Glaukos Corporation — Q3 2015 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2015. Glaukos develops and sells ophthalmic devices for glaucoma, led by its iStent MIGS device. Figures are unaudited; dollar amounts below are in millions unless stated otherwise.
Financial performance and liquidity
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Net sales | $19.0 | $12.1 | $51.4 | $31.5 |
| Gross profit / margin | $15.7 / 83% | $9.9 / 81% | $42.0 / 82% | $24.9 / 79% |
| Operating expenses | $17.4 | $11.8 | $50.3 | $33.1 |
| Operating loss | $(1.7) | $(1.9) | $(8.3) | $(8.2) |
| Net loss | $(2.1) | $(2.0) | $(36.0) | $(8.8) |
| Net loss per share, basic | $(0.06) | $(0.64) | $(2.78) | $(3.32) |
Q3 revenue rose 57% year over year; nine-month revenue rose 63%. Management attributed most growth to higher unit sales, supported by an expanded U.S. sales force. U.S. sales were $18.1 million in Q3 and $48.4 million for the nine-month period. The nine-month loss includes a $25.7 million charge from DOSE deconsolidation; this unusual, non-cash item substantially increased reported net loss.
SG&A increased 68% in Q3 and 64% over nine months, reflecting sales-force expansion, marketing and administrative hiring, legal expense, and higher stock-based compensation. R&D increased 21% in Q3 and 35% over nine months, mainly due to clinical personnel and study costs.
At September 30, cash and cash equivalents were $93.3 million, versus $2.3 million at year-end 2014. Nine-month cash flows were $(1.6) million from operations, $(15.5) million from investing (including the $15.0 million iDose asset purchase), and $108.1 million from financing, primarily $113.6 million of net IPO proceeds. Debt totaled $11.9 million, consisting of GMP-related notes; $8.8 million was classified current. The bank credit facility was repaid in July and was no longer available. Current liabilities were $19.7 million.
Material changes and notable items
- Glaukos completed its IPO on June 30, 2015, issuing 6.9 million shares at $18 per share for $113.6 million net proceeds. Preferred stock converted into common stock; 32.1 million common shares were outstanding as of November 10, 2015.
- Glaukos acquired the iDose product line and related assets from DOSE for $15.0 million cash and eliminated a $10.9 million intercompany receivable. It then deconsolidated DOSE and recorded the $25.7 million charge.
- Gross margin improved year over year, partly because fixed manufacturing costs and intangible-asset amortization represented a smaller share of higher sales. GMP-related intangible amortization remains a cost of sales through 2018; the company also owes the Regents of the University of California a low-single-digit sales royalty, subject to a $0.5 million annual minimum, expected to continue through 2022.
- On October 29, 2015, Glaukos settled patent litigation with Transcend Medical. Glaukos agreed not to sue over specified CyPass devices; Transcend agreed to quarterly payments equal to 1% of future net sales through April 2022, capped at $6.0 million. Glaukos must pay the Regents 33% of receipts under the settlement.
Outlook, risks, and contingencies
Management expects continued net losses as it expands sales and marketing, funds clinical studies and product development, and bears public-company costs. It believes available cash and expected product-sale cash generation will fund operations for at least two years; this is management’s estimate, not a guarantee. No specific revenue or earnings guidance is provided.
Key risks include dependence on iStent and the U.S. market; reimbursement and pricing changes; clinical, regulatory and commercialization uncertainty for iStent Inject, iStent Supra and iDose; competition; reliance on a single primary manufacturing facility and limited suppliers; and patent and product-liability exposure. The company reported no material legal loss contingency known to management at quarter-end; the Transcend settlement occurred after the reporting date. Noncancelable purchase commitments were approximately $3.0 million due within one year, and operating lease commitments totaled $3.5 million.
Management assessed disclosure controls as effective and reported no material change in internal control over financial reporting during the quarter. The filing notes the auditor’s prior-year going-concern explanatory paragraph, while stating that the IPO proceeds changed the company’s liquidity position.
Important facts for investors to verify
- Whether sales growth and improved gross margin persist, and whether expanding the sales force continues to translate into higher product utilization.
- Cash burn and the assumptions underlying management’s estimate that liquidity covers at least two years, particularly as clinical and commercial spending rises.
- Timing, cost, clinical results and regulatory progress for the pipeline, and continued reimbursement access for iStent procedures.
- Debt-service requirements on the GMP notes, including the $8.8 million current portion, and the effect of royalties and intangible amortization on future margins and cash flow.
- Potential proceeds and obligations under the Transcend settlement, including the Regents’ 33% participation, and developments in other intellectual-property matters.