Glaukos Corporation — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020; unaudited, consolidated results. Glaukos develops and commercializes ophthalmic medical technologies and therapies for glaucoma, corneal disorders, and retinal disease. Following its November 2019 acquisition of Avedro, its products include glaucoma devices and corneal-health therapies and systems.
Financial results and liquidity
Amounts are in millions of dollars, except per-share data and percentages.
| Metric | Q1 2020 | Q1 2019 / comparison |
|---|---|---|
| Net sales | $55.3 | $54.0; up 2% |
| Gross profit / margin | $22.8 / 41% | $46.9 / 87% |
| Operating expenses | $75.4 | $48.9; up 54% |
| Operating loss | $(52.6) | $(1.9) |
| Net loss / diluted loss per share | $(54.1) / $(1.24) | $(1.3) / $(0.04) |
| Cash used in operating activities | $(13.1) | $0.2 provided |
| Cash, cash equivalents and short-term investments | $163.7 | $174.0 at Dec. 31, 2019 |
| Working capital | $180.3 | $205.2 at Dec. 31, 2019 |
- Including $9.3 million of restricted cash, cash, cash equivalents, short-term investments and restricted cash totaled approximately $173.0 million at quarter-end, versus $183.3 million at year-end 2019.
- The company reported no outstanding debt obligations. It did report $59.3 million of finance lease liabilities and $13.6 million of operating lease liabilities at March 31, 2020.
- Total assets were $779.7 million and total liabilities were $138.4 million at March 31, 2020. Accounts payable and accrued liabilities were $12.9 million and $38.1 million, respectively.
Material changes versus the prior comparable period
- Sales growth reflected $11.2 million of corneal-health revenue from Avedro, acquired in November 2019; there was no corneal-health revenue in Q1 2019. Glaucoma revenue was $44.1 million versus $54.0 million, a decline of 18% overall. U.S. glaucoma sales fell 26% to $32.6 million, while international glaucoma sales rose 18% to $11.6 million.
- COVID-19-related restrictions and deferrals of elective procedures weakened demand, particularly late in the quarter. Management also cited promotional activity near the end of 2019, Avedro integration, and competition as factors affecting U.S. glaucoma sales.
- Cost of sales increased $25.4 million to $32.5 million. The increase included $9.7 million of amortization of the acquired Avedro inventory fair-value step-up, $5.5 million of amortization of acquired finite-lived intangible assets, and $7.9 million of inventory write-offs and COVID-19-related excess and obsolete inventory reserves.
- SG&A rose 45% to $50.5 million, and R&D rose 79% to $24.9 million, reflecting Avedro-related costs, compensation and stock-based compensation, integration and restructuring expenses, and increased development and clinical activity.
- Other expense was $1.9 million, compared with $0.7 million of other income in Q1 2019, primarily reflecting finance-lease interest and foreign-currency transaction losses. The quarter included a $0.45 million income-tax benefit; the effective tax rate was 0.83%.
Outlook, management commentary and risks
- Management expected COVID-19 to have its most severe effect on sales and operations in Q2 2020, followed by a gradual recovery. It anticipated procedures to begin returning toward more normalized levels starting slowly in Q2, subject to the easing of restrictions. The filing provides no quantified revenue or earnings guidance.
- Management believed available cash, investments, interest income, and cash generated from commercial operations would fund operations and liquidity needs for at least 12 months from public availability of the quarter’s financial statements. It also cautioned that future financing might be needed and might not be available on acceptable terms.
- The pandemic disrupted elective procedures and clinical-trial enrollment. Patient enrollment in iDose trials was temporarily paused, and management anticipated delays to completion of iDose enrollment. The duration and severity of the pandemic, procedure recovery, supply availability, and future operating effects remained uncertain.
- Cost-preservation actions included reduced discretionary spending and capital expenditures, temporary salary reductions, and deferral of a significant portion of planned 2020 capital spending. Management said these actions were intended to preserve jobs and core R&D programs, but could slow growth or delay projects.
- Following the Avedro acquisition, a restructuring plan targeted a reduction of about 40 employees. The company had accrued $0.9 million of remaining restructuring costs at March 31, 2020, had paid about $3.6 million, and expected total charges of approximately $5.2 million by completion, expected in 2021.
- Patent litigation with Ivantis concerning the Hydrus microstent remained unresolved; trial was scheduled for around July 28, 2020. The company said it could not estimate a possible loss and had accrued no amount. Avedro merger-related stockholder suits were settled for immaterial amounts, with named plaintiffs agreeing to dismiss their actions.
- Other notable exposures include competition, reimbursement and market adoption, manufacturing and supplier continuity, regulatory approvals, clinical-trial execution, foreign-currency movements, and acquisition integration. The company reported no material change in market-risk exposure and no material change in internal control over financial reporting; management concluded disclosure controls were effective.
Most important facts for investors to verify
- Whether elective ophthalmic procedures and product demand recovered as expected, and the resulting effect on quarterly sales and cash use.
- Whether glaucoma-product demand, particularly in the U.S., stabilized amid competitive and promotional pressures.
- How much of the reported gross-margin decline was temporary acquisition accounting and inventory charges, and how margins develop as those effects roll off.
- Whether iDose enrollment and other clinical programs experienced further delays, and whether any additional effects arose in manufacturing or supply chains.
- Whether the company maintained liquidity while funding operations, facility commitments, enterprise-system spending, and lease obligations; management’s 12-month liquidity view is not a guarantee.
- Developments in the Ivantis patent litigation, the Avedro integration and restructuring plan, and any changes in impairment assessments for acquired intangible assets or goodwill.