Glaukos Corporation — Q3 2021 Form 10-Q
Business context and reporting period
Glaukos develops and sells ophthalmic medical technologies and therapies, principally for glaucoma and corneal disorders, while advancing a pipeline of surgical devices, pharmaceuticals and implantable sensors. This unaudited report covers the three and nine months ended September 30, 2021; comparisons are with the same 2020 periods unless noted.
Key financial metrics
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Net sales | $74.7 million | $64.8 million | $220.8 million | $151.7 million |
| Gross profit | $59.3 million | $46.9 million | $171.0 million | $79.6 million |
| Gross margin | 79% | 72% | 77% | 52% |
| Operating income (loss) | $11.0 million | $(12.4) million | $(15.0) million | $(112.2) million |
| Net income (loss) | $6.2 million | $(15.7) million | $(27.7) million | $(109.7) million |
| Net income (loss) per diluted share | $0.13 | $(0.35) | $(0.60) | $(2.48) |
- Q3 sales rose 15%; nine-month sales rose 46%. Nine-month glaucoma sales were $174.9 million, up from $121.0 million, and corneal health sales were $45.9 million, up from $30.7 million.
- Q3 operating expenses included a $30.0 million litigation-settlement credit that helped produce reported operating and net income. Excluding that credit, Q3 operating results would have been a loss; the filing does not present this as a non-GAAP measure.
- Nine-month operating cash flow was $29.4 million, compared with cash used of $33.6 million in 2020. Investing activities used $49.4 million, including $38.5 million of property and equipment purchases; financing activities provided $37.6 million.
- At September 30, cash and cash equivalents were $113.1 million, short-term investments $315.8 million and restricted cash $9.4 million—$438.4 million combined. Working capital was $438.4 million.
- Convertible notes had $287.5 million principal and a $279.7 million carrying amount, classified as long-term on the balance sheet. Operating and finance lease liabilities totaled $102.7 million. Total liabilities were $463.1 million.
Material changes versus the prior comparable period
- Sales recovery reflected more normalized cataract and keratoconus procedures compared with pandemic-disrupted 2020, with continued volatility by geography. International glaucoma sales also benefited from favorable foreign exchange in the periods discussed.
- Gross margin improved substantially year over year. Management attributed this to higher sales and the absence of the Avedro acquisition-related inventory fair-value amortization recorded in 2020, as well as product mix.
- Research and development expense increased 42% in Q3 to $28.8 million and 16% for the first nine months to $74.3 million, reflecting continued pipeline investment. Nine-month SG&A increased 3% to $131.7 million.
- Glaukos early adopted ASU 2020-06 in January 2021, changing convertible-note accounting and increasing the notes’ carrying amount. The adoption reduced additional paid-in capital by $81.6 million and increased accumulated deficit by $5.5 million; future interest expense is expected to be lower under the new accounting.
Outlook, commentary, risks and unusual items
- CMS reimbursement: Final 2022 Medicare rules, published November 2, 2021, set a significantly lower physician fee for trabecular bypass stent implantation with cataract surgery. Facility reimbursement would decrease slightly at ambulatory surgery centers and increase at hospitals. Glaukos said the proposed reductions had already disrupted ordering and contributed to competitive-product trials; the effect on 2022 volumes, revenue, gross profit and income is uncertain. About 80% of U.S. procedures using its trabecular micro-bypass technologies were estimated to occur at ambulatory surgery centers.
- COVID-19 and supply: Procedures had generally recovered toward normalized levels, but future pandemic effects remained uncertain. Supplier raw-material and staffing constraints could delay product shipments, clinical work or launches.
- Pipeline timing: iDose trial enrollment was completed in June 2021; the company expected potential FDA approval in 2023. Following an FDA request to use a 510(k) submission for iStent infinite, Glaukos estimated clearance could be delayed until the first half of 2022. FDA review of Santen’s PreserFlo MicroShunt was also delayed pending additional surgeon input.
- Patent settlement: Ivantis agreed to pay $60.0 million, of which $30.0 million was received in Q3 and recognized as a reduction of operating expenses; the remaining $30.0 million is due by December 31, 2022. Ivantis also agreed to quarterly royalties of 10% of specified Hydrus sales through April 26, 2025, subject to a per-unit minimum. The parties dismissed their related litigation and agreed to mutual licenses and covenants not to sue.
- License and investment: Glaukos paid $5.0 million upfront for an exclusive Attillaps license covering investigational compounds targeting Demodex-related ophthalmic disease; additional milestone and royalty obligations depend on development and commercialization. The company also disclosed a separate $5.0 million Intratus-related IPR&D expense during the nine-month period.
- Management believed available cash, investments, interest income and operating cash generation would fund operations and liquidity needs for at least 12 months from public release of the financial statements. It cautioned that sustained profitability and future operating cash generation are not assured.
Most important facts for investors to verify
- How the 2022 CMS physician and facility reimbursement changes affect iStent procedure volumes, pricing, competitive activity and margins.
- Whether underlying operating performance improves apart from the one-time $30.0 million settlement credit, and whether revenue growth converts to recurring operating cash flow.
- Progress toward iDose and iStent infinite regulatory milestones, and the timing and commercial outlook for PreserFlo.
- Whether supplier constraints, COVID-19 disruptions or manufacturing expansion affect product availability, clinical timelines or capital spending.
- Collection of the remaining $30.0 million Ivantis payment and the amount and duration of royalty income; note that royalties are sales-dependent.
- Convertible-note conversion and liquidity exposure, including the $287.5 million principal, possible cash settlement obligations and lease commitments.