Q4 2019 SI-BONE Inc Earnings Call

Mar 10, 2020 (Thomson StreetEvents) -- Edited Transcript of SI-BONE Inc earnings conference call or presentation Monday, March 9, 2020 at 8:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Jeffrey W. Dunn

SI-BONE, Inc. - Chairman, President & CEO

* Laura A. Francis

SI-BONE, Inc. - CFO & COO

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Conference Call Participants

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* Craig William Bijou

Cantor Fitzgerald & Co., Research Division - Research Analyst

* David Joshua Saxon

Needham & Company, LLC, Research Division - Associate

* David Louis Turkaly

JMP Securities LLC, Research Division - MD and Senior Research Analyst

* David Ryan Lewis

Morgan Stanley, Research Division - MD

* Kaila Paige Krum

SunTrust Robinson Humphrey, Inc., Research Division - Research Analyst

* Kyle William Rose

Canaccord Genuity Corp., Research Division - Senior Analyst

* Carrie Mendivil

Gilmartin Group LLC - Principal

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Presentation

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Operator [1]

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Good afternoon, ladies and gentlemen, and welcome to the SI-BONE Q4 and Full Year 2019 Earnings Conference Call. (Operator Instructions) As a reminder, this conference call is being recorded.

I would now like to turn the conference over to your host, Carrie Mendivil, Investor Relations. Thank you.

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Carrie Mendivil, Gilmartin Group LLC - Principal [2]

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Story continues

Thank you all for participating in today's call. Joining me today are Jeff Dunn, President and Chief Executive Officer; and Laura Francis, Chief Financial Officer and Chief Operating Officer of SI-BONE.

Earlier today, SI-BONE released financial results for the quarter and full year ended December 31, 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 include forward-looking statements within the meaning of 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 funds -- of operating trends and our future financial expectations, which includes expectations for hiring, active surgeons, new products, reimbursement decisions 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 recent quarterly report on Form 10-Q filed with the Securities and Exchange Commission on November 12, 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, March 9, 2020.

And with that, I'll turn the call over to Jeff.

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Jeffrey W. Dunn, SI-BONE, Inc. - Chairman, President & CEO [3]

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Thanks, Carrie. Good afternoon, and thank you for joining us. I'm pleased to welcome you to SI-BONE's earnings call to review our fourth quarter and full year 2019 results. Our progress in 2019 was marked by strong commercial execution that drove accelerating revenue growth. Revenue for the fourth quarter was $19.8 million, up 27% compared to the fourth quarter of 2018. We ended the year with $67.3 million in sales, up 22% compared to 2018. We have now exceeded over 45,000 procedures performed by more than 2,000 surgeons worldwide. We are well positioned for the future and continue to expect our revenue for full year 2020 to be in the range of $80 million to $82 million, reflecting 19% to 22% growth over 2019.

As we enter 2020, we expect the progress and the investments we made during 2019 to pay dividends throughout this year. Starting with our sales force, we finished the fourth quarter with 56 reps in our U.S. direct sales organization. Of those 56 reps, 45 are mature reps who have been with the company for over 12 months. During 2019, our direct sales reps had an average run rate of over $1.3 million, and for our mature reps, that figure was over $1.6 million.

Our direct reps are further supported by clinical support specialists, or CSSs, who assist in case coverage. At the end of the fourth quarter, we had 51 CSSs. Looking ahead to 2020, we are focused on increasing the productivity of our U.S. sales force and incrementally hiring both U.S. direct sales reps and CSSs as needed. We expect to end the year with around 66 sales reps as we add approximately 10 direct sales reps to large and underpenetrated territories over the course of 2020. We also plan to further increase the number of CSSs, adding an equal number of new specialists throughout the year to support smaller and rapidly growing territories. This will bring our number of CSSs to 61 by the end of 2020. To support these expansion efforts, we have increased our number of U.S. regions from 10 to 12 by promoting 2 of our top direct sales rep leaders to regional sales directors.

At the core of our commercial strategy is our focus on driving iFuse procedure volumes. During the fourth quarter, our medical affairs team remained focused on training, educating and supporting surgeons. We ended the year with 539 active surgeons in the United States, which is defined as a surgeon who has performed at least one procedure in the last 3 months. While our team was focused on growing our base of active surgeons, they also were involved in increased utilization within existing active accounts. Over the course of the year, we saw our average number of cases per U.S. active surgeon increase from 3.3 in the fourth quarter of 2018 to 3.7 in the fourth quarter of 2019. In 2020, we will work to continue expanding our base of active surgeons while further penetrating existing accounts. By the end of 2020, we expect to increase the number of active surgeons in the U.S. to 625.

There are 3 ongoing initiatives we are implementing that will help us grow our active surgeon base: first, to train new providers; second, to reactivate inactive surgeons; and finally, to continue to grow KOL support for iFuse. Our vision is that eventually, every ortho and neurosurgeon will include the SI joint in their differential diagnosis of lower back pain. Our goal is for those surgeons to incorporate iFuse into his or her practice for patients suffering from SI joint dysfunction or degeneration or refer them to an iFuse-trained surgeon.

On to reimbursement, we made significant progress throughout 2019. Following the publication of the 5-year follow-up results, Cigna established positive coverage for MIS SI joint Fusion in December 2019. The new policy specifies that coverage will be exclusive for FDA-cleared implants that are placed across the SI joint and intended to promote bone fusion. Cigna is the fourth largest commercial health plan in the United States, with 14.6 million members, opening a significant opportunity to treat these patients with iFuse.

In December 2019, Anthem published a policy update on MIS SI joint Fusion. Anthem now covers the procedure but only in the case of pelvic girdle trauma. While we do not consider this a full-fledged positive coverage policy, it is a step in the right direction. We will continue to work with Anthem ahead of their next review in September.

During the fourth quarter, we also received positive news on the surgeon payment front. In the final physician payment rule released on November 1, 2019, CMS increased the CPT code's national average overall surgeon payment by 27% to $915 from $720. The Medicare fee schedule was updated to reflect this new amount effective January 1, 2020. Many private payers set their payment amounts with reference to the Medicare payment typically 10% to 33% higher than the Medicare payment for a procedure. We expect the process of updating commercial payer fee schedules and physician practice contracts to take some time, so the full effect of the payment increase may not be felt immediately. Collectively, we expect these reimbursement and payer wins from 2019 to support the expansion of iFuse in 2020.

Turning now to our international sales opportunities. We returned to positive international revenue growth in the second half of the year and ended the fourth quarter with 12% growth. Following sales force turnover in 2019, our German team ramped toward greater productivity over the course of the year. We also saw strong growth coming from the U.K. and our newer branch in France during the fourth quarter.

Additionally, we continue to make progress expanding our portfolio of comprehensive sacropelvic solutions. In December

2019, we were formally notified of the CE Mark certification in Europe for Bedrock. With these regulatory reviews complete, we launched iFuse Bedrock in Europe last month. Similar to our launch in the U.S., we are focused on gaining support from key opinion leaders at academic centers and creating a halo effect for our core SI joint fusion business.

We also launched iFuse Bone in the U.S. in December 2019. iFuse Bone is an enabling triangular technology for surgeons who are interested implant -- in implanting bone in conjunction with an iFuse procedure.

We are also working to increase awareness with patients of sacroiliac joint issues as the leading cause of chronic lower back pain -- or a leading cost, excuse me. A survey of 1,000 women in 2019 revealed that 8 in 10 are unaware of these issues after pregnancy. On Wednesday, February 26, orthopedic surgeon Dr. Michael Moghimi and SI joint -- Buddy Jamie were featured on the Emmy Award-winning daytime television talk show The Doctors. The Doctors show covers a variety of health and medical topics and has an audience of over 1.5 million people watching nationwide every day. Jamie and Dr. Moghimi discussed how the iFuse procedure enabled Jamie to return to an active lifestyle after over a decade of postpartum pain due to sacroiliac joint dysfunction, frustration and misdiagnosis.

Finally, before turning the call over to Laura, I would like to welcome Jeri Hilleman to our Board of Directors, serving as a director as well as the Chair of our Audit Committee. Her extensive experience as a public company CFO provides deep experience across public company leadership, capital raises and business development.

With now -- with that, I will now turn the call over to Laura Francis, our Chief Financial Officer and Chief Operating Officer, to provide more detail on our financial results and our 2020 outlook.

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Laura A. Francis, SI-BONE, Inc. - CFO & COO [4]

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Thanks, Jeff. For the fourth quarter of 2019, revenue increased 27% to $19.8 million compared to $15.6 million in the fourth quarter of 2018. The increase in revenue during the fourth quarter was primarily driven by higher case volumes. U.S. revenue increased 28% to $18.5 million, while international revenue increased 12% to $1.3 million compared to the corresponding prior year periods.

Gross margin for the fourth quarter 2019 was 90% compared to 91% in the fourth quarter 2018. Operating expenses increased 42% to $26.3 million in the fourth quarter of 2019 compared to $18.5 million in the fourth quarter of 2018. Our operating loss for the fourth quarter of 2019 was $8.5 million compared to $4.3 million in the fourth quarter of 2018. Net loss was $9.1 million or $0.36 per diluted share for the fourth quarter 2019 as compared to $5.3 million or $0.26 per diluted share in the fourth quarter 2018.

For the full year 2019, revenue increased 22% to $67.3 million compared to $55.4 million in 2018. U.S. revenue increased 23% to $61.8 million, while international revenue increased 4% to $5.5 million compared to 2018. The increase in U.S. revenue was primarily driven by higher case volumes. The lower growth rate for international sales was primarily due to softness in our German subsidiary in the first half of the year. Gross margin for 2019 was 90% compared to 91% in 2018. The change in gross margin was due to an increase in personnel and operations 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 54% to $96.5 million for 2019 compared to $62.5 million in 2018. The increase in operating expense was primarily driven by increased sales hiring, surgeon training, new public company costs, stock-based compensation and litigation expenses. Regarding litigation, we executed a definitive settlement agreement in January 2020 to settle all disputes related to the advertising fax case we mentioned in our third quarter report. We recognized a loss of $3.2 million in 2019, including $700,000 during the fourth quarter, which reflects the estimable costs the company incurred from settlement of the litigation. The reserve is recorded in our accrued liabilities, and we anticipate payment will occur in the third quarter of 2020. The operating loss was $36 million in 2019 compared to $12 million in 2018. Our net loss was $38.4 million or a loss of $1.55 per diluted share for 2019, as compared to $17.5 million or a loss of $2.20 per diluted share in 2018.

Cash and marketable securities were $93.1 million as of December 31, 2019. In the first quarter of 2020, SI-BONE completed a follow-on offering, raising net proceeds of $63.4 million after deducting the underwriting discounts and commissions.

Turning to our outlook for 2020. As Jeff mentioned, we expect revenue to be in the range of $80 million to $82 million, representing growth of 19% to 22% over full year 2019. We expect U.S. growth to be between 20% and 23% during 2020. We also expect our international growth in 2020 to continue improving.

Regarding the coronavirus, we are carefully monitoring the situation. To date, we have seen an impact to our procedures in Northern Italy, which represents less than 1% of our sales. Of course, it's hard to say how the procedures will be affected if the disease becomes more widespread. Also, we have no suppliers in China and are not experiencing supply issues at this time.

I'll now turn the call back over to Jeff for closing comments.

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Jeffrey W. Dunn, SI-BONE, Inc. - Chairman, President & CEO [5]

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Thank you, Laura. 2019 was a transformational year for SI-BONE. We made significant investments that will add to the continued growth in 2020. Looking ahead in 2020, we are focused on continued commercial execution in the U.S. and overseas, ramping up training and educational efforts and furthering our efforts on the reimbursement front. We are well positioned for growth and look forward to what is ahead. I want to thank the SI-BONE team for their enthusiasm and hard work. We look forward to updating you on our progress.

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

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Questions and Answers

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Operator [1]

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(Operator Instructions) Your first question comes from the line of David Turkaly from JMP Securities.

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David Louis Turkaly, JMP Securities LLC, Research Division - MD and Senior Research Analyst [2]

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Great. I know you mentioned Cigna and Anthem on the call. I was wondering, Jeff, if you might just give us an update on some of the other payers and where they stand and when you think you might hear from them.

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Jeffrey W. Dunn, SI-BONE, Inc. - Chairman, President & CEO [3]

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Yes. So as I think you know, David, Aetna had posted -- and did last year at the same time, had a date of January 9 to post an updated policy. Last year, they actually were late and posted on March 15. So our expectation, and we've heard this sort of indirectly as well, is that sometime mid-month this month, we should see an Aetna update.

As to Anthem, that's still scheduled for the fall. And as you know, they've started to cover some cases under the new policy, but we don't expect anything to change in a significant way until potentially the September time frame.

And I think, as I mentioned before, there's 112 payers that now cover, and there's 12 commercial payers, including the ones we've just talked about that do not cover. So there's a spattering of others that are still being worked on around the country.

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David Louis Turkaly, JMP Securities LLC, Research Division - MD and Senior Research Analyst [4]

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Got it. And then the 3.3 to 3.7 per active surgeon update is great. I think it's a little above what we'd look for. But I guess just your thoughts on -- now that you've been at this for a while, should we expect that to continue? Could that improve? I guess, what your thoughts are, sort of, as you look at 2020, do you think that continues to rise?

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Jeffrey W. Dunn, SI-BONE, Inc. - Chairman, President & CEO [5]

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