Nuvectra Corporation Common Stock (NVTR) Q1 2019 Earnings Call Transcript

Nuvectra Corporation Common Stock (NVTR)
Q1 2019 Earnings Call
May. 01, 2019, 4:30 p.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good day, ladies and gentlemen, and welcome to the Q1 2019 Nuvectra earnings conference call. [Operator instructions] As a reminder, this conference call may be recorded. I would now like to introduce your host for today's conference, Tram Bui from The Ruth Group. You may begin.

Tram Bui -- The Ruth Group, Investor Relations

Thanks, operator, and thanks, everyone, for participating in today's call. Joining me from the company are Fred Parks, chief executive officer; and Walter Berger, chief operating officer and chief financial officer. This call is also being broadcast live over the Internet at www.nuvectramed.com, and a replay of the call will be available on the company's website for 90 days. Before we begin, I'd like to caution listeners that comments made by management during this conference call may include forward-looking statements within the meaning of federal securities laws.

These forward-looking statements involve material risks and uncertainties. Such forward-looking statements are not guarantees of future performance, and actual results and outcomes can differ materially from our current expectations. For a discussion of risk factors, I encourage you to review our 10-K, 10-Q and other reports filed or to be filed with the Securities and Exchange Commission. Furthermore, the content of this conference call contains time-sensitive information that is accurate only as of the date of the live broadcast, May 1, 2019.

Nuvectra undertakes no obligation to revise or update any statements to reflect events or circumstances after the date of the call. With that said, I'd like to turn the call over to Fred Parks.

Fred Parks -- Chief Executive Officer

Thanks, Tram. Good afternoon, everyone, and thank you for joining us today for Nuvectra's first-quarter 2019 earnings conference call. On today's call, I will provide an overview of our first-quarter results and highlight our strategic initiatives that will drive further value creation, and we'll then cover our financial performance. Overall, our primary objective remains advancing Algovita.

During the first quarter, Algovita sales grew 22% year over year, continuing to grow in excess of the SCS market but less than our expectations. Our year-over-year growth relies on continued dedication to patient outcomes and physician partnering supported by stable ASPs, improved international performance and a strong trial to permanent implant ratio. However, our growth was moderated by lower-than-anticipated sales headcount due to turnover and flat year-over-year rep productivity. We are committed to making improvements in 2019 to accelerate growth in our Algovita business, and we'll judiciously expand our commercial team.

To provide additional context, we categorized our sales professionals in terms of the individual industry selling experience. Specifically, we had two categories of reps. One, which is more experienced and typically carries a larger territory quota. And the second, which has less direct experience in the SCS space and carries a lower initial year one quota.

We consider this second category as high potential given their combination of clinical and medical device sales experience. Our expectation for these reps is to eventually carry larger quotas as they become more productive. Each category of rep receives ongoing tailored training designed to encourage productivity and maintain currency as such, our average sales rep productivity can be impacted by the relative mix of these reps. Currently, that mix stands at around 1:2, higher quota to lower quota reps among our approximately 60 territories.

Our goal is to optimize that mix moving forward by refining our processes. We selectively hire new reps to ensure consistent and appropriate levels of productivity that will in turn drive future growth and profitability, and by focusing sales hiring efforts predominantly on geographies where we already have adequate clinical support and have cleared hospital committee hurdles to expedite contractual coverage. As I mentioned in addition to driving efficiencies and enhancing productivity for our existing reps, we remain committed to our 2019 sales hiring plan to further expand our market access to approximately 75 territories by year end. We will also increase our hiring of clinician specialists that will allow our reps to spend more of their time on direct sales activities and further territory penetration.

This will also allow us to expand our aforementioned productivity enhancement initiatives into even more geographies and meet our productivity goals more quickly. We expect to begin to see initial impacts from these strategies in the second half of 2019, with more material benefits in 2020. Based on these initiatives, we are providing annual Algovita revenue guidance in the range of $57 million to $62 million for 2019 as we continue to capture market share. Turning now to our regulatory strategy for Algovita.

We remain on track for submission of Algovita full-body MR conditional to the FDA in the second quarter of this year. That's this quarter. We believe full-body MR conditional approval will strengthen our competitive position and increase the number of patients eligible for treatment, supporting our future growth. Furthermore, we continue to advance our clinical work with Algovita that will highlight the relevancy of the product.

We have accepted an oral presentation at the International Neuromodulation Society, or INS Conference later this month. Dr. Levy, a board-certified neurological surgeon and President of the INS Executive Board of Directors will be presenting data on Algovita that suggests Algovita lead fracture and migration rates is lower than, as in more favorable to, the industry average. We expect to complete enrollment of the 120-patient study this summer, concluding the study in the summer of 2021.

We are encouraged with the preliminary data. We also had the initial arm of our forearm multicenter prospective randomized post-market clinical study focused specifically on comparing Algovita's high fidelity tonic simulation versus ultrahigh pulse width stimulation. We expect to enroll 90 patients at 12 to 14 sites and have eight sites activated to date. Enrollment should be completed by September of this year, as we work with marketing to initialize -- utilize social media in patient recruitment.

As we look ahead, we expect to add additional study on the design to highlight the efficacy profile of the different stimulation modes that Algovita delivers, which include; high-fidelity tonic, burst, ultrahigh pulse width and high-frequency with paresthesia. As it relates to our Virtis PMA submission, Nuvectra remains committed to Sacral Neuromodulation opportunity via eventual approval of Virtis by the FDA. Our process with the FDA remains interactive and ongoing. The FDA has requested additional information, narrow in subject and stated that other requests could be forthcoming as the review continues.

To satisfy the FDA's most recent request, we will secure supplementary data on the biocompatibility of our Virtis leads. We expect to submit this supplementary information approximately year-end 2019, projecting Virtis approval in the first half of 2020. Accordingly, we no longer expect Virtis-related revenue in 2019. Before I hand the call over to Walter, I'd like to welcome Jane Song, a recognized industry veteran to our Board of Directors.

Jane's appointment came as Tony Bihl's role was expanded to Chairman and followed the appointment of Christopher Chavez, another industry veteran. I look forward to working with each of them, as we focus on growing the company. With that, I'd now like to turn the call over to Walter who will cover our financial performance in the first quarter.

Walter Berger -- Chief Operating Officer and Chief Financial Officer

Thanks, Fred. And good afternoon, everyone. In the first quarter, we generated revenues of $11.1 million, representing an increase of 17% from $9.5 million in the first quarter of 2018. Our Algovita revenue in the first quarter was $11 million, a 22% increase from $9.1 million in the first quarter of 2018.

As we stated previously, we are continuing to wind down our existing development agreement with Aleva through the next several quarters. Upon completion of a DBS system for Aleva, and as we see a regulatory approval, we expect that Aleva will commercialize the DBS system in certain neuro markets initially and later possibly United States. If it does so and is successful, we would receive royalties on the sales of these DBS systems and components under our license agreement with Aleva. Gross profit in the first quarter of 2019 was $5.1 million or a 46% gross margin, a decrease from $5.1 million or 54% gross margin in the first quarter of 2018.

The decrease was primarily due to an unusually high inventory yield charge from our manufacturer of $0.5 million as defined in our supply agreement, which has already readjusted favorably in the second quarter. The decrease was also attributable to a one-time charge of $300,000 related to a minimum order quantity requirement, again, under our supply agreement, and lastly, a charge of $200,000 related to our annual inventory revaluation. Excluding these charges, we expect our gross margin to return to the mid 50% by the -- through the balance of the year. Operating expenses in the first quarter of 2019 were $19 million, a 28% increase from $14.8 million in the first quarter of 2018.

The increase was in line with our expectations. SG&A expenses increased $2.8 million, which included a severance charge of $1.2 million related to the resignation of our former CEO and an increase of approximately $1.1 million in selling expenses. RD&E expenses increased $1.4 million from the comparable prior period. Net loss for the first quarter of 2019 was $14.8 million or a loss of $0.83 per share, as compared with a net loss of $10.5 million last year or a loss of $0.84 per share for the first quarter of 2018.

Total cash and cash equivalents were $81.3 million as of March 31, 2019, compared to $99.2 million at the end of December. With that, I'd now like to turn the call back to Fred for closing comments.

Fred Parks -- Chief Executive Officer

Thanks, Walter. We reported 22% year-over-year revenue growth for Algovita. Additionally, we guided the growth will be sustained throughout the year yielding $57 million to $62 million of revenue. We expect that our growth rate will remain the highest among our major competitors.

Further, we now believe Virtis could be approved in the first half of 2020, recognizing that the FDA is in charge, in control of the process. We also highlighted some of the planning around our sales professionals with two purposes, driving revenue growth and rep productivity. Overall, I believe the outlook for Nuvectra over the next three to five years remains promising. As we await Virtis approval, we will remain steadfast in our commitment to invigorating our Algovita business, while building Nuvectra for that growth.

With that, I now turn the call over to the operator to open the Q&A sessions. I'd like to note that this quarter, Paul Hanchin, Nuvectra president, will be joining Walter and me for the Q&A should there be inquiries regarding our commercial team. Thank you.

Questions & Answers:

Operator

[Operator instructions] And our first question comes from Matthew O'Brien from Piper Jaffray. Your line is open.

Unknown speaker

Great. Thanks for taking the questions. This is Will on for Matt. I guess drilling into the next steps with Virtis, I'm curious on how long do you think it will take to compile the data? How difficult of a study as the biocompatibility testing for the leads? How much will it cost? And then what gives you the confidence this will address the FDA concerns?

Fred Parks -- Chief Executive Officer

Well, I may have to ask you to come back for some of those, I'll get the ones that I recall. First of all, we have a chemical composition of the leads. So we believe that we will pass the test, but we still have to do the biocompatibility testing. So preliminary work is encouraging to us.

The test take about -- I think it is 200 days, start to finish. So that gets us near the end of December. Upon receiving the report, of course, we will go through it with a fine tooth comb, and then we will forward it to the FDA. Barring any surprises, of which we hope there won't be any, at that stage, the FDA would have it, and it's a matter of their review time.

How many did I get of your questions?

Unknown speaker

That was great. I guess, in terms of the timing in the first half of 2020 that you are expecting approval? Is that a conservative estimate? Or is that, if everything goes according to plan?

Fred Parks -- Chief Executive Officer

When -- given our history, we try to be realistic. So I would say there is at least a 50-50 scenario, we would be reviewed within that period. There are scenarios that it would come forward in that period. But we're going to stick with first half of next year for approval as our estimate.

Unknown speaker

Great. Thanks. And my last question regarding the SCS franchise. Now that you're not expecting any contributions from Virtis, I guess, what gives you the confidence that you can reach that $57 million to $62 million guidance? And any updates on hiring any competitive hires as of late? And it looks like there's a ton of open positions on your career website.

So any updates there will be great. Thank you.

Fred Parks -- Chief Executive Officer

So I'm going to take the first half of that, and then I'll let Paul speak a little bit to the second half. We have spent a lot of time checking the maturity of our estimating systems. We spend a lot of time with the sales force. So not only am I giving you my endorsement and Walter's, but we are also giving a commitment from the sales team.

I think you then asked the question about what gives us the confidence in recruiting? So I'm going to refer that one to the Paul Hanchin.

Paul Hanchin -- President

Will, we continue to attract top talent both from within the neuromodulation space and external to the neuromodulation space. And most recently, we recruited a top level Regional Sales Director, who has a decade of experience in neuromodulation. That is one example. But we continue to attract top talent both from within and outside the space.

We are on track. Fred mentioned in his opening comments that our goal by the year is to have 75 territories, and we're on track to do that. Does that answer your question completely?

Unknown speaker

Yes. Thank you. And if I can just squeeze one more in. Any thoughts on cash needs going forward?

Fred Parks -- Chief Executive Officer

Will, this is Fred. I'm probably not going to be able to provide you much for that one. But I think there's one other thing that is helpful to us. Returning to your questions on the Virtis situation.

We have resources that are dedicated to that now that do have SCS experience. So the fact now that the biocompatibility studies are largely conducted outside our company, it allows us to deploy some of that resource back into SCS for this period that we're collecting data outside. So that is another source of talent that I think will be important to us as we go to SCS. Cash needs, I would look at the Walter, but I would say, little early in the cycle to give you a clear answer.

Walter Berger -- Chief Operating Officer and Chief Financial Officer

Yeah. I think Fred summarized it well. I think it's early. We've shared with you our burn, we've shared with you our balance.

I think one of the other things that's important to reiterate is that strategically, we've obviously, taken the position that we were not going to incur large amounts of capital on Virtis until we were through, and that still remains our philosophy and our thesis going forward. So the capital that we are currently in place with will be focused investing into the Algovita business.

Fred Parks -- Chief Executive Officer

Thanks.

Unknown speaker

Thank you.

Operator

Thank you. Our next question comes from Dave Turkaly from JMP Securities. Your line is open.

Dave Turkaly -- JMP Securities -- Analyst

Great. Thanks. Just on a -- from a process standpoint, on Virtis again, are we in any 180-day window here? Or I guess, once you submit that data, does that open another 180 days for them to come back in terms of a timing where they're supposed to respond? Just like to have any details you can give on that front.

Fred Parks -- Chief Executive Officer

The answer to your question is no, we're not inside any obligated review period from the FDA. I think we've been through two cycles of that. But I think to the extent that we get results that we're hoping for, we've seen I think of recent, a high level of cooperation with them. The communication is iterative.

And I think they will be fully responsive. The relationship, I think, is in good shape, but we are not with any -- within any obligated review period.

Dave Turkaly -- JMP Securities -- Analyst

Got it. I know there's a bunch of different communications that you could have with the agency. But I'm just wondering, whether it's email or a live meeting or a phone call? Have they ever mentioned anything about I know this is a biocompatibility study on the leads? But have they said anything about clinical trial or clinical evaluation, something about patients get -- patients being implanted live here in the U.S. in any of your communications?

Fred Parks -- Chief Executive Officer

So I'm very happy to answer that. Our animal compatibility studies will be in full response to all the questions we currently have. And I think my confidence and optimism about that, I have expressed. There's been nothing beyond that that they have suggested at this time.

But they have said, there could be further questions. And that's probably the most we could project at this time. Specifically to your question, they have not suggested anything for human studies.

Dave Turkaly -- JMP Securities -- Analyst

Great. And then just one last one. I think you mentioned that the reps, the territories were kind of flat sequentially. And you do have that 75 to 80 goal for the year.

I guess just comments -- we have seen some color and comments from some of your competitors in terms of what the market's doing. But I guess why no new net adds in the first five months of the year?

Paul Hanchin -- President

Well, we have had adds. We've also had some attrition. That happens for various reasons, but it's no more than the industry average for certain. Again, we do still attract top talent.

And we are actively recruiting, and we are on track with our recruiting efforts.

Dave Turkaly -- JMP Securities -- Analyst

Great. Thanks a lot.

Operator

Thank you. And our next question comes from Jayson Bedford from Raymond James. Your line is open.

Matt Wizman -- Raymond James -- Analyst

Thanks for taking the questions. This is Matt Wizman on for Jayson Bedford. So my first one is on the general SCS market. So looking at some of the competitors growth profiles and what's going on in the space, it seems that there was a bit of a slowdown in the market.

Can you speak to things that might drive that or kind of what you're seeing more broadly in SCS growth and uptake in the U.S.? And how do you expect that trend going forward in the year? Thanks.

Fred Parks -- Chief Executive Officer

I'd probably take the last question first. I think any 90-day period would be a little early to talk about a trend. We are familiar with those that have reported publicly. And we've certainly seen what you have seen.

I don't think I would change the answer that I gave 90 days ago. I think there was the plethora of patients out there. So I still think depending on patient outcomes, I think it's a 5% plus or minus -- I mean a 10% plus or minus 5% growth rate. If this persisted to the -- a large market share for two more quarters, maybe one more quarter, I would be more concerned.

But I am not particularly concerned about just the last 90 days. Paul, you're in the market every day?

Paul Hanchin -- President

I agree with what you said.

Matt Wizman -- Raymond James -- Analyst

OK. Got it. Thanks. And then I guess on the MRI, are you seeing the full-body MRI as a headwind on growth rate down? Is this advantage you're seeing in the market? And what could we expect once you get that?

Fred Parks -- Chief Executive Officer

Well, it's certainly not an advantage. And I think you for our salesmen, I think getting that approval could be significant and when I asked the questions from there -- I mean this is a little bit anecdotal and apocryphal. They think that we could end up addressing another third to a fourth of the patients that are out there. So if that's the case, that's a significant addressable market for us.

Matt Wizman -- Raymond James -- Analyst

OK. Yeah. So last one from me, now that you've been at the helm for a bit longer, you noted on the last call that you've been having these conversations with the reps about how you can improve productivity and all that. Can you speak about some of the feedback specifically and any changes that might be in the works with regards to the productivity levels? And then that's it.

Fred Parks -- Chief Executive Officer

You are right. Your memory is good. I have a lot of faith there, and I'll let Paul speak to it a little bit more. Our reps have great relationships with their physicians.

I saw some of this last weekend, and that validated to us. But our people with a clinical background are equally good in the OR, and our target is to hopefully let the clinical specialists do more of that work with a rep. We will never compromise that relationship. If they wanted Walter and I to come help them, we would make the time, but that's unlikely.

So I think it's about the mix that we need to achieve to give more selling time, while not compromising any of the relationships. Paul?

Paul Hanchin -- President

In addition, there are two concrete things that we are employing to bring in product -- bring in the time to productivity, the first of which is a concentrated effort on training, and the trainings are a little bit different depending on whether or not the person has prior neuromodulation experience versus no neuromodulation experience. But the goal is to bring productivity to -- productivity levels in from a timing standpoint. And then secondly, we are doing very granular and calculated business planning territory by territory. We have been, and we are continuing to refine it.

And both of those are contributing to what Fred had mentioned.

Matt Wizman -- Raymond James -- Analyst

Thank you.

Operator

Thank you. And our next question comes from Bruce Nudell from SunTrust. Your line is open.

Bruce Nudell -- SunTrust Robinson Humphrey -- Analyst

Hi. Thanks for taking the question. Fred, over the last two quarters, the SCS market as others have mentioned has slowed. Nevro has new, very experienced leadership, is promising way more waveform optionality.

Abbott is -- on the last call have made it that they'd have new -- a new front end kind of in development and is probably working on their sales force. So just given that, what are the key success factors to maintain the momentum of Nuvectra in the SCS space in your view?

Fred Parks -- Chief Executive Officer

We always put the clinical outcomes first above all. I think -- in addition to that, I think the size of the sales force makes a difference. For a portion of last year, we had issues we dealt with in terms of availability of supply. We have resolved that issue.

So I think now we can devote more of the sales team time to the selling process, and I think that's crucial. As far as other competitors talking about waveforms, we're flattered a little bit by that. It's encouraging that we are in front of that. And we have a lot to offer.

I am not familiar with when you say new front end for St. Jude-Abbott. Maybe Paul knows what that means. It doesn't mean anything to me.

But if you can go deeper we'll be glad to respond.

Bruce Nudell -- SunTrust Robinson Humphrey -- Analyst

No, I guess, they were promising an upgrade of their system, or a new system, they -- relatively vague about it. But we can just move on. I guess, my other question pertains to Virtis. It's let's say -- it sounds like it's about a year delay or so.

Has that, given the fact that Medtronic is promising a fully modern device in year FY '20, which is -- or '21 rather, which is May 2020 to kind of April 2021. Does that year hurt especially? Or do you still feel that the sacral neuro product has a bright future?

Fred Parks -- Chief Executive Officer

Well, I wish we weren't delayed. Let's be honest with it at all times. But I still believe from a year from now, this product will be competitive. I have no doubt that we men and women will still have bladders and we'll still be sneezing.

So the market is not going to go away. And I think the principal advantages of our products will still be there in the marketplace. Its flexibility, and so I'm comfortable. I wish we weren't delayed.

We're not blaming anybody for that except ourselves. But a year from now, I think that product will be competitive. We'll have to see what Medtronic has at that time.

Bruce Nudell -- SunTrust Robinson Humphrey -- Analyst

Thanks so much.

Fred Parks -- Chief Executive Officer

Of course.

Operator

Thank you. And I am showing no further questions from our phone lines. I would now like to turn the conference back over to Fred Parks for any closing remarks.

Fred Parks -- Chief Executive Officer

Thank you for your interest. We expect to hear back from you in 90 days. And we hope that you will find our presentation again interesting and encouraging. Thank you.

Bye.

Operator

[Operator signoff]

Duration: 31 minutes

Call participants:

Tram Bui -- The Ruth Group, Investor Relations

Fred Parks -- Chief Executive Officer

Walter Berger -- Chief Operating Officer and Chief Financial Officer

Unknown speaker

Paul Hanchin -- President

Dave Turkaly -- JMP Securities -- Analyst

Matt Wizman -- Raymond James -- Analyst

Bruce Nudell -- SunTrust Robinson Humphrey -- Analyst

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