Business context and reporting period
Glaukos Corporation’s unaudited Form 10-Q covers the quarter and six months ended June 30, 2015. The company develops, manufactures and markets ophthalmic devices for glaucoma, with substantially all sales generated by its iStent products. The iStent is FDA-approved for use with cataract surgery; iStent Inject and iStent Supra were in clinical development, and iDose was an early-stage drug-delivery implant candidate.
On June 30, 2015, Glaukos completed its IPO, selling 6.9 million shares at $18 per share. It reported approximately $113.7 million of net proceeds in the narrative; convertible preferred stock converted into common stock at the IPO.
Financial results and liquidity
| Metric | Three months ended June 30 | Six months ended June 30 |
|---|---|---|
| Net sales, 2015 | $17.8 million | $32.4 million |
| Net sales, 2014 | $11.1 million | $19.3 million |
| Gross profit, 2015 | $14.5 million | $26.3 million |
| Gross margin, approximately | 82%, versus 79% | 81%, versus 78% |
| Operating expenses, 2015 | $19.9 million | $32.9 million |
| Loss from operations, 2015 | $5.4 million | $6.6 million |
| Net loss, 2015 | $32.5 million | $34.0 million |
| Net loss attributable to Glaukos, 2015 | $31.9 million | $32.9 million |
| Basic and diluted loss per share | $(10.96) | $(12.35) |
Sales increased 60% for the quarter and 68% for the six-month period year over year. Management attributed most of the increase to higher unit sales and an expanded U.S. sales force. U.S. sales were $16.7 million in the quarter and $30.3 million for the six months. SG&A rose 90% for the quarter and 62% for the six months; R&D rose 66% and 43%, respectively, reflecting commercial expansion, clinical activity and IPO-triggered stock compensation.
Cash and cash equivalents were $104.1 million at June 30, compared with $2.3 million at December 31, 2014. Operating activities used $1.1 million in the first half of 2015, investing activities used $15.3 million, and financing activities provided $118.2 million. The operating cash-use figure includes substantial noncash adjustments, including the DOSE deconsolidation charge and stock-based compensation. Total debt was $20.9 million at June 30, including $14.0 million of subordinated GMP notes and $7.0 million of bank term loans. On July 31, Glaukos paid $7.0 million of principal, plus interest and fees, to retire the bank facility. The GMP notes remained payable under scheduled amortization through December 2016.
Glaukos reported an accumulated deficit of $192.3 million and stated that it had never been profitable. Management expected continued losses for the foreseeable future but believed available cash and expected cash generated from sales would fund operations for at least two years.
Material changes, outlook and risks
- DOSE transaction: On June 30, Glaukos acquired certain DOSE assets, including the iDose product line, for $15.0 million cash and eliminated a $10.9 million intercompany receivable. It then deconsolidated DOSE and recorded a $25.7 million expense, a major contributor to the reported net loss.
- IPO-related compensation: Completion of the IPO satisfied a performance condition on previously granted options, triggering cumulative stock-based compensation expense of approximately $3.8 million, reported primarily in SG&A and R&D.
- Cost and investment outlook: Management expected higher SG&A as the sales, marketing and public-company infrastructure expands, and higher R&D as clinical and product-development programs advance. It gave no specific revenue or earnings guidance. Sales may be seasonal, and gross margin remains exposed to product mix, manufacturing costs, the 2.3% medical-device excise tax, intangible-asset amortization and payments to the University of California.
- University of California obligation: The agreement requires a low-single-digit royalty on worldwide sales of specified products, subject to a $500,000 minimum annual payment, through expected patent expiry in 2022. The filing states that $1.825 million remained due within 60 days of the IPO, by August 29, 2015.
- Litigation and contingencies: Glaukos was litigating patent claims with Transcend Medical. The court had scheduled a November 2015 jury trial; the filing describes potential patent invalidity, non-infringement and inequitable-conduct outcomes as risks. Management reported no legal matter with a probable and estimable loss requiring accrual.
- Principal business risks: Reliance on iStent and the U.S. market; reimbursement and adoption uncertainty; clinical and regulatory risk for pipeline products; dependence on a single manufacturing site and limited suppliers; and potential patent, product-liability and public-company compliance costs.
Most important facts for investors to verify
- Whether iStent sales growth and U.S. sales-force expansion continued, and how much growth came from unit volume.
- Cash use, remaining cash runway, and debt and payment obligations after the July 31 bank-loan payoff.
- Progress, costs and regulatory milestones for iStent Inject, iStent Supra and iDose.
- Developments in the Transcend litigation and any effects on patent protection or commercialization.
- The amount and timing of University of California royalties and minimum payments, along with gross-margin effects from amortization, taxes and manufacturing costs.