Glaukos Corporation — Q2 2018 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2018. Glaukos develops and sells ophthalmic devices and therapies for glaucoma; sales were primarily from iStent products. The filing is unaudited and results are not necessarily indicative of full-year performance.
Financial performance
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Net sales | $43.2 million | $41.3 million | $83.3 million | $77.2 million |
| Gross profit | $37.0 million | $35.8 million | $71.3 million | $66.5 million |
| Gross margin | 86% | 87% | 86% | 86% |
| Operating loss | $(4.2) million | $(3.9) million | $(8.0) million | $(3.6) million |
| Net loss | $(5.4) million | $(3.3) million | $(8.1) million | $(2.4) million |
| Diluted loss per share | $(0.15) | $(0.10) | $(0.23) | $(0.07) |
Quarterly SG&A was $28.6 million, up 16%, and R&D was $12.6 million, up 31%. For the six months, SG&A rose 21% to $55.8 million and R&D rose 27% to $23.5 million. Higher employee compensation was the main driver of both increases. The prior-year periods included $5.3 million of in-process R&D related to the DOSE IOP Sensor System acquisition; there was no such charge in 2018.
Revenue mix: Q2 U.S. sales declined 2% to $36.3 million, while international sales increased 63% to $6.9 million. For the first half, U.S. sales rose 1% to $69.9 million and international sales rose 62% to $13.4 million, primarily reflecting expansion into international markets.
Cash, liquidity and debt: Cash and cash equivalents were $24.9 million and short-term investments were $95.2 million at June 30, 2018, totaling approximately $120.1 million. Working capital was $135.0 million. Operating cash flow was negative $2.6 million in the first half, compared with positive $6.6 million in the prior-year period; financing provided $5.7 million. The balance sheet reports no borrowings or debt. Management stated available resources and expected cash generation should fund operations and liquidity needs for at least 12 months from filing of the statements. Accumulated deficit was $200.3 million.
Material changes and developments
- Sales grew 5% in Q2 and 8% in the first half, but losses widened as operating expenses increased faster than gross profit.
- Other expense included $1.6 million of Q2 expense, primarily unrealized foreign-currency losses associated with intercompany loans; the comparable 2017 quarter had $0.6 million of non-operating income.
- Glaukos received FDA approval in June 2018 to market iStent Inject in the U.S. in conjunction with cataract surgery. Management cautioned that launch-related inventory depletion and physician training could temporarily affect sales.
- The company began enrolling patients in U.S. Phase III trials for iDose Travoprost. It also reported development activity for iStent Infinite, iStent Supra, iStent SA and the IOP sensor system.
- Glaukos adopted ASC 606 on January 1, 2018 using the modified retrospective method; the cumulative effect was immaterial and accounting was materially consistent with prior revenue recognition.
Outlook, risks and contingencies
No specific revenue or earnings guidance was provided. Management expects sales to benefit from international expansion and continued commercialization, while anticipating increased sales, marketing, R&D and clinical-trial spending. It stated that future profitability and operating cash generation are uncertain.
- Competition is increasing in MIGS, and substantially all sales remain concentrated in iStent products. Reimbursement, adoption, pricing and launch execution could affect demand.
- Clinical, regulatory and commercialization outcomes for pipeline products—including iDose—are uncertain and may require substantial time and investment.
- Manufacturing is concentrated at the San Clemente facility, with dependence on a limited number of suppliers for key components; disruption could constrain production.
- On April 14, 2018, Glaukos sued Ivantis alleging patent infringement by its Hydrus Microstent and seeking unspecified damages and injunctive relief. Ivantis filed motions and inter partes review petitions; outcomes were unresolved at the reporting date.
- Other items include $0.9 million of material capital commitments, operating lease payments of $5.6 million, and a low-single-digit royalty obligation to the Regents of the University of California on specified product sales, expected to continue until relevant patents expire, currently expected in 2022. Management reported no known material reasonably possible legal loss contingency.
Investor verification priorities
- Track U.S. sales trends and whether international growth offsets competitive pressure in the U.S. market.
- Verify iStent Inject launch uptake, training effects, and reimbursement conditions, including the Australian permanent code expected to take effect in November 2018.
- Monitor operating expense growth, cash burn and the adequacy of liquidity as clinical and commercial investment continues.
- Review progress and trial outcomes for iDose Travoprost and other pipeline programs, along with associated regulatory milestones.
- Follow the Ivantis litigation and patent-review proceedings, and assess any effects on intellectual property protection or costs.