Intersect ENT, Inc.
Q4 2016 Earnings Call Transcript

Published: 1 Mar 2017

[Operator:]

Good afternoon and welcome to the Intersect ENT Fourth Quarter and Year 2016 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 over to Jeryl Hilleman, Chief Financial Officer, please go ahead.

[Jeryl Hilleman:]

Thank you, Denise and thank you all for participating in today’s call. Joining me today is Lisa Earnhardt, our President and CEO. Before we begin, I'd like to remind you we will make forward-looking statements within the meaning of the federal securities laws. Actual results and timing in 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 filed 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:]

Thank you Jeryl, and thanks everyone for joining us. This is indeed an exciting time for Intersect ENT having just received PMA approve of the third product in the PROPEL family, PROPEL Contour. We are gratified that the FDA approved PROPEL Contour for use not only in the frontal sinus but also in the maxillary sinus. This approval expands both the PROPEL product line as well as the range of sinuses that can benefit from localized drug delivery. PROPEL for the ethmoid sinus, PROPEL mini for the ethmoid and frontal sinuses and now PROPEL Contour for the frontal and maxillary sinuses. I'll speak further about Contour on this call after we review our 2016 results. 2016 was a landmark year for Intersect ENT marked by the achievement of several long anticipated milestones and characterized by the continued expansion of our business. We were pleased to increase PROPEL adoption, introduce the newly improved frontal indication for PROPEL mini, advance our pipeline significantly and continue to gain leverage in our business. We finished the year with our strongest quarter yet delivering 29% growth for the quarter and 28% for the full year. This revenue growth was driven by expanded use among our existing customers as well as the addition of new customers and was supported by the introduction of the frontal indication and by the ongoing salesforce stability and execution. In 2016, we expanded our account base by 20% adding approximately 400 new accounts to build our base of customers to nearly 2,400. To-date over 150,000 patients have been treated with PROPEL and we estimate that PROPEL is now used in one of eight sinus surgery procedures compared with one in ten a year ago. We continue to experience growth even in our most established market. For example we estimate that PROPEL is now used in 60% of sinus surgeries in New York City and in 35% of cases in Houston. We believe that these markets represent the potential of what we can achieve nationwide essentially becoming the standard of care for patients receiving sinus surgery. A highlight of the year was of course the introduction of the frontal indication for PROPEL mini. We believe that this new indication enabled us to attract new users as well as to increase adoption by our existing customers. Our sampling of 700 physicians in the first two quarters of launch indicated that they elect to use PROPEL mini in an average of 40% of their procedures involving the frontal sinus. We have now also begun - we have also been successful in converting non-users with this indication including some high volume academic physicians who have not historically incorporated PROPEL into their ethmoid procedures but who are now embracing it to improve outcomes in the front sinus surgery. On the salesforce front, we ended 2016 with 103 field reps including 72 territory managers and 31 sales consultants, an increase of 10% from 2015. Sales consultants now operate in over 40% of our territories and we have been pleased with their contributions to both account growth and salesforce stability. We expect to continue the sales model in 2017 and to grow headcount similarly by about 10%. Our sales force tenure has also increased to just under two years for our territory managers, up from about 12 months at the end of 2015. As we move into 2017 we know that the new Medicare bundling rules which created a comprehensive ATC for sinus surgery with one flat payment rate went into effect in January. This change effectively lowered the reimbursement for patients with traditional Medicare coverage undergoing sinus surgery in the hospital setting. We believe this involves roughly 8% of patients receiving PROPEL. In the first two months we have not heard from either accounts or physicians that they will change practice patterns based on this new ruling. This reaction is consistent with our previous view that we would not expect near-term impact from this Medicare ruling recognizing that it is a change to a facility fee associate with a small portion of sinus surgery patients. Further, there is no change to the physician fee associated with the procedure. Over time, we do believe that the potential manifestation of the ruling could come in the form of increased cost consciousness. Fortunately there are several ways physicians can navigate cost pressures among the choices they make in surgical supplies and venue. In addition, our products are backed by 14 prospective clinical trials supporting the clinical and healthcare economic benefits of our technology to support provider demand. We believe it will take several order cycles likely in the mid-year to have a clear read on the impact of this ruling on physician use and private payer payment. Therefore we maintain our revenue outlook for the year of $87 million to $89 million in revenue. Beyond reimbursement we have strong drivers of growth in place for 2017 including continuing the introduction of the frontal indication for many and launching Contour. As we discussed previously, we have been pleased with the uptake of mini in the frontal sinus and expect continuing adoption. Complementing PROPEL mini, Contour offers several new features to physicians and patients including a unique hourglass shaped lower profile and a flexible applicator tip designed specifically to allow placement in smaller or more difficult to access sinus openings. Contour may be used in the operating room or in the office setting of care. In the OR we estimate that 30% of sinus surgeries involve opening the frontal sinus and 85% the maxillary. In addition for reference the ethmoids are treated in an estimated 85% of surgeries and typically physicians treat multiple sinuses in each procedure. While there is some overlap in the target patients with mini the unique features of the Contour product should enable physicians to treat patients who would not otherwise be able to receive a PROPEL mini. Specifically Contour maybe used preferentially following balloon opening of the sinuses which has performed annually in about 100,000 patients in the OR and 50,000 patients in the office setting of care. In addition, the maxillary indication provides a new treatment option for physicians that was not previously available. Overall, we believe that offering physicians a choice of size and shape to accommodate the wide variety of patient autonomy will ultimately lead to overall broader PROPEL usage. Regarding Contour reimbursement just as with PROPEL and PROPEL mini, when PROPEL Contour is used in the operating room the cost of the product will typically be included in the facility payment. In the office setting of care, providers can use existing procedure and product codes to seek reimbursement for use to PROPEL Contour. However, actives may be influenced by the existence of experimental or investigational coverage policies. Therefore providers may need to pursue the prior authorization and appeals process based on medical necessity for the patient. This is common to most new medical technology particularly when used in the physician office setting. Switching gears to our pipeline, we continue to advance the RESOLVE program. The RESOLVE product together with Contour strongly supports our goal of expanding our presence into the physician's office to provide a cost effective alternative to more traditional surgical approaches. We reported positive results from our 300 patient pivotal R RESOLVE II study in October. On the strength of these results we have moved forward with the preparation of the RESOLVE NDA and are on track to submit to the FDA this quarter and subsequently expect approval about a year thereafter. Let me now turn the call over to Jeryl to discuss our 2016 financial results and full 2017 outlook.

[Jeryl Hilleman:]

Thank you, Lisa. As Lisa mentioned we finished the year well delivering fourth quarter revenues of $24.2 million and full-year revenues of 78.7 million. Overall, we continue to see strong returning business with 92% of our 2016 revenue coming from reordering customers. We are often pleased to see continuing leverage with our salesforce with productivity in the fourth quarter at an annualized $1.3 million per territory manager and for the year at $1.1 million. This represents an increase in productivity of 30% achieved through the combination of a strong base business leveraged by sales consultant, the expanded usage of PROPEL mini and salesforce stability. We also increased our view of gross margin through the year ultimately delivering 2016 gross margin of 83%, a meaningful step up from 80% in 2015. This increase resulted in roughly equal parts from our 2016 price increase, increased production as we ramp sales and build inventory at a second distribution center and continuing efficiencies. Our 2016 operating expenses were $91.8 million of which over half were related to sales and marketing expense. Our R&D expenses included spending associated with the 80 patient Contour study and the 300 patient RESOLVE II study as well as production of initial large quantities of PROPEL Contour. For 2017 as Lisa mentioned, we are maintaining our guidance from $87 million to $89 million in revenue. Also reflecting that our experience with HOPPS is still early and we have a seasonally high volume of March ahead of us we are maintaining our outlook for Q1 revenue of $19 million to $19.5 million. Regarding 2017 gross margin. We expect to maintain margin levels consistent with 2016 of between 83% and 84%. Our outlook for 2017 operating expenses is a little increase by approximately 6% to $96 million to $98 million. With these expenses being relatively even across the four quarters of the year. Approximately $3 million of this increase is attributable to increase in stock-based expense. Sales and marketing expense will increase due to headcount growth as well as to expenses associated with preparing for the launch of PROPEL Contour and RESOLVE. R&D should remain relatively flat. We completed the pivotal PROPEL Contour and RESOLVE II studies in 2016 but will continue to invest in clinical studies as well as in research and development to continue advancing innovation in the ENT area. Regarding our cash, our 2016 cash flow from operations reflected a use of approximately $20 million and we ended the year with approximately $104 million in cash. Based on our outlook for revenue, margin and expenses, we do anticipate improving our operating cash flow in 2017. I’ll now turn the call back to you Lisa.

[Lisa Earnhardt:]

Thanks Jeryl, as we look to 2017 teams we are well positioned to deliver a number of value driving milestones including the PROPEL Contour launch and the submission of the RESOLVE NDA. In addition we expect a number of publications including the results of both the progress Contour and the RESOLVE II pivotal clinical studies. It is our expectation that the Contour study publication should occur by midyear and that the RESOLVE II study publication should follow by year end. In addition, we continue our efforts to fortify reimbursement for our products particularly as we anticipate expanding to the office setting of care. We are continuing our plans to secure a permanent category one CPT code for the standalone implant procedure and a J-code to facilitate payment for the product itself. We anticipate having these codes in place effective January 2019. We will also continue to work closely with payers towards the goal of ensuring that physicians and their patients have access to our products. We recognize that commercial payers must carefully evaluate new technology, but we are confident that we are well positioned for the world of value-based healthcare with strong and growing clinical evidence that supports our technology both improved outcomes and reducing the cost of care. Overall we believe we are in a strong position to continue our growth by offering ENT physicians and their patients a unique choice of evidence based solutions and a compelling value proposition. We look forward to building on the strengths as we launch PROPEL Contour and seek approval for RESOLVE this year. With that Jeryl and I will remain on the line to address any questions you may have. Denise would you go ahead and please open up the lines.

[Operator:]

[Operator Instructions] And the first question will come from Bob Hopkins of Bank of America Merrill Lynch. Please go ahead.

[Unidentified Analyst:]

Hey guys, it’s actually Brad in for Bob, how are you.

[Lisa Earnhardt:]

Hi Brad.

[Unidentified Analyst:]

First on the CMS side and maybe even on the private pay side, can you just talk a little bit more about the market environment around year-end and now two months into 2017, I know you said you haven’t really heard much from accounts or docs in terms to changing practice patterns but just a little bit about what specifically you’ve seen in recent performance of the Medicare business and then your private pay business.

[Jeryl Hilleman:]

As we said on the call, it really is early, Brad, to comment with any specifics around our performance, but as we articulated on the call we really do think that we were not concerned about a near-term impact to our business and if it were to manifest itself would be more along the lines of cost consciousness. So we clearly have our eyes and ears to the ground here on this one both with our field team as well as our customers and we’ll look forward to providing more color on our first quarter call.

[Unidentified Analyst:]

And I mean whether new data you’ve looked at about past CMS changes or anecdotes you’ve heard from the salesforce or from some customers. I mean is there anything that changed on outlook on 2017 whether it’s increased or decreased your confidence on this impact.

[Jeryl Hilleman:]

Brad, we're still very much in learning mode. I think what we are recognizing here is that first of all the overall bundling is new and this is a change to a facility fee not to direct product reimbursement. So it's a little less direct and a little harder to get a clear quick read when you can say X is happening in Medicare. This is what's happening to a pool, a hospital has available to pay for supplies associated with the procedure. So we are very much in learning mode there's not really a specific thing we can point to to say this happened in the past years what's going to happen. So we're encouraged in that we have not seen or heard anything significant thus far and we'll continue to learn and evaluate as we go through a couple of water cycles.

[Unidentified Analyst:]

And then on pricing, can you just talk about plants or pricing in 2017, I mean you guys typically raise the rates each year and is that still the plan or have you done - do you plan do any more studies on price elasticity now with this new change.

[Jeryl Hilleman:]

We typically do adjust our price a couple of percent, inflationary adjustment, it’s the beginning of the year and we did do that increase at the start of 2017.

[Unidentified Analyst:]

And then last one from me, just on the guidance of 2017, could you just help me think about how you got there. Did you [indiscernible] over time it's to strip out all the Medicare business or you modeling a private payer impact, just curious how you got to that range.

[Jeryl Hilleman:]

We felt there between the change in Medicare and potential changes in payers but together they could lead to a reduction in the use of PROPEL and we made some assumptions around that which are reflected in our guidance. Those would be less impactful in Q1 and potentially more so as the year goes on. And then we'll continue to learn and get new information to help refine that.

[Operator:]

The next question will be from Michael Weinstein of J.P. Morgan. Please go ahead.

[Allen Gong:]

Hi, this is actually Allen Gong on for Mike. Just first question on Contour, I don't know if you have broken out but like what are you baking in the guidance for Contour. And in terms of pricing, do you have any information on like what could that pricing premium might be relative to PROPEL or PROPEL mini.

[Jeryl Hilleman:]

Contour pricing will be fairly similar to our other products PROPEL and PROPEL mini. We’re not breaking out specific expectations for Contour at this point, we do see it as a driver of growth just as PROPEL mini frontal indications helped us last year, but we're not providing specifics on that at this point.

[Allen Gong:]

And then just to clarify, you ended the quarter with 72 territory managers so that would imply a net add of one, correct?

[Jeryl Hilleman:]

We overall increased our salesforce by 10% in the year, you're correct on the sale - the territory manager part, the biggest part of the growth was in the addition of sales consultant.

[Allen Gong:]

And then you said like it’d be 10% in 2017 as well, should I expect the similar breakdown between territory managers and sales consultants.

[Jeryl Hilleman:]

We're really thinking about 10% for field reps and as we go through the year we’ll figure out and work through with the precise breakdown of that.

[Operator:]

The next question will be from Matt O'Brien of Piper Jaffray. Please go ahead.

[Unidentified Analyst:]

Hi, good afternoon this is JP in for Matt. Thanks for taking the questions. I just want to circle back to the impact or lack of impact you're seeing from OPPS thus far in the year. I guess within Q1 guidance and the full year you obviously have some sort of impact, right. I mean you're growing you just grew 30% 29% in Q4 and then you kind of dropping off for guidance of 16% and then 11% for the full-year. So is that delta itself going to be the impact you guys assumed for OPPS. And then you know a lot of [indiscernible] are you being cautious that there could just kind of be a delayed reaction here and you haven't seen it thus far because it hasn't really come up in a lot of their conversations or just trying to get more details there.

[Jeryl Hilleman:]

As we think about our outlook for the first quarter, part of it is the change for seasonality from the prior quarter; part of it is that we recognized certainly at the low-end of our guidance there could be some near-term impact from increased cost sensitive as a result of [indiscernible]. So we tried to allow for a range.

[Unidentified Analyst:]

And then I guess [indiscernible] you were able to pass through a price increase is that fair?

[Jeryl Hilleman:]

We did, yes.

[Unidentified Analyst:]

And then I know it's kind of early to start thinking about ’18, I assume with RESOLVE the feedback we've gotten is a lot of interest there. Is it fair in the way you guys think about this kind of business going forward is an acceleration in growth in ‘18 on the back assuming RESOLVE gets approved.

[Lisa Earnhardt:]

So we are excited clearly about having our pipeline come to its fruition both of the Contour launch this year and then the RESOLVE launch hopefully around this time next year. And we do concur JP that there is just fantastic not just clinical support for RESOLVE but also really strong physician interest and we think that's because of a need to really significant unmet clinical need but then also provide a less invasive potentially more cost effective alternatives. So we haven't yet given guidance for 2018 and beyond but we do share your enthusiasm around that product launch.

[Operator:]

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

[Chris Pasquale:]

Lisa, I wanted to start with Contour, how do you position that product that it’s additive to the business rather than just cannibalizing Mini. Is it just a matter of picking up some of these maxillary implants that you might not have gotten previously or can you actually make a different push here in terms of the physicians you're targeting, maybe some guys that were doing more balloons previously?

[Lisa Earnhardt:]

Yeah. Chris, it’s a great question and I think there's a couple of different ways we're looking at Contour. First and foremost, any time we bring a new product to market, it gives us the chance to engage with the physicians, both our existing customers as well as maybe physicians who haven’t yet had the role for PROPEL in their practice and we know, given the unique features with the hourglass shape, the fact that it does provide good tissue apposition and we know the clinical results are just superlative that there will be interest there just by having an additional product in our bag if you will. There are two specific patient segments we are looking at, one of which as you actually articulated, both of those, one of which is with the balloon market, where or in any situation where the physician is maybe not making as big of an opening in the sinus ostium, we think Contour is really the right fit for those patients. And second of all, with the maxillary indication, once again that has not been something we've been in a position to sell or promote previously and we do think it's actually for those patients who have extensive inflammatory disease. That is yet another reason to consider PROPEL for a given patient. So we do feel like there are a number of different reasons why Contour is going to be a significant driver of our growth in 2017. In the long run, we think it has the potential as well to help open up the office market, given its smaller size and its flexible delivery system, but we think in the near term, i.e., 2017 the majority of use and growth will be from the operating room setting.

[Chris Pasquale:]

Okay. And that leads right into my next question, which is going to be how much of a push can you really make in the office prior to dedicated reimbursement being in place in 2019. I know you've had some success with kind of a pilot program guiding some of these centers through that process. Is that something that you would look to expand or do you wait on the dedicated reimbursement to be there?

[Lisa Earnhardt:]

Yeah. There are some markets. I mean, right now, it’s important to just recognize the overall office market for sinus procedures is around 50,000 procedures a year. So it's about 10% of the overall sinus surgery market, just to put that in perspective. It has clearly won the hearts and minds if you will of some physicians who are really interested in and learning more about that potential application, but it still is quite early in terms of developing that procedure in the overall market. That said, we do have some markets that have moved more quickly to the office arena, those tend to be markets where the reimbursement is well suited for that. As it turns out, some of those markets marry very well with where we already have a positive payer policies, so for example, I would say HCFCs is a large commercial payer where we do have a positive payer policy, where there is the potential for use of our products in the office setting. So that’s really where we'll focus our efforts will be much more targeted in markets where there are already existing positive payer policy than we could look to grow that over time.

[Chris Pasquale:]

That's helpful. And then just a quick question on the international opportunity, not something that’s been a focus. Recently, you guys kind of dipped your toe in there with some really approvals, but haven't really talked about as a revenue driver. At what point does that warrant increased investment and are you still actively laying the groundwork with the reimbursement size of the equation to make that a bigger piece of the story going forward?

[Lisa Earnhardt:]

Yeah. Chris, we are very much actively laying the groundwork in outside of the US and in particular, in Germany and Japan and I'll talk about both of those separately. We did have some sales in Germany in 2016, albeit modest and we do anticipate selling again this year in 2017. The most important thing as you mentioned is on reimbursement in establishing that process. So we did go through the NUB process once again this year and we're pleased with that outcome and to have more hospitals that are now eligible for use of our product this year. So we will continue to make that investment. It does take a couple of years. So as you know, we've looked further out in terms of this, in terms of growth driver, but we think we're making the right investment today as we look at the -- obviously there's not as strong the revenue payoff today, but certainly it’s something that we feel like we're investing in the appropriate amount at this point. We’re also working on the regulatory path at this point in Japan and as we learn more, we certainly will keep you all informed. So I would say it's important to act as a long term growth driver, but certainly not something I would anticipate 2017. I’m spending a lot of time talking about with you all about it. So just trust that there's work behind the scenes happening.

[Operator:]

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

[Richard Newitter:]

Hi. Thanks for taking the questions. I wanted to just ask about seasonality throughout the year, maybe for you Jeryl because you've always kind of given us good feedback on what underlying fast procedure has done 1Q, 2Q, 3Q, 4Q, where the dips should be, but this is a year also, it sounds like you have pretty exciting launch in Contour. So how should we think of that potentially offsetting the traditional kind of seasonal trends?

[Jeryl Hilleman:]

I think what we have historically done is we have moved with seasonality, but have mitigated the ups and downs of seasonality by continuing growth, which allowed us to outperform seasonality. And I think with Contour, since we consider that a growth that's just going to be part of what helps us continue to do better than what we might otherwise see just from the procedural changes quarter-to-quarter.

[Richard Newitter:]

Okay. But directionally, we should still see 3Q below 2Q and 2Q above 1Q and obviously 4Q above 3Q?

[Jeryl Hilleman:]

Yeah. Exactly. I think we would expect to continue roughly the same profile of seasonal shifts that we've seen in previous years. Contour is a driver of growth. We've discussed Medicare and some of the things we're watching there. We expect to see continuing growth driving from the frontal indication. But net-net, I think seasonality will continue to be a factor in the flows of our revenue.

[Richard Newitter:]

Got it. Helpful. And then maybe just one more on Contour, the in office segment and then ways you can potentially leverage kind of the whatever the initial push you're going to be having in the office segment and how you can leverage that ahead of the RESOLVE launch which -- is there anything we can assume you're going to learn from the launch that will position you better for when result hits the market. That could potentially facilitate even more rapid kind of ramp when that product comes.

[Lisa Earnhardt:]

Yeah. Our primary focus with the Contour launch, Rich, we’ll be in the operating room. So that's where 99% of our revenue in today and where the good majority of procedures are getting done. That said, we are aware that they'll be some physicians who choose to do it in their office, most likely in combination with balloon sinus plastic. So we’ll look forward to learning from that especially as we move into 2018 and 2019. So we’ll keep you abreast, but I would imagine at least for the first couple of quarter most of our learning will be from the operating room.

[Richard Newitter:]

Got it. And I think you mentioned that you're going to generate the SG&A leverage this year and I guess you have a new product launch coming and you’re probably ramping the sales force a little bit ahead of your 18 in office initiatives, but is there any way to just think about that as you get -- that just much more incremental leverage on the launch like contour, because you just drop it into an expanding portfolio, is that essentially what's happening. I

[Lisa Earnhardt:]

We expect to have the same sales force we will continue to build and expand the Salesforce. There are specific differences with RESOLVE since that will be regulated as a drug versus [indiscernible] so there will be some expenses there. But I think the leverage comes into just having more products with similar sales force.

[Jeryl Hilleman:]

And we see that Rich as you know for the last several years is we’ve really done a great job the sales team and just probably looking at sort of optimizing productivity or sales per inventory manager, in this past year, we got into it and a step up and we'll look forward to as we add more products to the back. It certainly helps us do just that.

[Operator:]

The next question will be from Ben Andrew of William Blair. Please go ahead.

[Unidentified Analyst:]

Hi, guys. This is actually Alexia in for Ben. How are you doing today? So first, you've talked about the contractual agreement between payers and hospitals and how that can potentially insulate even the impact of commercial reimbursement cuts. Have you analyzed through the major commercial payers the hospitals you’re work with and when some of the bigger contracts are up for renewal? I’m just trying to get a sense of when we could potentially expect a more impactful payer policy to be up for change?

[Lisa Earnhardt:]

Yeah. And typically payer agreements with the hospital are usually around a three-year period of time, but we would anticipate having some of those come up this year. We obviously don't have visibility to those specific negotiations. They are very tightly held to the chest of the hospital administrators, but we would expect we would hear at least some things anecdotally over the course of the next couple of quarters. And again, it's really a matter of how the hospitals choose to express cost consciousness and other related things to the physicians and what gets communicated to us. It could be that there also have been major payers who already have renewed their contracts this year, maybe their January 1 contracts. We honestly don't have visibility to that. It's really a matter of what our customers communicate to us.

[Unidentified Analyst:]

Okay. That's helpful. Thank you. And then somebody already touched on this, the pricing in case, you did see one and that was, was that again 2% to 3% like last year?

[Jeryl Hilleman:]

In that range, yes.

[Unidentified Analyst:]

Okay. And then is the increase across the border or does it vary by account?

[Jeryl Hilleman:]

I think the best way to think of it is an increase in our ASP.

[Unidentified Analyst:]

Okay. And then just last one for me, as we think about RESOLVE, can you talk to how your strategy will change in order to address this different setting of care and call point?

[Lisa Earnhardt:]

Yeah. So Alexia, it’s a great question. We're already starting to spend time thinking through the RESOLVE launch. It's important to note that it is the same physician community that will use RESOLVE as users use our PROPEL product. So we're in good position there because we're already having interactions and relationships with those various physicians today and they were able to leverage all that straight into the RESOLVE launch. Obviously, the focus for RESOLVE is exclusively in the office setting, where our E&T physicians are spending at least half of their time already. So my team has already spent time in the office as well as the OR. And so all things that we will be able to leverage. So I think that's where a lot of things will be the same and we're already getting a running start, because we will have over 100 members of our sales team plus a very strong commercial organization in Mass and then there will be some differences just because as we're launching a drug, which is what RESOLVE is being regulated as there will be some differences in terms of how we go about selling that but we do anticipate a lot of it will seem very much like a medical device sale, just in the office setting. Unfortunately, as you know, there are other products today and other companies who are working diligently on building the office market, so we're looking forward to jumping on their coattails and benefiting from a lot of the hard work that they've already done to establish that market.

[Operator:]

The next question will be from Tao Levy of Wedbush. Please go ahead.

[Unidentified Analyst:]

Hi. This is actually Na on for Tao. How are you? Most of my questions were taken, but I was wondering if you were doing anything to maybe change or improve the reimbursement policy.

[Lisa Earnhardt:]

Yes. There are lots of things that are in the works on the reimbursement policies for the private payers. And really first and foremost comes down to the clinical evidence and that has been our focus and will continue to be and we do expect a handful of new publications this year, especially with some of our pivotal trials, which I noted on the call and that really is the most important step as we look at expanding our coverage of our technology. We also, as we’re having the positive physician by the American Rhinologic Society and that is well, it's something we're working on communicating to the payers that came in September of last year. So that will be something that's new to payers as they revisit their policies this year and finally continuing to develop physician champions and ensuring physicians have experience as well with our products in the office setting, which is really where these coverage policies come into play. And so those three things, the clinical evidence, the support by the societies and continue building physician champions are very much all in the works and something we're actively working on.

[Unidentified Analyst:]

Great and now that Contour is slightly earlier than expected and you still plan to launch by mid-year, is there anything else you are doing during this time to launch that you didn't plan on before?

[Lisa Earnhardt:]

Yeah. We’re actually planning on launching very shortly or in the second quarter. So we did move up a little as the driver of growth we think our outlook of that we currently have is covers that variability and moving the launch up a little bit

[Operator:]

And the next question will be from Brittany Henderson of Deutsche Bank. Please go ahead.

[Brittany Henderson:]

Hi, Lisa. Hi, Jeryl. Thanks for taking the question. I just wanted to start off with a little bit of housekeeping question on PROPEL Contour. Does the approval of Contour in the maxillary indication, I don't think you are anticipating that at first change your outlook on the total addressable market for Contour and then can you just remind us as to how you're thinking about the long term patient population that you're targeting for that product?

[Lisa Earnhardt:]

I think as we think about the market for Contour, this obviously would be a broadening of the indicated approved usage of the product, which could be very impactful in actually changing physician practices. Overall, we continue to have our expectations that we would have just two PROPEL used per procedure, but now it can be a broader range of choice, not only from the products and the product shape and the applicators, but also now a broader range of approved indications. So we think it just strengthens the case for using one of the PROPEL products.

[Brittany Henderson:]

Okay. And I think just to that point there, when might we see an uptick in the two stent per procedure number, especially now that you have PROPEL and at the most you have Mini, [indiscernible] and you have Contour now. So I guess if you then perhaps talk to how many of your accounts use the product in both indications and when might we see that average numbers start to increase?

[Lisa Earnhardt:]

Yeah. It's always a balancing act with the use of the product against cost considerations in the hospital, the value and what the physician wants to see. I think, we're using two as our planning number and then if that shifts, we would certainly provide an update, but we think two is a good number for certainly our near term planning horizon.

[Jeryl Hilleman:]

And I just want to add to that, we do know of some clinicians who are choosing to use more than that based on the patient anatomy and their clinical needs. So that certainly is a possibility and it does happen today, but we think for planning two per patient is the most appropriate number to use.

[Brittany Henderson:]

Okay. Thank you. And I guess just lastly if we think about 2017, based on anything that you've heard from your sales force, does it appear that physicians are changing their practice patterns, particularly with the sites of care, now that this reimbursement change has gone into effect and how easy I guess might that be for a physician to decide to move some of his sinus surgery procedures from the OR to other sites of care like the ASC and the physician's office where reimbursements have not been cut. And then just how are you thinking about your mix of business overall for 2017 from a hospital OR, ASC and office standpoint.

[Lisa Earnhardt:]

Yeah. And so as we mentioned on the call, we haven't yet -- we have not seen any real change in practice patterns at least with the first two months of 2017 and we just haven't gotten that indication that that will happen. Taking a step accurately beyond just the Medicare change, there is an overall drive to move procedures, not just in E&T, but broadly into less invasive settings of care. And so that is something in the long run, we see happening and that's exactly why we have the product portfolio that we do, in particular those products that are geared specifically for the off issues, but we don't see a significant shift in 2017. Most physicians do practice today at a couple of different sites, so they might practice in a hospital setting, maybe privileges in ASC and maybe be doing some dabbling in the office setting, so they can move patients from setting of care relatively dynamically. It's just that we don't see it happening very quickly. I mean, as you know, balloon technology has been available for use and codes have been in place for probably five years or so and the move is happening, it's just not happening very quickly and we don't see that changing dramatically in 2017.

[Operator:]

[Operator Instructions] The next question will be from Ryan Zimmerman of BTIG. Please go ahead.

[Ryan Zimmerman:]

Great. Thanks for squeezing me in. Great. So a lot of questions have been asked. And not to beat the dead horse on the pricing, but just to be clear, you took a price increase in Q4 and then inflationary price increase in Q1, is that correct?

[Lisa Earnhardt:]

No. Fortunately, it was actually just one price increase that was effective on January first, because of that for an anticipatory way and now we're confirming that it did occur.

[Ryan Zimmerman:]

Okay. Thanks for clarifying that. And then the account growth came in a little ahead of where we're looking and I’m just curious to hear your thoughts. I mean was the account growth this quarter a product of the sales into the territories that have built consultants in them or just good old fashion knocking on doors and territory managers hunting. Just kind of curious to get your thoughts there and the dynamic that occurred in the quarter?

[Lisa Earnhardt:]

The fourth quarter is typically our highest growth in accounts, because really two factors, one of which is the largest volume quarter there is from a surgical perspective and we don't see that changing. And then second of all, because we have typically put an inflationary price adjustment in place as of January 1st, sometimes that doesn't incent accounts to order in the fourth quarter. So the fourth quarter is usually a little bit on the heavier side, but we think it was sort of all within the round in our normal course of business.

[Ryan Zimmerman:]

Okay. Thank you. And then just lastly, the gross margins continue to be very strong and I’m just curious if we're seeing the upper bound of where the gross margin can go longer term or can we expect them to creep longer term, at least within the US market, because of the mid to high-80s, beyond 18%.

[Lisa Earnhardt:]

Certainly for this year, as we introduced Contour and ramp, we are focusing on maintaining gross margins. Next year, we will introduce RESOLVE and give appropriate guidance specifically for that, but overall I think we're comfortable with where the gross margins are as we plan for longer term.

[Operator:]

And that will conclude our question-and-answer session. I would like to turn the conference back over to Lisa Earnhardt for any closing remarks.

[Lisa Earnhardt:]

Well, thank you all so much for joining us today. We certainly appreciate your interest and support and we look forward to stay in touch with you all. Have a great afternoon.

[Operator:]

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