Intersect ENT, Inc.
Q3 2017 Earnings Call Transcript

Published: 4 Nov 2017

[Operator:]

Good afternoon, and welcome to the Intersect ENT Third Quarter 2017 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 Jeri Hilleman, Chief Financial Officer. Please go ahead.

[Jeri Hilleman:]

Thank you, Chad, and thank you all for participating on today’s call. Joining me today is Lisa Earnhardt, President and CEO. 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 upon 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. Lisa?

[Lisa Earnhardt:]

Thanks, Jeri. We are pleased to report a strong third quarter, reflecting our continuing success with the introduction of Contour and with driving adoption of our PROPEL franchise. Overall, we grew revenue by 21% over Q3 of last year. Based on this success and strong outlook, we are raising our guidance for the rest of the year. To give you a flavor for our experience with Contour to date, we exited the quarter with over 750 accounts stocking Contour, up over 50% from Q2. This represents almost 1/3 of our active accounts. The majority of Contour usage to date has been in account that use PROPEL regularly. We recently surveyed about 50 physicians to better understand their usage and thereby, that account stocking PROPEL continue to use on average just over two implants per patient, with the primary use of Contour being in the frontal sinus. We are now starting to turn our attention as planned to accounts with lower or even no use of PROPEL. As we look forward, we expect that Contour will remain a driver of growth given its unique design and strong clinical evidence. In fact, we just announced today that the PROGRESS study was published in the ENT edition of JAMA, the Journal of the American Medical Association. As a reminder, this 80-patient randomized blinded study demonstrated a statistically significant 65% relative reduction in the need for postoperative interventions such as the need for additional surgical interventions or need for oral steroid prescriptions compared to surgery alone. This study is the second randomized controlled trial to demonstrate the clinical benefits of steroid-releasing implants in the treatment of frontal sinus disease. This publication will provide another great opportunity to educate the ENT community regarding the benefits of our PROPEL products, especially those who have not yet found a significant role for PROPEL in their practices. Overall, our observations to date reinforce our conviction that Contour will continue to be a meaningful driver of growth as we move through the fourth quarter and into next year. Taking a step back, our PROPEL family of products has been used to treat over 200,000 patients. This milestone is a particularly important and meaningful accomplishment for us, evidencing our commitment to improve the quality of life for chronic sinusitis patients. Our sales force continues to be strong, effective and stable with 112 field reps made up of 75 territory managers and 37 sales consultants. We have grown our sales force by 9% since the start of the year, consistent with our overall stated plan to grow our sales force by about 10% in 2017. Our annualized year-to-date revenue productivity per territory manager has also grown by 18% over last year to $1.2 million. Our third quarter results came in above our guidance and expectations, reflecting these factors, we are again raising our 27th revenue outlook – 2017 revenue outlook from $91 million to $93 million up to $94.1 million to $94.6 million. In addition to propelling our commercial success, we are preparing for the potential launch of our investigational product, SINUVA. Our PDUFA date remains January 7, 2018, and we anticipate launching commercial efforts in the second quarter of 2018. Recently, there have been a number of pre-approval activities for SINUVA, including expanding communications of clinical trial results, ongoing interaction with the FDA related to the NDA review and advancing SINUVA launch readiness. As we have previously disclosed, clinical study outcomes were presented by the RESOLVE II study co-principal investigator at recent medical conferences providing further transparency to the scientific community study results. A meta-analysis of our two randomized trials and a more in-depth review of the RESOLVE II study results were presented at two leading ENT conferences by Dr. Pablo Stolovitzky and Dr. Robert Kern. We are continuing to build on the clinical evidence for SINUVA. The trials we have completed today assess safety and efficacy based on a single use of SINUVA, demonstrating a significant reduction through six months in the proportion of patients indicated for revision surgery. We also believe that data regarding the repeated use of SINUVA is important as the product has the potential to assist in long-term management of polyps. Towards that end, we plan to initiate the ENCORE clinical study this quarter. The ENCORE study is a 50-patient prospective multicenter open-label trial focused on evaluation of repeat placement of the SINUVA implant in chronic sinusitis patient with nasal polyp. We have reviewed the study with the FDA and have confirmed that the results of the study are not required for approval of SINUVA. This study will be additive to our over 400-patient study to date with SINUVA and will be the first to characterize repeat usage. Given the chronic nature of this disease, we believe that some patients may benefit from periodic SINUVA placements to adequately manage their chronic conditions. I will provide further information regarding our outlook for SINUVA approval and launch in a few moments. But first, I will turn the call over to Jeri to discuss our recent financial results and outlook.

[Jeri Hilleman:]

Thank you, Lisa. To echo what Lisa said, we were pleased with our third quarter revenue and are raising our outlook for the year. Our outlook for the fourth quarter is to achieve revenue of $27.3 million to $27.8 million, and $94.1 million to $94.6 million for the year, targeting full year growth of approximately 20%. Regarding gross margin, if we look back to the first half of the year, our first and second quarter gross margins benefited by about 1% each quarter from the sale of Contour units produced, pre-approval, and expenses R&D in the fourth quarter 2016. In the third quarter, as we anticipated, the introduction and ramp of Contour led to some initial inefficiencies with a resulting gross margin of 83%. Over the coming quarters, we expect to continue to improve the Contour production cost to align more closely with PROPEL and PROPEL mini cost. Overall, we are upholding our prior guidance of 84% for the gross margin for the year, with an outlook of 83% for Q4, consistent with Q3. Our Q3 operating expenses of $23.1 million included $4.3 million of R&D and $18.7 million of SG&A. Our R&D spending was consistent with prior quarters as we continue to support SINUVA and develop our pipeline. Our SG&A spending was also consistent with the prior quarter. We do expect to see increased spending in the fourth quarter as we incur onetime expenses related to the launch of SINUVA, production of demo units and costs related to market access infrastructure. We, therefore, expect operating expenses to rise in the fourth quarter, with our outlook for the year at the high end of our previous guidance range. In addition, based on our progress thus far with the FDA review process, we plan to produce initial quantities of SINUVA commercial products in Q4 for an expense of approximately $1.5 million. As with Contour, these production costs will be recognized as R&D expense in Q4 since we expect to produce prior to our PDUFA date. Therefore, including setup and initial production costs, we are revising our outlook for total operating expense for the year to $98 million to $100 million. Finally, our cash and investment position remained strong and increased during the quarter from $100 million to $102.5 million. We did achieve positive operating cash flow this quarter of $0.5 million. However, we do not expect to continue to generate positive cash flows as we ramp SINUVA launch expenses starting in the fourth quarter. I’ll now turn the call back to you, Lisa.

[Lisa Earnhardt:]

Thank you, Jeri. Our final topic to address today is to update you all on our progress towards commercialization of SINUVA. First and foremost, we continue to work with the FDA as they progress on their review. This past Monday, the FDA commenced the pre-approval inspection of our manufacturing and quality practices. This audit is a standard step in the NDA review process, and we believe it is consistent with the PDUFA date timing. Other anticipated additional activities would include resolution of any audit findings, finalization of any information request and final labeling discussions. Regarding readiness for the anticipated SINUVA launch itself, there are several key areas of focus, including sales force plans as well as activities regarding our launch and market access. As we plan sales force deployment, our current business is well set up for the introduction of SINUVA and provides the potential to further leverage our sales organization. The ENTs we call on today with PROPEL are the same physicians that can incorporate SINUVA into their practices. Our sales force already spent considerable time with these physicians in the office setting of care. Our plan, therefore, remains to deploy one integrated sales force to sell both our PROPEL products and SINUVA upon approval. Through that sales force, we are committed to driving continuing growth of our PROPEL business in the OR while we introduce SINUVA into the office setting. We expect to continue to grow our sales force by 10% to 15% in 2018, including additional territory managers and sales consultants, a structure which has proven to be effective at driving depth in our business. Assuming FDA approval in early January, we would use the remainder of the first quarter for sales training, initial outreach and physician education and going live with our market access partners, including the reimbursement hub and specialty pharmacies. Starting in the second quarter, we plan to kick off product introduction using a targeted launch, with our priority being to provide a training and on boarding program that paves the way for a successful patient outcome and product adoption. Towards that end, we will guide our sales force to concentrate on training and building adoption among physicians, especially those with experience with localized drug delivery. We will also serve as the resource for questions related to the purchasing and reimbursement process as we recognize that these elements may be new for many ENT practices. Patients and physicians will have access to a reimbursement customer service hub to assist with questions related to benefits verification, claims and SINUVA product access. We will offer physicians the choice of buying the product directly to have it on hand in their office or of ordering it through a specialty pharmacy that will handle the reimbursement and financial aspects of the product acquisition. These avenues of support are all standard and proven elements that have been the backbone of many successful launches of physician-administered drugs. Therefore, through our field team and these market access programs, we expect to be in a fantastic position to provide physicians with the information and training they may want as they adopt SINUVA into their practices. After we complete this targeted rollout, we believe that we will have the experience and the track record to accelerate product growth. We envision that SINUVA, if approved, will be a unique product, combining mechanical opening with local sustained steroid delivery, which has the potential to benefit hundreds of thousands of patients each year. Thank you so much for participating in the call and for your interest, and Jeri and I will remain on the line to address any questions. Chad, would you please open up the lines.

[Operator:]

Certainly. We’ll now begin the question-and-answer session. [Operator Instructions] The first question will come from Michael Weinstein with JPMorgan. Please go ahead.

[Unidentified Analyst:]

Hi, this is actually Allen on for Mike. Congratulations on the good quarter. Just had a quick question. So you mentioned that I believe roughly 1/3 of your actual accounts have begun stocking Contour, and just in terms of kind of the mix of Contour and the base PROPEL business that you’re seeing, what kind of percentage is that shaking out to? And what kind of base business growth do you really see going forward now that you’re basically launching new products, granted that you compete in different spaces?

[Jeri Hilleman:]

Allen, this is Jeri. Thanks for your question. If you look out where we have gotten the initial sales and largest traction with Contour, it’s largely current existing accounts that are also stocking PROPEL. Part of that is just simply the process of adoption. Potential new accounts would go through with the value assessment committees and so forth. So those can come on a little bit later. We’re making traction both with current accounts and also gaining new accounts through the launch of Contour.

[Unidentified Analyst:]

And in the accounts where you already have PROPEL, like, there’s – could you – do you have any idea, like, what the ultimate mix would be do you think of base PROPEL and Contour?

[Jeri Hilleman:]

We’ve given some transparency to that as we launched because we really wanted you to have a good assessment of how the project is going forward and how we were doing during the launch. We think that based on the fact that all of our PROPEL products are used in the same procedure and are to some degree, interchangeable because – depending on the physician preference and patient needs. We’re really going to focus on just looking at the aggregate revenue and accounts for the PROPEL family. SINUVA may be a little bit different if that is approved, but at this point, we’re going to start – continuing to look at our business as one integrated family rather than breaking apart the individual components.

[Unidentified Analyst:]

Okay. And then just the final one. I know it’s still a little bit early. But just looking out to 2018, what kind of, like, growth do you kind of see yourself doing. With your guidance, again, kind of implying a step down in year-over-year growth in 4Q, should we expect kind of and that to be the go-forward rate you’re expecting in 2018? Or do you expecting SINUVA will be to another kind of step up, close to maybe not up to but the 20% growth that you’ve had over the year-to-date?

[Jeri Hilleman:]

So we certainly look to continuing strong growth, and we’ll quantify that when we look to give guidance at the start of the year. But Contour will continue to make its contribution to that and then assuming the launch timing of SINUVA, as we’ve indicated in the second quarter, that would also really help growth. Our strategy on the SINUVA launch, as Lisa described, is to really make sure there is very high quality adoption, the process goes smoothly for physicians. So I think the first couple of quarters or more focused on that. And then we can build more aggressively as we go over it. So I’m not answering directly your question quantitatively, but I think it gives you a sense of the overall drivers of growth and really positioning ourselves to continue strong growth over a long period of time.

[Operator:]

Our next question will come from Richard Newitter with Leerink Partners. Please go ahead.

[Richard Newitter:]

Hi, thanks for taking the questions. I just want to start off, I’m jumping between calls, I’m not sure if you mentioned it. But was there a hurricane impact at all? And if so, do you have an estimate as the kind of what that might have attracted from what – still was a strong result, but I’m just curious if that might have impacted at all.

[Lisa Earnhardt:]

Yes, Rich. We did not address that specifically on the call because we obviously have multiple drivers and levers of growth in our business and we’re able to develop and deliver strong revenue. Clearly, there was an impact on procedural volume, both in South Florida as well as in Houston. We would estimate it was probably a couple of percentage points in terms of volume.

[Richard Newitter:]

Okay, great, thanks. And then on this ENCORE study, I’m just curious, would you have any estimated timelines for enrollment and when we could potentially see a readout?

[Lisa Earnhardt:]

Yes. So this study – I don’t know if you have heard it, it’s 50 subjects, and we’ll commence enrollment, yes, this year. So we would expect the readout of the results – some of the initial results, probably within a year or 12 to 18 months or so.

[Richard Newitter:]

I’m just curious, in the preliminary conversations you’ve had with insurers, is this something that you think that you heard from feedback that insurers would like to see or that this is something that could help your cause with respect to the coding?

[Lisa Earnhardt:]

No. I mean, really, this is just focused on characterizing the safety of repeat usage of the implant. Obviously, word – or the foundation of the company has been strong clinical evidence, and hopefully, this is just the natural extension of the great work we’ve already done so far.

[Richard Newitter:]

Okay. That’s helpful. And maybe just last one on SINUVA. Jeri, the consensus estimates, they vary a little bit, but it feels like the majority of estimates are kind of in that kind of high single-digit million dollar range for 2018 for SINUVA. And I’m just wondering, this might be a good time to just kind of make sure the cadence and we’re all thinking about that correctly. Is it kind of right to think of maybe 2Q very, very early contribution or like a $1 million-or-so building to maybe a couple of million in 3Q, and then 4Q, looking more like what could be a run rate as we move into 2019? Is that generally the right way to think about the cadence? And do you feel comfortable more or less with kind of how we should be thinking about SINUVA.

[Lisa Earnhardt:]

That’s a good question, Rich, and then something that we certainly will talk quantitatively about a little more in January. But in terms of the timing of launch, that’s certainly consistent with our remarks and, I think, in the spirit of the nature of building the business and certainly, more towards the back end of the year is correct. I also noticed there’s a pretty tight consensus in The Street, so I think people are interpreting those comments we’ve made in a similar way. So I think that gives you some insight into how we’re looking at The Street numbers, and we’ll certainly speak to this more quantitatively when we get into the beginning of next year.

[Richard Newitter:]

Okay, thanks.

[Operator:]

Our next question will be from Bob Hopkins with Bank of America Merrill Lynch. Please go ahead.

[Bob Hopkins:]

Thanks. Can you hear me today?

[Lisa Earnhardt:]

We can.

[Bob Hopkins:]

Great, thank you. So my first question is just on the ENCORE study, I just want to make sure I got the background on that right. Is that something that was kind of mandated by the outside? Or is it a study that you’ve put together? Just kind of curious as to how it came about.

[Lisa Earnhardt:]

Yes. This study did come up in our conversations with the FDA as we look at the need to characterize repeat usage, knowing that this is very much a chronic condition and just wanted to make sure that would be one characterized in the clinical work that we’ve done.

[Bob Hopkins:]

Okay. And then on SINUVA, I understand it’s a very measured approach here. But I’m just curious, which is going to – which is sort of the bigger undertaking here and the bigger gating item, is it training or payment and reimbursement?

[Lisa Earnhardt:]

It’s really all things. And I kind of look at those that go hand and hand. Because when I think about rolling out SINUVA, there’s obviously our internal team training, both on the product, the procedure and then also the market access element because it will be new for some folks. A well drawn path for many drug launches, but will be new for our organization as well as new for the ENT customers. So the product, the procedure and the market access or how they get access to that. So we do want to make sure we invest in training heavily in the first quarter for both our team as well as our customers. And we do feel like that foundational work, we’ll pass into phase as we ramp later in the year.

[Bob Hopkins:]

The product – so from a training perspective, what has to happen? Because it seems pretty similar to the products you sell today, so what’s the training? Like what do doctors need to learn incrementally?

[Lisa Earnhardt:]

Probably for the physician perspective, it’s around anesthesia protocol. Given that this patient is, in a way, patient in their office setting, they don’t typically place our implants in that setting today so we want to make sure that both the physician as well as the patient has a great experience.

[Bob Hopkins:]

Right. Okay. That makes sense. And then what – can you just give us – last question for me. Just give us a sense on the reimbursement side. Just curious. You mentioned market access partners. Maybe just going a little bit more detail on who those market access partners are and how you’d be working with them.

[Jeri Hilleman:]

This is Jeri. I’m happy to begin to take that question. But the market access partners Lisa’s referring to really fall into three groups. One is the reimbursement hub that is basically a customer service center that can help with individual patient reauthorization, questions about where they will source the product, how to source the product, what their choices are and so forth. In addition to that, we are going – we are working with specialty distributors and we are in the implementation and contracting phase with those distributors. And then we also are working in a similar vein with specialty pharmacy partners, the difference being specialty distributors from a physician point of view are largely how they would source it if they want to stock it in their office. And specialty pharmacy allows them to access the product without getting involved and seeking reimbursement. They just simply ship the product and don’t need to deal with the financial aspect and reimbursement aspects of getting the product. So it’s variedly some set of tried-and-true methodology. We’re well along in implementation of this process consistent with our timelines, and we think that’s going to bring very good solutions to physicians on how to access this product. But again, for ENTs, there’s a certain element of novelty that would just require them to just learn the process of accessing the product. It’s straightforward but it is new.

[Bob Hopkins:]

Perfect. That’s all from me. Thank you.

[Jeri Hilleman:]

Thanks.

[Operator:]

Our next question will be from Matt O’Brien with Piper Jaffray. Please go ahead.

[Kevin Farshchi:]

Hi, this is Kevin on for Matt today. Thank you for taking the questions. I wanted to start first on Contour with the gross margin impact. I know you said the mix was a headwind this time. Just curious how long you think that’ll persist as the profile of the product improves over time? Do you think it’s a couple of quarters? Any comments on that would be really helpful.

[Lisa Earnhardt:]

Yes. I think we’ll make rapid progress with that. We’re already seeing good traction as we go into our Q4 production, which shows up in a quarter or so in terms of our – when we sell the products that we produce. So I think we’re already seeing very good traction toward that and I do think it’s going to be a long-term challenge for us with respect to Contour.

[Kevin Farshchi:]

Okay. Got you. And then for this year, great leverage in the model on the SG&A side. I was just curious, with SINUVA coming on in Q2 how you guys are thinking about the operating expense side into next year? Whether that’s a specific number or just the cadence in general?

[Lisa Earnhardt:]

Yes. And again, that will be part of as we give guidance. So as we think about drivers of expense for next year, we’ve talked a little bit about sales force so expect that to go up in the 10% to 15% range. We’re going to have to increase some of our internal infrastructure and headcount, and we’re going to be incurring sort of large-scale marketing expense and so forth. So we do see expenses continuing to go up. We may not raise the leverage next year, but we do continue to believe in moving the company in the direction of profitability after we have nearly completed the initial launch and ramp of SINUVA.

[Kevin Farshchi:]

Perfect. Thanks so much.

[Operator:]

The next question would be from Tao Levy with Wedbush. Please go ahead.

[Na Sun:]

Hi, great quarter. Congratulations. This is Na on for Tao. Regarding – I just have one question regarding the study ENCORE. Can you talk about, maybe describe how the study can help the adoption on SINUVA? And one more regarding SINUVA, how – what sort of gross margin impact can we expect when you start manufacturing SINUVA next year?

[Lisa Earnhardt:]

Yes, and I’ll address the ENCORE question, and let Jeri address the remainder. We do think the study will provide additional information to both physicians and patients to address any questions they might have. I don’t think it’s a gating factor for adoption of this product, but it’s always great to have additional information as they consider their use of this product. And we do believe, for some patients that suffer from this disease, that a repeat implant even within the same year could be beneficial for their condition. And so we want to make sure we characterize that. And as I said, that’s really been the foundation of Intersect is investing heavily in clinical evidence and we’re going to continue to hold up that mantra. So Jeri, do you want to speak to the...

[Jeri Hilleman:]

Sure. Supplementing your product as you introduce it or the cost will be a little bit higher initially and then, hopefully, we gain efficiencies and it drops. We do expect SINUVA to cost a little bit more than our current products, but we don’t expect to see a major shift in our gross margins. We have consistently said we expect long-term margins in the low 80s and that continues to be our view.

[Na Sun:]

Great, thank you.

[Operator:]

The next question will be from Kaila Krum with William Blair. Please go ahead.

[Kaila Krum:]

Hi Lisa. Hi Jeri. Thanks for taking our questions. So I guess first one on Contour. Understanding you guys don’t want to give specific clarity up to the dollar amount there. But, I mean, is it fair to say that, that product increased sequentially from second quarter level? And then can you talk a little bit about the publication today and then how you think it will support continued strength going forward?

[Lisa Earnhardt:]

Yes. We continue to see strong growth with PROPEL Contour and do believe that’s a significant driver of growth for us into this quarter and into next year as well. And the publication, I think, there’s a number of things that we’re really excited about. First and foremost, the fact that it was in JAMA. As you know, that’s one of the most widely distributed as well as most well-respected journals in the world. As you know, the results were somewhat stronger than those of the many cohort, although you can’t compare because we don’t do a direct comparison. But we do believe that there’s some really clinically meaningful outcomes there. Several secondary endpoints which were also prespecified and statistically significant. We also in this publication looked at 90-day outcomes, which is past the postoperative healing period. That is a question we have gotten from some clinicians and we do think that data could be incrementally helpful as they consider adoption. And finally, I do think it’s important to note that this is our fourth published randomized blinded controlled study in the PROPEL family. And I think it just is almost icing on the cake in terms of the strength of the clinical evidence supporting the PROPEL family of products.

[Kaila Krum:]

Okay. That’s helpful. And then I guess – I mean, you’re now planning to grow in the 20% for the full year this year. And next year, you guys will have some new guys being introduced into the market plus I assume that the rest of the business will remain relatively stable. I mean, is there any reason why you couldn’t sustain that growth rate into next year?

[Lisa Earnhardt:]

We agree with all the factors you have talked about as being drivers of the growth. And I think it really is our aim to continue to grow in the neighborhood of this level. But we’ll reserve until we give guidance to give any specifics.

[Kaila Krum:]

Thank you, guys.

[Lisa Earnhardt:]

Thanks, Kaila.

[Operator:]

[Operator Instructions] The next question will be from Suraj Kalia with Northland Securities. Please go ahead, Suraj, perhaps your line is muted. The floor is yours. Hi, we’re still unable to hear you. All right. [Operator Instructions] Showing no further questions, this concludes our question-and-answer session. I would like to turn the conference back to Lisa Earnhardt for any closing remarks.

[Lisa Earnhardt:]

Thanks, Chad, for your help today, and thank you all for joining us. We certainly appreciate your interest and support and look forward to staying in touch with you all. Have a wonderful evening. Bye-bye.

[Operator:]

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