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

Good afternoon. My name is Craig Bijou. I'm one of the analysts here at -- on the BofA Medtech team. And it's a pleasure to introduce SI-BONE and from the company, I have Laura Francis, CEO; and Anshul Maheshwari, CFO. Not Bad. So thank you. Thank you both for coming.

Thank you.

Thank you.

Was hoping to start. I know you guys reported earlier this week. So I was going to start there. I guess just kind of bigger picture, maybe present some of the highlights from your results, when you saw trends, COVID is obviously a big deal for you guys. So maybe just start there, and then we can dig in.

Yes, I'd be happy to at least get things started. So we did just announce on Monday our results and it was a good solid quarter as the way I would describe it. So we grew at 10% year-over-year, ended the quarter with $22.4 million in sales in total. And the primary challenge in the quarter was COVID related. January was one of the most challenging months we've seen since the pandemic started. So it was only second to April of 2020 in terms of cases that were deferred. We actually track cases and reasons for why they've been deferred. And for the month of January it was the highest next to April of 2020. But we did see a really nice bounce back in February, and then March was actually our highest revenue month in the company's history. And so what we believe is that we saw some of those deferred cases come back in the month of March, not all of them and then nice strong demand for the business. So overall, it was a solid quarter for us, especially given some of the headwinds from COVID, but overall, we're seeing the momentum that we want to see in the business. So we are the leader in minimally invasive SI joint fusions and that's really our core market. We've made a lot of investments in it over the last couple of years, universal reimbursement coverage, much of that exclusive with commercial payers and hiring a significant number of sales reps. We actually grew the number of quota-carrying reps last year by around 30%. We now have 85 -- or we ended the year with 85 and actually, we ended Q1 with 88 senior quota-carrying reps. In 2021, we had over 1,000 surgeons who performed at least one case. And in Q1, if you just looked at the number of surgeons that performed a case in that quarter, it grew by 17% year-over-year. So a nice forward-looking indicator for us. One of the highlights from the quarter is our TORQ product that was introduced in 2021 with applications for minimally invasive SI joint fusion plus trauma performed very strongly during the quarter. So a record for the quarter as well for that new product. And then we had a pretty exciting announcement as well technically in April. So the second quarter, but given our focus on sacropelvic surgical solutions, we also announced a new technology add-on payment for a product called Granite, applications in adult deformity with that product. NTAP goes up to a maximum of $9,800, and it's based on a breakthrough device designation that we received in November of 2021. So what we have is a really strong core business in minimally invasive SI joint fusion, but then we have these opportunities in trauma with TORQ and opportunities in adult deformity with Granite where just continuing data, reimbursement access, health economics. So overall, really continuing to execute very well and a lot of tailwinds going into the rest of the year.

Great. And planning to get into a lot of the product information that you mentioned. So we'll do that. I do want to just come back to the Q1 results just a little bit. I know it's hard to quantify how much of that deferred case. How much of it came back in March or February. I mean, I think it was $2 million, if I add up the Q4, January, February, what you said publicly. And I mean, is there any way -- is it half? Is there any way to think about what came through in March or in Q1?

It's a tricky question because what we're able to do from an analytical perspective is to actually look at our sales force system and know which cases have been scheduled, communicated to our territory managers and put into our system. And then if there is a deferral due to COVID-19, that is documented. So it certainly doesn't capture all of the cases that were deferred because of COVID, but it at least documents the ones that we were aware that they were on the schedule currently. So the challenge with your question is I can see all of the ones that are being deferred, but can I match them directly with ones once they come back in. I would say that we more have historical experience with that, that it's a 60 to 120-day period that it takes in order for these cases to return. And we more view it from the monthly experience that we're having after a surge. But it's been such a difficult period. You had Delta in the third quarter, and then you had Omicron in the fourth quarter and part of the first quarter, and which ones were deferred? And then when did they come back? And have you gotten all of those from Q3 or Q4 or not? But what we do know for sure is that these cases do come back and they do come back relatively quickly.

And I know you have some visibility into future bookings. And obviously, you've seen what April has done. So I mean, anything that you can glean from the trends that you saw there and maybe from a sequential standpoint and comparing that to maybe historical trends, what you're seeing? I guess, I mean, is there anything that stands out in terms of the rebound in procedures and...

I would say what stands out is just the momentum in the business continued into April. And so that was an encouraging sign to us. And then we did even talk on our earnings call on Monday about where we were from a bookings perspective that first week of May because it does help you to understand where the rest of the month is going to be. And so what we'll tend to do is look at a certain day of that month, compare it to a year prior so that you, at least in theory, take out some of the seasonality of the business and then make an assessment of where your growth is. And so as I said, we're encouraged by what we're seeing because we're continuing to see that momentum that we saw exiting Q1 going into Q2 in April and May.

Got it. Probably good segue into your guidance. You guys maintained your guidance, $106 million to $108 million for all of '22. So really kind of want to drill a little bit deeper into the cadence of that. Obviously, Q1, 10% growth is below that. So you're expecting an acceleration for the rest of the year. Anshul, on the call, I believe you said that you were -- the Q2 revenue at the time the Street estimates where you were comfortable with, and that's, I think, $25 million to $26 million in that range. And then Traditionally, Q3 is pretty close to Q2 and then there's a big ramp in Q4. So is that -- should we expect that historical pattern? And maybe just a little bit more detail on really how to think about the cadence throughout the year?

Sure. So as we -- as Laura talked about exiting the first quarter, we saw good momentum in the business. As the operating environment is normalizing, it's starting to feel more like 2019 trends, especially as you think about the trending for Q2, sort of what you think of step-up sequentially and year-over-year, similar cadence. The only difference being that we do expect sequential growth every quarter for the rest of the year. That's similar to what we saw last year with sequential growth. Well, we expect that to continue. And a lot of that is based on the momentum we see in the business, the investments that we've made and those starting to play out as well in the back half of the year. So we've -- we will be back offloaded, but the cadence is looking more like 2019.

Okay. And maybe shifting to operating expenses. They came in higher than we were expecting. So I guess I just wanted -- maybe if you guys can spend a little bit of time on what are those investments, kind of why -- kind of what went into it, I can't ask you why it came or why it was higher than what I thought it was going to be. But how much of it is spending from a more normalized environment, and what other investments you're making in the business there?

Sure. Happy to take that. So when you look at it sequentially, our expenses were up 1% from Q4 to Q1. And when you take a step back and see the things that we've invested in over the last 2 years through the pandemic, it was on initiatives that were critical for us to be able to drive top line growth as we come out of the pandemic. It was around building our sales infrastructure, like Laura said, last year we grew 30% there. It was around surgeon education. Throughout the pandemic, we've grown our active surgeon base and there's a lot of investment. That's gone on the surgeon education side. There's also the aspect of R&D on product innovation. We talked about the success TORQ has had. You've heard us talk about the potential for Granite with BDD and NTAP. So those things have been focused on investment. And then on top of that, to support that top line growth, we need to make some operational investments as well so we can scale and that investment is around instruments, which are capitalized and depreciated, but also building up some heft on the operational side to be able to manage a multiproduct company from an OpEx perspective, from a site perspective. So we did invest in a new facility in Santa Clara. So that was an additional facility that we added last year. So these are investments that we made because we know these are required to be able to drive that growth as we get into the latter part of this year and also into 2023.

And I guess the key question there is, as you've made these investments as expenses normalize, when do we start to see the operating leverage. I think on the call, you said you expect operating expenses to grow sequentially, which makes sense given revenue is going to grow sequentially. But are we going to see some leverage as we move through '22 from that perspective. And honestly, bigger picture, does that leverage accelerate in '23? Like how do we think about you being really able to drive that operating leverage going forward?

You're spot on, Craig, as we progress through the year and as the revenue ramps, you start seeing that leverage because a lot of the investments we made, again, these aren't episodic investments, right? These are investments that we've made that are going to be serving us for the long term. So as you start seeing the top line continue to grow, you see that leverage. We expect to see that start little bit in Q4 of 2022 with the ramp that we expect in revenue there, and then continue to accelerate in 2023, given the growth initiatives that we have in play.

And as you think about just your cash position, continuing to invest in similar investments, I assume you expect your business to continue to grow. So assuming that, how are you balancing what you have today getting that operating leverage? And I mean, are there decisions that you're -- is there a compromise that you have to make?

I don't think we have to make a compromise here. I think that we're at this tipping point in the business. And we are developing a new market. So SI-BONE didn't just create something that was a better product or a cheaper product or a faster product, we actually developed a completely new space here in SI joint fusion, identifying the prevalence of it, the diagnosis for it, the technique for it. And so it was really important for us, when people think about SI-BONE, they think about innovation, building markets based on clinical data and based upon an educational focus as well as reimbursement and market access. And what I would say is that we're at a point in the business where we have built really an extraordinary asset in our sales force as well as our product function, our engineering function, clinical, medical affairs, all the things that I was just talking about that we can leverage at this point in time in order to build and grow the business. So I really think we are at that tipping point, and we really don't have to compromise at this point in order to get the growth that we want and the leverage on the bottom line.

That's great. That's helpful. Maybe just kind of moving on to active surgeons, surgeon training, utilization. So you obviously grow by getting surgeons to be active. And what I wanted to ask specifically is the growth between driving further utilization with your active surgeons, and then adding active surgeons. And I know there's different components of that. So maybe just talk about the steps of driving more utilization with your known active users and the balance between that and then bringing on new surgeons?

It's really a multipronged approach that we use. And so what we've said is that we want to grow our active surgeon base by at least 15% in 2022 compared to 2021. And so -- and we've given guidance of 18% to 20% on revenue. So simplistically, what that means is that we're doing a combination of things, primarily focusing on increasing the number of surgeons that are performing the procedure, but also going deeper within those surgeons. And so there are a few ways that our reps approach this is, first of all, there's approximately 1,700 surgeons in the United States who have been trained and treated at least one patient, but there's 7,500 that are targets for us. So a little less than 6,000 surgeons that still need to be trained and treat at least one patient. And so that is a very key focus area for the sales rep, and that is to identify those surgeons, help them to understand the prevalence of the SI joint dysfunction and degeneration as it relates to lower back pain, how to diagnose it and then how to treat it. So that's at least how we start on all of this. But then it's a matter of if there are surgeons that have been trained and treated patients, but they've been inactive for more than a year usually, we'll look at those as long-term inactives, how do we reactivate them. And a lot of times, it's talking about the reimbursement on this. And sometimes it's talking about our new TORQ product, for example, is another alternative for minimally invasive SI joint fusion. So there are a number of things, and then we'll usually use or utilize our simulator technology to make it easy for them to train once again as opposed to having to go through an extensive training process. And so there are a lot of ways that we're dealing with the increase in the number of surgeons, but then your other question was how do we grow the number of procedures that a surgeon is performing. And our best estimate is that a surgeon that is fully utilizing this diagnosis within their practice. So in other words, they are including the diagnosis of the SI joint in the differential diagnosis of lower back pain with all of the patients coming in that have lower back pain. They're going to find once again, that 15% to 30% and simplistically, the number is around 9 procedures that those surgeons do each quarter if they have fully adopted this into their practice. And right now, the average is more in the 3% to 4% range. So we have this opportunity to more than double the number of procedures just with our existing surgeon base. But then we also have this big opportunity with thousands of surgeons that are not regularly diagnosing and treating patients. And in fact, most of them still need to be trained where we can grow as well. So it gives us a lot of different levers that we can use in order to grow the business.

And I guess what's the balance for -- from a sales rep time perspective, bringing the active surgeon in versus going deeper? And more specifically, what's the success rate on kind of going deeper? And how have you seen that change in the last, I mean, COVID makes it hard, but at least trending or run rate, how has that changed?

Certainly, the easiest thing for our reps to do is to go deeper in their existing base. And so I would say that the reps that are utilizing their time as efficiently as possible, that's really what their goal actually is, is to -- if I have a surgeon that is doing one procedure a year, how do I get that surgeon to do one procedure a quarter? If I have a surgeon doing one a quarter, how do we get it to one a month? If I have it at one a month, how do I get them to 3 a month? And and there are a lot of different activities that they can engage in, in order to make all of that happen. For example, some of our top surgeons are actually typically working with their physician assistant or a nurse practitioner in the determination, the diagnosis and making sure that they meet medical necessity criteria. So there are different training programs that we have with those physician assistants, nurse practitioners in order to make sure that we get the surgeon into a position where they can be as successful as possible. So lot of different activities about going deeper into the base where we have more control from a modeling perspective actually is with the training of the surgeons. So it takes more time to do the training but you can -- we have a clear pattern of behavior. If you train X number of surgeons, Y number of them are actually going to actually perform their case and Z number of them are going to actually start to regularly diagnose and treat patients. So when we look at it from a modeling perspective, that's the easiest way for us to control those factors, but the reality is going deeper into the base is less time-consuming.

Got it. I have another question on that, but I want to put that to the side just for a minute because I do want to talk about Granite. And just to understand, and maybe briefly describe kind of what Bedrock is, Bedrock Granite and how it differs from the core iFuse product?

Yes. So our core iFuse product is minimally invasive SI joint fusion. These are patients who are in debilitating chronic pain that emanates from their SI joint. And so the surgeon will diagnose the patient and will actually perform an iFuse procedure and we have really extraordinary results with the product where the average patient will go from 80% of the way up the pain scale down to 20%. And so that is our core business. That is the market that we are pushing very hard to develop at this point in time and where we are by far the market leader in this particular space. Granite is a completely different market although it leverages our skills in the sacropelvic space. So we have a current technique that we call the Bedrock technique that surgeons have been performing since 2019, and there is a significant issue that's been identified with long constructs. So these are surgeries with adult scoliosis patients, they have a significant curvature of the spine and the orthopedic or neurosurgeon is working with these patients to straighten the spine. They use pedicle screws and rods in order to do that with the patient. And typically, what they'll do is they'll use some sort of screw at the bottom of the long construct. They use an iliac screw or they'll use an S2AI screw. And the idea is to provide a base to the long construct because there are a lot of failures in adult deformity cases, screw loosening, rod breakage and so on in around 30% of the cases and in over 20% revisions. And so we launched our Bedrock technique in 2019 and what surgeons were doing is actually placing 2 long iFuse implants at the base of the long construct underneath the iliac screws or S2AI screws typically. What Granite does is it actually integrates with the long construct. And so it has the opportunity to not only provide fixation like a typical screw, but also fusion based upon the attributes of the product. And so that's why we received the breakthrough device designation for this. And so the surgeon may be using 2 Granite implants, they may be using 4 because oftentimes, the surgeon will want to use 2 on either side for fixation and fusion. And given the new technology add-on payment, there's approximately 98-100 of potential value for inpatient Medicare cases. So this is a completely separate market, and we estimate it's around $250 million in terms of the size. And we think it puts us into a really great position as the leader in sacropelvic solutions with this additional product.

Got it. And just remind us of the timing of Granite when you expect approval, when you expect it to launch and I'll also ask revenue contribution?

I think we actually -- you never know it is in the FDA clearance process right now. And so I don't necessarily want to speculate on where that's at, but we do expect it shortly. And as soon as we do gain that clearance, we will be launching the product. And the good news on this is we've already worked with quite a few surgeons with the Bedrock technique. And so there isn't as much market building as you would anticipate with a completely new product because a lot of surgeons are aware of this, and they understand this issue and unmet clinical need. And then we're not providing information on revenue. But what we've tried to do is be conservative about our estimates for the second half of the year. We want to grow into the revenues there, but we do think that it does provide significant upside for the business in the second half of the year.

And there are a number of products that have NTAPs and you can actually see the benefit in terms of adoption. So maybe just -- anything that you see for Granite specifically and how you think it could impact your access to hospitals for docs?

I think it's actually highly unusual for an orthopedic product to even receive an NTAP or any 510 cleared product. Usually, it's a PMA product that receives that designation. So that really just shows how innovative SI-BONE actually is. And the whole purpose of the NTAP program is to identify products that have a significant impact on patient care, which the FDA made a determination that this was that sort of a product. And then what CMS is doing with the NTAP is to provide access to patients for that better care. And so we do think the health economics of this is going to be important to the hospitals, and we think it's going to be important to the surgeons and we think that this product would have been adopted significantly without that in place because it's meeting this significant unmet need, but we think that it has even more implications now that there's the NTAP coverage.

Great. Question I get from investors, and I want to touch on it with maybe the last couple of minutes that we have is on the iFuse patent and the expiration of some of the patents. So maybe, I guess, it's a question I get, I'm sure you guys get it. So maybe just explain your position and the message on the impact of the patent?

Yes. So from a patent perspective, there are different groups of patents that we have. There is a group of patents that comes -- it's the shape of the implant. So any rectilinear implant going across the joint and then also the lateral approach as well that we use, and those were our original patents, which go through the end of 2024. And so that's why we get the question because it's coming up at the end of 2024. What we also do have in place is almost all of our product has switched from machined implants with the plasma porous coding or original iFuse product, to our 3D printed fenestrated implant iFuse 3D and I mean, 95% plus. And so the patents on the 3D portion of this go through 2035. So we think that we have created a significant enhancement with the 3D product, and it is patented. So we feel confident with where we're at from a patent perspective. But with all of that said, we also have really thought about how do we go after this large market opportunity where we have a big competitive advantage with others but also diversify the business. And so the torque product with applications and trauma has been really important to us and then what I just discussed with Granite as well in adult deformity, we think, is important as well in order to reduce risk overall for the business.

Great. I think with that, we are out of time. So Laura, Anshul, thank you.

Thanks, Craig.

Thanks, Craig.