Glaukos Corporation — Q3 2018 Form 10-Q
Reporting period: Three and nine months ended September 30, 2018. Glaukos develops and commercializes ophthalmic devices and sustained drug-delivery therapies for glaucoma. Sales were primarily from iStent products; U.S. sales of newly approved iStent Inject began during the quarter.
Financial highlights
Amounts below are in millions of U.S. dollars, except per-share data and percentages.
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Net sales | $43.9 | $40.4 | $127.2 | $117.6 |
| Gross profit / margin | $37.9 / 86% | $34.7 / 86% | $109.2 / 86% | $101.2 / 86% |
| Operating income (loss) | ($6.9) | $0.7 | ($14.9) | ($2.8) |
| Net income (loss) | ($6.6) | $1.3 | ($14.7) | ($1.1) |
| Diluted earnings (loss) per share | ($0.19) | $0.04 | ($0.42) | ($0.03) |
- Revenue and margins: Q3 sales grew 9%; nine-month sales grew 8%. International sales increased 57% in Q3 and 60% year to date, while U.S. sales increased 2% in both comparisons. Gross margin remained 86% in each period.
- Expenses and profitability: Q3 SG&A rose 31% to $31.6 million and R&D rose 35% to $13.2 million. Nine-month SG&A increased 24% to $87.4 million and R&D increased 29% to $36.7 million. Higher staffing, commercial launch activity, clinical programs and professional services contributed to expense growth. The 2017 nine-month period also included $5.3 million of acquired in-process R&D expense, versus none in 2018.
- Cash flow: For the first nine months, operating activities provided $1.7 million, down from $13.6 million a year earlier. Investing activities used $8.6 million and financing activities provided $19.6 million, mainly from stock-option exercises and employee stock purchases. Stock-based compensation of $19.0 million was a major noncash adjustment; working-capital changes used cash.
- Liquidity and debt: Cash and cash equivalents were $37.3 million and short-term investments were $100.6 million at September 30, totaling $137.8 million, versus $119.0 million at year-end 2017. Working capital was $150.5 million. The balance sheet reports no borrowings or debt; total liabilities were $27.1 million. Management said available resources and expected operating cash generation should fund operations for at least 12 months from public release of the statements.
Material changes and business developments
- FDA approval of iStent Inject was received in June 2018, with U.S. commercial sales beginning in Q3. Management attributed sales growth partly to the launch, international direct-sales expansion and the withdrawal of a competing MIGS product.
- International sales were $7.5 million in Q3, compared with $4.8 million; U.S. sales were $36.4 million, compared with $35.6 million.
- R&D investment rose, including costs for Phase III iDose Travoprost trials. Enrollment had begun in those trials; enrollment was also underway in pivotal U.S. trials for iStent Infinite. The company completed enrollment in the iStent Supra pivotal IDE trial in 2017.
- Operating cash generation declined materially year over year, while net losses widened. Stock-based compensation increased to $19.0 million for nine months, from $12.7 million.
- ASC 606 was adopted January 1, 2018 using the modified retrospective method; management said the cumulative adoption effect was immaterial and revenue accounting was materially consistent with the prior standard.
Outlook, risks and contingencies
- No specific revenue, earnings or margin guidance is provided in the filing. Management expects continued investment in sales, marketing, R&D and clinical trials, and states that expenses are expected to increase; future profitability and positive operating cash flow are not assured.
- Key risks include dependence on iStent-family products, increasing MIGS competition, reimbursement and pricing changes, regulatory and clinical-trial uncertainty, manufacturing concentration at the San Clemente facility, and reliance on limited suppliers. The filing also highlights foreign-exchange exposure and privacy, regulatory and intellectual-property risks.
- Glaukos is suing Ivantis over alleged infringement by Hydrus; Ivantis filed counterclaims alleging iStent Inject infringes its patents. The parties seek unspecified damages and injunctive relief. Fact discovery was ongoing; a claim-construction hearing was set for April 2019 and trial for February 2020. Ivantis also filed inter partes review petitions; the PTAB had not yet decided whether to institute review. Management did not identify any material reasonably possible legal loss in its general contingency disclosure.
- Alcon withdrew CyPass from the market in August 2018 and indicated possible future reintroduction. Australia’s new permanent reimbursement code for iStent and iStent Inject with cataract surgery became effective November 1, 2018.
- The company expects the medical-device excise-tax suspension to continue through 2019; absent further legislation, it would return in 2020. Management was still evaluating certain tax-law effects, including Section 162(m). The company also expected most lease commitments to be recognized as lease liabilities and right-of-use assets when the new lease standard is adopted.
Important facts for investors to verify
- Whether iStent Inject adoption and international growth can sustain sales growth amid increased competition and reimbursement constraints.
- Whether rising SG&A, R&D and stock-based compensation can be supported by revenue growth, and how quickly operating cash flow recovers.
- Progress and results of iDose Phase III and iStent Infinite, Supra and other clinical and regulatory programs, including post-approval studies.
- Developments in the Ivantis litigation and related patent-review proceedings, including potential financial or commercial consequences.
- Liquidity and spending against management’s at-least-12-month funding assessment, particularly if operating cash flow weakens or additional financing is needed.