Glaukos Corporation — FY 2016 Form 10-K
Reporting period: Fiscal year ended December 31, 2016. This is an annual filing, not a standalone Q4 filing; the filing also provides unaudited fourth-quarter results. Glaukos develops and sells ophthalmic devices for glaucoma, with revenue primarily from its iStent micro-invasive glaucoma surgery (MIGS) products.
Financial performance
| Metric | FY 2016 | FY 2015 | Change |
|---|---|---|---|
| Net sales | $114.4 million | $71.7 million | +60% |
| Gross profit / gross margin | $98.2 million / approximately 86% | $58.7 million / approximately 82% | Margin +4 percentage points |
| Operating expenses | $94.0 million | $69.0 million | +36% |
| Operating income (loss) | $4.2 million | $(10.3) million | Improved |
| Net income (loss) | $4.5 million | $(38.3) million | Returned to profitability |
| Operating cash flow | $12.3 million | $(2.2) million | Improved |
| Cash, cash equivalents and short-term investments | $95.8 million | $91.1 million | + approximately $4.7 million |
| Total debt | None | $9.7 million | Repaid in 2016 |
Fourth-quarter 2016 net sales were $33.2 million versus $20.3 million in Q4 2015. Q4 operating income was $0.5 million and net income was $0.1 million; the comparable 2015 quarter recorded operating and net losses of $2.0 million and $2.3 million, respectively. FY 2016 diluted earnings per share were $0.12.
At year-end, working capital was $103.1 million, total assets $134.4 million, total liabilities $17.1 million and stockholders’ equity $117.3 million. Investing activities used $26.1 million, including $6.3 million of property and equipment purchases and net purchases of short-term investments. Financing activities used $1.6 million, including $9.7 million of note payments.
Material changes and business developments
- U.S. sales were $105.0 million, approximately 92% of FY 2016 revenue, up 55% from 2015. Management attributed growth mainly to more customer facilities and greater iStent utilization. International sales rose 135% to $9.4 million.
- SG&A increased 47% to $64.8 million, reflecting expansion of domestic and international sales, administration and marketing. R&D increased 17% to $29.2 million, largely from added clinical personnel and trial costs.
- Gross margin improved as fixed manufacturing costs were spread over higher sales and the U.S. medical-device excise tax was suspended for 2016 and 2017. The filing says the tax is scheduled to return in 2018 absent further legislation.
- The $25.7 million 2015 DOSE deconsolidation charge did not recur. Glaukos also completed repayment of its GMP notes during 2016.
- The iStent Inject and iStent Supra were in U.S. pivotal IDE trials; a standalone iStent Inject study was also underway. iDose, a travoprost drug-delivery implant, was in a U.S. Phase II study.
Outlook, risks and contingencies
Management expects sales to increase with broader commercial reach and adoption, and expects 2017 U.S. ASC sales to benefit from higher Medicare reimbursement effective January 1, 2017. It anticipates higher R&D spending as trials and regulatory work advance, and continued investment in sales, marketing and manufacturing. No specific numerical revenue or earnings guidance is provided. Management stated that available cash, investments, interest income and operating cash generation were expected to fund operations for at least 12 months from issuance of the financial statements.
- The business remains highly dependent on iStent and the U.S. market. New U.S. MIGS competitors entered in 2016, and stronger adoption or clinical performance by competitors could pressure sales.
- Reimbursement and payment are material risks. Medicare’s 2016 HOPD payment change reduced combined reimbursement for cataract and iStent procedures. Glaukos also reported that Australian reimbursement under the existing code was to end May 1, 2017; a replacement pathway and sales impact were uncertain.
- Pipeline products face clinical, regulatory, manufacturing and commercialization uncertainty. iDose requires drug-product approval, and its anticipated 505(b)(2) pathway is not assured.
- Manufacturing had recently moved largely to San Clemente, with final regulatory approvals still pending for consolidation of remaining operations. The company relies on limited or single sources for certain components, including the titanium stent and heparin coating material.
- Glaukos reported no material legal proceedings and no off-balance-sheet arrangements. Contractual obligations included $7.1 million of operating leases and firm purchase commitments, principally due within one year.
- Management reported effective disclosure controls and internal control over financial reporting as of year-end. The auditor issued an unqualified opinion on the financial statements but did not attest to internal control effectiveness because Glaukos was an emerging growth company.
Key facts for investors to verify
- Whether iStent utilization and U.S. sales growth continue as competitors expand their commercial presence.
- Actual reimbursement outcomes, particularly the Australian replacement arrangement and the durability of U.S. Medicare payment levels.
- Clinical-trial progress and regulatory milestones for iStent Inject, iStent Supra and iDose, including any delays or adverse results.
- Whether rising SG&A, R&D and manufacturing investment can be supported by revenue growth while sustaining profitability and operating cash flow.
- How the 2018 medical-device excise tax reinstatement, absent legislative change, would affect gross margin and earnings.