Glaukos Corporation — Q2 2019 Form 10-Q
Business and period: Glaukos develops and commercializes ophthalmic therapies, with sales primarily from iStent products for glaucoma. This filing covers the quarter and six months ended June 30, 2019; financial statement amounts below are in millions of U.S. dollars unless stated otherwise.
Financial performance and liquidity
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Net sales | $58.6 | $43.2 | $112.6 | $83.3 |
| Gross profit | $50.7 | $37.0 | $97.6 | $71.3 |
| Gross margin | 87% | 86% | 87% | 86% |
| Operating loss | $(6.2) | $(4.2) | $(8.2) | $(8.0) |
| Net loss | $(6.3) | $(5.4) | $(7.7) | $(8.1) |
| Basic and diluted loss per share | $(0.17) | $(0.15) | $(0.21) | $(0.23) |
- Q2 sales grew 36% year over year; U.S. sales increased 32% to $48.1 million and international sales increased 53% to $10.5 million. For the first half, sales grew 35%; U.S. sales rose 32% and international sales 52%.
- Management attributed sales growth to U.S. iStent inject sales, expansion of international direct sales, and the August 2018 withdrawal of a competing MIGS device.
- Q2 SG&A increased 31% to $37.7 million and R&D increased 35% to $17.1 million. First-half SG&A rose 30% to $72.6 million and R&D rose 32% to $31.0 million. Increased staffing, professional and consulting services, systems implementation, litigation costs, and clinical-trial spending were cited.
- Operating cash flow was positive $6.8 million for the first half, versus use of $2.6 million in the prior-year period. Investing activities used $2.3 million and financing activities provided $5.7 million. Cash, cash equivalents and restricted cash increased $10.2 million to $48.8 million.
- At June 30, cash and cash equivalents were $40.0 million and short-term investments were $110.4 million. Management reported $159.2 million in cash, cash equivalents, restricted cash and short-term investments, and working capital of $170.2 million. It believed available resources and operating cash generation would fund operations for at least 12 months after the statements were made public.
- The filing reports no outstanding debt or committed credit facilities. Lease obligations were substantial: $68.2 million for finance leases and $13.1 million for operating leases at June 30. The new Aliso Viejo facility lease commenced April 1, 2019.
Material changes and notable items
- Q2 net loss widened 17% year over year despite higher revenue; first-half net loss narrowed 6%. Higher operating expenses outpaced revenue growth in Q2.
- Gross margin improved to 87% from 86% in both the quarter and first half. The University of California product payment recorded in cost of sales was $1.5 million in Q2 and $2.8 million for the first half.
- Glaukos completed its DOSE Medical acquisition in June for $2.5 million upfront. It expensed $2.2 million as in-process R&D; additional regulatory, sales-milestone and royalty payments may become payable if conditions are met. The transaction involved related-party connections: Glaukos’s CEO and board chair had served on DOSE’s board, and certain Glaukos insiders held DOSE equity.
- Adoption of lease accounting standard ASC 842 in January added lease right-of-use assets and liabilities. The Aliso Viejo finance lease contributed $68.2 million of finance lease liabilities at quarter-end.
- Stock-based compensation was $8.2 million in Q2 and $15.4 million in the first half, up from $6.5 million and $11.9 million, respectively, in 2018.
Outlook, risks and contingencies
- No quantified revenue, earnings or cash-flow guidance is provided. Management expects continued investment in sales and marketing, R&D, clinical programs and infrastructure, and cautions that sustained profitability and operating cash generation are not assured.
- Pipeline programs include iDose Travoprost Phase III trials and iStent Infinite and iStent Supra development. The filing highlights clinical, regulatory, reimbursement, competitive, manufacturing and product-adoption uncertainties.
- After quarter-end, Glaukos announced a proposed Avedro acquisition for stock consideration of 0.365 Glaukos shares per Avedro share. Closing was expected in Q4 2019 but remained subject to shareholder, regulatory and other conditions; Avedro shareholders were expected to own about 15% of the combined company.
- The company also described a Santen distribution arrangement for MicroShunt, dependent on FDA approval, and a July 2019 global licensing arrangement with Intratus. Commercialization, approval and revenue outcomes are uncertain.
- Glaukos is litigating patent claims against Ivantis concerning Hydrus. A court found Glaukos did not infringe Ivantis’s acquired patents; the company’s claims against Ivantis remained pending, with trial scheduled for around July 2020. The company said it could not estimate a possible loss and recorded no accrual.
- Other exposures include $8.8 million of restricted cash securing a facility-lease letter of credit and $7.4 million of firm commitments for global enterprise systems implementation. The medical device excise tax suspension was scheduled to end after 2019 absent further legislation.
Important facts for investors to verify
- Whether iStent inject sales growth continues and how much growth depends on competitor availability, reimbursement and procedure volumes.
- Progress, costs and results of iDose and other clinical programs, and the timing and likelihood of regulatory approvals.
- Cash generation relative to expanding operating expenses, lease payments, capital spending and acquisition-related obligations.
- Terms, closing status and integration effects of the proposed Avedro acquisition, including expected dilution and any material charges.
- Developments in the Ivantis litigation and any resulting legal costs, injunctions or financial exposure.