a source of incremental growth that we expect to continue through that part of the year and to help us restore PROPEL to ongoing growth going forward.

[Chris Pasquale:]

Okay. That's helpful. And then just lastly for me. I just wanted to confirm that with that July year-over-year growth number, there's nothing unusual in the year-over-year comparison, right? It wasn't like July of '19, was an unusually soft period for you guys?

[Thomas West:]

No. The comparable was - there was nothing unusual about the comparable period.

[Chris Pasquale:]

Okay, perfect. Thank you.

[Thomas West:]

Thank you.

[Operator:]

Thank you. The next question comes from the line of Ryan Zimmerman from BTIG. Please go ahead.

[Unidentified Analyst:]

Hey, guys. This is actually Max on for Ryan. Thanks for taking our questions. I just wanted to follow-up on the backlog dynamic a little bit. I know in the previous quarter, you mentioned that your field surveys indicated that between 70% and 80% of sinus procedures that were postponed or delayed as opposed to cancel. I know you mentioned that you saw some benefit from pent-up demand driving growth in PROPEL during the recent quarter. But do you have an estimate for kind of what portion of that 70% to 80% of procedures that were delayed, what portion of those do you think have been completed? Is this something that you're still kind of in the early innings of? And how are you thinking about the benefit from pent-up demand in the back half of the year?

[Thomas West:]

Yeah. It's a good question, and it's a hard one to break out, to be honest with you. I would say that we still have a fair level of pent-up demand in front of us at a minimum from the markets like Florida, Texas, Arizona, California. We do see that those regions are lagging behind, and we would expect to see that continue to unfold over time as we work our way through the hotspots and the challenges within those markets. So I think they're still further to go in terms of providing relief on the pent-up demand. But quite candidly, it is a hard number to specifically quantify. And I would say that we're probably - I'm going to call it halfway there. And - but that's, again, it's an estimate. It's a guess -- and where I would point to in terms of further opportunity is in those states that are slower to recover because they're still managing the depth of the pandemic.

[Unidentified Analyst:]

Got it. Yes, very helpful. And then in terms of margins, just kind of looking long term, and I appreciate your commentary around gross margins, maybe not getting back up to the 80% level by the end of the year. But just looking in 2021 and beyond, I mean thinking about all the cost initiatives that you've implemented in this quarter. Is there an opportunity as we move through 2021 for net margins to actually improve upon where you guys ended up in 2019? Or do you think it's still a little bit too early to tell in terms of the long-term outlook to margins?

[Richard Meier:]

Max, I think from a gross profit margin perspective, we finished up 2019 with pretty strong gross margins. We indicated that in our prior guidance that we had some higher cost inventory due to some shifting and focus and lower volumes. So we're still working through some of that inventory that is still up on our balance sheet. When we get out to 2021 and volumes start to pick up and you start to get out into 2022 and '23. I think there's a real opportunity, particularly with the PROPEL, SINUVA product mix to start to regain some of that higher-margin levels. I think it's a little too early to say if it might get there and - towards the tail end of 2021 or into 2022. But certainly, as we look out to the future, we think we can - within those - that product categories, we can get back to the 80%.

[Unidentified Analyst:]

Got it. Thank you.

[Operator:]

Thank you. The next question comes from the line of Ravi Misra from Berenberg. Please go ahead.

[Ravi Misra:]

Hi. Thank you for taking the question. So just my first one, I guess, would be just around what you're seeing from a competitive perspective in the pandemic. Can you help us understand if you had any sort of stronger or weaker impact from some of the biologics out there or anything else in the space?

[Thomas West:]

Yes, Ravi, it's a good question. It's - the answer - the simple answer is no, not really. The competitive set is pretty clearly understood in terms of what biologics are out there and what they can do and as well as more routine sinus sprays and otherwise. I don't think that impacted our business significantly nor do I think there was a meaningful shift one direction or another towards what the alternatives offer. I think our value proposition is fairly unique. Certainly, as it relates to the PROPEL business, there's not an easy alternative that would provide the kind of benefit profile that we do. I do think from a competitive standpoint, our position on SINUVA remains quite strong. In terms of the efficacy that we can deliver relative to biologics as well as the certainty of compliance and the alternative to a revision surgery. I think that value proposition remains quite strong, and we'll continue to exploit that as we go back to market in a more meaningful way. So not a big shift at all.

[Ravi Misra:]

Okay. Great. And then maybe a second one on just kind of -- if I step back, if we go back to January, decades ago almost in this kind of world. But if we go back to January and think about the original guidance that was given for the year is about kind of mid- to high single-digit growth. How do we reconcile that with some of the comments on this ramp here? I mean, would it be reasonable or I just want to hear your take on - can you get to that level, given the improving environment that you're calling out here and the sequential uptake? Or should we - should we think about - how should we think about the back half a little bit in granularity, please?

[Thomas West:]

Yeah. It's a good question. I would say it's too early to call in full, which is why we suspended guidance. I look at July and feel gratified that our business is growing, but I know that a portion of that is backlog. I look at the efforts that we've put in place and the fundamentals of the business, and I see really positive signs. SINUVA is beginning to take hold in ways that it had not before. That's clearly a positive in our outlook. The strength of the office-based PROPEL business is another positive on our outlook. So I think the business is more solid now. And the challenge is predicting the marketplace environment, and that makes any estimation of growth versus a year ago, a challenge in the back part of the year. But what - I do feel very confident in saying, and we noted is, I think you're going to see continued sequential improvement in performance. Just as we saw month-to-month from April to May, May to June, June to July, I think we'll continue to see that as Q3 is clearly stronger than Q2 and Q4 will be stronger than Q3. But it's, I think, premature for me to say and attach a specific number in terms of back half year-on-year growth. As we continue to come out of the impact of the pandemic, other than to say, I think our fundamentals are very sound.

[Richard Meier:]

Maybe just to expand on that a little bit. I think as Tom pointed out, you've got really two markets here. You've got the recovery phase where you're seeing fairly significant sequential growth. But I think that goes to the strength and breadth of the market that we operate in and the uniqueness of our products as we recover back to sort of the 2019 levels. But I also think as we look out ahead, some of the things that Tom has highlighted, it's not just the markets that we have been operating in traditionally, Tom's pointed out some significant opportunities for us to see some market expansions into the office market with the PROPEL family products as well as we're starting to gain pretty meaningful traction with SINUVA. So once we regain sort of the market that we sort of already had, I think our ability to get back to the growth rates that we talked about or even expand on that is a very real opportunity for us.

[Ravi Misra:]

Great. Thank you.

[Operator:]

Thank you. The next question comes from Suraj Kalia from Oppenheimer & Company. Please go ahead.

[Suraj Kalia:]

Morning, everyone. Tom, can you hear me, okay?

[Thomas West:]

Yes.

[Suraj Kalia:]

Perfect. Tom, a lot of questions have been asked. So I'll just stick to one. We - the questions have been focusing on the backlog versus the new patient flow through. Maybe I can come at it from a different perspective and you can shed some color as we look forward to the second half and for FY '21. What has been average patient acquisition time in Q2? And how does - once the patient is acquired, what is the conversion time for you guys? And maybe you can also parlay that into July. What are you seeing trends, hopefully, we can tie all of this together in terms of -- as we look forward to second half? Thank you for taking my question.

[Thomas West:]

Yes. Yes. It's an interesting question and one that's probably most relevant in looking at the SINUVA business in terms of how we acquire folks. We triage them through our hub in order to determine appropriate level of coverage ultimately, then dispense product based on whether medical benefit, pharmacy benefit through the appropriate specialty pharmacy. From start to finish, that's about 20 to 25 days, which is longer than we would wish. As you go through the initial insurance adjudication and obviously, part of that is also the scheduling of the patient to come in for the procedure itself. But it was about 20 to 25 days in Q2, still adversely impacted by unusual office times and availability because of the COVID pandemic. But one of the things that we talk a lot about, and this maybe is the insight that you're looking for is how do we accelerate that -- the language we use is how do we take the sand out of the gears in order to expedite that period of time from that initial insurance adjudication to the scheduling, to the dispensing, to the procedure being conducted in order to accelerate it. Clearly, that is in our interest, it's in our patient's interest. And as that improves, that will also improve the yield. Our yields are solid, but they're not where we would like them to be in terms of each referral, 100% of the time landing in a patient. So we focus on how many people we can put into the funnel, what is the conversion rate around the funnel? And how do we accelerate this feed through the funnel to improve the experience of both the customer and the patient. And again, some of that was adversely impacted through COVID. But I will say that it is absolutely a focal point in terms of how we expect to improve and continue to grow the SINUVA business in the back part of the year.

[Suraj Kalia:]

Thank you.

[Operator:]

Ladies and gentlemen, this concludes our question-and-answer session. I would like to turn the conference back to Tom West for any closing remarks.

[Thomas West:]

Thanks, everybody. I appreciate very much your continued interest and support for Intersect ENT. As I said, we feel very solid about where we are right now. We're on good footing. We've made good progress. We've weathered the challenges of the COVID pandemic. There are still uncertainty in front of us, but I hope that you've seen that we've demonstrated our ability to manage through that. And to continue to serve the patients with chronic rhinosinusitis that we have throughout our history as a company. So again, thank you for your interest, and we look forward to speaking with you soon. Take care. Bye-bye.

[Operator:]

Thank you. Ladies and gentlemen, the conference has now concluded. Thank you for attending today's presentation. You may now disconnect.