Glaukos Corporation — Q1 2017 Form 10-Q
Business context and reporting period
Glaukos develops, manufactures and sells ophthalmic medical devices for glaucoma. This filing reports the three months ended March 31, 2017, compared with Q1 2016. Sales were primarily from iStent products; the company reported one operating segment.
Financial results and liquidity
| Metric | Q1 2017 | Q1 2016 | Change |
|---|---|---|---|
| Net sales | $35.9 million | $23.1 million | +55% |
| Gross profit / margin | $30.7 million / 86% | $20.0 million / 86% | Profit +54% |
| Operating expenses | $30.4 million | $19.4 million | +57% |
| Operating income | $0.3 million | $0.6 million | -51% |
| Net income | $0.9 million | $0.9 million | -2% |
| Net income per diluted share | $0.02 | $0.03 | Down |
| Cash provided by (used in) operations | $2.4 million | $(0.9) million | Improved |
At March 31, 2017, cash and cash equivalents were $8.6 million and short-term investments were $90.6 million, totaling $99.2 million. Current assets were $123.7 million versus current liabilities of $14.6 million. Total liabilities were $14.9 million; the GMP notes had been fully repaid by December 31, 2016, and the filing reports no outstanding debt. Cash increased $2.1 million during the quarter. Stockholders’ equity was $123.0 million and accumulated deficit was $191.2 million.
Changes versus prior period
- U.S. sales rose 48% to $31.9 million; international sales increased 160% to $4.0 million. Management attributed growth mainly to higher iStent utilization and adoption by additional surgeons, with some U.S. growth from higher ASC selling prices following a Medicare reimbursement increase effective January 1, 2017.
- SG&A increased 75% to $21.5 million, reflecting higher personnel, stock compensation, international subsidiary, marketing and facility costs. R&D rose 27% to $8.9 million, primarily due to increased clinical-affairs staffing and study activity.
- Cost of sales increased 66%, faster than sales, while reported gross margin remained 86%. Operating income fell as expense growth outpaced gross-profit growth.
- Operating cash flow improved to positive $2.4 million from negative $0.9 million. Stock-based compensation was $3.2 million, versus $1.4 million, and was a significant noncash adjustment.
Outlook, commentary, risks and unusual items
- No formal revenue or earnings guidance was provided. Management expects sales to benefit from continued commercial expansion and higher ASC prices, while noting first-quarter seasonality and typically stronger fourth-quarter cataract volumes. It expects SG&A and R&D spending to grow and says profitability and positive operating cash flow are not assured.
- Management stated available cash, investments, interest income and expected commercial cash generation should fund operations and liquidity needs for at least 12 months. Future financing may be sought; availability and terms are uncertain.
- On April 12, 2017, after quarter-end, Glaukos acquired DOSE Medical Corporation’s intraocular pressure sensor system for $5.5 million upfront plus up to $9.5 million tied to development, clinical and regulatory milestones. The transaction involves related-party considerations: Glaukos’s CEO and board chair served on DOSE’s board, and company insiders held DOSE equity interests.
- Also after quarter-end, Australia’s reimbursement code for the iStent surgeon fee was suspended effective May 1, 2017. An interim code was issued for the remainder of 2017 while an application for a new code is pending.
- Key risks include dependence on iStent and U.S. sales, new MIGS competitors, reimbursement and pricing changes, clinical and regulatory uncertainty for pipeline products, and reliance on a single principal manufacturing location and limited suppliers. The 2.3% U.S. medical-device excise tax was suspended through 2017 and was scheduled to return in 2018 absent further legislative action.
- The UC agreement requires low-single-digit royalties on specified worldwide product sales, with a $0.5 million annual minimum, currently expected to continue until relevant patent rights expire in 2022. The GMP buyout agreement includes a potential payment of up to $2.0 million upon a qualifying sale of the company. Management reported no material reasonably possible legal loss contingency.
Important facts for investors to verify
- Whether sales growth and surgeon adoption continue, particularly in the U.S., and how much growth depends on ASC reimbursement and pricing.
- Whether the Australian interim reimbursement code remains in place and whether a replacement surgeon-fee code is approved.
- Progress, costs, clinical results and regulatory timelines for iStent Inject, iStent Supra, iDose and the acquired IOP sensor system, including potential milestone payments.
- Ability to sustain margins and profitability as operating expenses, clinical investment and manufacturing needs increase.
- Exposure to manufacturing disruption, supplier constraints, competitive products and any changes in reimbursement or the device excise tax.
- Related-party governance and the final consideration, assumed liabilities and milestone terms of the DOSE acquisition.