Avedro, Inc. (AVDR) Q1 2019 Earnings Call Transcript

Avedro, Inc. (AVDR)
Q1 2019 Earnings Call
May 9, 2019, 4:30 p.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good afternoon, ladies and gentlemen and welcome to Avedro's first quarter 2019 earnings call. At this time, all participants are in a listen-only mode. There will be a presentation followed by a question and answer session and instructions will follow at the time. If anyone should require assistance during the conference, please press * with the number 0 on your telephone keypad.

I'd now like to turn the conference over to your host, Miss Lynn Lewis, Investor Relations. Miss Lewis, you may begin.

Lynn Lewis -- Investor Relations 

Thank you. Thank you all for participating in today's call. Joining me are Reza Zadno, President and Chief Executive Officer, and Tom Griffin, Chief Financial Officer. Earlier today, we released financial results for the quarter ended March 31st, 2019 and a copy of the press release is now available on our website.

Before we begin, I would like to remind you that our discussion today includes forward-looking statements within the meaning of federal securities laws including statements about financial projections or business strategy and the expected timing and impact of future events. These statements are based upon our current estimates and assumptions and actual results or events may differ materially by these indicated by these forward-looking statements, including as a result of the risks and uncertainties described in our annual report on Form 10-K filed with the SEC as well as other filings that we make with the SEC from time to time.

All information we provide in this conference call represents our views only as of today. While we may elect to update forward-looking statements in the future, we specifically disclaim any obligation to do so even if our expectations change except as required by law. Finally, please be advised that today's call is being recorded and webcast. The length of the webcast is posted in the investors section of our website.

With that, I'll now turn the call over to Reza. Reza?

Reza Zadno -- President and Chief Executive Officer

Thank you, Lynn. Good afternoon everyone and thank you for joining us. I would like to start the call with a brief review of our first quarter performance. I will then discuss recent trends in reimbursement and patient awareness followed by an update on our product pipeline. Tom will then provide details on our Q1 financials and 2019 guidance, after which I will conclude our prepared remarks and we'll then open the call for your questions.

Our first quarter results we present a very good start to 2019. Revenue for the first quarter was $8.8 million, reflecting growth of 70% as compared to the first quarter of 2018. Our gross margins increased to 74% as compared to 49% in the first quarter of 2018. Therefore, we are increasing the low-end of our 2019 revenue guidance to a range of $37 million to $40 million. We're presenting annual growth of 39% at the midpoint of the range.

In the first quarter of 2019, we experienced sequential and year over year growth in utilization rates for our KXL system. Spearheading this growth was the speed of customer engagement and positive insurance reimbursement coverage and payment for patients treated for progressive keratoconus, a debilitating eye disease that if left untreated can lead to loss of vision and even blindness, which I will refer to in these remarks as keratoconus.

I am particularly pleased to report that we see insurance company updates of the recently effective J-code for Photrexa a little head of schedule. As we mentioned during our fourth quarter conference call, the new J-code became effective on January 1, 2019. This will have a significant impact on our business over the median to long-term as we expect that over time, insurance companies will treat the cost of Photrexa and Photrexa viscous drugs as past throughs and reimburse our customers for the cost of the drugs.

The change will not happen overnight and requires a high level of engagement from our US reimbursement team which we completed in mid-2018 in anticipated of this effort. Many of our customers are new to buy and build reimbursement and are in the process of engaging their administrative staff on claim processing.

Our reimbursement team is partnering with customers to ensure they have the information needed to build the J-code and reach CPT code payment agreements with the payers to cover their professional fees. And our reimbursement team is interacting directly with the payers at all levels to build awareness about the indications for the Avedro cross-linking treatment. The needs appear in patients and the providers will treat them.

We expect the groundwork we are performing now will have a pronounced impact on our business in the second half of this year, but as I mentioned, we are already seeing positive results. For example, we are experiencing fewer J-code-related inquiries coming through our Avedro reimbursement customer hub, evidencing fewer low payment claims for drug reimbursement.

Furthermore, we observe that many of our customers have seen a stabilization in the CPT code payments. We do not have access to every claim, but for the claims we monitored through our arch program, we have noticed a tighter range of payments. As more customers negotiate their payer contract and submit claims, we expect payment rates will continue to become more consistent. Finally, as we noted, there has been a significant uptick in customer engagement seen in drug purchases that we believe are attributable to the continued clinical confidence in corneal cross-linking and improving insurance reimbursement landscape.

In summary, I'm very happy with the progress our reimbursement team is making and I'm confident that the reimbursement landscape is becoming much more favorable as anticipated. Before leaving the discussion on reimbursement, we are pleased to announce that Health Partners recently added coverage for their 800,000 commercial beneficiaries in Minnesota, North Dakota, South Dakota, and Wisconsin. This increases the number of people in the US with insurance coverage for our technology to approximately 181 million, representing over 95% of the total commercially covered lives in the United States.

Moving on to the keratoconus awareness, our digital media sites have experienced steady increases in unique visits over the past 18 months with the number of searches on our website hitting a new record this recent quarter. We have seen a significant uptick in visitors looking for insurance and insurance policies as the use of the rapid expansion of the insurance coverage spreads.

What we could not anticipate was the recent news about NBA superstar Stephen Curry's keratoconus diagnosis. The resulting national and regional media coverage coupled with our own increased media presence drove a tremendous spike and Avedro and keratoconus patient-focused websites and social media traffic. We expect Steph Curry's diagnosis will continue building awareness for keratoconus and our FDA-approved cross-linking treatment.

Physician education also played a significant role in driving patient awareness. This process was spearheaded by our deep relationships with ophthalmology KOLs and expanding our reach through our sponsorships and attendance at medical society meetings and trade shows. Just this past week, we had a substantial presence at the America Society of Cataract and Refractive Surgery Annual Meeting, with physicians presenting over 80 podium talks and educational events on corneal cross-linking and keratoconus.

During the meeting, traffic at our booth exceeded our expectations as the combination of clinical confidence, patient awareness, and the dramatic improvement in reimbursement rates drove substantial interests from physicians.

I would now like to talk about our patented Epi-On corneal remodeling technology and its application across our exciting product pipeline. As you will recall, Epi-On refers to our new corneal cross-linking procedure that includes Avedro's latest generation UV light source, supplemental oxygen designed to enhance cross-linking and a new drug formulation designed to penetrate the epithelial layer of the cornea, eliminating the need for surgical removal.

We recently announced the completion of enrollment in our pivotal Phase 3 clinical trial for our Epi-On cross-linking procedure for treating keratoconus. This is the first pivotal clinical study to incorporate our Epi-On technology. If successful, we will have demonstrated that our Epi-On technology can be used to treat progressive keratoconus non-invasively.

Our Epi-On drug formulations and oxygen Boost Goggles eliminate the need for surgical removal of the epithelial layer, which we expect will make the procedure more comfortable for patients and result in faster recovery time. It may also lead to earlier treatment and quicker adoption as physicians and patients weigh the risk of treatment versus the risk of further disease progression and loss of visual acuity.

We are excited about the potential of our Epi-On corneal cross-linking and look forward to providing updates when the data become available.

While we believe our Epi-On technology could be a significant advancement in the treatment of keratoconus, we think it is crucial for a commercialization of non-invasive elective refractive procedures. We are therefore very excited to incorporate our Epi-On technology in our PiXL procedure. This zonal cross-linking procedure induces a change in the shape of the cornea and is designed to undergo refractive correction to reduce dependency on eyeglasses or contact lenses for patients with presbyopia, low myopia, and post-cataract refractive error.

We have identified investigators and engaged in clinical site initiation for a Phase 2a multi-centered clinical trial outside the United States to investigate the use of our PiXL cross-linking procedure to treat patients with presbyopia. Presbyopia is a refractive disorder that is a natural part of aging and affects everyone after the age of about 40. Presbyopia, which affects over 50 million people in the United States is primarily due to the hardening of the eyes crystalline lens over time, resulting in the loss of lens elasticity or the ability of the lens to change shape to focus incoming light on the retina.

In the Phase 2a clinical trial, we aim to optimize the parameters of PiXL for presbyopia and if successful, we will move forward to the next stage of clinical development. We expect to have preliminary data for this trial by the end of this year, but we do not intend to disclose the data publicly at that time.

Outside of the United States, we continued to build on the foundation of working closely with key opinion leaders in the development of improved corneal cross-linking treatment and leading the market through new technology innovation. We are encouraged by our pipeline development, which should present significant incremental opportunities. We are simultaneously making very good progress on our top priorities for 2018. Growth of our customer engagement and increasing utilization of our cross-linking treatment, completion of our Epi-On clinical trial, and our presbyopia pipeline advancement.

With that, I will now turn the call over to Tom Griffin, our Chief Financial Officer, and we'll then return with closing comments.

Thomas Griffin -- Chief Financial Officer

Thank you, Reza. For the first quarter of 2019, revenue increased by 70% to $8.8 million. This compares with $5.2 million in the first quarter of 2018. The increase in revenue was primarily driven by an increase in US revenue, which amounted to $3.3 million and to a lesser extent a $300,000 increase in non-US revenue.

The increase in US revenue for the quarter was primarily attributable to a $3.6 million increase in drug revenue, partially offset by a $300,000 decrease in US device revenue. US drug revenue increased due to increases in the average revenue per unit and volume of drug formulation sold. The decrease in US device revenue was due to a decrease in device sales as we've focused on increased utilization.

We are encouraged by the utilization rates in the United States during the first quarter. The utilization rate was 2.37 treatments per KXL system per month in the first quarter of 2019 compared to 2.04 in the first quarter of 2018. As of March 31st, 2019, our KXL systems are placed in 320 centers in the United States, which we estimate is a 40% penetration into our target centers. Worldwide drug revenue accounted for approximately 90% of our total revenue for the first quarter of 2019. Revenue from the United States accounted for approximately 74% of the total revenue in the first quarter of 2019.

Gross margin for the first quarter of 2019 was 74% as compared to 49.2% in the same quarter last year. This increase in gross margin was primarily due to an increase in drug revenue as compared to the prior year and to a lesser extent due to scrap cost savings realized during the current period.

Operating expenses increased to $14.5 million in the first quarter of 2019 compared to $8.2 million in the same period in the prior year. The 76% year over year increase in operating expenses was driven by a rise in sales and marketing costs due to hiring of new sales and reimbursement personnel and an increase in research and development expenses from our ongoing clinical trials.

Operating loss was $8 million in the first quarter of 2019 as compared to $57 million in the first quarter of 2018. Our net loss was $8.4 million in the first quarter of 2019 as compared to $6.6 million in the same period in the prior year. As of March 31st, 2019, we had $64.8 million of cash and cash equivalents.

As Reza mentioned earlier, we are increasing the low end of our annual revenue guidance to be in the range of $37 million to $40 million, representing annual growth of 39% at the midpoint of the range. Also, we expect our gross margins for the year to be in the range of 70% to 75% on a full year basis.

At this point, I would like to turn the call back to Reza for closing comments.

Reza Zadno -- President and Chief Executive Officer

Thank you, Tom. As the only company with an FDA-approved cross-linking treatment for progressive keratoconus, we are incredibly excited about the opportunities ahead of us. We are equipped with strong clinical data, a robust reimbursement infrastructure, and an enthusiastic commercial team to drive rapid physician awareness and adoption. We plan to continue to lead ophthalmology community in addressing the unmet needs of this large underserved patient population while we also drive forward innovation to move to non-invasive approaches to improve vision and reduce dependence upon eyeglasses and contact lenses. Thank you for joining us today and we look forward to providing future updates.

Operator, we will now open the call for questions.

Questions and Answers:

Operator

Ladies and gentlemen, if you have questions at this time, please press * and the number 1 on your telephone keypad. Again, ladies and gentlemen, if you have questions at this time, please press * and then number 1 on your telephone keypad.

Our first question comes from the line of Robby Marcus from JP Morgan. Your line is open.

Robert Marcus -- JP Morgan -- Analyst

Thanks for taking the question. Congratulations on a great quarter. Maybe we could start with coming off the back of what seems like a very positive ASCRS conference for you, there was a lot of physician energy at the conference, at least from my perspective. Maybe you could give us a sense -- I'll just ask both questions upfront and you can tie them together. You had some great utilization in the quarter. A, what drove utilization and B, from the physician interest, how much of that is driven by the better reimbursement year?

Reza Zadno -- President and Chief Executive Officer

Thank you for the question. So, definitely, we are very happy with the first quarter revenue outcomes, both in the US and outside. As we had previously mentioned, our primary growth area was in the US and more specifically increasing utilization. In the US, the utilization success was the result of three activities.

One, making sure the J-code was implemented in the policies of the payers. I should thank our reimbursement team for being very proactive in that. Second, focusing on current accounts who are less familiar with reimbursement using J-code or understanding their contracts and aligning the salesforce on utilizations by providing them with metrics such as regional coverage and payments.

These are the three main factors that are allowed to have a strong quarter. We are very pleased with the progress in reimbursement, which really drove these. This is mainly because of two areas. One is on coverage, as we have explained, more than 95% of the target population is covered for this treatment. All national and most regional payers are covering. This has reduced the pre-authorization time and in some cases eliminated, in fact, the need for preauthorization.

Operator

Our next question comes from the line of Bob Hopkins from Bank of America Merrill Lynch.

Travis Steed -- Bank of America Merrill Lynch -- Analyst

Travis Steed on for Bob. Congratulations on a great start to 2019. So, you did $8.8 million this quarter, a $35 million run rate. It sounds like you were quite positive on the potential acceleration on the back half. Maybe talk about how utilization in Q1 trended and where you think utilization goes over the course of 2019.

Thomas Griffin -- Chief Financial Officer

Sure. So, the utilization rates, we're encouraged by them. In the first quarter, the rates went to 2.37%, which was up year over year from 2.04% in the first quarter of 2018. It was also up sequentially from 2.31% in the fourth quarter of last year as well. In the fourth quarter call, we previously stated that we would end Q4 at 2.6 treatments per device per month and that still continues to be in line with our expectations.

Travis Steed -- Bank of America Merrill Lynch -- Analyst

Okay. Obviously, utilization is a much more important driver of your model and it sounds like you're focused more on that versus getting new customers. So, is that a new mandate for your salesforce that you're going to be focusing more on utilization and less on new customers going forward and how should we think about new customer adoption?

Thomas Griffin -- Chief Financial Officer

Travis, thanks for the question. I think it's a combination of both, though. We indicated that we would end the year 2019 at more than 360 KXLs placed in the US. So, we do have the placement of KXLs on our list of things for the year, but the salesforce is also focused on increasing utilization in these accounts. When you have the J-code becoming effective in Q1 and the positive experience that we're having with the reimbursement and the conversations we're having, we really believe we can drive both in the year. So, they're not focused on one or the other, but focused on both.

Travis Steed -- Bank of America Merrill Lynch -- Analyst

Okay. You talked about a successful ASCRS conference, just kind of curious how you measure that. Is there anything specifically about lead generation that you got at the conference or more interest from these doctors or is it more that your current customers are getting more information at the conference to drive more volume. I'm just kind of curious how you measure a successful conference.

Reza Zadno -- President and Chief Executive Officer

So, this is a good question. There were more than 80 presentations. This is a very large volume of presentations on cross-linking and keratoconus treatment. There were a number of educational program events, symposiums. We had good education lectures. They were always very well-attended every time we had a number of physicians sharing their experience. The booth was always very packed with people listening. These are new customers who are interested in learning not only about the treatment technique of other users, but also their experience on reimbursement.

Also, on one on one conversations, these are new customers that are interested in, again, not only talking to physicians, but also to company employees. Then we also had other separate meetings that we had organized, again, always between the new customers and existing customers. Our scientific advisory meeting we had and that was very productive, discussions around reimbursement and also future clinical studies.

Travis Steed -- Bank of America Merrill Lynch -- Analyst

Great. Thanks for taking the questions and congrats again on a good quarter.

Operator

Our next question comes from the line of Chris Pasquale from Guggenheim. Your line is open.

Chris Pasquale -- Guggenheim Securities -- Analyst

Thanks. Congrats, guys. Reza, can you just review the expected regulatory timeline for Epi-On? Should we be expecting to see that data in the back-half of next year?

Reza Zadno -- President and Chief Executive Officer

So, Epi-On, we are very excited about this study. The enrollment was complete. It's a mass randomized study. Data will become available second half of 2020. So, until then, we will not have visibility on that data. After that, there's data log and interacting with the FDA starting in 2021. So, we won't see that data until second half of 2020.

Chris Pasquale -- Guggenheim Securities -- Analyst

Okay. And then for the refractive programs, you say you don't intend to disclose the Phase 2a data. What should we expect to hear from you once that study is done? Is this going to be a situation where we can infer the quality of the data by whether you moved directly into a Phase 3 afterwards or is it not that simple?

Reza Zadno -- President and Chief Executive Officer

The purpose of the Phase 2a is to understand the parameters that we are going to use for the next phase of this study. Since we are looking at multiple factors, we would like to keep that information for ourselves, but define the optimum path going forward. It's based on the outcome of that we will decide for the next phase. That's why we will not share the data that will become available next year. So, the next phase of that will be either Phase 2b or a Phase 3 in the United States, either of those are good options.

Chris Pasquale -- Guggenheim Securities -- Analyst

Okay. Thank you.

Operator

Our next question comes from the line of Josh Jennings, from Cowen. Your line is open.

Josh Jennings -- Cowen -- Managing Director

Good afternoon. Congrats as well on the strong start to the year. I thought I'd start off just with ASCRS. It seems as if there is a new focus now with FDA approved treatment for keratoconus to make the diagnosis earlier. I was hoping to just get your thoughts on what types of technologies we could see or that are in the pipeline and then how big of a deal is it just in terms of the market for the market and the opportunity in front of Avedro for earlier diagnosis. As well, that seemed to be a mandate from the physician experts at ASCRS as well as early diagnosis, earlier diagnosis and earlier treatment.

Reza Zadno -- President and Chief Executive Officer

Yes, thanks for the question. So, there's still the gold standard for diagnosis is topography and understanding the mapping of the cornea. I would say for diagnostic, probably what we are doing by increasing awareness among optometrists because some of these patients for the first time, they go to optometry to ophthalmologists, increase awareness among optometrists that we actively participate in optometry conferences or symposiums to make sure they use topography to diagnosis patients.

Definitely during the conference, there were some discussions about some maybe screening tools that would become available either in optometry settings or maybe even at schools. We heard that some devices that people could add to an iPhone, that they could screen the patients earlier. The reason physicians are interested in diagnosing these patients earlier because they are weighing the risk of waiting and potentially seeing degradation of the visual acuity versus treating them early.

So, the trend among key opinion leaders was identify these patients as soon as possible. In fact, the younger patients are the ones that they want to treat earlier. But I think our opportunity when some of those tools become available is to continue what we are doing with increasing awareness with optometry. There were also some of these gene therapies, those were maybe in more long-term testing that they can test individuals who are prone to have keratoconus.

Josh Jennings -- Cowen -- Managing Director

Thanks for that. Just one follow-up -- when you talked about the T-code payments. I know you don't have access to every reimbursement level for every user out there, but can you just help us from a trend standpoint in terms of what you're seeing. Is the T-code reimbursement level stable? Is it improving? As the arch program and just individual centers get up to speed, could we see that T-code reimbursement expand further from where we are today as we move out through '19 into 2020. Thanks for taking the questions.

Reza Zadno -- President and Chief Executive Officer

Thanks. Good question. Again, on payment, the two levels, the T-code, definitely I'll come back to it and the drug code, we see that as we pass through. So, the T-code, based on the -- you will not see all the claims but through the arch program, the claims that we see many of the payers are paying the T-code according to the invoices presented by disaster and the contracts that they have to the providers. We see that more along those lines, whatever cost they are providing. That's what we are seeing.

Josh Jennings -- Cowen -- Managing Director

Great. Thanks again.

Operator

Our next question comes from the line of Danielle Antalffy from SVB Leerink. Your line is open.

Danielle Antalffy -- SVB Leerink -- Analyst

Hey, good afternoon, guys. Thanks so much for taking the question and congrats on a really good quarter. Just a quick question on utilization. It did tick up slightly sequentially, which was great to see. Can you talk about what the barriers are to that moving even higher and over the next few quarters how we should we be thinking about utilization, what the drivers are for pushing that higher? I appreciate the earlier diagnostics as a long-term opportunity, but how do we think about it in the near term?

Reza Zadno -- President and Chief Executive Officer

So, what drove utilization was really a combination of three activities -- the providers are getting paid consistently on the drug according to the J-code. So, that's the pass through. They are getting paid according to the invoice the contractor is submitting and the coverage. So, these three factors allowed utilization to increase and as in different regions, these three factors continued to be consistent, we will see continuous increase in those areas.

Danielle Antalffy -- SVB Leerink -- Analyst

Okay. Then my next question -- we touched on this at ASCRS. Thank you for hosting us there. That was really helpful. I don't know how close you are to some of your physician practices, but can you talk about what is happening on the referral side of things? Are physicians seeing referrals increase and if so, even qualitatively, how is that trending? Thank you so much.

Reza Zadno -- President and Chief Executive Officer

Thanks for the question. Definitely, most ophthalmologists have their own referral network. A lot of patients were being referred to them. Initially, it wasn't a matter of whether these patients were there or not, it was a matter of reimbursement. So, the bottleneck was not -- referral was the reimbursement. In fact, many of these accounts now as the reimbursement becomes simpler, they start treating their patients.

As far as expanding the referral, we continue participating in optometry networks and bringing awareness in symposium. Lack of patients has not been a bottleneck. Does that answer your question? It's reimbursement as reimbursement becomes streamline and treatment options are more consistent. They are treating now all of their patients rather than looking at which patients, which insurance companies they treat in.

Danielle Antalffy -- SVB Leerink -- Analyst

That's very helpful. Thank you, Reza.

Operator

I'm showing no further questions at this time. I would now like to turn back the call to Reza Zadno, company President and CEO.

Reza Zadno -- President and Chief Executive Officer

I would like to thank everyone for participating in this call and I wish everyone a very nice evening and a very happy Mother's Day this weekend.

Operator

Ladies and gentlemen, this concludes today's conference. Thank you for your participation and have a wonderful day. You may all disconnect.

Duration: 36 minutes

Call participants:

Lynn Lewis -- Investor Relations 

Reza Zadno -- President and Chief Executive Officer

Thomas Griffin -- Chief Financial Officer

Robert Marcus -- JP Morgan -- Analyst

Travis Steed -- Bank of America Merrill Lynch -- Analyst

Chris Pasquale -- Guggenheim Securities -- Analyst

Josh Jennings -- Cowen -- Managing Director

Danielle Antalffy -- SVB Leerink -- Analyst

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