Glaukos Corporation — Form 10-Q summary
Reporting period: Quarter and six months ended June 30, 2016. Glaukos develops and sells ophthalmic medical devices for glaucoma; substantially all sales came from its iStent products. Amounts below are in U.S. dollars; financial statement figures are in millions unless otherwise noted.
Financial performance
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Net sales | $28.6 | $17.8 | $51.6 | $32.4 |
| Gross profit | $24.2 | $14.5 | $44.2 | $26.3 |
| Gross margin | 85% | 82% | 86% | 81% |
| Operating expenses | $22.1 | $19.9 | $41.4 | $32.9 |
| Operating income (loss) | $2.1 | $(5.4) | $2.7 | $(6.6) |
| Net income (loss) attributable to Glaukos | $2.3 | $(31.9) | $3.2 | $(32.9) |
| Diluted EPS | $0.06 | $(10.96) | $0.09 | $(12.35) |
- Q2 sales rose 61% year over year; first-half sales rose 59%. Growth was primarily from higher unit volume. U.S. sales increased 58% in both comparisons; international sales increased 105% in Q2 and 77% in the first half.
- Q2 SG&A increased 21% to $15.1 million; first-half SG&A increased 35% to $27.4 million, reflecting sales-force expansion, foreign subsidiaries, additional personnel and marketing. First-half R&D rose 11% to $14.0 million as clinical activity expanded.
- Margin improvement reflected sales growth against fixed manufacturing costs, the suspension of the 2.3% medical-device excise tax for 2016–2017, and, in the first half, iStent Inject sales in Australia and Canada whose manufacturing costs had been expensed to R&D in 2015.
Cash, debt and liquidity
- At June 30, cash and cash equivalents were $12.3 million and short-term investments were $81.6 million, totaling $93.9 million, compared with $91.1 million at December 31, 2015. Current assets were $112.6 million and current liabilities were $18.7 million.
- Debt was $5.3 million, all classified as current, down from $9.7 million at year-end. The balance consists of secured GMP royalty-buyout notes; scheduled principal and interest payments run through December 2016. The company paid $4.4 million of secured notes during the first half.
- First-half operating cash flow was positive $5.1 million, versus cash use of $1.1 million a year earlier. Investing activities used $13.1 million, including net purchases of short-term investments and $1.2 million of property and equipment. Financing activities used $1.2 million.
- Management said available cash, investments, investment income and product-sale cash generation should fund operations and liquidity needs for at least the next 12 months. The company nevertheless may seek additional financing and cautioned that acceptable financing may not be available.
Changes, outlook and notable items
- Results turned profitable in the first half, but the comparison with 2015 is heavily affected by a $25.7 million DOSE Medical deconsolidation charge recorded in 2015. The 2015 period also included IPO-related stock-compensation charges; the IPO closed June 30, 2015 and generated approximately $113.6 million net proceeds.
- Management reported profitability in the two most recently completed quarters but warned it may not be sustained. No specific revenue or earnings guidance was provided. The company expects continued investment in sales and marketing, clinical development, R&D, manufacturing capacity and public-company costs, and says future R&D spending is difficult to forecast.
- Pipeline programs include iStent Inject, being studied in U.S. IDE trials; iStent Supra, in a U.S. pivotal IDE trial; and iDose, in Phase I in Armenia and Phase II in the United States. Regulatory and clinical outcomes, timing and commercialization are uncertain.
- Key risks include dependence on U.S. iStent sales, new direct MIGS competition following FDA approval of Alcon’s CyPass device, reimbursement changes, and clinical, regulatory and manufacturing execution. Medicare began a single comprehensive payment for combined iStent and cataract procedures in hospital outpatient departments in 2016; some payors deny coverage. A planned move of headquarters and manufacturing from Laguna Hills to San Clemente may cause transition disruption, added costs or lower margins. Operations remain concentrated at one principal location.
- Other cost and commitment items include University of California payments tied to certain product sales, with a $0.5 million annual minimum, and $3.2 million of firm purchase commitments due within one year. Estimated GMP intangible-asset amortization is $3.7 million in 2016, $3.6 million in 2017 and $3.0 million in 2018.
- Management reported no material legal proceeding or reasonably possible material loss contingency known to it, and no off-balance-sheet arrangements. Subsequent to quarter-end, Glaukos signed an agreement to purchase a nearby office/warehouse suite for approximately $872,000, subject to a diligence period; it also agreed in principle to sublease portions of its current facilities through March 2017 for approximately $295,000.
- Disclosure controls and procedures were assessed as effective at the reasonable-assurance level; management reported no material change in internal control over financial reporting during the quarter.
Investor verification points
- Track whether rapid iStent unit and sales growth continues, particularly given U.S. concentration and the emerging competitive landscape.
- Assess the durability of profitability and margins after the temporary excise-tax suspension and the first-half manufacturing-cost benefit for certain iStent Inject sales.
- Verify clinical-trial progress, regulatory milestones and commercialization prospects for iStent Inject, iStent Supra and iDose.
- Monitor reimbursement and coding developments, including the effect of Medicare’s bundled hospital-outpatient payment and coverage restrictions by certain payors.
- Confirm successful manufacturing-facility transition and regulatory readiness, and monitor remaining 2016 debt payments, purchase commitments and liquidity needs.