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

Good afternoon, and welcome to today's session at the JPMorgan Healthcare Conference with SI-BONE. My name is Jonathan Pham from JPMorgan's Healthcare Investment Banking team, and it is my great pleasure to introduce you to Jeff Dunn, President and CEO; as well as Laura Francis, CFO and CEO -- COO of SI-BONE to kick things off.

Thanks, Jonathan, and thanks, everyone, for attending. I'd like to just jump right into the slides. We'll skip by the safe harbor statement, and I am now on the third slide, starting with transforming and leading the sacropelvic space. We are addressing a very large market in the sacroiliac joint, which is the largest joint in one's body. It is responsible for about 20% of all lower back pain, and the market is about 279,000 potential procedures per year. We started the company about 13 years ago. We are less than 10% market penetrated, mostly because it took quite a number of years to get through the reimbursement. And now we're in a terrific place, and I'll talk more about that. So we did pioneer this space. In this past year, we did 7,500 procedures in the United States. And we have the majority of the market share. We have about more than 20 competitors. And according to Spine Market, which is tracking the market share. In 2020, our market share increased to about 64%, up from about 58% in 2019. So the strength of the company is getting even better each year. We did, at the beginning because most surgeons have not been educated in the anatomy of the sacroiliac joint, in the sacropelvic area, in the diagnosis of this particular malady with lower back pain, decide to invest in lots of clinical data. So we now have 5-year clinical data and there are now about 95 peer-reviewed published clinical studies on iFuse, which is our main product line. Because of the strength of the clinical data, for the first time in medical device history, payers have written policies to say that only our product is to be used. And there are 37 payers in the United States that have those exclusive designations in their policies, so that they -- the surgeons can only use iFuse. We have about 120 dedicated field reps in the field, and we have a very interesting pipeline of current products and a pipeline of products coming. We also, beside clinical focus, we have a real education focus. About 3 years ago, we invested in some simulation technology, which Laura will talk about a little later, that allows us to train surgeons with no radiation, very quickly and that is part of our market expansion strategy that Laura will talk about. I also mentioned that the clinical data has been produced because many of the academics or many of the surgeons do not understand the diagnosis and treatment because before we came on the scene about 13 years ago, there was no reason to teach this area of the body or address this malady because there was no solution. Now we have, in the past academic year, gone to 50 academic medical centers and done trainings, and we have trained more than 200 fellows and residents. As an example, at the Mayo Clinic, in 2019, we did our first training session. There were 14 surgeons that attended that training. Last month, we were asked to do an additional training and there were 65 health care providers at the Mayo Clinic that signed up for that training. They only allowed 25 in the room physically, but the demand for training is increasing, and using our simulation technology, we believe we can expand the market and the surgeon base. On to the next slide. The market is very large at $2.5 billion potentially per year in the United States. As I mentioned, we have more than 60% market share and the entire market, in our estimation, and according to the Spine Market, was about $110 million. The big win for investors is not for us to take the other 40% of the competitive business, although we are doing some of that. The big win is to increase the entire market to $200 million, $300 million, $400 million, $500 million through growth initiatives, like patient awareness, surgeon and HCP training, increasing our sales force, additional products and coverage and reimbursement. I'm on to the next slide. You can see the progression of U.S. cases over the last few years. In 2017, we did 4,300 and then up to 5,100, up to 6,400. And even in the face of COVID, which affected us tremendously last year, we grew the number of surgeries to 7,500 in 2020. When we went public in Q4 of 2018, our growth rate was 13% year-over-year in that quarter. We progressed to 19%, then 21%, then 23% and then to 27% in Q4 of 2019. On January 1, 2020, the surgeon payment was changed by CMS to increase by 27%. We did expect some elasticity to help us with the growth rate but, of course, COVID arrived. We did, on the positive side, get a Cigna coverage win in that same time frame. We were on track to do 30% growth, up from 27%, but because of COVID, we only delivered 12% growth. And then the growth through the next quarter in Q2, because of the effect of COVID, it went down to minus 14%. We did get another huge win with Aetna and increased our covered lives to 300 million and then had a very terrific recovery in Q3 of 2020 with 26% year-over-year growth. One of the things that we had said was we were concerned about a COVID resurgence in Q4. We all know that has happened. And we would have had a very good growth quarter, but because of COVID, particularly in November and December, our growth rate was 11% to 12%. At the same time, we did have a positive there with a Humana win, and that was an exclusive coverage policy. Some people ask me, do you cut a deal with them? Do you give a discount? Do you give a rebate? Nothing like that. It's strictly based on the clinical evidence that has been produced out there. And Humana, on their own, made the decision that only our product should be used for this particular surgery. I'm on to the next slide. On the left side, these are the major joints in the human body. You can see that they're all constructed differently. And for the SI joint, we needed to invent -- Dr. Riley, I should say, who was my co-founder, needed to invent a different kind of technology here, hence he invented an -- a 3D triangular implant for anti-rotational purposes. So these implants, typically, there are 3 of them that go in with the surgery. They go across the joint. They go in laterally through a very small incision of about 1.5 inch and go from the hip side or the lateral side into the sacroiliac -- into the -- through the sacroiliac joint into the sacrum and create like girders in the building and take away their micro motion. You can see those implants are 3D printed. They're very porous. They're made to look like cancellous bone and, therefore, create a very good bone growth environment. To the next slide. There are about 32 million people that suffer from lower back pain each year in the United States. And the incidence is, in the literature, between 15% and 30% vis-à-vis how many -- what percentage of lower back pain is attributed to the sacroiliac joint. So if we take the low end, i.e. 15%, and multiply it by 31 million, 32 million people, you get to 4.7 million SI joint sufferers. But not everyone is a surgical candidate because if you're a 3 on a scale of 1 to 10, you're not going to get surgery. If you're an 8 or 6, 7, 8, 9, 10, the you're surgical candidate. So in our large U.S. randomized study, 31% of the patients who were screened for lower back pain and found to have SI joints actually had surgery. So you multiply 31% x 4.7 million and you get 1.4 million people or patients that are eligible and good candidates for surgery. In that same U.S. randomized study, the average patient goes in pain for 5 years, so we divide by 5 to get to 279,000 patients per year from a top-down standpoint of our market. Again, we did 7,500 surgeries last year in the United States and, again, these are U.S. numbers on this page, so we have a long way to grow and create shareholder value by realizing the market opportunity. There's also a bottom-up way to look at the sizing of this market. There were 1.2 million therapeutic SI joint injections last year in the United States, which means there's lots of people that have been recognized to have SI joint issue, but they are basically getting these therapeutic injections and creating less inflammation and trying to treat these particular patients. But in many cases, it's not really a successful therapy. These are steroid injections. I don't think any of us want to have a lot of steroids over a period of time injected. And when there was a structural problem, surgery is a good option for the right candidates. On to the next slide. As I said, we have pioneered this space when we started the company in 2008. We have now done more than 50,000 procedures and over 2,300 surgeons worldwide have been trained and performed at least 1 procedure. We're finally at the place where we also have terrific reimbursement coverage. We work closely with all the insurance companies in the United States, and now there are 312 million people that are covered and can have our surgery or are eligible for our surgery and 80 million out of those are exclusive covered lives. Before one gets to surgery, you need to really hone -- we needed to hone the diagnostic algorithm. As you may know, in lower back pain, oftentimes, the surgeons look at x-rays, CTs, MRI, and they see a bulge, they see a compression, they see a fracture, and they think that they may have found the answer to the pain. However, the sacroiliac joint, which, on average, we kind of used 20%, as I mentioned, it ranges from 15% to 30% in the literature. But on average, 20% of these patients, say, have SI joint issues, and it's not visible on an x-ray or a CT or an MRI. So we have to teach the diagnostic algorithm. You can see this patient on the left pointing to the sacroiliac joint on the right side of her body. Typically, lower back pain from the main part of the spine is above the belt and in the middle. On the SI joint, because you have 2 of them, left and right, joining your spine to your hips or your hip bones, they're offset. And so we teach how to -- teach the physicians, the PAs, how to take a patient history, how to examine the patient, and then if they suspect that the patient has SI joint issues, they go on to provocative tests. These take 2 to 3 minutes. There are 5 tests that can be done in that period of time. So they're very quick and there are various tests that stress the joint and create potentially a little more pain or show you that they have SI joint issues. If they're positive in 3 or 5 of those provocative tests, they go on to a fluoroscopy-guided injection with about a 1 cc or 1.5 cc of anesthesia directly into the joint. And if that relieves the pain, they are a terrific surgical candidate. However, every patient should try nonsurgical management or conservative care. Surgery should be called the last resort. As I said, in our large randomized study, 31% of the patients actually had surgery. Conversely, 69% did not have surgery. So the therapies that are required by the insurance companies before they will approve surgery are physical therapies, some pain killers, therapeutic injections, radiofrequency ablation, which really doesn't have very good success rates in the literature. And so they go through those. The old way to do this was an open SI joint procedure, that's really not done anywhere in the United States today or in Europe or our procedure. I'm on to the next slide. As I mentioned, this is a 3D printed triangular implant. It is very, very porous. On the left side, if you have a regular titanium surface, it looks like that box on the left. If it's -- if you put TPS, or titanium porous spray, coating on it, it looks like our first-generation product, which is the second box. And we upped the game to try to make -- with our 3D printed product, which we introduced a couple of years ago, make it look like cancellous bone, which in our bodies is the best bone growth environment and so hence, we built iFuse 3D. And on the right, you can see what it looks like when the bone grows on it and through it. All of our competitors are screws. We have 6x the rotational resistance because we have triangles, 3x the strength, and they really haven't invested in any clinical studies. As I mentioned, there are about 25 competitive companies. There's a grand total of about 18 publications between them and no high-level randomized studies. So we have a platform technology. We've also built all kinds of enabling technologies to support the surgeons, and we are moving into the adult deformity business as well as the trauma business. We introduced an adult deformity product last year, and we are starting to do more trauma-based surgeries. The goal of our company is to own the sacropelvic area of the body, and we are certainly the leading company in that particular space. Our intellectual property, we have 54 issued patents, 35 more pending. The base technology goes through November 2024, which is the triangular technology and the 3D patents go through out to 2035 as well. The patient experience is terrific, and that's why the insurance companies have covered this and covered us exclusively. There are, as I said, 5-year studies, and I'm now on the 5-year study, which I believe is Slide 18. This is the 5-year study. You can see that the patients start about 80% of the pain scale, the visual analog scale. They get better dramatically, and they stay better over this 5-year study. So with that, I'd like to turn it over to Laura to complete the rest of the presentation.

Thanks, Jeff. And just a reminder to everybody that you can submit questions via the conference website. I'm on Slide 19 right now, and this shows our revenue and our gross margin over the last 5 quarters. And what you can see is -- there are really a couple of things you should take away from this. So Q4 of 2019, Jeff mentioned that we had record revenues in that quarter of $19.8 million. We grew by 27%. You can see that in Q1, those revenues declined due to the effect of COVID in the last couple of weeks of March and then Q2, in particular, April was a difficult month. Our sales were down 85% in that month. But what we also saw was a return of our sales to growth already by May at 6%. And then June, we actually had 42% growth. And then going into July, we didn't give growth numbers year-over-year for that month, but it was in a similar range as June. And what I think that should tell you is how quickly our business came back from COVID, both the core base business of new patients that are seeing one of our surgeons but also reschedules. It really took -- as soon as the pandemic subsided, it only took around 3 months for us to work our way through that backlog of patients. And so as you see in Q3, we finished the quarter at $20.4 million or 26% growth, which was record for us. And although we were impacted, as Jeff also mentioned, in the fourth quarter by COVID, we still had a record quarter of $21.9 million to $22.2 million in sales, even with over 150 cases that we are aware of that were canceled. That doesn't even include what we did not see come on to the books. So I think the takeaway from this is how rapidly we were able to return our business, and even being impacted in the fourth quarter that we were able to sequentially increase our sales approximately 10% between Q3 and Q4. The other thing to take away from this particular slide is our gross margins tend to be in the high 80s. We were impacted in the second quarter because of COVID, but we quickly returned and increased over 200 basis points in the third quarter back to the high 80% range for our gross margin. If you go to the next slide, this talks about 2021 growth drivers. So we actually had a follow-on financing in October, and we finished the year with almost $200 million in cash and marketable securities because with the way that we work through reimbursement, we see reimbursement as a tailwind to us at this point versus a headwind. And so what we wanted to do was even with some of the challenges that COVID presents, we wanted to put in place an accelerated plan, and that includes 4 different areas of investment. The first is in our sales force and hiring more salespeople. The second is introducing direct-to-patient initiatives to increase patient awareness. The third is launching 2 new products in 2021 in the adult deformity and trauma space. The trauma product also has applications for our core market and so adjacent markets are a part of our growth strategy. And then surgeon training, we actually implemented a new program in 2020 in July, where we can use simulators to train our surgeons to perform our surgery. Previously, we primarily relied upon regional training and in large cities, New York, Chicago, Las Vegas, San Francisco. And now what we're able to do with these simulators is that we can train surgeons better, quite frankly, than we did in a cadaver lab with our virtual system. If you go to the next slide, it gets into a little more information on each of these initiatives. So on Slide 21, we're talking about the investment in our U.S. sales force. At the end of the third quarter, we had 116 FTEs in our U.S. sales force, including 59 sales reps and 57 clinical support specialists in 12 sales regions. When we finished Q4, we had 122. So we've added 6 people already. 5 of them senior sales reps who are focused on the more complex educational part of the sale and then 58 clinical support specialists who are primarily responsible for cold calling, lead generation with new surgeons as well as case coverage. And we also increased the number of regions from 12 to 14, which we think is an important part of growing the field force is making sure that there's appropriate sales management in place, and our team is doing just that. If you go to the next slide, it talks a little bit more about the simulator surgeon training system, and I'd like to take just a little bit more time on this. We have 5 simulators that we were testing in the field for the last 6 months of the year. And it talks about some of the benefits anywhere, anytime without travel, on demand, no radiation with virtual CTs, eliminating the expense of the cadaver. And I even mentioned that it's a better procedure if you spoke with our Chief Medical Officer, Dr. Carlton Reckling. And the reason why is because normally with the cadaver training, you're working with the cadaver that can be in various states. And instead, what we have are consumables that have female anatomy, male anatomy as well as dysmorphic anatomy, which is a malformed sacrum. And so what our surgeons are able to do is to work with the simulator and on different examples of what they may run into in their own practices. And so what you can see is just with those 5 simulators, 4 of them in the U.S., we trained almost half of our new surgeons using the simulators. So there was a pretty rapid move toward the simulators. And in fact, we're adding 20 simulators in the first half of this year. We've already purchased them, and we expect to start receiving them already this month. And it gives us the ability to really change up the game here, where there's 7,500 target surgeons. Approximately 1,600 of those have been trained and treated at least 1 patient, and so we still have 6,000 surgeons that are out there to train. And if you do some basic math, the simulators that we've been using in the field in late 2020 were used approximately 3 days per week. And if you do that math, you can actually train approximately 3,000 surgeons over a 12-month period with those 20 simulators in the United States. So really a way to more rapidly accelerate our ability to train surgeons. The other comment that I would make on this is that when we looked at the trainings, there were 2 types of trainings that we had. One was on new surgeons, which I've been talking about, but we also saw around 50% of our simulator training was being used for retraining. So these are surgeons who have been trained and done at least 1 case, but they've been inactive. So in total of those 1,600, we have a little less than 600 surgeons who are active at this point in time. So there's around 1,000 that we are trying to get to in order to ramp them back up now that reimbursement is in place and now that the surgeon payment is at a level that we believe to be adequate for all surgeons. The next slide shows the -- actually some pictures of the simulator being used. So on the far left-hand side, this is a surgeon in Michigan. And obviously, with COVID, you have to be nimble. And what our sales team was able to do, along with our training manager for professional education, they actually trained a surgeon at his home outdoors. And then you can see in the middle of the screen the actual simulator. So this is what the surgeon is going to use in order to replace a cadaver training. And on the right-hand side, what you can see is they're using the instruments that they would use in a typical case. And the bottom right-hand side shows you the visualization so that they can understand if they have properly placed the implant across the SI joint. The next slide, I'm moving to talk about significant milestones, and this really just summarizes some of the more recent news about the company. So as I mentioned, we've made a lot of progress on reimbursement. Humana came out with an exclusive coverage recommendation in December, which was really exciting for us, but also Priority Health and Blue Cross Blue Shield Association reaffirmed their exclusive policy. So these were all very important announcements and just continue to show the reimbursement advantage that SI-BONE has. Another announcement that came out earlier this month is the ISASS policy update. And in that policy update, to summarize it, it provides that the only evidence, high level 1 evidence on the efficacy of SI joint fusion is iFuse, number one. Number two, that the coding for CPT code 27279, which is minimally invasive SI joint fusion, as well as 27280 for open is for translateral procedures, and there was a recommendation for an unlisted coding for all others. So obviously, we fall into this category of being the recommended approach by the societies. The final milestone that I wanted to talk about is from a clinical perspective, we have a SILVIA study that's going on that some of you may be aware of. This relates to our Bedrock product in adult deformity, and we enrolled 41 patients by the end of the year. So we're pleased with the progress there, even in an environment where COVID has been a factor. One of the other things that we talked about in our more recent press release in addition to our Q4 record results is a senior management transition. As Jeff mentioned, he has been the founder of the company. He's been with the company for 13 years. And so Jeff is actually going to be moving to the Executive Chairman of the company. By May 1, he'll be working 50% time. He will be advising me as the new CEO of the company as well as working on strategic issues, and the plan is for us to work together in that capacity for 2 years and then for Jeff to continue to be the Chairman of the Board. As I mentioned, I will move from the Chief Financial Officer and the Chief Operating Officer to the CEO of the company. I am currently in the process of identifying candidates for the CFO role. And so that is why we are targeting May 1 as the date for the transition. In addition, Tony Recupero, our Chief Commercial Officer, is moving to the President of the company. He is taking on additional responsibilities, including medical affairs, professional education, reimbursement and market access. And Tony is a key to our management team. He has been in the orthopedics industry for approximately 30 years. He was the VP of Sales for Kyphon when they went from 0 to $250 million. So he really understands how to help us to build out the market here for the future. I'm going to turn it back to Jeff for the final slide.

Yes. I think why don't we just hold on that. I see a couple of questions in the chat. The first one is the 2021 growth, direct-to-patient initiatives. So we completed our first 6-week test following our radio tests. The 6-week test was TV test in multiple cities. That looked quite promising. We are starting another multicity test on February 1, and we should have readouts on that later in April. The -- we're making some operational improvements because we put up a call center, and just with call flow and calls into the call centers and then out to the surgeons' offices for the patients as well as making some tweaks on the television ads. So more to come later in the spring. The second question I see has to do with ASCs. We had about 10% to 15% of our business as ASCs. It's a little bit at the higher end of that right now due to COVID. This surgery certainly can be done in an ASC. So we do expect that to tick up a bit. I don't think we expect it to get more -- to be more than 20%, 25%. Of course, it's up to the surgeons to decide on the site of service, whether that's inpatient, outpatient or in an ASC. And then I see a third question here. Do you expect more -- any more payers to move from nonexclusive to exclusive payment status this year? We saw Priority Health, as an example, which is in the Midwest, who had a general coverage policy recently moved to an exclusive policy. As Laura mentioned or maybe I mentioned, we have 80 million covered lives that are exclusive in the United States and 37 payers. There are many payers that we're talking to who are looking at the additional clinical evidence who may go exclusive. I mean the payers want to know that the surgery works, that the surgery lasts, that it's durable and then understand the revision rates. Typically, in spine surgery, revision rates can be around 10%. Our revision rates on our first-generation product were north of 3%, which is great, but we've improved it with iFuse 3D significantly. And that's important because someone's got to pay the cost either in the first 90 days in the global window or outside of the 90 days, which would be in the insurance company. So we don't have any forecast there on additional payers going to exclusive. We did get Humana, which was exclusive. I will tell you, we were hoping to get Humana. We did not expect to get exclusive. And I think it's a nice positive that they looked at the clinical evidence and decided to go in that direction. So maybe it's just -- I think that's it for the questions. Maybe we can just go to the last slide, and I'll do a brief summary. We've gotten to a place where, as Laura said, we have put in the accelerated growth plan and it's basically because we have phenomenal evidence at closer to 95 peer-reviewed papers and multiple randomized studies. There are no competitors that have randomized studies. And as far as I know on clinicaltrials.gov, no one started, and it takes -- to do a 5-year study, it may take as many as 7 years. So we feel like we're in a very good position from a clinical evidence standpoint. From a reimbursement standpoint, we did more than $73 million this past year, and we have very good gross margins compared to most of the industry. But the real win for us as a company and for our investors and the way we can increase the market value of this company is to increase the market. And so the current market was a little more than $100 million, but there's huge opportunity over the next few years to move toward that $2.5 billion, so that we can increase market share. And finally, we have the capital to do that. As Laura mentioned, you can look in the financials. But in summary, we only burnt $7 million or $8 million through last year, each quarter, I think, on average. So we're well capitalized to expand the market, and we will be the primary beneficiaries. So if there are no more questions, Laura and I thank you for joining today. And we really appreciate it. And if you'd like to follow up with us, we're certainly available. Thanks very much, and have a good day.

Thank you.