Intersect ENT (XENT) Q2 2019 Earnings Call Transcript

Intersect ENT (XENT)
Q2 2019 Earnings Call
Aug 01, 2019, 4:30 p.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good afternoon, and welcome to the Intersect ENT second-quarter 2019 earnings conference call. [Operator instructions] Please note that this event is being recorded. I would now like to turn the conference over to Intersect ENT's CFO, Jeri Hilleman. Please go ahead, ma'am.

Jeri Hilleman -- Chief Financial Officer

Thank you, Nancy. Joining me today is Kieran Gallahue, our executive chairman; and Tom West, our newly appointed president and CEO. Before we begin, I'd like to remind you that we will make forward-looking statements within the meaning of federal securities laws. Actual results and timing of events could differ materially from those anticipated in such forward-looking statements as a result of these risks and uncertainties, which include, without limitation, our outlook for financial performance, sales force growth, clinical studies, approval of new products and indications and procurement of reimbursement codes and coverage, which are based upon our current estimates and assumptions as well as other risks detailed from time to time in the reports we file with the SEC.

We disclaim any obligation or undertaking to update or revise any forward-looking statements contained herein. I'll now turn the call over to Kieran.

Kieran Gallahue -- Executive Chairman

Good afternoon, everybody, and thanks for joining us. Let me start the call by welcoming Tom to Intersect ENT. Tom has now been with us for just over a week and we're thrilled to have his considerable talents and experience at the helm. Tom will make some remarks later in the call, and of course, in the future will lead these calls and investor discussions along with Jeri.

Let's now turn to a review of our business. As I engaged with the company in a broader role this past May and particularly following Lisa's exit in early June, I was able to view our business at a more detailed operating level. This proximity has provided me with an expanded view of the opportunities ahead of us, which I continue to see as significant. We have great people here at Intersect, who are knowledgeable and dedicated to improving the lives of patients.

We have a strong product portfolio and technology pipeline poised to deliver clinical value to ENTs. Our R&D capabilities are well developed and create a platform for meaningful innovation. Along with these opportunities and strengths, there are also near-term challenges, challenges that I am confident Intersect ENT will overcome. On today's call, we would like to convey three core messages.

The first is acknowledging that the recent performance of Intersect ENT has not met your or our expectations. The second is that as we have dug in, we firmly believe that the issues we face are addressable. And in fact, we have already begun to address them. The third is that our core products and technologies are people and our pipeline remain market leading.

And with the focus on execution that Tom brings, we feel confident those strengths will return us to a path of industry-leading growth. OK. Let's get into it. As noted, our performance since the launch of SINUVA has been disappointing.

While Intersect has a long history of product and clinical innovation, it is not always translated to delivering the desired commercial results. Recognizing this, we have spent the past two months focused on the whys, aiming to achieve better understanding of three critical areas. First, understanding PROPEL demand and customer ordering dynamics. Second, assessing SINUVA and what we can do to improve SINUVA product access and adoption.

And third, clarifying our priorities with an emphasis on the fundamentals of commercial execution. OK. Let's start with a discussion of PROPEL, which today remains the backbone of our enterprise. PROPEL was introduced seven years ago, having now being used to benefit over 300,000 patients.

We are proud that the PROPEL family has become the standard of care for polyp patients undergoing sinus surgery, and we have grown adoption of this family of products through adding new users, expanding usage frequency and by introducing new indications and products. In fact, just last week, we gained FDA clearance of the straight delivery system, offering physicians an additional insertion option for our PROPEL Mini stent. With the introduction of SINUVA and the associated reduction of attention on PROPEL, our sales tactics diverted from those that had built our prior commercial success. Our sales force focused significantly on SINUVA adoption and the unexpected challenges of SINUVA product access.

And this left insufficient time for the market development and market expansion work that has historically built our demand pipeline and longer-term growth of PROPEL. To be clear, this was not a full switch on or switch off of activity, but rather a question of balance. Instead of focusing primarily on working with physicians to broaden their understanding of PROPEL's clinical end benefits and its appropriate usage, as we have done in the past, with less time available to focus on PROPEL, we responded commercially by offering selective discounts on high volume orders. While inner totality the discounted high-volume orders have not been a major factor in our business, they have been growing and moving us away from the flow of natural market demand, and we have already taken steps to correct this.

We sought to address these challenges of competing demands by expanding the sales force in the latter part of last year. However, a true market development campaign needs an organized, prioritized and sustained focus across the sales force to be effective. And in our case, market development and market expansion for PROPEL were not prioritized as highly in the past. Going forward, we are renewing our focus on market development, which includes: Number one, driving clinical demand via our PROPEL clinical value proposition; number two, strategic targeting of new customers and expanding usage with existing customers; and three, implementing refreshed and targeted marketing programs that are designed to bring product and disease education to both patients and physicians.

Additionally, we decided to scale back on the higher volume orders that I just mentioned. We began this adjustment to order discounting immediately at the end of Q2 and felt its adverse impact on short-term revenues in the quarter. We plan to continue that renewed shift in balance from larger orders to a renewed focus on market development activities. This will result in lowering customer shell stock and potentially reducing revenues for the remainder of the year.

Importantly, we believe the back to basics approach will yield stronger business fundamentals and will position PROPEL for additional, more sustainable and predictable growth in the future. Now turning to SINUVA. Our overall assessment is that we are making strides in providing a functioning, organized and more predictable market access process. We are gratified that just over a week ago, CMS issued an anticipated J code with an effective date of October 1, a quarter earlier than CMS's typical schedule.

We are very pleased with this news and look forward to communicating with physicians and payers about this advancement. We expect that having a specific code for SINUVA submission will be welcomed by physicians that use or are evaluating potential use of SINUVA. Typically, J codes streamline reimbursement and product access, which may in turn encourage broader use of buy-and-bill ordering. On a metrics basis, approximately 2,200 patients have now been treated with SINUVA since the start of commercialization with an increase of over 500 patients in Q2.

Since launch, these treatments have been administered by about 750 physicians. Feedback from physicians on the clinical aspects of the product is strongly favorable. However, feedback regarding the ease of product access and specifically, the need to buy and bill for many patients has not been so favorable. And in fact, some physicians have deferred ordering the product, pending a more streamlined access process.

To date, only 225 of the 750 total physician users have engaged in buy-and-bill ordering. So how do we fix this? Fortunately, we have several solutions available to us that we think will get us what physicians want to see. These solutions include: One, providing greater reimbursement training for physician practice education, which we have begun to implement through our recently expanded field reimbursement team. Two, improving information accessibility to streamline data flow across product access.

And 3, providing more effective product access through expanded channel relationships, especially via specialty pharmacies. On the first point, leveraging our field reimbursement team, we commenced our master class program, a combined effort led by our sales and field reimbursement teams. This educational program is intended to more effectively guide physicians' offices through the access process and is designed for physicians who have used SINUVA and for those that are considering the product. These classes will also help caregivers understand the burden of nasal polyps on their patients and provide clinical information about SINUVA as a unique and innovative solution.

With our recently expanded field reimbursement team, we are now able to make a reimbursement specialist the primary point of contact in educating and answering coverage questions from the offices we serve. This new approach has the triple benefit of helping physicians' offices operate in a more informed way, of having a reimbursement specialist there to directly answer reimbursement questions and freeing up our sales force bandwidth to discuss clinical benefits. Next, once the physician and their office staff are engaged, they want to be able to stay informed of patient status. We are working with our partners to improve information accessibility from the initial submission for prior authorization, all the way through to approval and product access.

Better information flow and automation will enable the office staff to spend less time on SINUVA administration, while gaining greater confidence about the process. This capability will also help our reimbursement and sales teams operate more effectively without needing to take time to answer questions on status. Thirdly, we are working to improve channel access for product dispensing by expanding our distribution network, and we are pleased with the opportunity that now appears to be available. At launch last year, SINUVA was a new product with no payer coverage, unclear J code status and no commercial usage.

Thus, to support the launch, we selected available appropriate partners including specialty distributors and specialty pharmacies. As you may recall, specialty pharmacies are important to SINUVA distribution as they provide product to physicians' offices without the physician needing to buy the product. Instead, the specialty pharmacy takes care of and receives reimbursement directly from the payer. While our current specialty pharmacies have allowed for access for many patients who have coverage via their pharmacy benefits, we are encouraged by the interest from several large specialty pharmacies that allow for more comprehensive patient access based on established and broad payer contracts, opening up previously closed doors.

This is an exciting area of opportunity where we believe that now, following a year of commercial and reimbursement activity, our options have improved significantly. There are a few reasons for this positive change in interest, including SINUVA's payer coverage, which we assess at over 70% of commercially covered lives, emerging demand and now an assigned J code. We are engaged in discussions with new potential partners. And while we have significant work ahead navigating contracts and data implementation, we are excited with the prospect of adding partners to further streamline SINUVA access by year end.

We don't expect that greater specialty pharmacy access will eliminate the need to do buy and bill for some patients, but it should reduce the burden of and our dependency on buy and bill. Further, with the J code, we believe buy-and-bill access will become both simpler and more attractive for those that do use it. It's gratifying to have a path that we believe will deliver a major step forward in delivering a product access process aligned with physician expectations. We continue to receive positive feedback from physicians and patients about the efficacy of SINUVA and are enthusiastic to be in a position to ensure deserving patients have a path to accessing this meaningful innovation.

We are putting full efforts in to getting at least one new specialty pharmacy partner onboard by year end, leveraging the timing of J code availability. In the interim, our sales force will continue to support physicians currently using SINUVA and prepare for a broader rollout in early 2020. Let's now transition to our outlook, integrating all of the points that we touched on in this call. As we work to position for growth, we are creating capacity in the sales force to refocus on market development and on our organic demand.

We are returning to the basics of clinical selling to further develop and expand the PROPEL market. For SINUVA, we will continue to support doctors currently using the product, but do not expect to realize meaningful growth until early 2020, when we expect to introduce the superior product access that I have just described along with the newly assigned J code. Consistent with this strategy, we are now revising our financial performance outlook for the full year to be flat versus last year, providing updates and transparency on our progress with the initiatives I've described. Moving beyond revenue, we should also touch on gross margin as this, of course, is tightly aligned with demand.

As producers of combination products, some of which are regulated as devises and one as a drug, we need significant resources to manage production quality and regulatory considerations. This overhead has been well absorbed to date with growing demand and appropriately rising inventory, and we expect to remain on track with our previously stated 2019 outlook for gross margin of 80% to 81%. However, in line with our view of revenue, we are lowering our near-term production volume below that which we produced in recent quarters. This reduction will increase our unit cost as we spread our overhead and process development expenses over a smaller production volume.

Accordingly, we expect that these higher costs will adversely impact our 2020 gross margin, which we will quantify when we provide guidance for next year. With that said, it's important to note that we view this as transitory, and that we expect to return to more normalized product costs as we grow revenue and more fully utilize our production infrastructure. Overall, we are taking steps needed to reshape our business. This will impact near-term growth, but we strongly believe that we are positioning the company for long-term success with a return to basics, a focus on PROPEL growth and a true ramp for SINUVA.

Of course, to affect this evolution, it takes an experienced leader who knows how to dig and deliver. This brings me to Tom West, who has joined the company expressly to execute a vision of growth and to realize the potential of our innovative products and pipeline. We're excited to have a CEO of Tom's caliber with his experience and leading organizations through challenging transitions and into sustainable growth, building cohesive and focused management teams and driving and motivating organizations to perform at their best. It is precisely these qualities and experiences that made Tom such a compelling candidate and the reasons we're thrilled to have him onboard.

At this juncture, I'd like to invite Tom to say a few words. Tom?

Tom West -- President and Chief Executive Officer

Thank you, Kieran. First, let me open by saying how pleased I am to be here and how excited I am to be digging in. When the Board approached me about potentially joining Intersect ENT, I was very intrigued and immediately setout to learn as much as I could. What ultimately drew me to join Intersect is the company's unparalleled commitment to innovation in a category of scale with substantial unmet patient and physician needs, chronic sinusitis.

My diligence also revealed the proven and differentiated clinical benefits of the PROPEL and SINUVA family of products. We have strong evidence-based offerings that are complementary in the ENT space. And candidly, with eyes wide open, I was also drawn by the executional challenges the company is currently navigating. I believe that there is enormous potential for success with the products, pipeline and innovation capabilities we have, and that my executional and commercial background are well suited to building upon existing strengths, reinvigorating growth and taking Intersect ENT to the next level.

It may seem simple, but throughout my career I've experienced that success is deeply dependent upon establishing execution excellence, the kind of execution driven by clear processes, attention to detail, a culture of accountability and management decisiveness. I will bring these execution strengths to Intersect in order to unleash our full potential. Success also rests on having the strongest talent that is fit for purpose, that is to say the best and most appropriate people set against well-defined objectives. I'm impressed by the talent I see at Intersect ENT, and I'm eager to build upon our talent base.

Bottom line, I'm committed to bringing unrelenting and deliberate effort and the strongest talent in order to maximize the clear strengths of our existing and prospective assets. With nearly two very busy and rewarding weeks under my belt, I am indeed digging in. And while it is clear that there is work to be done, I'm encouraged by our strengths and prospects. I look forward to speaking with you as we progress.

Let me now turn the call over to Jeri to touch on our financials and then back to Kieran for additional remarks.

Jeri Hilleman -- Chief Financial Officer

Thank you, Tom. To touch on revenue from the quarter, our total of $26.7 million included $25.6 million of revenue from PROPEL, essentially flat with the second quarter of last year as well as SINUVA revenue of $1.1 million, double what we reported in the second quarter of 2018. With an outlook for flat growth for the calendar year, taking into account the 6% growth realized in the first half, we are anticipating a decline in the back half of the year, especially in Q3. Overall, to characterize our outlook by product, we anticipate modest back half declines in PROPEL revenue as we realign our sales strategy and we expect to maintain SINUVA revenue at current levels.

Gross margin in the second quarter was 81%. And as Kieran noted, we remain on track with our previous guidance of 80% to 81% for the year. Gross margin for the remainder of the year will be slightly lower than the first half as anticipated in our guidance in the range of approximately 79% to 80%, reflecting period expenses for improved process development. Looking ahead to 2020 gross margin, we have revised our production plans to align with our near-term demand outlook and available inventory and anticipate producing lower volumes than we have in recent quarters.

As a result, our overhead, which is typically about 2/3 of our ongoing production costs, will be allocated over a lower production volume, leading to lower 2020 gross margins as Kieran indicated. Regarding opex, we are maintaining our outlook of $135 million to $137 million, but believe we are likely to come in closer to the upper end of the range as we invest over the balance of the year in implementation costs associated with expanding SINUVA product access partnership and capabilities as described earlier. Finally, our cash position at the end of the second quarter was $93.5 million with a net cash usage in the quarter of $4.1 million. We believe that we continue to have a strong cash position as we work to ramp revenue in 2020.

Let me now turn the call back to Kieran.

Kieran Gallahue -- Executive Chairman

Thanks, Jeri. In discussing our business and our future, I'd be remiss if I didn't touch on our innovative pipeline, an important driver of our longer-term potential. We have built considerable skill and knowledge in ENT drug delivery and have identified several ways to leverage that in further product development. One of these programs, the ASCEND drug-coated balloon, has reached the point where we are in clinical trials and to discuss the program publicly.

We continue to enroll patients in this study and are on track with our previously stated guidelines of completing enrollment by the end of Q3 and reporting top line results by the end of the year. As a reminder, ASCEND is a 70-patient clinical study designed to assess safety and efficacy of our drug-coated balloon technology compared with a plain sinus balloon. Based upon conversations with FDA and depending upon results, this study could serve as our pivotal study for submission. It is also possible that a further study may be warranted.

We will have a better sense for that upon review of the clinical findings, but the trial is designed to show superiority. As I mentioned at the outset, we are moving forward with plans to commercialize the recently PMA-approved PROPEL Mini straight delivery system to provide further options to our customers when placing PROPEL Mini in the ethmoid sinus. We expect to begin to offer this system commercially for a nominal fee in Q3. So let me conclude by summarizing where we think we are and what we see as our path forward.

We're a company with a history of innovation and success, navigating the challenge of introducing the first physician-administered drug into the ENT practice. We believe we are making true progress and are excited with further benefits we may offer physicians through impactful new partnerships and capabilities. In addition, we are building skills and capabilities designed to provide a long-term differentiated advantage. Our goal is to open up future opportunities for an expanding pipeline, leveraging the unique capabilities we are putting in place today.

We live at the intersection of drugs and devices where we see localized drug delivery solving difficult problems for ENT physicians and for their patients. We stand alone in this industry as developing a capability that will over time create valuable white space for us to bring innovative technology to market. By building the capability to deliver both devices and drugs to market, we can focus on developing and delivering solutions to our customers that are centered on their needs, not defined by the false walls of how a product is regulated or reimbursed, drug or device. We are committed to rebalancing our efforts to reinvigorate the PROPEL family, while firming up the partnerships that will simplify SINUVA access and continuing to invest in bringing further innovative products to market.

With diligent execution against these three areas of strength, we believe that Intersect will once again be a strong innovation leader and provider to ENT physicians and positioned to deliver attractive and sustainable growth. Thank you for your time and your attention, and Jerry, Tom and I will remain on the line to address your questions. Nancy, would you please open up the lines?

Questions & Answers:

Operator

Thank you. [Operator instructions] And the first question comes from Robbie Marcus from JP Morgan. Please go ahead.

Robbie Marcus -- J.P. Morgan -- Analyst

Great. And first off, Tom, congrats on the new role.

Tom West -- President and Chief Executive Officer

Thank you. Appreciate it, Robbie.

Robbie Marcus -- J.P. Morgan -- Analyst

Three quick questions for me. First, when did the stocking start, and maybe you could help us understand how much it contributed in 2018 and first half of '19? And where are levels now and what are they need to come down to?

Kieran Gallahue -- Executive Chairman

Yes. So this is something that we've been digging into for the last couple of months, just trying to get a much better understanding of the sales process, what has been the behavior and the balance of the sales organization. What's pretty clear is that once SINUVA -- and I'm going to give you a little bit of context there, OK? Once SINUVA was launched, there was a significant opportunity, obviously, getting very good clinical feedback on the product, but it's also very clear as we discussed in the past that the product access process is and was relatively inefficient. So at that time, you saw that there was a change in balance, not an off switch, on switch, but a change in balance in our field sales force, where they spent substantial amount of over time in trying to support our customers in that product access process and in trying to develop the SINUVA market.

And as a result, they -- and again, I should -- one of the things I should highlight, this is an awesome commercial organization by the way. I've seen a lot of organizations before, last two months of digging in is one of my great pleasures spending time with these guys. But one of the things that they ended up doing is they started to balance the reference a bit away from the market development side of PROPEL, which is what drives the pull through in these customers. And so it really wasn't anything that was sudden, it was just something that built over probably in the last 6 or so quarters, where the behavior in the field was a little bit more on the support side with SINUVA, maybe a little bit more on the transactions with the customers, a little bit less on the PROPEL pull through and so it was sort of a bit by bit sort of process that grew up over time.

Just to guage this though, we're talking about is a few percentage points of the total annual revenues, maybe 2%, 3% or so, so it sort of gets you in the right ballpark. So not a substantial impact on any given period. It's just that as we work to help our customers work that off and turn our priorities or I should say balance our priorities back on market development, it's going to be a process that over one, two, three quarters, we're going to see that sort of inventory of the customers working its way through, and we'll be able to focus on what's really the right thing for us to be doing, which is building the long-term demand of the PROPEL product. Does that make sense, Robbie?

Robbie Marcus -- J.P. Morgan -- Analyst

Yes. Maybe second question I had just to follow-up on that. As I look at sort of the past few years in the PROPEL Contour business, last year it was a little clouded as to what the underlying trends were, given how much time the reps were spending focusing on SINUVA. This year, you've clearly deprioritized SINUVA, given the access issues, but we're not seeing that rebounding in growth.

So help us understand and not just a '19 issue, but more a 2018 and 2019, you could tease out how much is an issue of market penetration versus self-inflicted issues?

Kieran Gallahue -- Executive Chairman

Yes. It's always hard to tease out that at a granular level. But what I will say is that from the self-inflicted portion of it, it was not insignificant. And when I say that, I mean two areas.

One is the challenges that we have with diversion of activity and we've been trying to gradually pull the sales reps away from that. But I wouldn't say in the first half of the year, as an example, they were fully away from that SINUVA support. You just -- you don't get away from that fundamentally when it's your customer. You're going to spend time dealing with some of the escalations of the issues.

We did add people. It has improved. So there has been an improvement in the balance. But on the activity level, the way that we during that time period chose to balance our efforts in the way we manage the sales organization, we pulled away from the daily coaching on PROPEL market development.

There really was -- if you look at fundamentally the way that a senior sales leader was dealing with their reps, there wasn't a lot of basic fundamentals, things like sharing success stories about where we increased PROPEL utilization of a given customer, sharing success stories about the methods we use to engage a physician that formally wasn't using PROPEL. I know that sounds like blocking and tackling, but quite frankly, it is blocking and tackling. It's the kind of stuff that helps you get additional points. So I think that there is substantial penetration left with the -- with our ability to execute by focusing on execution, getting back to the basics of helping understand utilization and expanding that physician base.

We can get back to the basics of growing this PROPEL business. Tom, what do you think?

Tom West -- President and Chief Executive Officer

Robbie, if I could add to it, it's obviously early days, but I spent time with a number of our sales team at a physician education summit up in Seattle last weekend. And the one thing that I would certainly say that is very encouraging is, our sales folks aren't saying that the market is saturated. They still see opportunity and are embracing the focus on a back-to-basics, primary demand generation clinical selling. So that gives me great encouragement as to where we can go, how we -- too early for me to quantify, but I think the organization's momentum toward back to basics is quite high.

Robbie Marcus -- J.P. Morgan -- Analyst

OK. And then maybe just last for me. I was surprised to see SG&A grow 31% and R&D 38% in the quarter, given where the revenue growth is. So maybe you could just help us understand where that spending is going? And maybe where it's going and looking out over the future, how to think about where those dollars are being spent?

Jeri Hilleman -- Chief Financial Officer

Yes. Robbie, this is Jeri. In terms of R&D, that's -- the simplest answer on that is that we've added the ASCEND trial and we are expanding the work for product development and the clinical studies for that product. So it's an increasing investment in that and also some other pipeline activities.

On the SG&A side, that has a lot to do with investment in continuing to work and all the things that Kieran was really talking about supporting SINUVA to field reimbursement team and the additions in market access, and then some additional support in the sales side of things. And it is also, as flagged on last call, our overall stock-based compensation expense has been increasing in association with some of the management changes and that also drives a differential. So I think it's really those key factors.

Robbie Marcus -- J.P. Morgan -- Analyst

OK. Thanks a lot.

Operator

Our next question comes from Bob Hopkins from Bank of America. Please go ahead.

Bob Hopkins -- Bank of America Merrill Lynch -- Analyst

Thank you and good afternoon. And welcome, Tom. Two quick things. First, on a positive note, I was interested in your drug-coated balloon commentary, and you said that from a -- the data that you generated today could be a pivotal or you may need a new trial.

Can you give us any sense as to what's the more likely path here? Or do you really have no idea at this point because you don't know the data? Just curious if there's any way to weight which path is more likely?

Kieran Gallahue -- Executive Chairman

Yes. No, it's a good question, Bob. But I just think it's too early for us to comment on that. I don't know that we can give a weighted average, sort of, guestimate at that.

Jeri Hilleman -- Chief Financial Officer

Yes. It's really going to depend on the clinical trial results. But it's our understanding that if we meet the endpoints with significance and clarity that there is a very good likelihood that would be the pivotal study. If there's something required in subgroup analysis or other things that we would probably continue and pursue it through further study.

So we really do need to see the data.

Bob Hopkins -- Bank of America Merrill Lynch -- Analyst

OK. And then the second question is just on -- really on -- frankly on SINUVA or on PROPEL because obviously, both are challenged right now. I feel like this is the second or third or fourth quarter where there's been sort of a discussion around, OK, "here's why it's not working and here's what we're doing to change." It all, sort of, sounds good at that time and so far it hasn't had a big impact. So I'm just kind of curious maybe if you can summarize like, what specifically is it that you were doing that wasn't working? And what specifically is changing? And may be helpful to give a concrete example of kind of what will change going forward?

Jeri Hilleman -- Chief Financial Officer

Bob, that's a really good question, and I'll take maybe the first cut of the answer to that. And one example that I would point to is in the area of specialty pharmacy. Because as you know, after we launched, one of the challenges that we've had is that as we engaged with the initial partners, we did not have partners with contracts with the major payers. And so as the payers approved and did prior authorization for the use of SINUVA for patients, however they directed that, that had to be fulfilled through specialty distributors, which meant that the doctors had to basically buy the product and submit for reimbursement directly under buy-and-bill model.

We believe that if we could have a flow where a material number of those prior authorizations went through specialty pharmacy, again that's where patients -- the doctors don't have to purchase the product, it's provided by the specialty pharmacy that, that would be a benefit and make it a lot easier and streamlined for physicians to access the product. When we launched the product, we didn't really have the assets that we have today in terms of having a J code and having established coverage, having feedback for clinical verification and enthusiasm around the use of the product. And with those, we have been able to get at least engagement and discussion with some of the specialty pharmacies that could change the profile of product flow through the distribution channel and have more of it flowing through specialty pharmacy. So I think one of the aspects I had highlighted is different is that because of these elements I've talked about, we have some doors open to it that we couldn't access last year.

Kieran Gallahue -- Executive Chairman

Yes. And if I can just build on that a little bit. When you boil that down, what it says is that in the last several quarters, what was available to us was two things. One is to put more bodies at the issue and the second was to shift which bodies were addressing what issues.

This is a process that gets us back into the fundamentals of what's causing the challenges in the access process, right? So it is getting back to addressing some of the root cause of the inefficiencies, which fundamentally is a more sustainable way of attacking these problems.

Bob Hopkins -- Bank of America Merrill Lynch -- Analyst

One last quick thing. Is it -- is part of this potentially -- now that you're 1.5 years in, that the kind of just underlying demand for the product isn't quite what you thought? And the reason I ask that question is that, I thoroughly understand that there's challenges with the launch and the J code. We're, sort of, six quarters in and still at roughly $1 million in a quarter. So it -- just curious, it's so far below what we were originally modeling, and I'm wondering if part of this isn't just a little bit of miscalculation on underlying demand for the product?

Kieran Gallahue -- Executive Chairman

I think it's the right question to ask, right? Sort of is the juice worth the squeeze sort of question. I've got to tell you, and I was at that same ENT meeting with Tom last weekend, and that's not the first one, we've been out in the field now for the last couple of months. Physicians love this product. The clinical utility of it is substantial and they get great feedback from their patients.

The issues that all of them bring up are around access, about process. So we still remain very comfortable that this is a product with a great opportunity in front of us. We just got to get the barriers out of the way. And by the way, I do want to -- just a little pivot on that.

There's also the second thing that we need to keep in mind. This capability that's been developed around having us, which is historically a device company building this physician-administered drug access capability. The amount of white space that this capability, not just SINUVA but what comes after that, that it builds into our ability to look at solutions in this marketplace and not have this false barrier, whether it's a drug or device but rather it may fall on either side. I got to tell you, that is very exciting from my perspective.

So we remain comfortable the juice is worth the squeeze, and we just got to get the blockers out of the way.

Operator

Our next question comes from Richard Newitter from SVB Leerink.

Jaime Morgan -- SVB Leerink -- Analyst

This is Jaime on for Rich. So first question I'll start with, I guess, to kind of last point in talking about the buy-and-bill and specialty pharmacy. It seems like if we dial back a year a year ago, it seems like the reliance was shifting more toward buy-and-bill versus specialty pharmacy for some of the reasons that you guys were talking about. I was just curious like from a go-forward perspective, how are you going to balance, sort of, the two reliances? And ultimately, is it something where buy-and-bill will be less reliant as you get more of these specialty pharmacy partnerships in place? And I'm just trying to gauge, if that's something that is kind of initially starting with specialty pharmacy, transitioning to more of a reliance on buy-and-bill and now back to specialty pharmacy, what the outlook is there?

Jeri Hilleman -- Chief Financial Officer

Jaime, it's Jeri. As you think about the two different avenues, they are often driven by the payer and insurance coverage of the patients. So the net-net is that both of these channels and ways of product access that are going to remain part of what the doctor will look to do as they adopt the product, and that is partly why we're putting in place for educational programs that Kieran referenced in the call, so they get really comfortable with it. But we also think it's nice to have a good blend of product following through the specialty pharmacy and specialty distributors.

For example, Medicare patient will continue to go through specialty distributor. But a lot of the commercial payers -- patients have the potential to go through specialty pharmacy. So we can't really predict or quantify at this point what the flow is going to be. But I think having a good balance or we think having a good balance will be something that the physicians will be most comfortable with.

Jaime Morgan -- SVB Leerink -- Analyst

OK. And then just, I know, in the past you guys have referenced trying to build out an EOB database. Kind of how are the conversations with surgeons going around that? Are people still on the sidelines just because there's still a little bit hesitant toward taking on the risk? Or is this something that's resonating and you're starting to see a little bit of payoff from building out that database?

Jeri Hilleman -- Chief Financial Officer

Yes. There was a lot of work going into that, and we do have a substantial number of EOBs that we can reference and I think that has definitely gotten a number of doctors more comfortable with buy-and-bill, but I think it still remains for many a little bit of a hassle factor and there are some that just really want to see the J code. They realize that the J code does streamline the submission and reimburse profit. It also provides a high level of confidence that there is defined reimbursement in place for the product.

So I think we have definitely softened the approach and gotten more trial with the EOBs. It's been an effective tool. But I think to really move the needle, the J code and all these other things were talking about, partnered with things like the EOB are really important to moving the needle at a faster pace.

Jaime Morgan -- SVB Leerink -- Analyst

OK. Great. And then just last one for me, if I could squeeze one more in. I know Doobie just recently got approval at the end of June therefore the chronic polyps.

Are you running into any -- have you guys have been any conversations with the sales force at least with physicians about that, and kind of what -- has your outlook changed at all on that and it being potentially competitive with SINUVA?

Jeri Hilleman -- Chief Financial Officer

Yes. I think the focus on the monoclonal antibodies has been at this point largely in the allergy space. I think it is something that ENTs may look at for patients with high comorbidities and others as you're certainly aware of, is a very expensive therapy requiring high patient compliance and other things so it has got a very different clinical profile than SINUVA does. We feel that SINUVA really has a very strong market that is independent, and we really don't see that as impacting our opportunity.

Jaime Morgan -- SVB Leerink -- Analyst

Thanks.

Operator

The next question comes from Chris Pasquale from Guggenheim. Please go ahead.

Chris Pasquale -- Guggenheim Partners -- Analyst

Thanks, Kieran. I appreciate you walking through your thoughts on the challenges the company has had with SINUVA to date. I think we've been talking about adding specialized reimbursement support to try and take some of those issues off the plate of the rep for about a year now. So I just want to understand, do you feel like you have the resources in place within the commercial organization today from a headcount or from a division responsibility perspective to go forward, at least from that angle, the way you'd like to attack it?

Kieran Gallahue -- Executive Chairman

Yes. I do think that we're in the right place from a staffing perspective and from a mix of staffing at this point. Obviously, we always look at optimization over time and as Tom comes in, he'll make his own assessment because he's quite driven by the commercial side of the business, he'll be digging in deep. But if you look -- to me it's a matter of the balance between the bodies and getting at the fundamental issues and addressing them both, right? You want to make sure people are in the right jobs that they have the right capabilities but also you give them the right tools and to be able to execute and to be more efficient.

So as I look forward into the beginning, let's say of 2020, right? So as we get over the next couple of months, we get to that point, we're going to have a fully staffed, fully engaged R&D, reimbursement -- field reimbursement team that's going to have about six months under their belts, right? Well educated, understanding and have been dealing with their customer base and are well entrenched. So you got the full R&D staff. We'll have another SP we believe by year end, up and running. You will have greater technology enablement, and I don't want to minimize some of the technology enablement that we are working on within that channel to simplify it, and we'll have a J code, which would have been established at that point for a couple of months.

So we've got four different really positive events that come together toward the end of this year, that gets us, I think, into that, sort of, next wave of growth and building out SINUVA. So it's part of what gets us excited about it. So I do think we have the right people, and more importantly, I think we're surrounding them with the right tools.

Tom West -- President and Chief Executive Officer

And this is Tom, just to jump in and add to that. And maybe it speaks to Bob's question earlier about the rate of adoption for SINUVA, and how -- why it's lingered as long as it has. The reality is we're getting all the pieces of the puzzle together now. While we have added reimbursement capability in the past, to Kieran's point, only now do we have kind of the architecture of the J code covered lives at 70%, specialty Pharma up and running and reimbursement where we need it to be.

Add that to the clinical evidence that has been there all along, and a more knowledgeable and capable reimbursement team in the field, now all the pieces are coming together. Adoption is never as quick as any player might wish it to be, but now it's coming in strongly and we're hitting it. And that will drive 2020 and beyond as we get our feet underneath us with that new J code coming out in October.

Chris Pasquale -- Guggenheim Partners -- Analyst

And I just want to understand the specialty pharmacy piece better because it feels like the six years has been a little bit of a moving target over time. Initially it was confidence in buy-and-bill and the J code. Now that we've almost got the J code in place, this upgrading of the specialty Pharma relationships. Is getting a major partner online before the end of this year the piece that you guys need to feel confident going into 2020 that you can start to do what you wanted to do on the commercial side? Or do you ultimately need three or four and this is just going to be the start in six months we're talking about getting that second or third one online before we can really start to see momentum?

Kieran Gallahue -- Executive Chairman

I think that for us, we want to get another highly capable SP up and running before the end of the year. Maybe the biggest and the most capable one may trail that by a couple of months, will be early, we think, next year. But we think just by adding probably a couple of highly capable and more broadly capable SPs, we'll be in extremely good shape. So I'd call one toward the end of this year and probably another one following sometime in Q1.

Operator

Our next question comes from Ravi Misra from Berenberg Capital Markets. Please go ahead, sir. Mr. Misra, is your line open? Is your phone muted? The next question comes from Matt O'Brien from Piper Jaffray.

Please go ahead, sir.

Kevin Farshchi -- Piper Jaffray -- Analyst

Hi, everyone. This is actually Kevin Farshchi on for Matt. A few quick ones for me. First, I just wanted to put a finer point on the core PROPEL outlook for '19.

Definitely understand the disruption around the sales force because of SINUVA, but we're seeing a pretty meaningful revision from one quarter of that disruption. So if you could talk through what changed specifically on your expectations for customer demand or utilization in the core business? Or am I thinking about this wrong, and the outlook is just highly risk-adjusted given all the new strategies you're putting in place? And I'll just ask my follow-up as well, which is, you alluded to market development activities and there being much more penetration available. What exactly do you think is necessary to return to growth in 2020? I think you have a large majority of potential accounts that could use PROPEL, isn't this more about utilization and how do you really drive that demand in the customers you're with?

Kieran Gallahue -- Executive Chairman

Yes. So let me get at the first question, I think actually the second one will weave its way into it. So market development is a process that yields a longer-term benefit but takes a little bit longer for you to see the impact. Transactionally, when you move away from some of these larger orders, you feel the impact more quickly.

And particularly, what we've been trying to do is work with your customers to make sure that they work of any inventories that may be sitting on the shelves and make sure that their real focus is on the pull through, right? So you got an in balance and timing, and that's why you feel it short term on the negative side before you feel the, sort of, rising wave that getting back to the basics and fundamentals. It's a little bit of short term pain for a lot more long term gain is simplistic way of looking at it. So even a couple of percentage of annual sales, if you try to work them off over one or two quarters, it -- unfortunately when you're a company our size, it affects the growth rate a couple of points, and that sort of drives us toward that flat period. The good news and actually what we would expect to see during that time actually is that the fundamental utilization of the product is actually little bit higher than the new revenue because working off your inventory for a bit.

So fundamentally, you just feel there's a short term, it's the right thing to do to work on market development and I'll go back to what Tom said earlier in his conversations with the sales reps when it comes to penetration, there's just some fundamentals we do believe that there are still customers that are not using the product that we can drive initial utilization and we do believe that there are opportunities with a given patient where there are opportunities to use them more frequently. So the doc is using it in 15% of the patient we think that it might be more appropriate for 20% or 25%, we could help them understand the clinical evidence the clinical efficacy and help them make the best decision for that patient. And again, it is back to basics, right? And that's what we're going to do and that's what's going to use dividends

Kevin Farshchi -- Piper Jaffray -- Analyst

Sounds good. Thanks again.

Operator

[Operator instructions] This concludes our question-and-answer session. I would like to turn the conference back over to Mr. Tom West for any closing remarks.

Tom West -- President and Chief Executive Officer

Yes. Thank you, and thanks all for joining us today. We greatly appreciate your interest and support. I'm excited to be here and excited to work with you and we'll report back on our progress since we work against our strategies with the optimism of the potential that is before us.

Thanks very much.

Operator

[Operator signoff]

Duration: 60 minutes

Call participants:

Jeri Hilleman -- Chief Financial Officer

Kieran Gallahue -- Executive Chairman

Tom West -- President and Chief Executive Officer

Robbie Marcus -- J.P. Morgan -- Analyst

Bob Hopkins -- Bank of America Merrill Lynch -- Analyst

Jaime Morgan -- SVB Leerink -- Analyst

Chris Pasquale -- Guggenheim Partners -- Analyst

Kevin Farshchi -- Piper Jaffray -- Analyst

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