Glaukos Corporation (10-Q) — Quarter Ended June 30, 2017
Business context and reporting period
Glaukos develops, manufactures and markets ophthalmic medical devices for glaucoma. Its commercial sales were primarily from iStent products; it also had development programs for iStent Inject, iStent Supra, iDose and, following an April 2017 asset purchase, an intraocular-pressure sensor system. This unaudited report covers the three and six months ended June 30, 2017. Financial amounts below are in millions of dollars unless stated otherwise.
Financial results and liquidity
| Metric | Q2 2017 | Q2 2016 | First half 2017 | First half 2016 |
|---|---|---|---|---|
| Net sales | $41.3 | $28.6 | $77.2 | $51.6 |
| Gross profit / margin | $35.8 / 87% | $24.2 / 85% | $66.5 / 86% | $44.2 / 86% |
| Operating expenses | $39.6 | $22.1 | $70.1 | $41.4 |
| Operating income (loss) | $(3.9) | $2.1 | $(3.6) | $2.7 |
| Net income (loss) | $(3.3) | $2.3 | $(2.4) | $3.2 |
| Operating cash flow | Not stated by quarter | Not stated by quarter | $6.6 | $5.1 |
- Q2 sales rose 45% year over year; first-half sales rose 49%. U.S. sales were $37.1 million in Q2 and $69.0 million in the first half. International sales were $4.2 million and $8.2 million, respectively.
- Q2 basic and diluted loss per share was $0.10; first-half loss per share was $0.07. The comparable 2016 periods reported income per share.
- At June 30, cash and cash equivalents were $13.4 million and short-term investments were $90.4 million, or $103.8 million combined. Current assets were $131.2 million; current liabilities were $19.1 million. Total liabilities were $19.6 million and stockholders’ equity was $125.9 million.
- The balance sheet lists no debt balance. The cash-flow statement reports no secured-note payments in the first half of 2017; $4.4 million of such payments were made in first-half 2016.
Material changes versus prior comparable periods
- Despite strong sales growth and higher Q2 gross margin, Glaukos moved from profit to loss. The main identified one-time driver was a $5.3 million in-process R&D charge for the DOSE IOP Sensor System asset purchase.
- Operating expenses increased sharply: Q2 SG&A rose 63% to $24.7 million and R&D rose 39% to $9.6 million. First-half SG&A rose 68% to $46.2 million and R&D rose 33% to $18.6 million. Management cited expanded staffing and international operations, marketing, legal costs, and increased clinical-study activity.
- Sales growth reflected increased global unit volumes, higher U.S. ambulatory surgery center pricing following a Medicare reimbursement increase effective January 1, 2017, and expansion of direct sales in international markets. Australia and Germany accounted for most of the international increase.
- First-half cash from operations increased to $6.6 million from $5.1 million. Stock-based compensation was $7.9 million, compared with $3.5 million a year earlier.
Outlook, risks and unusual items
- Management expects sales to benefit from expanded sales and marketing efforts and anticipates seasonality broadly tracking U.S. cataract procedure volumes. It expects increased SG&A and R&D spending as commercial infrastructure and clinical programs grow. The filing provides no specific revenue or earnings guidance and cautions that profitability and operating cash generation are not assured.
- Management stated existing cash, investments, interest income and commercial cash generation should fund operations and liquidity needs for at least 12 months from public availability of the financial statements. Additional financing may be sought, with no assurance it would be available on acceptable terms.
- The April 12 purchase from DOSE included $5.5 million upfront and up to $9.5 million in development, clinical and regulatory milestone payments. The transaction was accounted for as an asset acquisition; $5.3 million was expensed because the acquired R&D had no alternative future use. Glaukos’s CEO and board chair serve on DOSE’s board, and some Glaukos directors and management hold an equity interest in DOSE.
- Australia suspended the existing surgeon-fee reimbursement code for iStent effective May 1, 2017. An interim code was issued for the remainder of 2017 while Glaukos’s application for a new code is pending.
- The 2.3% federal medical-device excise tax was suspended through 2017 and, absent further legislative action, is scheduled to resume January 1, 2018, potentially affecting margins.
- Key risks include dependence on iStent and the U.S. market, new MIGS competitors, reimbursement changes, clinical and regulatory uncertainty for pipeline products, reliance on a single principal manufacturing location and limited suppliers, and the possibility of future losses. Management reported no material legal proceedings or material reasonably possible loss contingency known to it.
- Glaukos plans to adopt the new revenue-recognition standard in 2018 and preliminarily expected no material financial-statement impact; assessment was ongoing. It expected the new lease standard to result in additional recognized assets and liabilities.
Important facts for investors to verify
- Whether iStent sales growth, including the contribution from Medicare reimbursement and international expansion, continues and whether Australia establishes a lasting surgeon-fee code.
- Whether rising SG&A, R&D and stock-based compensation can be supported by revenue growth, and how often unusual development charges affect reported earnings.
- Progress, costs, milestone terms and regulatory status of the IOP Sensor System and other pipeline programs; assess the related-party nature of the DOSE transaction.
- Whether cash generation and the stated 12-month liquidity outlook remain adequate as clinical, commercial and manufacturing investments increase.
- The duration of the medical-device excise-tax suspension and any effects of its scheduled reinstatement, reimbursement changes or competitive launches on pricing and margins.