SI-BONE, Inc. (SIBN) Earnings Call Transcript & Summary

Good afternoon, everyone, and welcome to the Morgan Stanley Healthcare Conference 2020. As we wrap up our day 2 of 5, it's my pleasure to have with us here SI-BONE, and obviously, 2 members of management, Jeff Dunn, CFO; Laura Francis -- Jeff Dunn, CEO; Laura Francis, CFO. I think I got that right smoothly on the second try. So Jeff is dispensing with his right for a preamble. We're going to jump straight into Q&A.

And Jeff, I want to start with the most important dynamic we learned from the second quarter, which was we saw a couple of spine companies, yourself and Globus, put out very dramatic numbers different than the street, right? We saw a broader recovery across medical devices, but your numbers had a much more dramatic recovery. So let's just talk -- let's break this down a little bit. The first step is, what have you seen sort of post that June, July time frame? A lot of medical device companies at the conference have talked about July-August-September recovery. What have you seen from a recovery perspective since June, July?

Yes, David, as we said in the last call, going into July, we saw backlog very strong off of that 42% growth in June. We've continued to see good activity in the third quarter. As I think everyone knows, consensus has us down a negative growth in Q3. And clearly, we're going to be in positive growth. And that's really I think just based on the strength of the business. But foundationally, as you know, 80% of our business is outpatient or in ASC. So I think patients were okay going to those particular locations. But it also has to do with the strength and the engagement of our sales team led by Tony Recupero, engaging the surgeons through the whole COVID quarter where we took a big hit in April and then positive growth in May and then superb growth in June. And so I think it was really just a testament to the team and the execution during the quarter of not sitting back but going at it and doing 12 webinars, and we just did another one last week with over 100 surgeons on it. So it really had to do with the engagement and then, of course, the momentum that we've -- and the tailwinds that we've had because of reimbursement increasing so much to 300 million lives and then getting Aetna and Cigna more recently.

Okay. So as that -- one of the concerns, I guess, in the quarter was it looked like there was underlying momentum, but some investors ask how much of that is backlog versus sort of new patient growth. So has there been a significant backlog effect you've seen sort of leveling? Or have you seen sort of sequential improvement kind of continue throughout the summer?

I think there was some -- there was obviously some -- a lot of backlog in June. But -- and I'm sure that there was some backlog in July. I think we've, at this point, completely worked through all of that, and we are seeing strength in the business in Q3. When it gets to Q4, we do have -- I have some macro concerns around are we going to see some COVID kinds of resurgence, but I think the fundamentals of the business are very strong. And we can talk more about the simulator and training and some of those fundamentals, which I think will drive the business, on a very foundational basis, training more surgeons. But I think we're powering through the COVID situation really, really well.

Okay. So you -- it sounds like that momentum has continued sort of month-over-month. As you head into fourth quarter, I think every CEO is sort of worried about COVID-oriented dynamics, flu pressures, things of that nature. But assuming the environment we see today, any reason why you think you can't get back to some semblance of normalcy by the fourth quarter? So it sounds like we have seen month-over-month improvement, how are you feeling about new normal in the fourth quarter?

Well, I think -- of course, we're concerned, like, about COVID, with the college kids going back and sometimes come in home afterwards and some sort of outbreaks across the country. But there's -- the fundamentals of our business are intact, and I feel like we're firing on all cylinders with training surgeons with this new simulation system where we're able to train a surgeon in 2.5 hours locally with no radiation, take it to their house, to their office, whatever it may be, as opposed to a cadaver lab. It's -- we're adding sales reps. We opened up for extra 6 more sales reps. And with the CPT payment up, we really don't feel that, that actually kicked in, in Q1 and Q2 because it's really more applicable to new surgeons as opposed to the surgeons that are already doing the cases. So we think that whole dynamic of the interest from surgeons wanting to get trained is going to be improved in Q3 and Q4, or has improved in Q3 and Q4, because the payment is there, because it's easy to get trained. And in fact, the training is even better with the new simulator in a suitcase. So we do feel like Q4 can be normal. It's just a question of patient flow and COVID sort of affecting things that could swing the numbers a bit.

No, totally understand. And I want to talk a little about the dynamics of what's driving this improvement in momentum these last couple of quarters. But just before I do that, Laura, if I think about 2021, I know it's early, so I'm just kind of curious, a lot of companies, say, have commented kind of qualitatively or quantitatively on '21. My model, I think, has your -- my business -- my model, like, '21 over 2019 is something like 33% or maybe kind of underlying growth of sort of 15-plus percent over that 2-year period, which seems doable from my estimation. And then from a margin perspective, which is a little less relevant, perhaps I still have you losing a little money in, obviously, '21. Any comments you've been going off for sort of a '21 relative to '19 from a growth perspective?

I mean we're not giving specific information yet on 2021. But the way that I actually look at our financials, given how unusual this year is going to be, is I'm going to be paying close attention sequentially to what happens with the business. So when we were talking about Q2 versus Q3, we made some comments sequentially about what we thought would happen between Q2 and Q3 would have stepped up from quarter-to-quarter. And then we're not saying anything about Q4 yet, but I think that Q4 is going to be the bellwether for where we're actually at starting into 2021. But I think what's probably most important is to just say that when we went into the issue with COVID, what we did is we actually did focus primarily on 2021 to make sure that we had the salespeople in place, we provided support with guaranteed commissions underneath them to protect the downside, plus providing them with incentives to hit the upside. We kept our product pipeline moving as well. And the whole goal was to just try to hit 2021 with limited impact from COVID.

Okay. So Jeff, regardless of backlog patients, new patients, it's very, very clear this momentum business. Really, I think the last 3 quarters, it's somewhat obfuscated by COVID, but I think we saw it forced first in second quarter. So you talked a little about some of these drivers. It may just be a smattering of all of it, Jeff, but I wonder if you think about commercial expansion, obviously, increased payment code, a lot of reimbursement coverage. You now talked about the training. I think some -- because of COVID, some investors are questioning is there NOI improvement. I think there is. But what are really some of the core drivers that explain why it's gotten so good so fast? Kind of help us understand that more.

Well, beside what I already mentioned, David, on most of it being outpatient and ASC, first and foremost, foundationally, the reimbursement is now a tailwind versus a headwind. And you know, over the last few years, we've had headwinds on the reimbursement side. And there are 2 new aspects on the reimbursement side. One is obviously the -- and the second one is the payment. And really the only payers of real importance. We have 115 payers that now are covered. And Anthem is supposed to publish their spine update in September, so in the next couple of weeks. And so we'd like to really be in a position, and I think we hopefully will be in a position, where we don't have to talk about reimbursement. It's just a tailwind going into 2021. The next thing is the surgeon training. When we envisioned this surgeon training system simulator 3 years ago, we've been working on it with haptics, so you can actually use the instruments. And the whole goal there was to try to make it easy for the surgeons to get trained. So instead of them getting on a plane, we could bring it to -- bring the training to them the next day. So we've only had that out there 45, 60 days. But I think in a COVID world where people are saying, hey, maybe I'm going to Zoom more, maybe I'm not going to travel as much, I think we are set up absolutely beautifully with this training system. And by the way, it cost hundreds of dollars to train a surgeon versus thousands of dollars when you have to have a cadaver lab and pay for cadavers and fly them and feed them and house them and those kinds of things. So I think the second one is increasing the number of surgeons that we train out of those 7,500 potential surgeons. And then, Laura, we talked about the sales force. And then the other driver is the academic strategy around Bedrock that is continuing to make enormous progress at the University of Louisville to Mayo Clinic to NYU. And so we are getting into most of the major academic centers and there is that trickle-down effect around -- from the adult deformity cases to the SI joint fusion cases. So it's really reimbursement headwinds. It's training a lot more surgeons because it's easier to do. So in fact, we think it's more effective with this system because, at the same seating, on the same machine, you can train them on an injection, you can train them on SI joint fusion, you can train on adult deformity, you can train them on a female blank, a male blank, a dysmorphic blank. And all of this is just, we think, beautifully set up for the future for us and for our patients and surgeons. And then with the new products going into 2021, we have 2 major product lines coming that will help us in all 3 of our areas that we're working on, SI joint fusion as well as adult deformity and trauma. And so I think all those pieces have come together quite nicely as drivers and really in the order that I mentioned them.

Okay. That's super helpful. And so what does this mean, Jeff? I mean it sounds like, a, we have inflection; and b, there's nothing that you just mentioned that's not sustainable. I mean all these things, I would argue, from training to payers, to physician payment, commercial expansion, all these things are just really gathering momentum, right? There's not a factor here that seems 2020 specifically seems to build in '21 and '22. How would you help us sort of frame that from a kind of a revenue per rep perspective? You were kind of at $1.1 million, $1.2 million, $1.3 million prior to COVID. Where can those numbers go sort of coming out of this? And how quickly can they get there?

I'm going to let Laura answer the productivity question, David, and then I'll add on top of that as well.

I think your -- the way that you posed it is the way that we do think about it, David. We do think that we have hit this point of inflection that we have really gotten rid of the headwinds that the company has been experiencing for a number of years. And really, the last domino that we're really looking at is Anthem at this point given that they're the second largest payer in the United States. And we think that there will be a decision shortly. We don't know whether it will be positive or negative, but they really are the last holdout here. And they are already covering in the event of pelvic girdle trauma. So they've even opened up the door in the last few months from the perspective of minimally invasive SI joint fusion. But in terms of how to drive the business, those are the things that Jeff and I talk about quite a bit now given where we're at currently, and the drivers of the business are placing sales reps. And we finished last quarter with 62 sales reps in place and 54 clinical support specialists. And those sales reps with the clinical support specialist underneath him or her can do around $2 million in sales a year. And so far, we're only at around $1.2 million. So hiring sales reps, the real question is how many and how fast. Then we have the surgeons that are out there, and there are 7,500 target surgeons out there. And last quarter, there were 455 who had actually done at least 1 procedure. There's 1,500 in the U.S. that have been trained and treated at least 1 patient. So we have 2 goals there. One is to train the surgeons that have never been trained before or treated a patient and then also to activate these inactive surgeons, probably mainly due to the reimbursement environment, which has now improved. So that's a factor. Patient awareness is another factor as well. Not so much that patients aren't aware of this as an issue. There are over 1 million SI joint therapeutic injections a year. So this is identified. But do the patients understand that there's a permanent solution working with an orthopedic or neurosurgeon versus just conservative care with the pain docs? So that's another factor. And then new product development is a really important factor for us, too. We've obviously done some work in adult deformity and trauma, but we think we're really just at the beginning of this expansion of our product line in the sacropelvic surgical space.

So this business is growing 20% in 2019 pre-COVID. I think it's very clear listening to you, thinking about the last 3 quarters, this business will be growing faster in 2020 if it wasn't for COVID. That's kind of a certainty. It's obviously going to go faster into '21 because we have this comp issue. But the real question is this business should be entering a phase of structural growth acceleration, what is that growth? Is it 25%? Is it 30%? Is it 35%? What is the sustainable level? When I think about the reps, the market size, all these factors, I mean it feels like -- I would feel very confident saying it's 25% sustained growth here for several years, but maybe that number is conservative. How can we -- how should we think about that number?

Yes. I think -- I mean, David, we've obviously built a pretty good foundation of a business, and we've just crossed 50,000 procedures just in the last number of days. So we've got the foundation that's accelerating. And as you know, the growth rates have gone from 13% to 18% to 19% to 21% to 27% and a pro forma of 30% in Q1. We are, as a management and a leadership team, working on exactly the issue you're talking about because we feel quite confident that we can grow in 2021 at certainly north of 20%. The question is how much investment and where do we make the investments beginning relatively soon. Because we think we've sort of crossed this place where reimbursement is a tailwind, how much investment do we make in order to potentially drive the business at a higher rate. We're in a good cash position. As you know, our balance sheet has $125 million on it at the end of -- correct me if I'm wrong, Laura.

It was $135 million, Jeff.

$135 million. So -- and we, in the last quarter, as you saw, our EBITDA number was almost on plan, even though revenue was down 14%. So we have a very good handle on the expenses. And I think we're actually being more efficient as a business. If you think about the simulator costing a fraction to train surgeons, so we're literally in the midst now of working on plans to potentially invest more aggressively in the growth. I don't think we're going to talk about guidance until we get to the new year, but I think it sets us up -- we're set up to work in a place where we can make those investments with confidence and know that we can grow in a really interesting way.

I'm curious, you say reinvest in the business, but given that sort of 60% commercial expansion in the business that really happened in '19, I guess, my question would be, isn't there a fair amount of capacity in the commercial infrastructure to grow revenues at a pretty good clip without making substantial investments? And maybe that's what you're saying, Jeff, and we're mincing words, but there is -- you feel confident you can grow fast and control the burn rate. I just sort of feel like that major investment has a lot of scale left in it.