Intersect ENT, Inc.
Q4 2015 Earnings Call Transcript

Published: 23 Feb 2016

[Operator:]

Good afternoon, and welcome to the Intersect ENT Fourth Quarter and Full Year 2015 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 Jeri Hilleman, Chief Financial Officer. Please go ahead.

[Jeri Hilleman:]

Thank you, Laura. With me today is Lisa Earnhardt, our President and CEO. We appreciate you joining us today to review our fourth quarter and full year 2015 results and business update. Before we begin, I'd like to remind you that we will make statements during this call that include 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, which are based upon our current estimates and assumptions, as well as other risks detailed from time-to-time in Intersect ENT's reports filed with the SEC. Intersect ENT disclaims any obligation or undertaking to update or revise any forward-looking statements contained herein. I will now turn the call over to Lisa Earnhardt. Lisa?

[Lisa Earnhardt:]

Thanks Jeri and good afternoon everyone. 2015 was a remarkable year for Intersect ENT, and we are very pleased with our achievements, as measured by both commercial results and advancement of our pipeline. We exited the year with our strongest quarter ever, with over 100,000 patients having received the benefit of PROPEL in their sinus surgeries through date. Throughout the year, we added consistently between 130 and 150 new accounts a quarter, bringing our total account base to just under 2,000 accounts. We are now working with about one in three accounts, and approximately one in four ENTs or otolaryngologists. We believe our success in 2015 sets the stage for continuing growth in 2016, as our team focuses on increasing market penetration and physician adoption, and on advancing our pipeline of new products. With regard to market penetration, we are pleased that almost one out of 10 patients undergoing sinus surgery now receives PROPEL. As expected, our market penetration varies throughout the country. With regard to our clinical pipeline, 2015 was a productive year, as we work toward expanding indications at our product offering. In 2015, we completed the progress trial, assessing the safety and efficacy of PROPEL mini, when used following frontal sinus surgery. The study met its primary endpoints, demonstrating a statistically significant 38% relative reduction in the need for post-operative interventions. Based on these findings, we filed the PMA supplement with the FDA in September, and believe that we will receive approval this quarter. We also started enrolment of a pivotal study for the NOVA steroid releasing implant, as well as continued enrolment of the pivotal trial for the RESOLVE implant. Enrolment for both trials is going exceptionally well, and I am pleased to share that we now expect to complete enrolment for both trials earlier than previously communicated with progress NOVA enrolment now expected to be completed by the end of this quarter, and RESOLVE II by mid-2016. Our timeline for potential approval of these products remains in line with previous guidance, with NOVA in 2017 and RESOLVE in 2018. As we look towards our 2016 commercial goals, we continue to expect to achieve $78 million to $80 million in revenue. This outlook is supported by several specific drivers of growth, including first, increasing sales force tenure, as reps gain maturity in their territory, following the significant expansion we undertook last year. Second, the late 2015 edition of sales consultants to help drive higher utilization of PROPEL. Third, the expected approval of the frontal indication for PROPEL mini. And finally, effective January 1st, increased reimbursement for the FESS procedure. To touch on each of these drivers, I will start first with our sales team. In line with our communicated plans, we grew our sales force from 52 territory managers at the start of the year, to 74 at year end. Given promotions of some to management as well as turnover, exactly half of our territory managers joined us in 2015. As these reps gain tenure and others continue to grow, we would expect to see an increase in leverage, or a per rep productivity, as we progress in the year. In addition, we now have 20 sales consultants in place to provide greater physician support. Most of these sales consultants were in training in Q4, and we look forward to seeing their impact grow over the course of 2016. This year, we do plan only limited expansion of our sales force. We maintain our view, that the appropriate size sales force for the surgical facing market falls in the 75 to 100 rep range. At this point, with our territory managers and sales consultants, we are effectively a critical mass, and we can now focus our team on leverage. Our third driver of growth is the expected approval of the frontal indication for PROPEL mini, which offers the benefit of expanding the addressable market, and providing clinical outcomes data that reinforce the overall benefit of PROPEL. We estimate that approximately 25% to 30% of the over half a million sinus surgeries a year involve the frontal sinus. If approved, this would allow us to promote -- [indiscernible] not only to existing PROPEL customers, but also to physicians, who to this point, have not found a role for PROPEL in their practice. One further driver to 2016 growth is the increase in the CMS reimbursement rate for the FESS procedure that became effective at the start of the year. Despite our strong clinical evidence, at times, physicians do limit their use of PROPEL due to costs. Therefore, we consider the increased reimbursement rates a meaningful opportunity to engage both physicians and administrators, in discussions about increasing the role of propel in their practice. Finally, although this is a longer term driver of growth, I would also like to highlight our efforts towards international commercialization, as we were very pleased that the German Institute for the Hospital Remuneration System, has assigned a status one reimbursement, the highest level for PROPEL. This reimbursement only applies to the 11 hospitals that submitted applications in 2015, but it is a gating step, and one on which we will build on the next few years. We are also actively working in Japan, and secondarily China, to define our regulatory path forward. I will now turn the call over to Jeri, to discuss our recent financial results and outlook. Jeri?

[Jeri Hilleman:]

Thank you, Lisa. Our fourth quarter revenues were $18.8 million, a 40% increase over revenues in the fourth quarter of 2014. Our annual revenues were $61.6 million, a 60% increase over the year 2014. We continue to see significant contributions from new accounts, with about 40% of our year-over-year growth coming from new accounts; and we also continue to see strong recurring revenue, with about 88% of our revenue from reordering accounts. Looking back at these periods, we accomplished a great deal. Our productivity in the seasonally high fourth quarter, was an annualized $1 million revenue per territory manager, in both 2014 and 2015. Our productivity per territory manager for both years, 2014 and 2015, within the range of $900,000. Putting these together, our takeaway is that we were able to double the size of our sales force, while keeping productivity per territory manager relatively constant. As we look to our 2016 growth, at our guidance target of $78 million to $88 million, and with the addition of five or so territory managers, we expect to see a continuing rise in territory manager productivity. We expect this leverage to be supported by our 2016 growth drivers, including, as Lisa said, sales force tenure, the addition of sales consultants, the expected approval of the frontal indication for PROPEL mini, and the expanded procedure reimbursement. For 2016, we also continue to expect to see seasonal variation in procedure volume, with the low point in Q3 and high point in Q4. We have seen its historic procedure volumes drop by at least 10% in Q1 compared with Q4, and we expect our revenue to be impacted accordingly. Switching to gross margin, our gross margin for 2015 was 80% versus 74% in 2014. This increase was achieved through a combination of expanded volume, spreading the overhead component in gains and efficiency. We expect to continue to improve gross margin slightly, expecting to see 2016 gross margin at 80% to 81%, as we expand to make growing product sales. Our 2015 operating expenses totaled $76 million, including $4.9 million in stock based expense. As in 2014, 22% of our expense went to R&D, including our clinical development efforts, and 78% to SG&A. Key drivers of overall expense included our headcount growth, especially in sales; expansion of our clinical development efforts, and G&A associated with being a public company. Looking toward 2016, we would expect to see a similar split between R&D and SG&A, and total operating expenses of approximately $92 million, including approximately $8 million of stock based expense. Finally, our cash balance at year end was $124.3 million, representing a net use of cash during the year of approximately $20 million. Based on our financial guidance specifics, we would expect the net use of cash during 2016, in the order of magnitude of about $25 million. That concludes our financial narrative today. Lisa, let me turn the call back to you.

[Lisa Earnhardt:]

Thanks Jeri. We certainly navigated significant growth in 2015, our first full year as a public company. Now that the dust has settled on last year, a year full of long hours, inevitable challenges, substantial change and lots of learning, we are proud of all that we have accomplished. More importantly, I am proud of the team. Their focused determination, hard work are remarkable, and they never fail to keep the patient version [ph] all we do. We are excited about 2016 and the significant milestones ahead, and remain committed to our vision of providing innovative solutions to chronic sinusitis patients across the continuum of care. With that, Jeri and I will remain on the line to answer questions. Laura, let's go ahead and open up lines.

[Operator:]

[Operator Instructions]. Our first question will come from Mike Weinstein of JP Morgan.

[Mike Weinstein:]

Thank you. And guys you covered a lot of ground very quickly there. Couple of items I just want to circle back on, if we can; so number one, on the frontal indication for PROPEL mini, are you still hoping that comes through this quarter, and could you talk about that impact on current PROPEL usage? Thanks.

[Lisa Earnhardt:]

Yeah Mike. Great to hear from you. And you are right, we do anticipate approval for the frontal mini indication yet this quarter. And so we are looking forward to launching that new indication. About 25% to 30% of all patients undergoing sinus surgery have their frontals treated. So we think it’s a really just fantastic opportunity, both to drive adoption with our existing users, to expand the pool of patients, that they believe will benefit from our products. But also a chance to reengage physicians who maybe haven't found a role for PROPEL, in their practice. So we really think there are a number of different drivers for us, as we think about launching this. And the third thing is, really thinking about, this is another set of high level clinical data. So once again, prospective randomized trial, it actually had some nuances, where the choice of control is different, and in this case, it's randomized to nothing, which really is the standard of care in the frontal. So it's another data source, which really does corroborate in the incredible amount of evidence we have for the benefit of PROPEL. So really across the board, we are very much looking forward to approval of the new indication.

[Mike Weinstein:]

Okay. And you gave a very encouraging update on the pipeline; with those, the PROGRESS trial, to NOVA completing tests this quarter, and RESOLVE II by the middle of the year; you kept your timelines for approvals unchanged. Is that just conservatism, because you want to see the date and get in front of the FDA? I assume there is nothing else there, rather than just being conservative?

[Lisa Earnhardt:]

Yeah. And I think once we have the top line data, and we understand the merits of that and how it will impact potential approvals, as we get closer to approvals, we feel like we will provide more specificity. But at this point, 2017 and 2018 are great places to plan for.

[Mike Weinstein:]

Okay. And maybe just remind people, given that the [indiscernible] the enrolment in those trials, when we might see data from each?

[Lisa Earnhardt:]

Yeah. So for the progress in NOVA trial, we expect data -- top line data to read out midyear. And then for RESOLVE II, likely late 2016, early 2017 in terms of top line data.

[Mike Weinstein:]

Okay. And RESOLVE is obviously the one that's, because of the regulatory past, a bit more uncertain in terms of the turnaround at the agency, is that fair?

[Lisa Earnhardt:]

Yeah. I mean, as you know, what's going down the drug pathway, and so that timeline, typically is a little bit longer in terms of approval for an NDA.

[Mike Weinstein:]

Okay. And last question, I will let someone else jump in; so as we are into early part of 2016, anything different about this year, seasonality versus prior year seasonality? Obviously, we typically see some drop-off in elected procedures in 4Q to 1Q. Anything looked different so far this year, versus, last year, or the year before?

[Lisa Earnhardt:]

Nope.

[Mike Weinstein:]

Okay. That's very helpful. Thank you guys.

[Lisa Earnhardt:]

Great, thanks Mike.

[Jeri Hilleman:]

Thanks Mike.

[Operator:]

And our next question will come from Bob Hopkins of Bank of America Merrill Lynch.

[Brad Mas:]

Hey guys, this is actually Brad in for Bob. Just two quick ones, one, wondering if you could talk about how you see the frontal indication driving the units per procedure? And where you think that can go from the current probably too, as well, I assume it didn't move much this quarter?

[Lisa Earnhardt:]

Yeah. Good question Brad; you are correct. I mean, we are looking right now around two implants per procedure, with our current indication, the ethmoid. We do anticipate a small pickup there, but as we think about planning, we really think about the frontal indication as an opportunity to expand the number of patients being treated, more than simply increasing the implants per patient.

[Brad Mas:]

Okay. That's helpful.

[Lisa Earnhardt:]

Just to reinforce [ph] that, we expect the number of stents per procedure to stay roughly even in the near term.

[Brad Mas:]

Okay. And then, can you just talk about -- you gave some numbers about profitability per territory manager can you just vie some sense on where you guys think that can go at a peak, and how long you expect it to get there with the new shift in the territories?

[Jeri Hilleman:]

I think we have given you some idea of what we achieved last year, expect for this year. We would expect to see productivity per territory manager going up. There is a couple of dynamics. As we go into 2017 and then 2018, we will be adding an incremental product to the bag. We would also probably continue to build our sales force up to, in total, closer to 125 reps, as we start adding the in-office. So there is a couple of dynamics on that. For the current place we are at with PROPEL, we have seen territories go up to $1.4 million, $1.5 million. We have often split the territories at that point, so we haven't really tested to see how high we can get in productivity. But on average, we do expect to see the continued build, roughly 10% from 2015 into 2016.

[Brad Mas:]

Okay, that's very helpful. And then just last one, can you talk about pricing for PROPEL next year? Do you expect it to be stable again?

[Jeri Hilleman:]

Well, we did do an increase of around 3% from 2014 into 2015. We did that again from 2015 into 2016, that seems to be in line with industry practices. We haven't formulated our specific plans for 2017 yet.

[Brad Mas:]

Great. Thanks guys.

[Operator:]

Next, we have a question from Thomas Gunderson of Piper Jaffray.

[Kyle Bauser:]

Hi good afternoon. It's actually Kyle on for Tom. It sounds like the second cohort of the PROGRESS trial to evaluate, or use of NOVA in the frontals its progressing nicely, which takes back to top line results sooner than expected. But, could you provide sort of any updated details on the C2 trials and its use of NOVA, the trial size enrolment completion data, etcetera.

[Lisa Earnhardt:]

Yeah Kyle. Thanks for the question. At this point, our focus for NOVA is much like we do with PROPEL, is getting our initial approval, and then we will consider potential follow-on studies. So we have just decided with all the clinical programs we have ongoing this year, its best to focus our efforts on getting PROGRESS, NOVA across the finish line and getting the NOVA product approved. And at that point, we will look at additional studies for that product.

[Kyle Bauser:]

Okay. And congratulations on receiving Status One from your NUB application on the first try. You mentioned that a limited number of participating hospitals or 11 will be able to receive reimbursement for PROPEL. How many you think it will take to start seeing a material impact of sales from O-U.S. reimbursement?

[Lisa Earnhardt:]

It's going to be a few years. We would expect Germany to build at a fairly slow pace. We will look at other countries. We have regulatory considerations we have to work through in Asia. So it's going to be a few years, before we start seeing material revenue from overseas.

[Kyle Bauser:]

Okay. Thanks, and then just lastly. The annual rep productivity is about $900,000 and you're reaching sort of critical mass, at least, in terms of territory managers for the surgical market. But any update to how long it takes for the average rep to get to that $900,000 market, and what are some of the highest productivity levels you're seeing amongst your sales force?

[Lisa Earnhardt:]

Yeah, it is really varying how long it takes for an average rep to get up to that level. And we are still continuing to learn. We split territories last year, we added a lot of new ones in. Historically, we took about nine months I think in many cases, we are seeing it take a little bit longer than that. In terms of peak productivity, again, we tend to split the territories around $1.4 million, $1.5 million. So that's about the peak we have seen, but again, we did cap it by splitting the territories.

[Kyle Bauser:]

All right. Great. Thanks.

[Lisa Earnhardt:]

Okay. Thank you.

[Operator:]

The next question is from Richard Newitter of Leerink Partners.

[Ravi Misra:]

Hi good afternoon. This is Ravi in for Rich. Can you hear me okay?

[Lisa Earnhardt:]

Yeah. Hi Ravi.

[Ravi Misra:]

Hi. How are you doing? So a couple of questions, shuffling between calls, so forgive me if I am asking something twice. First, if I get to start on the sales force, you are saying that 125 is the sort of boldest sort of -- I am sorry, when you are getting the in-office product, and how should we think about hiring around that -- or is that going to be pre-hired before approval in 2017, or should we think about hiring in line with your launch strategy?

[Lisa Earnhardt:]

Yeah. We really think that's something that will build over the course of 2017 and 2018, to meet the needs of the office demand. And this year, as we commented on the call, just very sort of modest additions, given that we are already at critical mass, we believe, with the 74 territory managers plus 20 sales consultants for the surgical opportunity, and we would expect, as I said, between 2017 and 2018, to start to build up to a greater number, to take advantage of the office opportunities.

[Ravi Misra:]

And are these, are you sort of anticipating -- I know it's early, but would you anticipate similar productivity versus the surgical opportunity or higher or lower? Any color on that would be helpful?

[Lisa Earnhardt:]

Yeah. We are really looking at it being the same sales force. So just as a reminder, you are calling on the same customer, as merely a different sight of care, if you will, going from the hospital or the ASP to the clinic. And so, we would anticipate driving increase in productivity over time.

[Ravi Misra:]

Great, thanks. And then, on reimbursement, could you just maybe remind us of the timing strategy, is that still a 2018 event, and what are sort of the steps that you have been taking so far?

[Lisa Earnhardt:]

And as you know, and you have probably heard me say ad nauseam. I do think reimbursement is a multiyear, multi-step process. So we haven't commented on a specific date. What we are really looking at, is ensuring by the time we have both of our office products on the market, that we have reimbursement in place to ensure that physicians and patients have access. So reimbursement is both sort of coding, and then also working on the coverage. And those are all very much in the works. So the next couple of years, I think, we will be well positioned to take advantage of those opportunity.

[Ravi Misra:]

Great. And then maybe, one or two more; in Germany you have that NUB status; I mean, what's the launch date on that? I mean, have you guys begun to sell products in that area? And number two, did you give a gross margin guidance on the call for 2016? Thanks.

[Lisa Earnhardt:]

Yeah. With regard to Germany, we are working through some logistics of it. We will probably start selling at some point. Potentially this year, and it would be at a very small level, and will build over time. But again, something we are kind of working through. We did give gross margin guidance for 80% to 81% for 2016.

[Ravi Misra:]

Great. Thanks so much.

[Operator:]

[Operator Instructions]. Our next question will come from Kyle Rose of Canaccord Genuity.

[Ryan Zimmerman:]

This is actually Ryan on for Kyle. Can you hear me okay?

[Lisa Earnhardt:]

Yeah. Hi Ryan.

[Ryan Zimmerman:]

Hi. So just to go back to the frontal indication bit, I understand the 25% to 30% of all cases, including frontal sinus. Should we expect additional reimbursement for the frontal sinus indication, and ultimately longer term, would there be an additional opportunity for codes, for that frontal sinus indication?

[Lisa Earnhardt:]

Yeah Ryan, much like with the ethmoid indication, use of PROPEL mini in the frontal would be intended to be covered by the existing FESS reimbursement code. So the codes that and the reimbursement that the hospitals or surgery centers get for the procedure, would be intended to cover that. So there wouldn't be sort of specific codes, other than the codes that currently in coverage, other than those that currently exist. Over time, you would anticipate potentially, in the office setting, having codes specifically designed for the physician, for the implantation. But really, we don't anticipate new reimbursement in the facility setting.

[Ryan Zimmerman:]

Okay. Great. And thinking about the guidance for this year, $78 million to $80 million. You know, when we think about the drivers of that outperformance, utilization, sales rep productivity, possibly reimbursement. In terms of those drivers, is there one that drives the outperformance in the quarter, or that really moves it ahead of the needle?

[Lisa Earnhardt:]

No. We really think of all those between this; increasing sales force tenure, addition of the sales consultants, approval, potential approval of the frontal indication, and then the increased reimbursement, are all significant drivers for us this year, and we are excited to have so many things going in our favor.

[Ryan Zimmerman:]

Okay. Great. That's it for me. Thank you.

[Jeri Hilleman:]

Thanks Ryan.

[Operator:]

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

[Lisa Earnhardt:]

Great. Thank you all for joining us today. We certainly appreciate your interest and support, and look forward to staying in touch with you all. Thanks so much.

[Operator:]

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