Glaukos Corporation — Q3 2019 Form 10-Q
Reporting period: Three and nine months ended September 30, 2019; comparisons are with the same 2018 periods. Amounts below are in U.S. dollars; financial statement amounts are in millions unless otherwise stated.
Business context
Glaukos develops and commercializes ophthalmic medical technology and pharmaceutical therapies, primarily for glaucoma, with emerging programs in corneal and retinal diseases. Sales were primarily from iStent products. The company reported one operating segment: ophthalmic medical devices.
Financial performance and liquidity
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Net sales | $58.5 | $43.9 | $171.1 | $127.2 |
| Gross profit | $50.8 | $37.9 | $148.5 | $109.2 |
| Gross margin | 86.8% | 86.3% | 86.7% | 85.9% |
| Operating loss | $(12.4) | $(6.9) | $(20.6) | $(14.9) |
| Net loss | $(13.5) | $(6.6) | $(21.2) | $(14.7) |
| Diluted net loss per share | $(0.37) | $(0.19) | $(0.58) | $(0.42) |
- Sales growth: Q3 revenue rose 33%; nine-month revenue rose 35%. U.S. sales increased 31% and 32%, respectively, while international sales increased 46% and 50%.
- Costs and margins: Gross margin improved modestly. Q3 SG&A rose 41% to $44.4 million and R&D rose 31% to $17.3 million. Nine-month SG&A increased 34% to $117.0 million and R&D increased 31% to $48.3 million. Higher personnel, enterprise-system, legal, acquisition-advisory, clinical-trial and iStent inject launch costs contributed.
- Cash flow: Nine-month operating cash flow was $3.8 million, versus $1.7 million in 2018; investing cash use was $6.4 million and financing provided $12.4 million. Operating cash flow benefited from $23.9 million of stock-based compensation and other noncash items despite the net loss.
- Liquidity: At September 30, cash and cash equivalents were $39.5 million, short-term investments $113.4 million, and restricted cash $8.9 million. The company reported $176.2 million of working capital and said available cash, investments, interest and operating cash generation should fund operations for at least 12 months from publication of the statements.
- Debt and leases: The filing reports no outstanding debt or committed credit facilities. Lease liabilities totaled approximately $82.2 million, including $69.2 million for finance leases and $13.0 million for operating leases. The Aliso Viejo facility finance lease began in April 2019 and runs for 13 years, with extension options.
Material changes and notable items
- Revenue gains reflected U.S. iStent inject sales, growth in direct international sales, and the withdrawal of a competing MIGS device in August 2018. Management noted that a competitor could potentially reintroduce that device.
- Net losses widened as operating expenses grew faster than gross profit. Nine-month IPR&D expense was $3.7 million: $2.2 million related to the DOSE acquisition and $1.5 million to the Intratus license.
- Glaukos adopted lease accounting standard ASC 842 in January 2019, recognizing right-of-use assets and lease liabilities; management said adoption did not materially affect operating results or cash flows.
- UC patent-related payments included in cost of sales were $1.5 million for Q3 and $4.2 million for the first nine months, versus $1.1 million and $3.2 million in the comparable 2018 periods. The obligation is expected to end when the relevant patents expire, currently expected in 2022.
Outlook, risks and contingencies
- Outlook: Management expects sales to benefit from expanding commercial operations and product awareness, but provided no quantified revenue or earnings guidance. Sales may be seasonal, typically softer in Q1 and stronger in Q4. The company expects continued investment in sales, R&D, clinical programs, facilities and administration, and gave no assurance of future profitability.
- Pipeline and strategy: iDose Travoprost Phase III trials were underway; the iStent Infinite IDE study completed enrollment in 2019. Glaukos said it would not pursue FDA approval of iStent Supra at this time. A Santen distribution arrangement for MicroShunt is contingent on FDA approval, with a U.S. launch targeted by Santen for 2020 following its planned PMA submission.
- Avedro merger: The proposed stock-for-stock acquisition was expected to close in Q4 2019, subject to remaining conditions and Avedro shareholder approval. The exchange ratio was 0.365 Glaukos shares per Avedro share; former Avedro holders were expected to own about 15% of the combined company. Four lawsuits challenged the merger; Glaukos said it believed the complaints lacked merit. No loss was accrued because the outcome and any loss range could not be reasonably estimated.
- Legal matters: Glaukos’ patent suit against Ivantis over Hydrus was scheduled for trial around July 2020. The court had ruled that Glaukos did not infringe Ivantis-acquired patents; the PTAB also denied Ivantis’ IPR petitions described in the filing. The company could not predict outcomes or estimate potential losses in the disclosed matters.
- Other risks and commitments: Key risks include reliance on iStent products, intensifying MIGS competition, reimbursement and adoption, regulatory and clinical-trial uncertainty, supplier concentration, and dependence on a primary manufacturing site. At quarter-end, commitments included approximately $7.2 million for enterprise systems/software and $1.2 million of capital expenditures. Management reported disclosure controls effective and no material change in internal control over financial reporting during Q3.
Important facts for investors to verify
- Whether revenue growth and iStent inject adoption continue as competitors expand or re-enter the market.
- Whether expense growth, particularly SG&A and R&D, translates into pipeline progress and improved operating leverage.
- The status, closing terms, dilution and integration costs of the Avedro merger, including the related lawsuits.
- Cash generation and liquidity after lease payments, facility and systems commitments, and any merger-related spending.
- Clinical, regulatory and reimbursement milestones for iDose, iStent Infinite, MicroShunt and other pipeline programs.