SI Bone INC (SIBN) Q2 2019 Earnings Call Transcript

SI Bone INC (SIBN -2.19%)
Q2 2019 Earnings Call
Aug 06, 2019, 4:30 p.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good morning, ladies and gentlemen, and welcome to the SI-BONE to report operating results for the second-quarter 2019. [Operator instructions] As a reminder, this conference call is being recorded. I would now like to turn the conference over to your host, Lynn Lewis. Please go ahead.

Lynn Lewis -- Investor Relations Contact

Thanks, Laurie. Thank you all for participating in today's call. Joining me are Jeff Dunn, president and chief executive officer; and Laura Francis, chief operating officer and chief financial officer of SI-BONE. Earlier today, SI-BONE released financial results for the three and six months ended June 30, 2019.

A copy of the press release is available on the company's website. Before we begin, I'd like to remind you that management will make statements during this call that may include forward-looking statements within the meaning of the Federal Securities laws, which are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Any statements contained in this call that relate to expectations or predictions of future events, results or performance are forward-looking statements. All forward-looking statements including, without limitation, our examination of operating trends and our future financial expectations, which includes expectations for hiring active surgeons, reimbursement decisions, urgent payments, and guidance for revenue are based upon our current estimates and various assumptions.

These statements involve material risks and uncertainties that could cause actual results or events to materially differ from those anticipated or implied by these forward-looking statements. Accordingly, you should not place undue reliance on these statements. For a list and description of the risks and uncertainties associated with our business, please refer to the Risk Factors section of our most recently quarterly report on Form 10-Q filed with the Securities and Exchange Commission on May 9th, 2019. SI-BONE disclaims any intention or obligation, except as required by law, to update or revise any financial projections or forward-looking statements whether because of new information, future events, or otherwise.

This conference call contains time-sensitive information and is accurate only as of the live broadcast today, August 6th, 2019. And with that, I'll turn the call over to Jeff.

Jeff Dunn -- President and Chief Executive Officer

Thanks, Lynn. Good afternoon, and thank you for joining us. I'm pleased to welcome you to SI-BONE's second-quarter 2019 earnings call. Before we get started, I'd like to announce that Laura Francis has been promoted and will now serve as both chief operating officer and chief financial officer for SI-BONE.

Across these roles, she is responsible for finance, accounting, treasury, supply chain operations, quality, IT, facilities, and human resources. During her time at SI-BONE, Laura has demonstrated exemplary leadership, integrity, problem-solving acumen, and dedication. We look forward to her continued contributions. Turning to our business results.

We made important progress during the second quarter. Total revenue was $16.3 million, growing 19% over 2018. U.S. revenue was $15 million, representing 24% growth over the same period last year.

And international revenue for the quarter was $1.3 million. Our second-quarter results demonstrated momentum as we expanded our commercial footprint for providing differentiated surgical devices in the sacropelvic space. This was particularly evident in the U.S. where we have seen accelerating growth since the end of 2018.

We are starting to see the impact from growing payer coverage and sales force expansion. We expect further productivity gains in the back half of this year as our newer sales reps ramp toward full productivity. As a result of this momentum, we recently reached a very important milestone. iFuse has now been used in more than 40,000 procedures by more than 1,900 surgeons worldwide.

This achievement confirms the growing attention and focus on sacroiliac joint dysfunction and its role in lower back pain, as well as the joint's importance as part of our musculoskeletal system. It is gratifying that so many patients who have suffered for years are now able to regain [Audio gap] who become potential candidates for surgery due to their debilitating SI joint dysfunction, we believe we are still just at the beginning of this journey. On the sales and marketing front, we ended the second quarter of 2019 with 50 direct sales reps and 37 clinical support specialists. We're encouraged by these quality additions to our growing sales team and are firmly on track to reach our goal of adding 10 to 15 direct sales reps and 25 to 30 new CSSs by the end of the year.

As a reminder, these expected additions will bring us close to a 1:1 ratio for direct sales reps to clinical support specialists in the U.S. And we will get our total count to over 100 reps in the field by the end of the year. In addition to our U.S. sales force expansion, our medical affairs team remains focused on training, educating, and supporting new surgeons, we are on track to increase the number of active surgeons from 450 during the fourth quarter of 2018 to 550 by the fourth quarter of 2019.

Turning to our international opportunity, we experienced some residual weakness in Germany related to our previous revenue issues from the second half of 2018. As we mentioned on our last call, we have made important investments to improve our situation in Germany. In line with these efforts, our new head of sales has made significant changes in the field personnel that were necessary to drive the business forward. This transition resulted in a few open territories during the second quarter, which impacted the region's performance.

Outside of Germany, our operations in the U.K., France, and Italy are driving growth in line with our expectations. Looking ahead, we expect international Q3 revenue to be relatively in line with the second quarter, and we anticipate incremental improvement over the next 12 months as the new German team ramps to full capacity while other countries continue to execute. Turning to clinical evidence. SI-BONE has always been a company grounded in robust and high quality, long-term data, and we remain committed to building on our vast body of clinical evidence.

In line with this commitment, five-year follow-up results from LOIS, a long-term prospective study, were recently submitted for publication. At five years, the data demonstrates durability of the clinical benefit related to the procedure and further supports the benefits of minimally invasive sacroiliac joint fusion with iFuse. We believe our superior clinical data is a key component of growing positive support from clinical evaluation organizations and garnering payer wins, many of which are exclusive to iFuse based on our clinical evidence. We will leverage the extended results from LOIS with our existing data to drive progress on the reimbursement front and pick up the remaining U.S.

commercial payers that currently do not cover iFuse. From a reimbursement perspective, there has been a draft update on the surgeon payment for minimally invasive sacroiliac joint fusion under CPT code 27279. In July 2017, the code was identified as misvalued by the CMS in the Federal Register. On July 29th, 2019, CMS proposed to maintain the current work RVU of 9.03 as recommended by the RUC, resulting in a surgeon payment of $720 for Medicare.

U.S. commercial payers generally follow this recommendation, although they pay 20% to 30% more on average than Medicare. Following this proposal, CMS solicited public comment on whether an alternative valuation would be more appropriate. That said, we're confident in our ability to grow in the U.S.

with the current and proposed surgeon payment and will continue our efforts to improve the reimbursement landscape for hospitals, physicians, and patients. We are also continuing to see increasing interest in our iFuse Bedrock technique, which we believe is an important advancement in how surgeons treat adult deformity patients. As a reminder, in November of 2018, the Bedrock technique was cleared by the FDA for use in adult deformity surgeries in patients with SI joint dysfunction. In April, we received an additional FDA clearance to expand the indication to cover any long construct procedure in which the surgeon wants to stabilize the SI joint.

The Bedrock technique allows the surgeon to place one iFuse implant on each side of the sacrum with a posterior approach or up to three implants on each side with a lateral approach in conjunction with a multi-level spinal fusion. Biomechanical testing data shows that the addition of iFuse implants placed using the posterior Bedrock technique reduces SI joint motion by 30% more than an S2AI screw alone. Adult deformity surgery represents one of the fastest-growing segments of the spine market with an estimated 50,000 procedures last year, of which 25,000 involved fusions down to the sacrum. Acknowledgment of the SI joint as a pain generator by key opinion leaders is foundationally important to the adoption of this technique.

Following our U.S. surgeon summit this past May, we hosted a Bedrock symposium in Amsterdam in early July at the International Meeting on Advanced Spine Techniques. Presenters included Dr. David Polly from the University of Minnesota, Dr.

Chris Shaffrey from Duke, Dr. Isador Lieberman from Texas Back Institute, and Dr. Juan Uribe, from Barrow Neurological Institute. The symposium was attended by surgeons representing leading academic institutions from around the world including the Netherlands, Germany, Switzerland, Italy, Hong Kong, and the U.S.

The key opinion leaders discussed tactics for increasing awareness of the SI joint as a pain generator and the value of the Bedrock technique and technology. Long construct deformity surgery was also a key area of focus at the 16th Annual State of Spine Surgery Think Tank meeting in late June. Presentations were given by Dr. Frank Phillips, from Rush, on the effects of long construct fusions on the SI joint, Dr.

Juan Uribe, from Barrow, on the biomechanical effects of long construct fusion on the SI joint, Dr. Rush Fisher, from Christiana Spine, on why he fuses the SI joint in adult deformity patients, Dr. Josh Heller, from Jefferson University, on a single-center study showing rates of SI joint pain in adult deformity patients, and Dr. Robert Eastlack, from Scripps, on the technique for the Bedrock approach.

We are encouraged by this growing interest in the Bedrock technique at leading academic institutions where the majority of long construct deformity surgeries are performed. We have a fantastic team of passionate and dedicated individuals focused on transforming sacropelvic treatment. To that end, we were thrilled to welcome Mark Foley and Heyward Donigan to the SI-BONE team as new members of our board of directors. Mark brings more than 25 years of operational and investment experience in healthcare including having been chairman, president and CEO of ZELTIQ Aesthetics from 2012 through the company's acquisition in 2017 by Allergan.

Heyward brings more than 30 years of payer and digital health experience including executive leadership positions at Cigna, Premera Blue Cross Blue Shield, and Empire Blue Cross Blue Shield. I'm delighted that SI-BONE can benefit from their respective leadership experiences, which span multiple technology and healthcare companies, as well as the private-payer landscape. Finally, I'd like to take the opportunity to congratulate Laura on her expanded role. I will now turn the call over to her for details on our financial performance then will return with closing comments.

Laura Francis -- Chief Operating Officer and Chief Financial Officer

Thanks, Jeff. I appreciate your confidence in me, and I'm excited to continue as the chief financial officer of the company while also overseeing the operations of the business. I'm fortunate to work with a fantastic team of people at SI-BONE, executives, managers, and individual contributors, who are committed to our patients and surgeons while also driving growth and success of the company. Let me now turn to the financial results.

For the second quarter of 2019, revenue increased 19% to $16.3 million, compared to $13.7 million for the second quarter of 2018. U.S. revenue for the second quarter was $15 million, representing 24% growth over the same period of the prior year. The increase in revenue was primarily driven by an increase in domestic case volumes.

International revenue for the second quarter was $1.3 million. As Jeff mentioned, international sales were constrained by open territories in Germany. Gross margin for the second quarter of 2019 was 90%, compared to 91% in the corresponding prior-year period. The slight decrease in gross margin was driven by an increase in personnel spending to support the growth of the business.

This is in line with our expectations for gross margin to trend toward the mid to high 80% range over the next couple of years. Operating expenses increased 61% to $22.9 million for the second quarter of 2019, as compared to $14.2 million in the corresponding prior-year period. The increase was primarily driven by higher surgeon education spending and increase in sales force hires and additional resources allocated to advertising and marketing. During the quarter, we increased our sales and marketing spend to capture the opportunity from positive and exclusive reimbursement decisions made by U.S.

commercial payers. We also incurred higher general and administrative expenses due to higher stock compensation expenses and the ongoing costs associated with being a public company. The operating loss was $8.1 million in the second quarter of 2019, as compared to $1.7 million in the corresponding prior-year period. Our net loss was $8.7 million or a loss of $0.35 per diluted share for the second quarter of 2019, as compared to $3.1 million or a loss of $0.87 per diluted share in the corresponding prior-year period.

We ended the second quarter with $108.5 million in cash and marketable securities. Turning to our outlook for 2019. We continue to expect revenue to be in the range of $65 million to $66.5 million, representing growth of 17% to 20% over full-year 2018. Due to the seasonality of the summer months, we expect revenue in the third quarter to be sequentially flat compared to the second quarter and then accelerate in the fourth quarter.

Outside of the U.S., we expect an improved second-half growth rate with further improvement in 2020. I'll now turn the call back to Jeff for closing comments.

Jeff Dunn -- President and Chief Executive Officer

Thank you, Laura. In summary, we are encouraged by our growth in the U.S. Our U.S. sales hiring efforts are squarely on track, interest in the Bedrock technique continues to grow, and we are confident in our ability to improve our international performance over the coming quarters.

You may have seen the save-the-date for our upcoming surgeon Q&A event on the morning of September 26 in Chicago in conjunction with the North American Spine Society meeting. At the event, we will be hosting a surgeon panel with Dr. Josh Heller from Jefferson, Dr. Andrew Kranenburg from Providence Medford Medical Center, Dr.

David Polly from the University of Minnesota, and Dr. Timothy Holt from Montgomery Spine. Investors and analysts will have an opportunity to interact and ask questions of these leading surgeons, as well as our executive management, and we anticipate an insightful and productive morning. We look forward to providing updates on our progress and look forward to seeing some of you this week at the Canaccord Growth Conference in Boston.

With that, we will now open it up to questions. Operator?

Questions & Answers:

Operator

[Operator instructions] Your first question comes from the line of David Lewis from Morgan Stanley. Your line is now open.

David Lewis -- Morgan Stanley -- Analyst

Good afternoon. Jeff, just a few questions for me. The first is just thinking about commercial expansion in the first half of the year. So two things: one, the second half of the year, should we think about commercial expansion, rep and clinical support specialists similar to the first half or you slow down the pace of ads just given the traction you've had in the first half of the year? And in terms of -- is it safe to assume for the U.S.

market, we should be thinking about acceleration from the 2Q levels into the back half of the year? And then I have a couple of follow-ups.

Jeff Dunn -- President and Chief Executive Officer

Yeah. So, David, on both those questions -- so first of all, as I said, we're very much on track, and we are highly confident that we'll get to that 102 to 112 range of total reps in the field. And there's a little doubt in my mind and Laura's mind that we're going to get there. We're going to continue to hire at a pretty strong pace in the back half, and Laura talked a little bit about the expenses -- or can talk more about those expenses.

But we're finding really good quality people. And we're a little bit ahead of where we expected to be. So we feel very good about that. As to your question about accelerating revenue, as you know, we've gone sequentially in the U.S.

from 16% growth to 19% growth to 24% growth. We certainly think that we can keep it in the 20s in the back half of 2019. I'm certainly not, at this point, going to promise you that we're going to take it north from 24%, but we're feeling very good about what's going on in the U.S. And for that matter, Europe has taken a little bit longer to get back on track.

But we feel very good about what's going on in Europe and getting their growth that if you've done the calculations on the number, you know that numbers -- you know that we had some challenging growth, let's just say, in the second half of last year in Europe. And it's absolutely getting better, although it's certainly not helping the overall picture yet. But when it does, I think with the U.S. doing really well and Europe back on track, the overall picture will look really quite good.

David Lewis -- Morgan Stanley -- Analyst

OK. Very helpful. And then kind of two related reimbursement questions, one you kind of already addressed, but one is sort of on the physician side and one is on the third-party payer side. So there are a couple of large third-party payers that are not yet -- have not yet issued national coverage decisions.

How important is the five-year data going to be in terms of swaying some of those larger payers? And the CPT code process, Jeff, on one hand, I say some of the language in the document on the proposal was encouraging, and that they're still saying the code was undervalued yet they said that a year prior. So how are you interpreting that relative language? Thanks so much.

Jeff Dunn -- President and Chief Executive Officer

Yup, you're welcome. So on the large payers, David, the ones that we -- the one that we've had the most interaction with is Cigna, and they clearly said to us that the five-year data is very important to them. And we've gotten sort of positive signals there. So I'm encouraged there.

Last communication with Anthem and Aetna -- Humana isn't quite as important in the sense that a lot of it's still government business. The schedule on those is Anthem is this fall. As I think you may know, Cigna and Aetna are scheduled on their annual reviews to be in early Q1. I think if the five-year data publishes, and it is in review right now at a journal, and I know it's to the point where there's one more reviewer needed on that.

If that happens to publish a little bit earlier in the next couple of months, I think there's a chance that Cigna could flip prior to January. But I'm kind of counting and hoping that January is sort of the time frame there. So those are the larger payers. And I do think five-year, in general, is important.

And it all takes a little bit longer than we hope, but I think once we get over that hump, that will help the business overall. As to the CPT commentary, I think it is a little bit unusual -- I should say, unusual for CMS to ask about specific commentary. So I read it at least is encouraging that they want to hear from people as to why the code and they specifically set 20 RBUs -- might actually go up to 20 RBUs, and that was the proposal to -- from one of the medical societies to make it at parity like there is parity in certain other medical procedures. I know for a fact that there are a lot of comments that have already been sent in to CMS from surgeons who have written them their own original commentary on why the procedures should be paid more from a time intensity compared to other surgery.

So I think there is a groundswell of people pushing on the issue, as well as medical societies. These things, as I think we all know, are difficult to handicap, but there's clearly an opening, and I don't think we'll know what the result is till the first week or so of November.

Laura Francis -- Chief Operating Officer and Chief Financial Officer

Right now, what we're assuming, David, is that it stays the same, and we feel very comfortable and confident that we can build and grow the business with where the surgeon payment currently is at. But there's definitely a lot of activities around trying to make a change to that before the end of the year.

David Lewis -- Morgan Stanley -- Analyst

Great. Thanks so much, guys.

Jeff Dunn -- President and Chief Executive Officer

You're welcome.

Laura Francis -- Chief Operating Officer and Chief Financial Officer

Thank you.

Operator

And we have a question from the line of Kyle Pezzi from Bank of America. Your line is now open.

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

Oh, hi. This is actually Travis Steed, and I'm here for Bob Hopkins.

Laura Francis -- Chief Operating Officer and Chief Financial Officer

Hi, Travis.

Jeff Dunn -- President and Chief Executive Officer

Hi, Travis. Yeah, I was confused too with...

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

Yeah, me, too. OK. Thank you. One quick housekeeping question.

Wanted to see it if Bedrock contributed any revenue this quarter? And also what you're assuming for Bedrock in your full-year outlook?

Jeff Dunn -- President and Chief Executive Officer

It certainly did contribute revenue. I wouldn't say that in the big picture was overly meaningful. There were a fair amount of surgeries done with Bedrock across quite a number of academic institutions, and I'm reluctant to sort of say exactly how many at this point because we don't want to be tracked on every single Bedrock number. But suffice it to say that we're very encouraged.

And if you look at the presentation, the corporate presentation that has posted or is about to be posted or I will make tomorrow when I speak publicly at this conference, you can see that there have been -- there was a June large session on Bedrock attended by many academic surgeons in the U.S. There was a second Bedrock big symposium where there were, I think, six or seven presentations from major surgeons in June. So there was one in May, one in June and then in July. So three months in a row, there have been presentations.

And that July 1 was in Amsterdam, as I mentioned, at IMAST. And so the interest level is very good. And I have heard, for instance, Dr. Polly was at I think at least two of those three where he is getting calls from surgeons and said, I want to learn more about this.

I'm hearing about this. And then at NASS coming up in Chicago, there are three sessions on Bedrock. One is an actual surgeon training, there's a Bedrock educational summit dinner. And then third, there's an official mass program on pelvic fixation.

And the question is, where are we now? And that entire session is focused on Bedrock. So really encouraging interest. What we had hoped for as to revenue in the back half, I think probably we're going to punt on that question at the moment.

Laura Francis -- Chief Operating Officer and Chief Financial Officer

Yeah, our primary focus there, Travis, as you know, is really getting the halo effect of Bedrock with the key opinion leaders and the focus on the SI joint. And that's exactly what we're getting from Bedrock. So we're pleased with that. And for right now, revenue is a secondary consideration.

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

That makes sense. And on the Bedrock, you've talked about 25,000 cases in total per year. Just trying to think over the next couple of years, you think you can penetrate 1% or 5% or 10% of these. It seems like you could -- there's less friction with that versus your core product and just seems like it can move faster.

Just want to get a sense for how you're thinking about that over the next two to three years.

Jeff Dunn -- President and Chief Executive Officer

I think it's fair to say that it's well under -- there's no diagnosis involved. There's -- because it's more preventative. It's a well-understood problem that needs to be addressed. And so there is no friction or question on those two subjects.

And I think it's going to be -- what we're seeing is it's a pretty, pretty -- not easy procedure, but it's not that difficult a procedure to actually add on reasonably rapidly at the end of these long adult deformity cases. So there isn't a lot of – there isn't a lot of -- I'll put it this way, I have not heard one surgeon say, that makes no sense.

Laura Francis -- Chief Operating Officer and Chief Financial Officer

But Travis, what we're primarily doing is we really just launched the product in June of this year. We had some market preference testing going on earlier in the year, just launched in June in the U.S., have not launched yet in Europe. And so it's very early days. And I think what we'd really like to do is see how the product performs over the remainder of 2019 and probably, more directly, answer the question that you're asking as we start thinking about guidance for 2020.

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

OK. That's helpful. Thank you.

Jeff Dunn -- President and Chief Executive Officer

You're welcome.

Operator

I am showing no further questions at this time. I would now like to turn the conference back to CEO, Jeff Dunn.

Jeff Dunn -- President and Chief Executive Officer

OK. In closing, we remain confident that our fundamentals are intact, and we're well positioned to execute on our strategy. We look forward to updating all of you on future calls. Thanks, again, for your time today.

And with that, we'll close up the call. Goodbye.

Operator

[Operator signoff]

Duration: 33 minutes

Call participants:

Lynn Lewis -- Investor Relations Contact

Jeff Dunn -- President and Chief Executive Officer

Laura Francis -- Chief Operating Officer and Chief Financial Officer

David Lewis -- Morgan Stanley -- Analyst

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

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