InMode Ltd. (INMD) Earnings Call Transcript & Summary

Good morning, everybody. We'll begin our next session. My name is Matt Miksic. I cover medical devices here in the U.S. at Barclays. I'm very pleased to have with us today, InMode. We've got Yair Malca, Chief Financial Officer; and we've also got Spero. I'm not going to try to pronounce your last name.

Okay. Theodorou, like Theodore Roosevelt.

Okay. Theodorou, Chief Medical Officer.

So I wanted to maybe start with just one of the things about InMode that I think catches a lot of medical device folks a little bit offguard, and you probably answer this question all the time here, is the growth model. I think the first conversation we had and I'm relatively new to the name. But in medical device land, we like to think of capital consumable, capital-based growth but with the razor-razorblade focus being to sell the blades, not the razors. And it took me a little bit to get my mind around the idea that this is really just a razor company, that you're selling platforms that enable procedures for clinicians, but that you see this, like this very, very large opportunity to kind of expand laterally. So maybe talk a little bit about the rationale behind sort of that business model and -- versus the approach that many other device companies is almost like we'll give you the capital, we just want the consumables.

Absolutely. And first of all, thank you for having us. Just to mention, we do have razorblades. We do have consumables on many of our products. But you're right, we took a different approach from many of the companies in the space. And ultimately, we decided to listen to our physicians. They don't, and Spero can talk about it, they don't like the razor-razorblade model. They tend to forget pretty quickly what they paid for the original device. So even if you discounted or heavily discounted, as many of the companies do, the ones that go with the razor-razorblade, at some point, doctors don't like the fact that they need to pay a hefty fee to this manufacturer. And what we do differently is we charge them the full price on the device and charge a very reasonable price on the consumable. And by doing that, we have incentivized them to offer our procedures as many times as possible to the patient. And it works. Spero, do you have any comments about that?

Yes. I mean, I'm a practicing plastic surgeon so I can tell you right now that every time you do an operation or a procedure, you're thinking a lot, this company has their hand in my pocket, right? So there's a magic number of what that disposable number can be. But don't forget, as we grow and that disposable base is going to grow as well. We want them to be successful because the majority of our clients are small business operators, right? So for them, it's a very simple math. Here's how much it costs. Here's how fast I can pay it off. The difference is that because our procedures are hard, it's not laser hair removal, they'll be able to pay it off within a year, which is pretty quick, which allows them to get a new machine from us, a new platform. And that model has worked for us. But we understand the criticism. We understand that. We're completely aware of that, Matt, but I appreciate you having us here and trying to explain it.

Sure, yes. And I wouldn't say it's so much criticism. It's just a different model that is different -- it's different than what we're used to, I think, on the medical device side. And zooming out and thinking about the process of my digesting that kind of, this is really, does this make sense? Is this going to work? Is that you are dealing with directly with an entrepreneurial business owner versus selling it to a health care system that's based on reimbursement to DRGs and procedure codes and so on and so forth, which really does change the way you need to position that. Another aspect of it that, just again, sort of topical issues that come up in investor conversations is around the sort of economic sensitivity of aesthetics generally and how that might or might not affect InMode. And when we launched in December, it struck me that in our view anyway, as we talked about in our notes, I mean, the stock was discounting this sort of, call it, rote assumption that if there's a recession coming, isn't that going to be hard on this procedure and this company because you're kind of in the aesthetics category? But maybe talk a little bit about how your procedures are positioned against some of the broader available products to patients. In other words, this is bigger than BOTOX but smaller than sort of a larger invasive procedure. So can you talk about the positioning?

Well -- you don't mind if I answer this?

Sure, go ahead.

It's a really good question, Matt. So a lot of our management team as well as our sales force comes from Cynosure. So we had the experience of being with Cynosure in '08, '09 when the crisis happened. So what happens is during those periods, does it affect the company's sales? Of course, it does. But from a practitioner's standpoint, what happens is that patients don't stop doing aesthetics. It's lipstick in cigarettes. They continue doing it. What has changed though is the price point is different. Instead of having a $30,000 tummy tuck or a $20,000 facelift, they'll still have things done, and -- but they'll do it in your office, no anesthesia, no hospital fee and the range is around $3,000 to $5,000. If you were in that range, which our procedures are in that range, the doctors that have that ability with our technology to do it in the office, they go through the recession, they're a lot more resilient to it. That's one. The second thing is the spas, right? We're heavy in the core doctors and plastic surgeons and all the things that we do. Our spa exposure is not as big. But during the recession back in '08, '09, the spas were the first to fold, so we don't have that sort of that exposure as well. The third thing is, and this is important, we designed everything we did. We wanted to have staying power. If you look at aesthetics and you look, it's kind of the Wild West, right? You have a great machine. You market the hell out of it. 18 months later, it becomes a coat hanger, and you get another machine and this is crazy vicious cycle. We never wanted to do that. We wanted to make our machines ubiquitous in every office and have staying power that will protect us through that period of time. So our -- majority of our clients are those kind of professional clients when they're able to have established practices and to weather that storm. So we're not -- no one is completely insulated but we are as best as we could, considering also that we're sitting on a bunch of capital in our balance sheet and all that. But we're not concerned if there is a recession, if it does come for, that will affect us tremendous or anything like that.

Sure. No, and I get that.

Did I answer your question, Matt?

Yes, absolutely. And I have a couple of follow-ups of what I would say is that is taking into account that sure, to your point, there could be an impact. If the recession is of a certain degree, there is likely to be an impact. But at least from our perspective, hence, our overweight rating was -- that really seems like it's adequately discounted here, if not more than adequately discounted. So we wouldn't say you're bulletproof either, but it seems like it's contemplated in the numbers.

You mentioned BOTOX, and I think this is an important sort of analogy, right? BOTOX is, at this point, commercialized commodity. Everyone does it, right? We looked at our patients. We looked at all the numbers and the studies that we've done. And we know that the average patient that comes in has a procedure done has 3.8 procedures done a year at a $3,000 to $5,000 price point. So we are the BOTOX of minimally invasive surgery in a way. So -- and it's a differentiated product that nobody else really has. So you have to sort of take a step back because it is a paradigm shift from what's traditionally being done because it's a long-term surgical result delivered in a minimally-invasive way in the office. And that recurring patient that keeps on coming back for more is also very similar to BOTOX but a different price point.

Yes, and different price point, so the follow-ups are different price point to the patient, to the consumer, but also a different price point to the clinic. So maybe talk about one of the aspects of 2007 and '08 was that the price tickets on lasers and such were quite different from the sort of the capital required to begin using your platform. So maybe talk a little bit about that.

Well, I mean, your average, at this point, laser hair removal, for example, is $200, right? And it's going to take you -- how long to pay off even a $60,000 machine? It could take a lot of laser hair removal, a lot of procedures to do that. If you're looking at our procedure, average ASP for the box is $130, $140, right? And then you have the average procedure is around $5,000. The numbers actually add up very quickly. So the doctor can do that simple math in his head right off the bat. So the average -- it's less than a year when they pay off the box, about 12 months.

Okay. And then the other follow-up on this idea of like sensitivity and sort of risk to growth, if you will, risk to your plan is that you're sort of moving laterally into these other specialty segments, so urogynecological and ophthalmology. So maybe talk a little bit about that.

I think it's very -- I'm glad you brought that up because the first criticism could be, are you guys losing focus? What are you doing? Why are you going -- are you sort of butterfly hopping everywhere? And we're not. You see, the biggest criticism for aesthetic companies, they can't get past the $0.5 billion mark, right? This is it, this is the market. There's only so many people you can sell to. What we're doing is we're increasing our TAM so we're -- at the core who we are, we're an aesthetics company, right? But when you're selling to a gynecologist who's never bought equipment, who has never bought things like that, they're scared. They've never bought a piece of capital equipment for that. So we go to them and say, "Look, you have these patients in your practice already, stress urinary incontinence. You don't have to go look for them. Send them an e-mail. You have the procedures from your scope of training. You're comfortable with it, right? And by the way, here, we'll teach you how to do aesthetics." So for us, we're going in with an indication or something that they already know and then teach them aesthetics. And that's how we're increasing our TAM. Now that was our theory, right? So that was our theory. That's what we thought it was going to work that way. But we had to validate that theory. So what we did in that was we looked at our Morpheus -- vaginal Morpheus tips. And we say, okay, for every vaginal Morpheus tip used for stress urinary incontinence or for GSM, how many tips are being bought for aesthetics? We looked at the top tier practices and we found it was 1:6. So it validates the fact that for every vaginal Morpheus tip, there's 6 aesthetic tips placed everywhere in the body that's being sold. Across the board, we look at everybody, it was 1:2.8, 1:3. So we know that when we tell this, you don't stop being a woman [indiscernible] the patients than when we walk in a gynecologist's office. So that's how we are looking at this. Same thing with ophthalmology, right? We're looking at dry eyes, right? We go in, but we're doing a periorbital rejuvenation. There's a lot more money in Morpheus, in IPL for the orbit around the eyes for aging as opposed to a dry eye procedure. So it's the same concept. We have a very large training force, and we have a lot of things in place to be able to educate and train these practitioners so we keep things safe, which is also a big deal, right? What people don't know about us? Everyone has said, you're a plastic surgery company because we stuck to plastic surgeons at the beginning. I can tell you right now that 50% of our clients are noncore. And that's a lot larger number of people doing aesthetics than actually your 8,000 plastic surgeries, out of which 2,000 do pure aesthetics. So we do have a long runway. We're only penetrated in dermatology about 8%. So we have ways to go. So we're very confident with this core approach still going to dermatologists, still going to the people we know, but also opening up the TAM with these different procedures. There's a method to the craziness. It's not like we're jumping around and doing stuff.

No, I wouldn't say it's crazy. It's -- certainly, it's different. It's a different strategy but when you sort of piece it together, it makes sense.

Many physicians or practice owners are looking for ways to grow their practice, and introducing cash-based procedures is a very attractive way to go with. And this is how we attract more of them into aesthetics.

Yes. Makes sense. On just the timing, so you're launching into -- within vision into ophthalmology this year. So maybe talk a little bit about what sort of early proof points or what do you have already that gives you confidence in that? And when do you think investors will start to see kind of the breadcrumbs of the path towards what that opportunity could be like Empower, which has been pretty successful?

Well, we don't think it's going to be as Empower, as strong as Empower. We've been already selling to ophthalmologists and oculoplastic surgeons so they're familiar with our product. Our device, if I had to quantify it, we're a little better than J&J's LipiFlow, obviously, right? Are we dramatically better? Is this going to save all dry eyes of the world? No. But it's a good -- it actually does -- the fact that we control the temperature do what we need to do is very effective. What's differentiated is that it's customized to every eye, right? It's not a -- J&J's product is basically a one-size-fits-all. So that customization helps and a lot also for the efficacy. On the device though, we have Morpheus and we have IPL, right? So again, we're going in with a dry eye issue. We're hitting -- we're going to be talking to a lot of different specialties that focus on dry eye. I say, by the way, you could also do rosacea with IPL. You could do the periorbital rejuvenation with Morpheus, and that's all cash-based and that will make money. Depending -- for example, optometrists in certain states where we're allowed to sell and what we do with them, that's also a call point because an average optometrist will spend $250,000 to get up, set up his practice. None of that revenue is -- makes him revenue. It's all diagnostic. So we're looking at the whole gamut, but we're very careful how we position our devices, just like we do plastic surgery. We start with the oculoplastic surgeons and the ophthalmologists and we're getting the credibility we need. We're publishing our studies. And as we trickle forward down, we see, within reason, what we can do to the different other specialties. That's sort of...

And to answer your question, yes, we are going to do a soft launch what we call this year, so the contribution to the revenue will not be significant this year. But later in the year, maybe we'll be in a better position to understand what long-term opportunity from this market. But as Spero mentioned, just because this community is smaller, it's not going to be as high as Empower.

Okay, fair enough. Yes. I guess, yes, thinking about one of the thematic issues across our space, which so far doesn't seem to be impacting you very much but maybe you could speak about it as you get into -- further into urogynecological surgery and then also further into ophthalmology, is staffing. A lot of these clinics are trying to figure out how to get patients through faster with a tighter staffing footprint. How does that -- how does your solution fit into that or are you starting to see any pressure like that?

No, Matt. I think no one's ever asked us that question, and I think it's an excellent question because every physician is thinking about it. If you start disrupting the physician workflow, I don't care if your device is amazing. They're not going to use it. So 2 things. First, we try to make our devices so simple where the lowest common denominator in the office can use it. That's very, very important. Morpheus is like that, depending on the state, of course, and the regulations. That's if we -- and the training and all that goes into that is what matters. So we're able to do that. And we're able to say, okay, yes, you could be playing golf and someone in your office is doing it while you're not there. So that's a huge, huge thing. And again, our devices are small. They're compatible. Wheel it out in 1 room, wheel it out of the other. So all those things is what physicians like about. If you put it in their car, take it to a different clinic, you can't do that with lasers. So all these things, even though these sound mundane, do have a very high impact on what the physicians the way they look at things. I mean, a simplistic way of answering your question.

And many of the practices also that we said to our fairly small practices with 1 physician on the practice and 1 or 2 nurses, so they don't need a huge staff. We did some survey late last year about staffing concerns with some of our physicians, and we don't see many.

Yes. And I mean, what strikes me as the challenge for ophthalmology, not so much cosmetic surgery is that, and you can appreciate this, I think, is that the margins are just better in cosmetic surgery. The margins are tighter in ophthalmology. What they're trying to do is -- the reason why staffing's an issue is because they need these patients coming through like a well-oiled clock. It's like here, here, here and out because they're doing a lot of Medicare IOL procedures that are not really with the -- where they're making their money. And so it's a way of figuring out, I guess, 2 things. One is the workflow, but the other is if the issue there is profitability per patient, then introducing something that raises that margin opportunity.

I mean, you have ophthalmologists fighting for $20 co-pay. You'll find the time. If you're making $500 off a procedure, they'll find a time to make that workflow work. What they usually do is you start off with, like this will be our aesthetic day, right? And then sort of -- and then when they realize that aesthetic day is pretty effective, they add another aesthetic day, right? Next thing you know, the whole batch is converted over a period of about 18 months to 50% aesthetics.

Okay, so that's helpful.

Yes, the market drives it.

And then Yair, maybe just to wrap up, again, kind of ticking through the things that I found unique, at least getting to know InMode a little better, is sort of the the margin and cash flow. And I'm sort of chuckling when I say this because it's different and strong for a company growing this fast. So maybe talk a little bit about what drives your gross margins, which are high, the sustainability of that sort of 83%, 85% range. And then some of the elements of your P&L that help you get to the kind of cash flows that you're generating. And I'm speaking of the R&D spend, the G&A cost, the Israeli-based organization and so on.

That's a good question. Listen, this company started with an initial investment of $3.5 million, the seed round. The next round was IPO in 2019. So we operate as a very lean and mean startup. We still try to maintain this -- as now we are the biggest company in the space. We can maintain -- expect to maintain 83% to 85% gross margin because of the fact that our ASPs are very high. Because of the IP that we have, we can maintain very high ASPs. We don't have too many competitors that can compete with us on the surgical or minimally invasive procedures. And we manufacture in Israel using some outsourced manufacturing agreements. That helps us a lot in maintaining a very low cost of manufacturing. Also the fact that we are mainly focused on radio frequency. This is a much more effective and efficient energy to work with and less expensive than laser. So taking all this into consideration, I believe we can maintain this gross margin range also in the long term. R&D. I think R&D, we don't like to look at it as a percentage of sales, more as a total dollar spend and productivity. We were able to bring, in the last 4, 5 years, 2 to 3 new technology or new products to the market every year. This is much better than any other company in the space did. And we plan to continue to do that. So we know that the R&D structure that we have in place can continue to bring at least 2 new products to the market. G&A, very lean and mean mentality. And the rest is sales and marketing. And on that, this is the only thing we don't save on. We spend 35%, up to 35% of our revenue on sales and marketing because this is an industry that is very heavily related to sales and marketing. If you want to continue to grow and take market share, you need to continue to spend. And luckily, we have the gross margin and the profitability to afford spending 35% on gross margin -- on sales and marketing as part of our business model, which is not something many other companies can say.

Sure. And with the growth trajectory that you have, constantly investing and expanding the sales force and so on, getting into new specialties, that you can see the need for higher spend there. No, that's super helpful. And I think given that we're at time, we should probably stop, but -- so with that, I'll say thank you, both, for coming, and this is a really helpful kind of overview of what's unique about InMode at least from a perspective of a traditionally medtech analyst. So thanks.

Thank you, Matt. Thanks for having us.

You bet.

Thank you.

See you.