Glaukos Corporation (NYSE: GKOS) — Q3 2022 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2022; filed November 3, 2022. Amounts below are in U.S. dollars. Financial statement amounts are in millions unless stated otherwise.
Business context and financial performance
Glaukos develops and commercializes ophthalmic medical devices and pharmaceutical therapies, primarily for glaucoma and corneal health, while pursuing programs in retinal disease and other eye conditions. Sales are driven principally by iStent glaucoma products and Photrexa therapies and related systems.
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Net sales | $71.3 | $74.7 | $211.6 | $220.8 |
| Gross profit / margin | $54.4 / 76% | $59.3 / 79% | $159.9 / 76% | $171.0 / 77% |
| Operating expenses | $76.0 | $48.3 | $208.5 | $186.0 |
| Operating income (loss) | $(21.6) | $11.0 | $(48.6) | $(15.0) |
| Net income (loss) | $(27.6) | $6.2 | $(67.7) | $(27.7) |
| Net loss per share | $(0.58) | Net income $0.13 | $(1.43) | $(0.60) |
Q3 sales fell 5% year over year; nine-month sales declined 4%. In Q3, U.S. glaucoma sales were $37.2 million, down 14%, while international glaucoma sales rose 9% to $16.5 million. Corneal health sales increased 8% to $17.5 million. For the nine months, U.S. glaucoma sales fell 16% to $109.3 million, international glaucoma sales rose 15% to $52.0 million, and corneal health sales rose 10% to $50.3 million.
Cost of sales increased 10% in Q3 and 4% year to date. Management attributed lower gross margin mainly to sales mix and higher materials costs from inflation. SG&A rose 6% in Q3 and 7% year to date; R&D was essentially flat in Q3 but increased 18% year to date, reflecting increased personnel, facilities and clinical-development spending.
Cash flow, debt and liquidity
- Cash and cash equivalents were $104.0 million and short-term investments were $257.6 million at September 30, 2022; restricted cash was $9.1 million. Combined cash, cash equivalents, short-term investments and restricted cash totaled $370.7 million, versus $423.5 million at December 31, 2021.
- Operating activities used $28.9 million in the first nine months of 2022, compared with $29.4 million provided in the prior-year period. Investing activities provided $28.1 million, including proceeds from investment maturities, while financing activities provided $5.7 million. Capital expenditures were $22.0 million.
- Inventory rose to $34.2 million from $23.0 million at year-end, and accounts receivable was $34.8 million. The company reported current assets of $448.8 million and current liabilities of $60.6 million; balance-sheet working capital calculates to $388.2 million. The MD&A also gives a different working-capital figure of $387.6 million.
- Convertible senior notes have $287.5 million principal, a 2.75% coupon and a June 2027 maturity; their carrying amount was $281.1 million. No holder conversion conditions had been met at September 30. Operating and finance lease liabilities were $29.1 million and $72.3 million, respectively.
- Management said available funds and expected cash flows should be sufficient for operations, capital spending and obligations for at least the next 12 months and the foreseeable future. It also cautioned that continued profitability and future operating cash generation are not assured.
Material changes and unusual items
- Reduced 2022 Medicare physician reimbursement for trabecular bypass stent procedures, effective January 1, disrupted customer ordering and contributed to lower U.S. glaucoma volumes and trials of competing products. The 2023 CMS final rules did not materially change the relevant 2022 rules.
- Q3 results compared with a prior-year quarter that included a $30 million Ivantis litigation-settlement payment recorded as a reduction of operating expenses. The first nine months of both 2022 and 2021 included a $30 million settlement benefit. The settlement also provides quarterly royalties of 10% of certain Hydrus sales through April 26, 2025, subject to a per-unit minimum.
- Glaukos recorded $10 million of in-process R&D expense for the iVeena license in the first nine months of 2022, including a $10 million upfront payment. Further milestones and royalties may be payable. The 2021 comparison included $10 million of license-related in-process R&D expense.
- Unrealized foreign-exchange losses contributed to higher non-operating expense: $9.8 million for the first nine months of 2022 versus $3.1 million in 2021. The company also reported $5.3 million of unrealized losses on short-term investments year to date, primarily related to interest-rate changes; it did not expect to need to sell the securities before cost recovery.
Outlook, management commentary and risks
- Glaukos received FDA 510(k) clearance for iStent infinite in August 2022 and planned a commercial launch beginning in Q4 2022. Facility reimbursement for standalone insertion was lower than anticipated; the physician reimbursement rate was not yet known and is set by Medicare administrative contractors.
- In November 2022, following FDA feedback in pre-NDA meetings, Glaukos said it would not submit an Epioxa NDA that year and instead planned a second pivotal confirmatory study, with enrollment estimated to begin in the first half of 2023.
- Management expected the reduced physician reimbursement to continue to affect iStent procedure volumes and U.S. glaucoma revenue, gross profit and net income into 2023. It also cited competition, staffing constraints, supply-chain delays, inflation, higher interest rates and foreign-exchange movements as ongoing uncertainties. Supply challenges could continue through the remainder of 2022 and possibly into 2023.
- The company expects continued investment in sales and marketing, R&D, clinical programs and manufacturing capacity; it provided no numerical revenue or earnings guidance in the supplied filing text.
- Material risks include reimbursement changes, competition, regulatory and clinical-trial delays, reliance on limited suppliers and manufacturing sites, product quality, foreign-exchange exposure, and the possibility of continued losses. The filing reported no legal proceedings under Part II, Item 1. Management concluded disclosure controls were effective and reported no material third-quarter changes to internal control over financial reporting.
Most important facts for investors to verify
- Whether 2023 reimbursement and payment rates, including the still-undetermined physician fee for iStent infinite, support adoption and procedure volumes.
- Actual launch progress and commercial contribution from iStent infinite, and the Epioxa confirmatory-study timetable and regulatory path.
- Whether U.S. glaucoma sales stabilize amid competitive product trials, and whether international growth and corneal health sales can offset U.S. weakness and currency headwinds.
- Cash burn, working-capital trends, inventory growth and planned capital spending relative to the company’s liquidity outlook; note the filing’s two differing working-capital figures.
- Potential cash or dilution effects if the convertible notes become convertible, and any future milestone or royalty obligations under licensing agreements.