Intersect ENT, Inc.
Q2 2018 Earnings Call Transcript

Published: 2 Aug 2018

[Operator:]

Good morning, and welcome to the Intersect ENT Second Quarter 2018 Earnings Conference Call. All participants will be in a listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. Please note that this event is being recorded. I would now like to turn the conference over to Jeryl Hilleman, Chief Financial Officer. Please go ahead.

[Jeryl Hilleman:]

Thank you, Kate. Good morning. As you know we had originally scheduled this call for aftermarket today, but since our financial printer erroneously filed the 8-K earlier this morning, we moved the call to before market open. We want to thank you for accommodating us and we sincerely apologize for any scheduling inconvenience this has caused. Before we begin, I’d like to remind you that we will make forward-looking statements within the meaning of Federal Securities Laws. Actual results and timing of events could differ materially from those anticipated in such forward-looking statements as a result of these 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 on our current estimates and assumptions as well as other risks detailed from time-to-time in the reports we file with the SEC. We disclaim any obligation or undertaking to update or revise any forward-looking statements contained herein. I’ll now turn the call over to Lisa Earnhardt, our President and CEO. Lisa?

[Lisa Earnhardt:]

Good morning. Our business continued to make progress in Q2, growing revenues at 10% and advancing in our journey to both drive adoption of our three core PROPEL products, while launching our first pharmaceutical product, SINUVA. As we have discussed in the past, the early month of a new product launch can be a bit bumpy as we educate our customers on the products and new business practices, streamline product access, establish consistent reimbursement and keep our sales team appropriately focused on both existing and new products. The good news is that there are strong physician interest in SINUVA and the early clinical outcomes have been fantastic. In our view, this is the most critical input we can get early in the launch because it reinforces that SINUVA has a valuable role to play in patient care. That being noted, we experienced some early bumps in the road and fell short on both our PROPEL and SINUVA goals. Today, I plan to reviewing some of those challenges with you and giving you an overview of the action plan we have already been on implementing to direct those challenges and accelerate our progress. We commenced the first sales of SINUVA in late March and have realized approximately $800,000 in revenue to date, with over 325 patients treated. Physician interest and feedback has been positive and payor coverage has been consistent with our launch expectations. We also initiated product access and found several areas of improvement necessary. The challenges experienced in product access caused stronger than anticipated dilution of our field effort as our sales force focus on SINUVA support, giving the team less time than planned to drive PROPEL growth. SINUVA is a first of its kind product, both in its function as well as how it is procured by ENT practices as the first physician administered drug introduced specifically, to the ENT specialties. From the outset of the launch, we identified four aspects of commercialization that would be critical for success. Physician and patient experience, a reliable and efficient product access process, payor coverage and the effectiveness of our sales force in balancing commercialization of both our device franchise PROPEL and our new pharmaceutical product, SINUVA. In my remarks, I will discuss our experience in each of these four areas, our action plan for straightening our approach where needed and our adjusted outlook. I'm going to start first in my comments around the most complex area, product access. It is attractive to physicians to have options to secure products without needing to extend their own capital. Specialty pharmacies typically fill that need for many drugs by verifying benefits, securing prior authorization and patient co-pay, providing the product on the patient-by-patient basis and collecting payment from the payor. At launch, we expected specialty pharmacy to service an easy and available way for physicians to access SINUVA. What we have learned through our experience to-date is that this procurement pathway is not always straightforward or possible. In some cases, payors have agreed to cover SINUVA but are requiring that physicians acquire it via a buy-and-bill process, in which a physician purchases the product and bills payors directly. After observing bottlenecks in product procurement, we began encouraging all physicians to work through ASCENT, our reimbursement hub versus going straight to the specialty pharmacies or that each prescriptions potential to be filled via SP partners. If buy-and-bill is required and that can also support offices through the process, this change in turn places increased burden on our reimbursement hub due to higher than anticipated volumes, resulting in delays and impacting access for physicians and patients. Our commitment is for physician offices to receive high-quality timely service. As such, we immediately initiated the process to hire and train additional staff at ASCENT. As of July 1, an expanded ASCENT team is working closely with physician offices to verify benefits and determining the appropriate procurement pathway. We believe we have taken substantial strides towards making product access easier and will continue to focus closely on performance and throughput and on building a sustainable foundation for a SINUVA growth. Now, let's turn to the next aspect of commercialization, payor coverage. We have been pleased with the initial rate of payer willingness to cover SINUVA, which has remained consistent that 50% to 75% of prescriptions gain prior authorization. A few payors establish policies at the outset of launch, but we are seeing no notable policy sets as expected. We believe we can drop preliminary conclusions about coverage, based on experience with prior authorization and ultimately payments. Net-net payor coverage has met our expectations. Next on our list is very much related to market access is sales force balance and effectiveness. Our sales force has built strong relationships with our ENT customers and works hard to helping with all aspects of our products, including clinical education and case support. Our teams spent a disproportionate amount of time in the first few months of the launch trying to troubleshoot SINUVA access. Clearly for sales to work efficiently, product access needs to work effectively and our team is committed to making sure that happens. To touch on what happened with PROPEL growth during the second quarter, we did expand the number of existing accounts stocking contour by 20% to about 1,200 accounts and also added about 40 new PROPEL accounts. What we did not do, because the sales team was focused on introducing SINUVA and navigating inefficiencies in product access is efficiently engaged in the more hands on the side of growth. This resulted in a disappointing Q2 for PROPEL. So, are we doing to drive the launch forward and address the challenges that I just outlined? The answer is several things and we expect to see evidence of impact somewhat this quarter and more fully in the fourth quarter and into 2019. First, as I mentioned, we've increased staff at our hub to account for increase enrollments where we've expanded the staffing and are closely monitoring performance to ensure effectiveness and reliable throughput. Second, we are expanding our sales force to enable greater attention to PROPEL. We ended the second quarter with 117 field reps, including 83 territory managers. We are in the process of adding an incremental 20 representatives, including a mix of sales consultants and contract reps to focus on PROPEL. This growth is in addition to our previously planned 10% to 15% headcount growth and will bring our target for a year-end field rep in the range of 140 to 145, a total increase of 30% for the year. It is important to note that most of the additions happened in sales support roles, which have not impacted territory alignment. We believe that this extensive commitment to field support of physicians will put us among the largest sales forces in ENT. Third, we will work closely with a targeted group of physicians to establish a leveragable buy-and-bill track record. Today, over 40 physicians have purchased SINUVA through buy-and-bill, representing about 20% of doctors who have accessed SINUVA. Of these, only a few cases of payment have come through, as it typically takes a few months from treatment to collection of payments. We will be capturing payment trends that will provide physicians increased confidence in the buy-and-bill process. We are very appreciative of the early adopters and those that are contemplating joining them as they are showing leadership and not only offering SINUVA to their patients, but also pioneering the buy-and-bill practice within the ENT specialty. We anticipate that this form of product access will become more than normal ENT, just like it has in orthopedics, rheumatology, ophthalmology and other specialties. Four, we are adopting and strengthening our reimbursement team. We have added to our reimbursement leadership to give focus to payor outreach and field support. We are also expanding the field reimbursement team to further help physicians’ offices navigate the buy-and-bill process. Of note, we continue to expect the SINUVA will be assigned a product specific J-Code effective at the start of 2019. As a reminder, we anticipate the final ruling from CMS in November. We believe a product specific J-Code will streamline the market access process and facilitate buy-and-bill. However, we do believe we can drive SINUVA growth effectively, even under what we see is the less likely outcome of continuing to use the unassigned J-Code. So let's turn the conversation to the most critical and exciting aspect of our launch, physician and patient interest and experience. Physicians have found that SINUVA clinical evidence compelling. 400 patients were studied in two randomized, blinded, sham-controlled clinical trials. All patients were indicated for repeat sinus surgery at enrollment and less than half will needed surgery following treatment. The fact that SINUVA can be delivered in a routine office visit has often been of interest as physicians strive to deliver less invasive, more cost-effective solutions to their patients. ENTs can immediately see the benefit of incorporating SINUVA into their practice to help their most challenging chronic sinusitis patients. We have received very enthusiastic feedback on the ease of the procedure and the initial clinical outcomes, consistent with our clinical studies. Through the end of the second quarter, over 1,600 patients have been submitted by physicians to ASCENT or on specialty pharmacy partners. Of these, about 325 have been treated and the majority remains in process. Consistent with our initial targeted approach, about 225 physicians have treated patients. And we look forward to continue to work with these as other pioneering physicians to expand product trial and adoption. Finally, our experience in the second quarter is reshaping our expectations for both the SINUVA ramp and PROPEL growth. As we rolled out the action plan I discussed and build on the impact of these changes, we anticipate 2018 revenue in the range of $106 million to $109 million, continuing our previous year view of annual PROPEL revenue while adjusting our SINUVA expectations. We expect third quarter growth to be similar to Q2 and to see improvement in the fourth quarter and on into next year as our modifications begin to bear fruit. More importantly, however, we will strive to deliver on two key objectives by year-end. First, we aim to establish a strong foundation for SINUVA, setting this up to deliver on a tremendous potential of this therapy in 2018 and beyond. We can achieve this goal through offering reliable product access, deliver through efficient hub service and continuing strong patients’ payor coverage, and by providing payment evidence to support adoption of buy-and-bill. Second, we expect to have an expanded sales force in place that is resourced and trained to effectively balance expanding introduction of SINUVA and growing PROPEL. PROPEL is currently used in one of eight sinus surgeries and based on what we've achieved in our flagship market, where we are seeing usage in one in three cases are higher, we believe that PROPEL offers continued growth potential wherein supported by the right commercial effort. Through achieving these goals, we believe that we will position ourselves to once again deliver in the range of 20% annual growth for 2019 and beyond, as we expand SINUVA from a targeted rollout and expand reach with PROPEL. Let me now turn the call over to Jeri to take you through our financial results and outlook.

[Jeryl Hilleman:]

Thank you, Lisa. Lisa has touched on our recent revenue experience and outlook but to provide some further insight, PROPEL Contour represented 29% of sales in the quarter, up from 27% in Q1, continuing to drive growth as we roll this product out to customers. Recognized SINUVA revenue was just over $500,000 in the quarter, rounding to $800,000 to-date. Our net price has been favorable at about $1,000 a unit as we ramp elements that will impact our gross to net factor and our long-term outlook for SINUVA net price remains similar to the price of PROPEL. Looking to the third quarter, as mentioned earlier, we are implementing improvements to market access and expanding our sales force. We expect these efforts to gain traction in fourth quarter. And accordingly, are setting our guidance for Q3 in the range of $23.8 million to $24.3 million, and for the year at $106 million to $109 million, with about 2% to 4% of our annual revenue to come from SINUVA. Moving to gross margins, we reported 79% gross margins due to cost allocations with slightly lower volumes. Our outlook for Q3 is a similar gross margin and for the year we expect to achieve a margin of approximately 80%. We continue to expect improving margins as we exit the year and further ramp production and more fully utilize our newly added third-line. Our operating expenses for the quarter were $25.4 million and for the first half of the year, $51.2 million. We are maintaining our year view for OpEx of $113 million to $115 million, as we are ramping expenses in association with the increased staffing that has been referenced. We expect OpEx to increase in the remaining quarters of 2018, with SG&A and R&D continuing to represent 80% and 20% of OpEx, respectively for the year. I'll now turn the call back to you, Lisa.

[Lisa Earnhardt:]

Thank you, Jeri. In closing, I want to reinforce that we maintain our full conviction enthusiasm that SINUVA will grow to be an important therapeutic offering benefiting a significant number of sinus suffers. As one patient recently said after being treated with SINUVA, this is the first time that I have attained relief to a point where I actually felt normal. There is no doubt in my mind that they work. We've also heard similar enthusiasm from a physician. One physician chose to offer SINUVA to a patient in their 70s who had long suffered the symptoms of chronic sinusitis. After treatment, the doctor told us for that patient, SINUVA has a life-changing with the relief that she has received. The patient benefits we've seen SINUVA deliver make us determined more than ever to build the product access and field team that will support physicians and enable them to adopt SINUVA as a regular part of their practice. We are meeting the challenge of the launch with strong action, expanding and leveraging the reimbursement hub, quickly growing our sales force and reimbursement teams and focusing on establishing buy-and-bill through growing evidence of payments. The strong physician and patient interest in SINUVA, our robust clinical evidence, initial positive outcome and the fact that payers are providing access in the strong majority of cases, combined to reinforce our conviction that SINUVA has a bright future. The same actions that will solidify the launch of SINUVA will also strengthen our sales force’s ability to drive the PROPEL growth that we believe lies ahead. We remain greatly appreciated of your attention and interest. And now Jeri and I would like to remain on the line to answer your questions. Operator, will you please open the lines?

[Operator:]

We will now begin the question-and-answer session. [Operator Instructions] The first question comes from Robbie Marcus of J.P. Morgan. Please go ahead.

[Robbie Marcus:]

Great. Good morning and thanks for taking the question. Maybe we could start with the SINUVA reimbursement, because if you go back, you put the pharmacy – specialty pharmacy in place to avoid physicians having to the do buy-and-bill. So maybe help us understand what prompted the change during the quarter and what is the decision from commercial reimbursement to not cover it that way due to the nonspecific J-Code at all?

[Lisa Earnhardt:]

Yes, and it's really not related to the unassigned J-Code at all, Robbie, but it is a good question. We were hopeful that specialty pharmacies will be able to sell the majority of prescriptions out of the gate. We have learned that some payers have required that the physician buy-and-bill. So they are basically trying to streamline the process themselves and work directly with that physician. And so that's something we appreciated that trend in some areas of medicine, as you think through how do we drive efficiencies in healthcare, but that was something that was sort of new learning for us out of the gate.

[Robbie Marcus:]

Okay. As I look at guidance for the balance of the year, it looks like, correct me if I'm wrong, PROPEL growth in the single-digit range and then SINUVA in a much slower than previously thought. So one, is that the correct way to think about the business for the balance of the year. And then two, seeing how the initial SINUVA launch is going, can you give us some early thoughts on 2019 for SINUVA? And what that launch curve might look like with a specific J-Code and without?

[Jeryl Hilleman:]

Yes, Robbie, this is Jeri. As we think about Q3 for the reasons we described, we will be putting in place the additional sales force. We have just recently expanded the staffing at the hub and put a number of other measures in place, but those are going to take time to play out. So we think we'll begin to reap the benefits of these changes as we go into the fourth quarter, so we are employing a high rate of growth for PROPEL in the fourth quarter but we think the third quarter will look much like the second quarter in terms of growth rates and our guidance is very similar to that. And then as we get into next year, we'll be able to clear guidance on SINUVA. Lisa did mention a goal of being able to produce approximately 20% of growth next year. And we we've not broken that out, but we do expect to continue to ramp SINUVA as we go into next year.

[Robbie Marcus:]

Is it still your belief that the launch will be similar with and without the J-Code?

[Jeryl Hilleman:]

Yes, we do believe, obviously, yes, it's a good question. The existence of a product specific J-Code would certainly streamline market access, because there is some additional documentation needed for the unassigned J-Code. But we do anticipate we can still drive the SINUVA launch effectively even if you were to continue to meet to use an unassigned J-Code. We don't think that is a likely possibility.

[Robbie Marcus:]

Okay, great. Thanks a lot.

[Operator:]

The next question is from Bob Hopkins of Bank of America. Please go ahead.

[Bob Hopkins:]

Thanks. Can you hear me okay?

[Lisa Earnhardt:]

Yes, we can.

[Bob Hopkins:]

Great. So my first question just sort of is to get understanding of how long do you think its going to take to get rid of the friction in the system, if you will. All the things that you need to do to make this a successful launch? Can most of that be accomplished this year? Or is this really going to bleed into 2019?

[Lisa Earnhardt:]

Yes, Bob. It’s a good question. We continue to learn. We think SINUVA will continue to ramp as we go into next year that we'll get to see the benefit for the extended sales force, just work through the unfamiliarity of the process, we will have – we are also expanding our field reimbursement team. So we think as we watch those elements, they are approved in the fourth quarter will be able to give a clear picture of next year. But we do see that we believe we will be on a positive trajectory once these elements are fully in place.

[Bob Hopkins:]

Right. I appreciate the 20% comment on 2019 and beyond. But I'm just curious, and I realize it's early, but you've obviously been seeing these trends for at least a couple of weeks, if not a month or whatever its been. So what's the best guess on how long it'll take to kind of fix all these issues, is this four to five, could this take a year? I realize it's early but I just would appreciate a best guess at this point.

[Jeryl Hilleman:]

Yes, and I think certainly our outlook for 2018 would imply, that it will take a couple of quarters to work through to streamline and optimize the product. And as each quarter goes by, we'll be able to communicate additional progress with some of the actions that we've taken as well as the impact that’s having in streamlining patients through the funnel. It is important to note, as I commented on the call, that we had very strong physician interest and patient demand but there were sort of bottlenecks through the process and so I ended up with only 325 patients treated. That said, we do believe that there is continued strong interest and it will take some time for us to tweak the process to get it to be optimal.

[Bob Hopkins:]

Did you have any doctors that were kind of unconstrained, if you will, where the process went very smoothly? And if you did, I'm just curious that kind of what – how many they were doing, may be in a month period, just maybe an example on anecdote of a doctor where things were unconstrained. And then my last question is, if you just – I appreciate some of the – sort of the backlog type of data points that you gave in terms of patients. Maybe if you could just go over that in a little more detail. I thought I heard a number of around 1,600 or something, sorry if I missed it. But so may be an anecdote or example of a doctor's unconstrained what kind of volume they're doing in a month. And then any more detail on the patient interest, quantitatively would be great. Thank you.

[Lisa Earnhardt:]

Yes. We did have a mix of experience by physicians, obviously, it's all specific to an individual patient and their insurance and what their plans are. But we did have a typical experience within physician has done a couple of patients would be sort of those, there was really nothing that was sort of untapped or where we had one physician doing a significant number. It really does depend on the geography that they’re in and patient's specifics with insurance and what those plans recommend.

[Jeryl Hilleman:]

Yes, and I think typically they might try for a couple of patients as Lisa said. And then just wait and see how the outcomes so and so forth. And then add further patients, so we are really just kind of at the point where a number of patients and doctors have gone through that trial, but it's definitely been more of a tried on a couple of patients and wait and see how the clinical results play out just sort of they had see it in their own hands.

[Bob Hopkins:]

And then on the patient backlog question?

[Jeryl Hilleman:]

Yes, I had mentioned there were 1,600 – over 1,600 patients that were submitted to either or ASCENT, which is our reimbursement hub or specialty pharmacy partners. And so it will take some time for those patients to get work through. Unfortunately, because of some of the delays, some of those patients may have already selected other treatment options, but we're hoping to get a good number of those patients access to SINUVA. There are reasons that you might imagine that patients might fall out of the overall process. A, the delay, B; the co-pay piece of it; C, if the payer does require a physician buy-and-bill, that's an additional hurdle. But all that said, working with even if we don't capture this patient backlog around, ultimately, this is a chronic disease and we could see them return as new patients in the future.

[Bob Hopkins:]

As your view on the size of this market opportunity change at all, Lisa?

[Lisa Earnhardt:]

Absolutely not.

[Bob Hopkins:]

Great, thanks for taking the questions.

[Operator:]

The next question is from Richard Newitter of Leerink Partners. Please go ahead.

[Richard Newitter:]

Thanks for taking my questions. I just wanted to start off with the shift to or the emphasis to buy-and-bill now. So my first question on this is, are the physicians that maybe didn't want to do buy-and-bill but they are being required to do buy-and-bill because that's the only way that the insurers will allow it to happen. Are they – in anyway, shying away from buy-and-bill because they don't want to take on any of that risk and they were only going to do it if they could do it through the third-party? And then my second question is, what's the difference between the buy-and-bill coverage, preauthorization or coverage percentage rates versus kind of the 50% to 75% that you expressed, which I'm assuming is an average between buy-and-bill and specialty pharmacy. Based on some of the doctors we've spoken to that are actually doing buy-and-bill, they say it's 100% hit rate. So I'll be curious to know, as you convert to buy-and-bill, maybe more than you previously had thought into 2019 and 2020 does the steepness of the adoption does actually increased that’s what you previously thought? Thanks.

[Lisa Earnhardt:]

Yes, it's premature to comment on your second question about is the buy-and- bill approval through the payers any coverage determination differs than that of going to the specialty pharmacy. So we're expected at this point to be similar. And your first question was just regards to the specialty pharmacy and how physicians view using buy-and-bill versus the specialty pharmacies. And you're right, either absolutely is a trepidation on behalf of some ENTs to buy-and-bill if it does require them to outlay their own capital to the extent that we continue to demonstrate proof of payment. And that's something that we are working on collecting as well as their own individual experiences. And to your point, there are number of physicians, who had great success already with buy-and-bill, we insured about 40 or so are doing that currently, but that's still very early. So a part of it will be word-of-mouth amongst the peer group. Secondly, it will be their own personal experience and third, we're hopeful it could information to payer as it relates to evidence of payments.

[Richard Newitter:]

Okay. And then Lisa, it sounds like if you have 225 doctors that are implanting, obviously, wasn't the case all throughout the quarter, so maybe a little less on average throughout the quarter. But if we think about how many SINUVA the doctors that are doing us are doing per month or per quarter. Has the biggest limiting factor just been getting through that preauthorization process? In other words, is there something that you could even do as you're migrating people over to buy-and-bill to speed up that preauthorization process which is taking weeks?

[Lisa Earnhardt:]

Yes, that is exactly what we are doing, Rich, in terms of doubling down on our resources on ASCENT in the specialty – in the reimbursement hub to make sure they're able to meet the larger-than-expected demand. We also continue to educate the physicians on that. So we really feel like to your point earlier, that a number of the patients were treated later in the quarter. So it is something, it's hard to sort of talk about number of patients per month, there are number of patients per quarter really is still early. And we do expect to work with those physicians and some incremental ones in the third quarter as well. So as we proceed with this launch in the following quarters, we will continue to provide sort of metrics that you can find useful in your modeling and planning.

[Richard Newitter:]

Okay, thank you.

[Operator:]

The next question comes from Matthew O'Brien of Piper Jaffray. Please go ahead.

[Matthew O'Brien:]

Okay. Thank you. Just to follow-up on Robbie’s question from earlier, just to be specific on this, the guidance came down about $7 million for the year. Are you expecting I think $8 million to $10 million from SINUVA. Is the guide down of about $7 million entirely, SINUVA or $6 million of the $7 million, something along those lines?

[Jeryl Hilleman:]

So just to clarify, the original guidance was $111 million to $116 million, with approximately 8% or roughly $9 million for SINUVA, which we revised to $106 million to $109 million with 2% to 4% of that coming from SINUVA. So I think that gives clarity to the specific pieces of it. It's really – these PROPEL guidance roughly unchanged and the greater part of the delta is almost exclusively due to change in outlook for SINUVA revenue for the year.

[Matthew O'Brien:]

Okay, so that's helpful, Jeryl. Thanks. On the spec pharma side of things, I'm by no means an expert in this area of the market. But I'm just a little surprised that they wouldn't be able to navigate this reimbursement issue. I think that's the biggest factors for using those folks, so are there other examples or devices out there where the payers have come back and said no, you can't go through spec pharma, you need to go through the buy-and-bill process. And I guess what I'm trying going to get at is, how the sales force is expanding and they have to go through spec pharma in some situations, through the buy-and-bill process and other situations, you're trying to build the reimbursement hub, strengthen that group. So are we comfortable that six months is enough time to get all this done or is there another factor to consider that could potentially slow things down into 2019, when you move to permanent J-Code or something along those lines?

[Lisa Earnhardt:]

Yes, so I think that’s a lot of questions in one but I do think our specialty pharmacies are confident handling sort of verification of benefits, securing approvals. In some cases, it's not that they can't. Processes as if the payer say either A; it needs to go through their own specific specialty pharmacy, right, so some payers have their own specific group that they will allow physician administered drugs to go through. Or B; they are just saying, hey, we'll pay for it as long as you do buy-and-bill. So it's not, because of the competency of the specialty pharmacy, it's more whatever the payer is dictating. The great new is as we commented before is, payers are covering the majority of cases, its just a matter of what pathway they need to go through. And so we do think it will take some time, probably the biggest determinant of time is getting physicians comfortable that buy-and-bill needs to be part of their practice. They will likely use both specialty pharmacy and buy-and-bill moving forward. So it's not that specialty pharmacy is going away, it just isn’t “always easy and available option”, it's not a guarantee that they can use that, but it certainly is an important option and we continue to work with our partners.

[Jeryl Hilleman:]

Yes. And just to build a little more color on that, we had anticipated that may be just to put some numbers around 80% or 90% we go through the specialty pharmacy and allow the physician to rely primarily on that model as a mode of securing the product. What we're finding is that because some payers have taken this approach to either use our specialty pharmacy, which may not be an option for us, given our size and scale and – or go to specialty distributed in the second quarter, we are more at 60% specialty pharmacy, 40% specialty distributors, just to give an illustration of how business is going. This, of course, can change. it's just a snapshot at this point in time, but it does reinforce that we think specialty distributor is comfortable with buy-and-bill and need to be part of the physicians practice – as they fully adapt SINUVA.

[Matthew O'Brien:]

Okay. And then just last question for me and I just want to take this off the table because I have not had a chance to run the model yet. But extra spend, a little less revenue this year, that spend is going to push into next year as well and we didn’t have you get profitable until 2020. Can we completely eliminate the potential need for an additional capital raise?

[Jeryl Hilleman:]

The unequivocal answer to that is yes. And I also want to point out that our spending, we are accelerating the spending in the second half of the year but it is staying within our guidance range. So that's unchanged. So we do not believe it will need to raise additional capital we have $104 million in cash at this time. So I think that gives you some perspective.

[Matthew O'Brien:]

Thank you.

[Operator:]

The next question comes from Chris Pasquale of Guggenheim. Please go ahead.

[Chris Pasquale:]

Thanks. Did I hear you right that only 50% to 75% of cases submitted to payers are being approved under the prior authorization process, could you just review what that number was?

[Jeryl Hilleman:]

Yes, that’s exactly. That was consistent with our launch expectations going in. And we hope over time that will increase as we were to educate payers on the therapy.

[Chris Pasquale:]

Okay. And have you seen a trend in that direction from April to July?

[Jeryl Hilleman:]

Yes, it’s been very consistent out of the gate.

[Chris Pasquale:]

Okay. Lisa, you are now planning a major sales force expansion at the time when your commercial team is already dealing with an awful lot. How do you ensure that the process of expanding the team by 30% this year, it doesn't further disrupt the business. And maybe as part of that you can review how many of those 140 to 145 team members by year-end, you expect to be territory managers versus sales consultants?

[Lisa Earnhardt:]

Yes, we finished the second quarter with I believe 83 territory managers and as we look at the additions in the second half of the year, the vast majority, almost all of them are going to be sales support roles. So that will either be our sales consultant role, which as you may recall, works in partnership with our territory managers, or it will be a contract sales organization that will play a similar role to the sales consultants, where they partner with an existing territory manager. So, we do not anticipate or plan for any territory realignments, and we think that will help mitigate the any potential disruption, if anything, I believe the sales team is really excited about the opportunity of having additional resources, because that will set them up in a position to be successful in both introducing SINUVA and continuing to drive growth in PROPEL. So, they have been quite busy in the second quarter and are anxiously waiting welcoming new peers to the group.

[Jeryl Hilleman:]

Yes, we see this as a way to really expand the bandwidth, which is clearly needed at this time but preserving the strong relationship that our territory managers have with doctors and without disturbing that, but still adding the bandwidth.

[Chris Pasquale:]

That’s helpful thanks. And then lastly, you mentioned ASPs around 1,000 for SINUVA in the quarter. If I take $800,000 of revenue, divided it by 325, actually implies something more like 1,200 thus far. Could you just review, what you’re actually getting for the product and why you would expect net pricing to eventually end up closer to $800 you get for PROPEL?

[Jeryl Hilleman:]

Yes, for Q2 our net price was $1,000. The difference may be in some surroundings, but almost a quarter-to-date, and our quarter-end to date numbers, but we did have a $1,000 net price in the quarter, the same as that will impact that as we go forward would largely be really initiating transactions with government mandated discounts such as the 340B program that would probably the single biggest factor that is not yet playing into our business, but as hospital, clinics, offices and hospital clinics purchase the product that could have a further impact on that. There's a couple of other factors but that's one of the main ones.

[Chris Pasquale:]

Thanks.

[Operator:]

The next question is from Brian Weinstein of William Blair. Please go ahead.

[Andrew Brackmann:]

Hi, good morning, this is actually Andrew Brackmann on for Brian. So, Lisa you’d made the comment that the sales force been a disproportionate amount of time on the SINUVA launch and didn’t effectively engage in the hands on side of growth for PROPEL. Could you maybe qualify that a little bit more and talk about how much time these sales force spent on the SINUVA launch versus the base?

[Lisa Earnhardt:]

Yeah, anytime you have a new launch that obviously attracts a lot of attention from the team and there is a significant physician interest as I had mentioned and so I do believe, as I said that there was disproportionate amount of time spent. And I think of course we always anticipated the sales team spending time on managing the demand and supporting the clinical education, training required for SINUVA, but what we have anticipated with the amount of time they would spend on sort of troubleshooting product access and that's really where the disconnect was, as we were sort of working through, patients through the funnel, they ended up spending a little amount of time there. So, I would expect moving forward with that process streamlined, we'll continue to move forward with targeted launch that they will be able to better

[Andrew Brackmann:]

Great thanks. And then Jeryl you made the comment that a few surgeons are implanting the device and then waiting sometime to see the results. Could you maybe talk about how long you expect these surgeons to wait to see the results and how long you think that will take for them to get back and do some more procedures? Thanks.

[Jeryl Hilleman:]

Yeah, it really varies it's an individual choice. Sometimes they wait and they see a 30-day result and are very, very pleased with that, but it's really going to vary by surgeons and the patients that they have.

[Andrew Brackmann:]

Okay, thank you.

[Operator:]

The next question is from Suraj Kalia of Northland Securities. Please go ahead.

[Suraj Kalia:]

Good morning, everyone. Thanks for taking my questions. So Lisa, can you tell us if there were any ASP increases in PROPEL in the quarter?

[Lisa Earnhardt:]

Yeah, there was modest ASP increases. We did put a price adjustment in place as of January 1, as we've done the last several years, and so we did see a modest up tick in price for PROPEL.

[Suraj Kalia:]

And would it be in the low single digits again?

[Jeryl Hilleman:]

No, it is just 1% to 2%.

[Lisa Earnhardt:]

Yes, yes, low-single digits.

[Jeryl Hilleman:]

That was effective from January 1.

[Suraj Kalia:]

Got it, right. And following up on – I know everyone has asked the same question. I'm just trying to ask it from a different flavor. The maths indicates you guys are roughly around 110 or so reps in the quarter, maybe slightly less, plus or minus. And on the last quarterly call, they say you've given an update, if I remember correctly, about 2750 accounts on PROPEL, just the whole family of PROPEL. If you strip out SINUVA, PROPEL growth in the quarter was 4% year-over-year. Then you strip out ASP increases of roughly 2%, could you help me reconcile – I appreciate the commentary about the reimbursement issues and the spec pharm route, the half pre-off getting approved and some level of confusion, but if I look at these numbers, this will be the number of reps, but there are other accounts, can you give us some additional color, how many reps need to be on site? What was the disruption? Just help me understand the math on the non-SINUVA business. Thank you for taking my questions.

[Jeryl Hilleman:]

Suraj, this is Jeryl. I will just add one added to some of the – map we were just going through, but the PROPEL growth was $25.8 million, compared to $24 million last June, which was an 8% growth, just to clarify some of the math. And then Lisa, did you want to talk to the question of representatives?

[Lisa Earnhardt:]

So we finished the quarter with a 117 representatives and as we said on the call, we expect to grow substantially in the second half of the year.

[Suraj Kalia:]

Thank you.

[Operator:]

The next question is from Kyle Rose of Canaccord Genuity. Please go ahead.

[KyleRose:]

Great, thanks for fitting me in. I wanted to talk a little bit more about the buy-and-bill situation. And, I think you talked about the fact that maybe you have 40 accounts, you are taking the initial leap and going into the buy-and-bill side there. I just wanted to see the characterizing what those accounts look like for us? Are they larger? Are they part of a larger multispecialty practice or an academic practice, maybe somebody that might have a bigger budget to be able to potentially take more of an at-risk buy-and-bill type situation and wait for reimbursement down the road? And then also just what that would look like and when you expect to get more color insight into I guess the timeline from when they actually will get reimbursement and when you think you will be able to have enough confidence to sell that to your broader underlying account base.

[Lisa Earnhardt:]

Yeah, good questions. The first question about the physicians, there were about 40 physicians who have already access to buy-and-bill option to our special distributor. Those are the vast majority of community physicians in small practices, so we do have some large accounts who’ve purchased the product, but when we talk about the number of physicians, the vast majority are private practice. And, the second question we were actually going to get the payments, sorry. It's – we would anticipate, so there is let’s say there were 325 patients that were treated. A portion of those went through the buy-and-bill process. And so we would expect to have some proof of that payment this quarter. And that's exactly what the team is working on, to really get an understanding of – windows are coming in. So we expect over the course of that quarter, so it's literally just a couple of months after a patient was treated. So given that we just launched in the second quarter, it will take some time for us to collect that evidence of payment through EOBs and things.

[Kyle Rose:]

And can you maybe just talk about the tone or the focus of the sales force? Obviously this has been a big focus of them, it’s has gone slower-than-expected. You're bringing on new investments as far as these sales consultants, but just the underlying tone of the sales force and how engaged they are there and then maybe any incentives one way or the other with respect to hitting targets for both SINUVA and PROPEL through the year-end?

[Lisa Earnhardt:]

Yeah, I think the entire organization, not just the sales force fully appreciates. It is a rare opportunity that you get to launch not one but two revolutionary technologies in your career and that's exactly what we doing here with PROPEL and SINUVA. Obviously, lots of learning and I think what we're relying on is our more senior reps who have been through those early learnings with PROPEL and while they were a whole different set of learnings, there are often times speed bumps along the way, and so we are in active communication with our sales team and keeping them focused and incented to drive growth across our businesses.

[Kyle Rose:]

And then the last question for me is on that date clinical data side. Wanted to see if you had an update on ENCORE and then as you're engaging with payors any feedback from a clinical data standpoint specifically on SINUVA and what they are looking to see to start to make some positive coverage decisions moving forward.

[Lisa Earnhardt:]

Yeah, so ENCORE, remains on track to have data read-out in the second quarter of 2019 and the discussions with payors about our clinical evidence with SINUVA are really ongoing, really that’s not as much of a focus with us in the near-term because they are already paying, the vast majority of the large payors are paying and so – but we’re working through the education process. There is really, no new feedback we're getting from the payors on a clinical evidence. Obviously, with randomized blinded sham controlled multiple studies that were done in a very robust fashion. It has been a real strength for us in our discussions.

[Kyle Rose:]

Great, thank you for taking the questions.

[Operator:]

[Operator Instructions] The next question comes from Ravi Misra of Berenberg. Please go ahead.

[Ravi Misra:]

Hi, good morning. Thank you for taking the questions. So, a couple questions, first around the doctors who are not kind of constrained by any of these reimbursement issues, can you help us understand how long it's taking for them to actually go to get the product and then have that product. And how that compares to the doctors who actually are constrained? Just, so we can get an understanding what an optimal kind of timing could be from a patient walking into their door and working through the approval process.

[Lisa Earnhardt:]

Yeah, to be clear it's not like there are some physicians who are constrained, some who are not. It's really based on the patients insurance and what that – the payor decides in terms of their preferred method procurement. But that said, we would anticipate sort of a typical process should be and will be about a month from the time a patient presents. And get prescribed SINUVA to the time that they can actually be treated. It has been widely variable to-date and we recognize that’s not an experience we want to repeat for either patients or physicians but we do anticipate overtime unless it is good planning for the physicians that they – if they consult their patients.

[Ravi Misra:]

Okay and then just wanted to parse through a couple of comments that you made earlier. You're saying something around providing payment evidence in support of buy-and-billed. Can you explain that a little bit in more detail and then secondly my sense is that you were pretty confident around that CMS reimbursement. Can you maybe update us a little bit on why you still feel that November, you're still positive about the November outcome.

[Lisa Earnhardt:]

So, for the first question in terms of proof of payments, and something that would be important to have data points to take to the physicians to continue to give them confidence that not only will the payor prior authorization, but then they will ultimately, they would actually ultimately pay is something, we're able to verify through obtaining something like a EOB, which is the explanation of benefit. So, basically it is what comes with the final payment to a physician's office and some physicians have been open with us as we work through this process in partnering with us to share that information on a confidential basis, so that we can then use that in de-identified fashion as appropriate with other physicians, so that is just in process. As it relates to the J code there really is no update from our, the last time we spoke about this, we remain confident that the J code will – a permit J code will be issued or notified of that in November by TMS and that it would go in to effect January 1, 2019. The only thing that I would say that would be a sort of a new development there is that as anticipated the category three codes related to the placement of drug-eluting assignment and plans are – has been confirmed that will be deleted January 1, 2019. That came out in the most recent physician fee schedule proposal. And so that was great that – that change is actually officially noticed. If you know that was one of the concerns or issues that came up from CMS, is those existence of those codes had caused some issues as they thought about this from an administrative perspective. But now that the codes are now officially recognized and it was in the ruling to be deleted, I think that will – that in my mind that's the one thing that is sort of new news for us but that was in the preliminary release.

[Ravi Misra:]

Great and then maybe one last question on the sales force. Can you just given kind of pushes and pulls between the PROPEL and SINUVA dynamic can you kind of just strategically walk through what the roles of now the territory managers are, the sales consultants, and it sounds like this is a new role, the sales contractor, did I hear that right? And how we should think about that in our productivity calculations.

[Lisa Earnhardt:]

Yeah. So the roles really remain the same with the territory manager is our primary point person, for our physician customers. And then in some select markets they will have additional resources either field consultant or potentially a contract representative. That is essentially playing that same sales consultant role. And so, it's not like a new role that is being identified. This is additional incremental resources vis-à-vis our original plans.

[Ravi Misra:]

Thank you

[Operator:]

This concludes our question and answer session. I would like to turn the conference back over to Lisa Earnhardt for closing remarks.

[Lisa Earnhardt:]

Great, well thank you all so much for joining us today. We greatly appreciate your interest and support and look forward to continuing to discuss our process and our progress as we move forward. Have a great guy.

[Operator:]

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.