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

Thank you everyone for joining us for Day 4 of the Morgan Stanley Healthcare Conference. I'm Drew Ranieri, one of the medical device analysts here. From SI-BONE, I'm excited to have CEO, Laura Francis; and CFO, Anshul Maheshwari here joining us today for a fireside chat. Before we get there though, just a quick disclaimer. For important disclosures, visit morganstanley.com/researchdisclosures. If you have any questions, please reach out to your Morgan Stanley sales rep. With that, Laura and Anshul, thank you so much for your time today. I really appreciate your participation again this year at the conference, and looking forward to the discussion.

So I don't think you'll be too surprised where we're going to start. Just kind of the general procedure environment. In early August, you gave some directional guidance for modest sequential growth into the third quarter. You called out some factors, including normal seasonality, more conferences, one switch to virtual, surgeon vacations -- vacationing and the variant. So just like to see how it's kind of shaping up? And any detail that you could provide?

Yes, happy to, Drew. And thank you very much for inviting Anshul and I again this year to present. We have a lot of meetings today. They look like great meetings. So really appreciate the invite. The other thing that I would say is I actually couldn't be prouder of our team and how we have navigated through this particular environment. During the pandemic, we've gained nearly universal coverage of iFuse in the U.S. We've grown our sales force. We've introduced our simulator technology for remote surgeon training, and we've even launched our iFuse TORQ product with applications in our core market as well as in trauma. So we have executed really beautifully during this whole pandemic. As you said, on August 2, during our earnings call, we did maintain a conservative tone, given the uncertainty around COVID and normal third quarter seasonality and vacation schedules and there were also multiple surgeon conferences during the quarter. So what we tried to do throughout this entire process is just be as transparent as possible. And while vacations and conferences actually have been less of a headwind, those have been offset by an increase in elective procedure delays due to Delta. But given that, we're not updating our guidance at this point in time because we feel like we took into consideration some COVID effects in the third quarter and also a strong fourth quarter. But let me give you a little more insights on the impact of Delta. So Delta, we did start to see impact the business in August and it was mostly in the southern states and hospital resources were more focused on COVID cases and some elective procedures were delayed. And then since then, we've seen some intermittent deferrals of elective procedures in certain other regions in the Northwest, for example. So it feels a lot like what we saw during the winter this last year. But as with prior surges, we expect these procedures to be rescheduled in a short period of time, and it will be based upon the capacity that the hospital actually has. At the end of the day, the reason why I think we've navigated the COVID environment as well as we have over the last year and a half is, this is a procedure where these patients are debilitated. They're in a lot of pain. It's a highly successful procedure. 95% of patients would say they'd have this procedure again, so surgeons want to perform it. And then it's also an outpatient procedure or in an ASC. So we estimate 80% of our procedures are in one of those 2 sites of service, which is less impacted by COVID. And so we navigate well through it. And then at the point where the sites of service are able to handle cases, they come back very quickly. So at a fundamental level, I'm really pleased with the strong underlying business momentum as I look at surgeon engagement and new case bookings, and it gives me confidence that once the transitory Delta impact fades, the business is set up for accelerating growth.

And a couple of follow-up questions from that. You talk about Delta is looking -- or the situation is looking similar to the winter time of last year. And if I'm remembering correctly, I think the impacts in the fourth quarter might have been like 150 scheduled cases that were canceled and then you, of course, didn't know what wasn't booked at that point. But is that kind of the right proxy to think of? I know that was more of a national impact. We didn't really have vaccine rollout. Today, it's more, for lack of better words, localized to some geographic regions, but any perspective there?

I wouldn't give you the number of cases per se, although we have been very transparent with all of that. And obviously, the 150 came in multiple months. But if you look at things on a monthly basis, it's in that similar sort of range.

And just in the geographic areas where you're not seeing the Delta impact. Just on an underlying basis, what kind of trends at the hospital level or surgeon adoption are you seeing that's kind of giving you increased confidence in the underlying business and the foundation of iFuse?

For us, it's really -- we are really focused on market development at this point. And so it's hiring of salespeople in order to cover growing territories, then it's those salespeople identifying surgeons to train. And so our simulator technology has been particularly important during this period of time. We can -- we have 21 simulators in the United States right now. We can bring them into the surgeon's office, outside to their home, if that's what we need to do. Whatever we need to do in order to train the surgeon, we actually do that. So it's allowed us to actually build the business in the way that we would have in a normal environment between the hiring of the salespeople and then the training of the surgeons.

And last COVID question, but you talked about the procedure side. Is there anything in terms of supply chain or supply constraints that we should be thinking about?

We have not seen any impact to our implants related to supply chain issues. So titanium, there's no issues in terms of raw material supply in terms of the manufacturing of our implants. Our implants are 3D printed. So it's not a heavily labor-intensive process. So they're printed in a very large piece of equipment. And so no issues on the implant side. On the instruments and the instrument trays we've seen some impacts because stainless steel was an issue. Some instrument suppliers had furloughed staff. They were trying to bring them back, staff back up. They ran into potential bottleneck issues. But that didn't impact our core business anyway in any way. We already have the instrument trays that we need, the instruments that we need in order to conduct cases with our surgeons. I did mention that it had some impact on new product development because with new product development you're developing new instruments. And they're -- a typical lead time for an instrument maybe 4 months, and we were seeing some situations where they were 8 months instead of 4 months. So that was the only supply chain impact that we really ran into during the last 18 months.

Let's maybe move on to kind of reimbursement and coverage. I mean, Anthem seems like it's the last coverage domino to fall into place. I think you've talked before maybe about the cadence of how that could affect your overall procedure, volumes or surgeon adoption over time. But any more detail that you can offer up there? And just as you're thinking about the broader coverage landscape, I think 300 million covered lives, 120 million exclusive. Just what's the opportunity on that exclusive side to close the gap there?

I joined the company in 2015. And at the time, we had literally no coverage of this procedure. And so where we've come from then to now is really quite extraordinary. We're at the point where we have basically universal coverage of the procedure, over 300 million covered lives in the United States. And as you said, 120 million of those are exclusive to iFuse. Almost all of those are commercial payers, by the way. And so if you look at commercial payer coverage, it's around 210 million covered lives in the United States. So we have over 50% of covered lives that are through commercial payers, and it's a very big deal. So Anthem was the most recent decision that happened on July 30, and it was very exciting news for us. So what they did is they transitioned to AIM Clinical Appropriateness Guidelines for SI joint fusion. And basically, they have a requirement that iFuse triangular implants are used exclusively in those procedures. And the reason why is because of all of the clinical data that we have. We have 95 published papers at this point and 2 randomized controlled trials. We have one prospective study that goes out over 5 years and it shows rapid, dramatic and durable pain reduction and disability reduction over that period of time. So that's why we're getting all of these exclusive decisions. And you were saying what impact does that have, well, Anthem covers approximately 15% of the people in the United States. But I believe that the impact of the Anthem decision is actually even larger than that 15% because a surgeon decides whether to perform a procedure or not based upon whether the majority of the patients coming into his or her office have coverage. And if Anthem wasn't covering, the second largest payer in the United States, it was dissuading those surgeons from going to training, from starting to diagnose and starting to treat these patients. So we anticipate that there will be some impact already in 2021 from this decision. There were patients that we know of out there that were going through the appeals process. And so those are low-hanging fruit basically. And the good news is that Anthem is looking actually very closely at the medical necessity criteria, including the requirement for an iFuse implant. So -- but we know that those cases are being worked through, but we also believe that the additional -- it's going to be a big additional catalyst for surgeon adoption in 2022 for those that have been holding out. So while now we have near universal coverage and reimbursement as a tailwind, the Anthem exclusive has actually energized us and our reimbursement team to double down on our efforts to convert other providers to exclusive coverage based on our clinical data. So I think we're done in terms of reimbursement, but we continue to actually seek additional exclusive coverage decisions.

I think you've brought up kind of an important point that there have been some surgeons that might have been on the sidelines because of reimbursement and coverage. But like you're on the offensive now, going after that surgeon base and you have the simulator training so they can get reoriented.

We have a whole program right now around the Anthem decision. So we have -- it's a marketing, sales and medical affairs initiative where we're reaching out to all of those surgeons initially through our marketing team then engaging those surgeons with our sales team, our territory managers and then working with our medical affairs team in order to get those surgeons trained if they're new or retrained if they previously were performing iFuse procedures. So it's been a big effort, just a great effort by our commercial team headed up by Tony Recupero, and it just gives us a really great opportunity to reengage on this topic with a lot of surgeons.

And so when we look at SI-BONE, I think we kind of see a company that -- it's about execution. It's still maybe a little bit about market development at this point. As you kind of pointed out, most of the prior headwinds are now behind the company. And putting aside kind of the elective procedure pressures for a moment, just when you look at IQs, you look at adding on new technologies like TORQ and the new adult deformity product at some point, why shouldn't this business be anything but a durable 25% plus grower?

The way that I look at our growth is I look at pre-pandemic. And right before the pandemic hit our fourth quarter of 2019, our year-over-year growth was 27% in the fourth quarter of 2019. And then the first quarter of 2020 when we looked at our revenues and then took into consideration those cases that were canceled in March due to COVID, we would have been close to a 30% growth rate in the first quarter of 2020. And so this was where we were at late 2019 early 2020. And if I think about all of the investments that we've made since that point in time, all the execution around reimbursement, hiring additional salespeople, training of surgeons with our simulator program, the launch of our TORQ product, it gives me a lot of confidence in further accelerating the growth of the business late this year and into 2022.

And to maybe go to the ASC setting for a moment. I think it's 20% of your revenue generally, give or take, might be tied to the ASC setting. So how is the company positioned for success there as more procedures are moving into the outpatient setting and ASC setting? I mean, are you doing anything in terms of a different sales strategy? And maybe just talk about the impact on ASC potentially?

I think we're -- go ahead, Anshul.

Happy to take that question, Drew. So from an ASC perspective, Drew, you're right. A vast majority of our procedures are either in a hospital outpatient or an ASC setting, and ASC is about 20% of our overall procedures. And as we've shared previously, our procedures are today profitable at all sites, whether it's ASC outpatient or inpatient. And what we've actually seen from prior surges is, every time you have a COVID surge, you start seeing an increase in number of procedures that are in the ASC environment because of the simplicity of the procedure. But then as things normalize, you'll start to see some of that shift back to that hospital environment. But over the long-term, we do expect that because of the simplicity of the procedure, the move towards an outpatient and ASC settings will continue, and we are really well positioned for that change. And you're absolutely right, ASCs are a bit more price sensitive, and that tends to have some impact on our oral pricing and gross margins. But again, Tony and his team have done a really, really good job to minimize the potential impact on pricing. And we've done that by continuing to engage the ASCs at a strategic level, like we did with surgical care affiliates to drive a deeper penetration, some exclusivities and build those long-term relationships that allow us to gain more market share even there. And then when you think about some of the proposed rules that just got announced for 2022 in a hospital outpatient and ASCs, there were a lot of updates on SI joint fusion. And the biggest update was the fact that rates actually increased for minimally-invasive SI joint fusion in both those settings by about 5% and 6% respectively. So you've got that economic benefit also going into the ASC environment that should support it. So our view is, assuming these proposed changes on rates are adopted, it will be a positive economic outcome and an impact on how hospitals and outpatients and ASCs view are pricing for our implants and should actually help with the higher payment levels.

And Anshul, maybe sticking with you for a moment, just on the pricing dynamic for ASP. I mean gross margins are kind of in the high-80s right now. I think you've talked before about that moving down over time near or intermediate term, but just aside from the shift to the ASC, could we think that maybe new pipeline products like TORQ or the next-generation adult deformity product pressure margins initially, but then get accretive over time? Just how stable should we be thinking that 80% is...

So let me just start by saying I'm really pleased with what our sales and ops team do to maintain this industry-leading gross margin. We saw that happen in the first half of 2021 as well, so really happy about that. And I do believe that the strength of our gross margin signals the strength and differentiation of our products, which is driven by the nature of our clinical results as well as the strength of our brand. And again, our sales force, like I said, Tony has done a phenomenal job even in the ASC environment. So when we think about gross margins, Drew, we take a few things into account. The first one being sort of this shift to ASC, which we know will continue to have some pricing pressure, but we navigate that effectively. Then you've got this general price decline that happens as people are focused on healthcare cost, and we sort of think about that as being 1% to 2%. We had a big higher number last year because of some of the noise around COVID. And then when we think about new products, from an ASC -- from an ASP standpoint for an implant, we're very focused on trying to make in the ASP at a consistent price level. But on a procedural level, you've got the traditional SI joint fusion, which uses 3 implants versus if you're looking into adult deformity or you're looking into trauma, it could potentially be 2 implants. So while the ASP may -- per implant may not change drastically, the ASP per procedure may be lower because of the number of implants being used, and that will also have some impact on gross margins.

That's helpful. And I want to make sure we touch on TORQ and even Bedrock. So just any more color that you can provide on the ongoing TORQ launch? How big of a product do you expect this to be in 2021 and in 2022? And then just essentially kind of a similar question with Bedrock.

So it's only been 5 months since the full launch, but we are extremely pleased with the resounding initial reception for TORQ across trauma and competitive conversions. And once again, I would say, Tony and his commercial team have really done an excellent job to ensure a successful launch. It's still early days, but we really like the momentum across the competitive conversions and in trauma as well. The surgeon feedback has been great; innovative design, differentiation, all of the things that we are known for and now bringing into our core market as well as in trauma for TORQ. And I'm not giving out numbers in terms of here's how much TORQ is going to contribute this year or next year. But I think what's most important is the product was developed primarily for trauma. And our best estimate is that this market represents a $350 million additional opportunity for the business. And so it's been a great addition to the portfolio along with iFuse 3D, which is the gold standard and that's where a lot of the exclusive coverage comes from. And then Bedrock has been great as well. It really has established us in this position that we envisioned ourselves, and that was as a sacropelvic public surgical solutions company with multiple products.

You touched on TORQ potentially converting competitive accounts, but just on competition more broadly. Just maybe remind us kind of what your current thoughts are from a market perspective? And are you seeing anything from any earlier stage competitors?

We've been growing our market share. We're a market leader. Our best estimate is that we have over 60% market share in the United States right now. And we think that we can actually increase our leadership there with work, for example, in these competitive conversions that we just mentioned. And then also the exclusive coverage decisions as well are -- we believe are going to have an impact. We have started to hear from surgeons who were using competitive products, and they have Anthem cases. And they're usually surgeons that we know that we've worked with. It's possible we can train them. And so it provides us with a new opportunity there. So -- but our primary focus isn't really necessarily on taking market share. What we really want to do is go after the broader market, which we believe is over a $2 billion market.

And now we're getting closer to the top of our session. But I mean, with NASS coming up in a couple of weeks, is there anything that you would highlight that should be put on our radar to better appreciate, whether it's from a data perspective or I guess we know the new products, TORQ, but would there be anything on the new deformity product coming out?

We are really looking forward to the NASS event. We are going to have a number of surgeons who work with SI-BONE in primary SI joint fusion, in adult deformity and in trauma and they're going to be speaking at the event. So we will be focusing on our core products, iFuse 3D, TORQ and Bedrock during that conversation. And then we'll also have one of our simulators there so that the participants involved in the event will actually be able to see how our simulator works, they may even be able to try the simulator as well. So we think it's going to be an interesting conversation. It's always good to hear directly from the surgeons, and some of the people that are going to be on that panel are key opinion leaders within the industry. So we're excited about it.

And just wanted to leave some time for any closing that you might have that you wanted to highlight.

Drew, once again, thank you so much for the invite. We really appreciate it. As I said, we have a lot of meetings scheduled for today with some great investors, current as well as potential. And we know that COVID is at the top of mind. But what I always try to end with is to think about the opportunity that we as a business have here. And for those of you that have been following us for a long period of time, we really pride ourselves on having differentiated product that's patented, high quality clinical data, long-term data RCTs, a high gross margin, a low cost of capital, and we execute really well. So the way that we've handled a very difficult reimbursement decision, I think really shows what we can do as a company. And so I understand the questions about COVID. What I really enjoy talking about are all of the investments that we've made during the pandemic in reimbursement, in the sales force, in surgeon training, especially with the simulators and our new TORQ product. And then maybe one of the things that we didn't touch upon at all was digital marketing as well. There's -- there are 1.2 million therapeutic injections into the SI joint in any year; in 2020, 1.2 million therapeutic injections into the SI joint. And a lot of those patients don't have good awareness of a surgical solution, especially those that are in chronic debilitating pain. And so what we're trying to do with our digital marketing and direct-to-patient initiative that goes on top of all of those other investments that I mentioned is to really increase that patient awareness in order to help drive the business as well. So thanks again, Drew. Really appreciate it. And thank you so much.

Thanks, Laura. Thanks, Anshul. We'll cut it there, but really appreciate it.