Business context and reporting period
Glaukos Corporation filed this Form 10-Q for the quarter and six months ended June 30, 2020. The ophthalmic medical technology and pharmaceutical company sells glaucoma products and, following its 2019 Avedro acquisition, corneal-health products. Results reflect COVID-19 disruption to elective procedures and the inclusion of Avedro’s business.
Key financial metrics
Amounts are in millions of dollars, except per-share data and percentages.
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Net sales | $31.6 | $58.6 | $86.9 | $112.6 |
| Gross profit | $9.9 | $50.7 | $32.7 | $97.6 |
| Gross margin | 31% | 87% | 38% | 87% |
| Operating loss | $(47.2) | $(6.2) | $(99.8) | $(8.2) |
| Net loss | $(39.9) | $(6.3) | $(94.0) | $(7.7) |
| Basic and diluted loss per share | $(0.90) | $(0.17) | $(2.13) | $(0.21) |
- Revenue: Q2 sales fell 46% year over year; first-half sales fell 23%. Q2 glaucoma revenue was $24.9 million and corneal-health revenue was $6.6 million. Six-month revenue was $69.1 million from glaucoma and $17.8 million from corneal health.
- Costs and margins: Q2 cost of sales was $21.7 million, up from $7.9 million; first-half cost was $54.2 million, up from $15.0 million. Avedro purchase-accounting inventory step-up and acquired-intangible amortization materially increased cost of sales. First-half results also included $7.4 million of inventory write-offs and COVID-19-related excess and obsolete inventory reserves.
- Operating expenses: Q2 SG&A was $38.1 million and R&D was $19.0 million. For the first half, SG&A was $88.7 million, up 22%, and R&D was $43.8 million, up 41%, reflecting Avedro-related costs, stock compensation and development activity.
- Cash flow: First-half operating cash use was $24.0 million, versus $6.8 million provided in the prior-year period. Investing used $20.0 million; financing provided $248.1 million, principally from the convertible-note issuance. Cash, cash equivalents and restricted cash ended the period at $276.3 million.
- Liquidity: June 30 cash and cash equivalents were $267.0 million, short-term investments $128.0 million and restricted cash $9.3 million, totaling approximately $404.3 million. Working capital was $398.4 million.
- Debt: In June, the company issued $287.5 million principal amount of 2.75% senior unsecured convertible notes due 2027. Net proceeds after fees and capped-call costs were $242.2 million. The balance-sheet carrying amount was $184.0 million after debt discount and issuance costs. The notes have a $56.10 initial conversion price; capped calls have an initial $86.30 cap price.
Material changes versus the prior comparable period
- COVID-19 restrictions and deferrals of elective ophthalmic procedures significantly reduced demand, particularly in the U.S. Q2 U.S. glaucoma sales were down 62%; international glaucoma sales were down 36%.
- Avedro added corneal-health sales but also increased expenses and reduced reported gross margin through acquired inventory step-up, intangible amortization and a lower-margin product mix.
- First-half accumulated deficit increased to $283.7 million. The 2020 first-half net loss was substantially larger than in 2019.
- The June convertible financing increased cash and introduced long-term debt, interest expense and potential conversion-related dilution or cash requirements.
Outlook, management commentary and risks
- Management said procedure volumes began moving toward more normalized levels in May and expected that trend to continue later in 2020 if restrictions remained lifted. The filing provides no quantified revenue or earnings guidance; the pandemic’s duration and financial effects remain uncertain.
- Management expected available cash, investments, interest income and any operating cash generation to fund operations and liquidity needs for at least 12 months from publication of the financial statements.
- COVID-19 disrupted clinical-trial enrollment, particularly for iDose; management said the disruption could delay its anticipated 2022 FDA approval timeline. Patient enrollment remained affected into July.
- Cost-saving steps included reduced discretionary spending and capital expenditures and temporary salary reductions. The company anticipated restoring affected salaries beginning in Q3 2020, with senior management restoration in Q4, and planned to resume deferred capital projects as reopening permitted.
- Key risks include renewed COVID-19 restrictions, elective-procedure demand, competition, product adoption and reimbursement, clinical and regulatory delays, manufacturing and supplier disruption, Avedro integration, and the company’s ability to fund ongoing losses and debt obligations.
- Patent litigation with Ivantis was scheduled for trial around March 9, 2021. The company could not predict the outcome or estimate a possible loss and recorded no accrual.
- The Avedro-related restructuring targeted a reduction of about 40 employees; approximately $5.3 million of total charges were expected, with completion anticipated in 2021. The company had accrued $0.8 million at June 30 and paid about $4.1 million since inception of the plan.
- Other notable obligations include a low-single-digit royalty on certain product sales under the University of California agreement, with a $0.5 million annual minimum, currently expected to end in 2022; and $5.4 million of firm commitments for enterprise systems and software. Management reported effective disclosure controls, while noting the new ERP system’s controls would continue to be evaluated.
Important facts for investors to verify
- Whether elective procedures and sales recovered after May 2020, and whether any resurgence or renewed restrictions reversed that trend.
- How much reported gross-margin pressure came from temporary Avedro purchase-accounting charges and inventory reserves versus continuing product economics.
- Actual operating cash use, liquidity runway and cash needs as salary reductions end and deferred spending and capital projects resume.
- Convertible-note terms and potential conversion, cash-settlement, refinancing and dilution impacts, including capped-call counterparty exposure.
- Progress of iDose trial enrollment and any effect on the anticipated approval timeline, as well as outcomes of the Ivantis litigation and restructuring plan.