Glaukos Corporation (GKOS) Earnings Call Transcript & Summary

Good afternoon. I should say this is Marissa Bych with Morgan Stanley Equity Research. I work with David Lewis covering med tech. I'm very excited this afternoon to have with me Glaukos Corporation. I think this is their first time presenting at our Morgan Stanley Healthcare Conference. So welcome. It's great to have you. And I'm here with Joe Gilliam, the CFO and SVP of Corporate Development; and also Chris Calcaterra, the COO. So looking forward to an exciting conversation over the next 30 minutes.

Joe or maybe Chris, I wanted to start off with kind of the here and now dynamics of COVID-19 and then we can work into what you see for Glaukos longer term and maybe some comments on Avedro as well. But for now, I was hoping that we can talk about how things have trended since the second quarter since your report. Obviously, iStent sales were down roughly 50% year-over-year in the quarter due to COVID-19. Can you give us a sense of how procedures have trended relative to your exit rate, which I think was around 80% of normal since then? And anything else qualitative that you would call out that you're seeing?

Sure. Marissa, it's Joe. I'll start off with this, and Chris can add any color if he'd like. First, thanks for having us. We're excited to be a part of the conference as well for the first time and look forward to many more on that front. Second, as it relates to the trends, I mean, I would say that, first, we, obviously, in the course of the second quarter, proved that the -- there's a high degree of elasticity in our business to what's transpiring from a COVID perspective, right? Over the course of April, we talked about trends that, at least in the U.S. glaucoma business were down 97% or at 3% of normal levels for that time. And that's really -- it's funny. We don't typically think of our business as being elective. But the reality is patients can defer for some period of time. Ultimately, they have to get a procedure done. It doesn't get better, whether it's the cataract, glaucoma or keratoconus that we're talking about, but they ultimately have to get it done. And so what we saw was a high degree of deferral in that month of April. And as the markets and states reopened in the U.S. and many other countries around the globe, we saw a pretty rapid recovery over the course of May and June to the levels you referenced at 80% in exiting the June quarter. We also said that in July, things were stable to improving. Obviously, when you think about globally, there's a lot of different dynamics going on around the world. And even within the states, you have little flare-ups of COVID that can impact demand at any given time, while other states are starting to accelerate and recover in a faster period as you go forward. In general [Technical Difficulty] expectations for the quarter. But I will say, enough companies have now talked about the trends they're seeing in vision care whether that be some of the contact lens players or others, that -- I think it's fair to say that the general environment has been stable to positive, right? And what we've seen is while we all wish that the COVID dynamics were a bit more under [Technical Difficulty] the stability has certainly led itself to, I think, [Technical Difficulty] attached to them. So in general, right now, we feel good about that trend line.

Great, great. And where there is still an ongoing impact, I just want to help parse this off for investors. Can you give us a sense of whether or not you think some of these impacts are more office-based in terms of logistics being able to handle patient traffic versus patient psychology and patient fears are still, I think, a concern in some cases going in and having a procedure like this, especially with an older demographic. So how would you kind of balance those 2 forces for us at this time?

Well, I'd say it's a little bit of both, right? So I think it's appropriately phrased as a question. Number one, you have to think about site of service. And the further away from the hospital you are, probably the little bit better in that context. So to orient you in our business within glaucoma, the vast majority of procedures are done in the ambulatory surgery center, ASC setting, with, call it, 20% or so done in the hospital setting. So obviously, what we've seen in some of these states, for example, where you had COVID rebounds, Texas being a good example, was they did start to restrict some procedures in the hospital setting. But the ASC setting was largely left untouched as a part of some of those moving parts. And then, of course, on the other end of the extreme is in the physician office, where most of our corneal health procedures, the keratoconus procedures are done. And that clearly has even a degree more of liberality in the context of getting things completed there and the recovery attached. And the second thing that you're talking about, it does play a role, right? I think elderly patients, most of whom are the candidates for glaucoma surgery or getting combination cataract surgery with glaucoma tend to shelter-in-place more than the younger patients. As part of why we've seen some of the trends that we've talked about, if again, if you go back to the end of the Q2, the U.S. glaucoma business was back to 80% of normal, while the keratoconus business was 85%. I think that has to do a little bit with site of service and a little bit to do with the fact that you can have a younger patient demographic with the keratoconus procedures.

Great. And then iStent procedures are concomitant with cataracts generally, but Alcon has guided you, I'm sure you're familiar, to basically surgical procedures recovering to a normal level by year-end. Do you think that investors should generally expect a similar path for you? It sounds based on your commentary that you are continuing to see that improvement. But is there anything that's different about that you think would make a patient more hesitant than a standard cataract? Or is there any reason why there should be a material deviation between?

Yes. I'm not so sure there's any reason why there'd be a material deviation, conceptually speaking, right? I think in general, we're all faced -- and in this case, as you talked about Alcon and maybe the cataract surgery franchise and the like, we're all faced with very similar dynamics that we talked about, right? Practice efficiency, patient flow patterns into the vision care, optometry and ophthalmology channel in general, all those things are pretty aligned in the context of the macro drivers of the recovery. We've -- I guess we've tended to be a little bit more conservative on how we're thinking about that recovery and what we say, just because I think it's really difficult to predict what COVID has in-store in the fall and winter months. But that's less of a Glaukos-specific comment, right, than it is the macro fundamentals. And I think you positioned it correctly. I'm not so sure there's a significant difference between the way we think about these trends and what Alcon might say.

Okay. Great. And then I just want to run 2 more numbers by you before we move on. But on an organic basis, I think the street is modeling roughly negative 20% 3Q decline for you and maybe down low single digit to mid-single digit in the fourth quarter. I'm sure you can't comment explicitly on those numbers, but maybe on the cadence between 3Q and 4Q based on what you're seeing today versus August versus July, is it a given that 4Q should definitely be better than 3Q? Different management teams seem to have different views on whether flu season will drive more of an impact this year. So any commentary on kind of the separation between those numbers? And do you think that that's a reasonable pathway quarter-to-quarter for you?

Yes. It's a fair question. It's obviously a difficult one to answer with the degree of specificity that you'd like. I think the way -- in general, if you set aside COVID, the fourth quarter tends to represent the biggest quarter in our business, right? In general, you tend to see higher cataract volumes in the fourth quarter in terms of procedures. And as a result, you tend to see higher MIGS. In the past that we've talked about, in a normal year, the seasonality within glaucoma tends to be about 28% of your year happens in the fourth quarter. So not a dramatic seasonality, but there is that marginal seasonality that exists within the industry. Of course, all of those numbers are thrown out of whack with what we've all been going through. And so while I think that there's a natural underlying potential increase in demand that would normally exist. It's hard to figure out the offset of that relative to what we're experiencing or what we may experience in the context of the flu season and increased dynamics around COVID. Back to my earlier point, there's just no question that if you start to see flare-ups in the winter months in parts of the country or across the country from a COVID standpoint, patient population for our particular procedures are likely to be a little bit more sheltered in place and deferring their procedures to the spring than maybe some other more acute settings that you might cover. So I think there's -- like I said before, there's a degree of elasticity here that we have to factor in when we think about these things. And when we run our models internally in our scenarios, we try to. But obviously, absent those kind of setbacks, in general, there tends to be a little bit more demand in the fourth quarter than the third.

Got it. So more maybe about traditional seasonality, of course, which makes sense. Great. Let's take a step back from kind of the immediate hear and now and maybe for any newer investors on the line or for those who are brushing up, can you help us level set on just the market as you see it today? Remind investors how you size the market for broader glaucoma management for MIGS and kind of where penetration levels are today?

Yes. So I'll start with that, and then Chris, if you want to add a little bit of color around it. So from a sizing perspective, here's how we think about it. We have a slide that we typically include in our -- we used to include in many of our decks to help with this. And the first, when you think about within glaucoma, setting aside corneal health for a second, with glaucoma, our initial beachhead here has been in combo cataract MIGS, as we've talked about. That market opportunity in the United States is between 500,000 and 600,000 annual procedures. If you look at sort of where we're at and where sort of the broader industry is at, I wouldn't say we're in the early innings of that penetration anymore, but we're certainly not in the late innings either. The last time that we gave a doctor training number was exiting 2018, and we were about 3,000 -- or in 2018, we're about 3,000 doctors trained of 9,000 total. Obviously, we've made progress towards that since then. It hasn't been entirely linear because we've had new product introductions and retraining and different things that were there, but we made progress. So I think it's a good -- fair to say that we're in the middle innings of that penetration curve in combo cataract MIGS. Of course, that is the initial beachhead. And when you start thinking about the approvals that we hope to see in the coming years, that number vastly expands from there. The first of which, if we're fortunate to get an approval, will be the MicroShunt opportunity, which is for late-stage glaucoma management, a surgical intervention for those patients who either exhausted their therapy on meds or other surgical options. That particular procedure should add another, let's call it, 150,000 annual potential procedures. Again, all these numbers I'm referencing are United States numbers. Typically, when you think about things globally, you kind of double that in traditional ophthalmic markets. So another 150,000 procedures for the MicroShunt in late stage. IStent infinite which also goes after a later-stage patient population but probably sits a little bit in front of what we're just describing in MicroShunt in terms of the treatment algorithm, physicians are likely to use that a little bit earlier in the treatment paradigm than the MicroShunt. You could probably expand that number to, let's call it, 200,000 of face value. You can say there's maybe more bullish scenarios where physicians utilize that a bit earlier in the treatment paradigm that will of course be off-label not promoted by us as a part of that approval. And then -- so that adds to that overall pie. So now you're talking about 500,000 or 600,000 getting into that ZIP code of, let's call it, closer to 1 million potential eyes that you're going after annually here in the U.S. And then with iDose in 2022, we hope to vastly expand that by another 3 million eyes. The reason why it's such larger is that iDose, if approved, would have a much broader label, where you could treat them from ocular hypertension all the way through these advanced patients, and it's a recurring therapy, right? Whether ultimately the data and the commercial reality suggest that you can use it for 1 year or longer, the likelihood of it being a recurring therapy is high, and as such, you get more cracks at the apple each going out per patient. So substantial market expansion there where you ultimately end up in a market that you're going after more than 4 million annual procedures over time. And then within corneal health, we've talked about this. They're about -- diagnosis is one of the bigger hurdles of keratoconus. But on average, there's 35,000 eyes diagnosed a year, but there's also a really large pool of patients who have not been treated because there wasn't a therapy available for them historically other than rigid contact lens. So your annual opportunity probably exceeds that incidence for the foreseeable future. How far that goes will remain to be seen as we continue to build the market and diagnose this and bringing these patients into the fold over time. But another attractive market there as we go after keratoconus. And of course, beyond that, we're expanding into, as you know, from a pipeline standpoint, presbyopia, dry eye, retinal conditions, but I won't belabor that will take up the rest of this call.

Great. That's very clear. And in your internal forecast, if we just think about maybe over the next 2 to 3 years, obviously, there's a lot of new patients, as you mentioned, that's kind of coming into the fold for this across some of the therapies, and you'll have some new products as well. But generally speaking, how would you balance kind of percent of growth that you would attribute to higher utilization within your existing physician base versus new physician adoption? And just how important is the training and education component of this for you?

Maybe I'll analytically answer that. And then Chris, you want to talk about the training component and everything else that goes into it. And I knew, Chris, you're on mute. But so I think going back to the answer I just gave around the market size opportunity, Marissa, it's hard not to say that it's going to be much more dominated by new utilization, right? So given the overall opportunity set that exists in stand-alone, whether that be surgical or pharma and glaucoma, more growth is going to come from that arena than necessarily farming and cultivating within the existing combo cataract segment, right? That doesn't mean that we don't have expectations for continued growth and expansion, both same-store sales and new doctor training in that segment, but it just gets dwarfed by the opportunity that exists in getting these other doctors. So maybe with that, Chris, do you want to comment on the overall training dynamics and the importance of that and our thoughts there?

Sure. So in terms of training dynamics, we have a 3-step process, which has been somewhat altered by COVID, but I'll go into that in a second. And that is doctors have demand online training, where they can do that at their leisure. I think there are 7 modules. Once they complete that, then the reps spend time with the doctors, the night before, the morning of doing wet labs and reviewing video and dealing with some what-if scenarios, practice using the gonioprism. And then the rep monitors and proctors the doctor for as many cases as it takes until he or she is comfortable. Now that is for someone who has not been involved with MIGS. Doctors who are moving from iStent to iStent inject or iStent inject to iStent inject W, our new platform, that it's shortened significantly. They may spend just a couple of cases in surgery. The nice thing about this is from an efficiency standpoint, once the doctor's trained, it's not often where the rep has to go back in and retrain them or spend time with them in surgery or be there during surgery. So it frees up our reps to go and talk to potential new customers. And certainly, they're meeting with doctors from a relationship standpoint and are there if need be. In this COVID environment, we've had to alter this a bit. We're doing more remotely where we may do the wet lab, our dry lab through Zoom like this. I even have a scenario recently, a couple of them, where the rep did the proctoring in surgery remotely on FaceTime. And they just set up a phone, and he was looking at the monitor, at the procedure and was giving feedback to the doctor while in surgery. So we've had to adapt, and we will continue to adapt, but we've tried to make this as seamless as possible and as painless as possible for the physician.

Great. That's a lot of a lot of really interesting color. And while we're at a high level, Joe, I think you touched on this, especially with your pipeline and kind of where Glaukos may be going over time. But let's talk about the vision you have for Glaukos, right, the markets that you want to be in, and what it means to be a holistic glaucoma company? Do you see yourself on -- what kind of long-term evolutions or adjacencies does that require? Do you think that Glaukos ever has a role in AI, diagnostics, pharmaceuticals? Or are those things less of a focus, at least in the near to intermediate term?

Yes. I'll start, and Chris, if you want to add commentary you can. I think quietly behind the scenes for quite some time, Glaukos had been developing these 3 synergistic but distinct platforms across corneal health and glaucoma and retina. And a variety of opportunities led us there, both in terms of skill sets within the organization, skill sets of folks that we're able to bring in over time that expanded our capabilities. And ultimately, I think these are the areas we're quite committed to, right? We think they're the largest areas of ophthalmology. We think they're the areas that have the most potential for disruptive novel approaches to traditional problems, whether that be diseases or ways of treating them. And you've seen from us a shift from, obviously, a more surgically-oriented company. We're still surgically oriented, but with the introduction of pharmaceuticals as well, right? And if you think about holistically, the pipeline that we've got and that we're bringing forward, both in preclinical development as well as in clinical development, there's a lot more orientation towards drug delivery and pharmaceuticals than maybe the traditional surgical solutions that iStent and inject represent. That's not necessarily fully by design. The reality is we're following where our innovation takes us and where we think we can have the most impact in changing or disrupting markets. And we're a little bit agnostic to whether or not that is surgical, pharmaceutical or hybrid they're in, right? But you can expect from us that we're going to continue to try to go after novel shots on goal, right, in these areas to change the treatment paradigm. And we think we're fairly good at pioneering new markets or new ways of doing things. That's something that is in itself a unique aspect of Glaukos. We didn't go into with MIGS a market that existed. It never existed before we came into that space. We had to, through Chris' leadership, Tom's leadership, et cetera, change physician behavior in the way they thought about the treatment of the disease, right? And that takes a lot of skill, both in terms of the commercial side, that takes reimbursement and various other elements that we think we can deploy successfully in other areas of ophthalmology. So we're excited about that future within that. I'm not so sure that that necessarily means to your point to your question that that would take us holistically into things like AI or business -- health care services or diagnostics. I think we're good at that core area of development within pharmaceutical and device and more likely to stay largely within that knitting.