Silk Road Medical, Inc. (SILK) Q1 2023 Earnings Call Transcript
Good day. Thank you for standing by. Welcome to the Silk Road Medical’s 2023 First Quarter Earnings Call. [Operator Instructions] Please be advised that today’s conference is being recorded.
I would now like to hand the conference over to your speaker, Marissa Bych, Investor Relations. Please go ahead.
Great, and thank you for joining today’s call. Joining me are Erica Rogers, Chief Executive Officer; and Lucas Buchanan, Chief Financial Officer and Chief Operating Officer. Earlier today, Silk Road Medical released financial results for the 3 months ended March 31, 2023. A copy of the press release is available on the company’s website.
Before we begin, I’d like to remind you that management will make statements during this call that include forward-looking statements within the meaning of federal securities laws that are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995.
Any statements contained in this call that relate to expectations or predictions of future events, results or performance are forward-looking statements. All forward-looking statements, including, without limitation, those relating to our operating trends and future financial performance, expense management, expectations for hiring and growth in our organization and our business, physician training and adoption, market opportunity and penetration, commercial and international expansion, regulatory approvals, reimbursement, competition and product development are based upon our current estimates and various assumptions.
These statements involve material risks and uncertainties that could cause actual results or events to materially differ from those anticipated or implied by these forward-looking statements. Accordingly, you should not place undue reliance on these statements. For a list and description of the risks and uncertainties associated with our business, please refer to the Risk Factors section of our quarterly report on Form 10-Q filed with the Securities and Exchange Commission on May 9, 2023.
This conference call contains time-sensitive information and is accurate only as of the live broadcast today, May 9, 2023. Silk Road Medical disclaims any intention or obligation, except as required by law, to update or revise any financial projections or forward-looking statements, whether because of new information, future events or otherwise.
And with that, I will turn the call over to Erica Rogers, Chief Executive Officer.
Good afternoon, and thank you all for joining us. Our first quarter progress marks the start of an important year at Silk Road as we capitalize on the strong foundation we have built to drive TCAR adoption and alleviate the devastating burden of stroke on patients’ lives. We delivered revenue of $40.1 million, reflecting 43% year-over-year growth, supported by over 5,800 procedures. We are pleased to see strong underlying demand for TCAR. And considering our progress thus far and our outlook ahead, we are reiterating our guidance for $176 million to $184 million in total 2023 revenue. As we make our way through the year, our most important objective remains to grow our business through U.S. physician adoption as we march towards the standard of care. The largest opportunity to do so comes from leveraging our broad commercial footprint to drive utilization across our trained physician base.
This includes onboarding and training new sales, sales management and other field professionals to expand and align our territories as we increase touch points with our customers. Early in the year, with this objective in mind, we carried forward an initiative to further optimize our expanding sales organization through hiring, promotions and territory design. We have been pleased with our recruiting ability and the quality of candidates that seek out Silk Road Medical. And we believe this effort creates the right structural balance for strong, continued growth looking forward.
Simultaneously, we are strengthening our category leadership and commercial prospects following the expansion of our addressable market last year to include patients as standard surgical risk of surgical complications.
TCAR has demonstrated exceptional outcomes in this patient population, and we were pleased to see a paper published recently in JAMA Neurology, built on real-world propensity-matched data in over 20,000 patients from the vascular quality initiative or VQI, which investigated outcomes in standard surgical risk patients treated with TCAR versus CEA. Outcomes from the publication largely reflect Liang et al’s presentation at the Vascular Annual Meeting in 2021.
The study found statistically equivalent outcomes across primary endpoints with significantly lower incidence of cranial nerve injury and procedure time using TCAR. The paper represents another important piece of clinical evidence and provides a strong foundation for our early momentum in this expanded patient population. We will continue to reinforce TCAR’s value proposition in this expanded population and all eligible patients, for that matter, through the continued collection and analysis of real-world outcomes in the VQI. In 2022 alone, there were 31 TCAR-related VQI papers published in major medical journals and another 11 in the first quarter of this year.
ROADSTER 3, our prospective post-approval study for patients at standard risk for surgical complications, recently eclipsed the 100 patients enrolled mark, and we are excited about the progress to date. The undeniable benefits of TCAR versus transfemoral carotid stenting and carotid endarterectomy continue to accrue. As we lead the field of stroke prevention forward, we are expanding and diversifying our portfolio by innovating around our transcarotid and neuroprotection core competencies.
After a successful limited market release, we recently initiated the full-scale commercial launch of ENFLATE, the first balloon purpose-built for TCAR and the fifth product and our market-leading portfolio. Early traction and utilization patterns are encouraging as we work through hospital contracting and continue to conduct the first cases across many TCAR centers. I’m also excited to announce that we received 510(k) clearance for our next-generation ENROUTE neuroprotection system or NPS Plus. This product was designed to further support the ease of use and minimize the risk of complications. We anticipate a limited market release followed by a broader release later this year.
Finally, we continue to lay the groundwork to broaden our geographic reach, starting with China and Japan. I am pleased to share that we received clearance in Q1 in China for our ENROUTE neuroprotection system.
We are now focused on approval for our ENROUTE stent as well as regulatory activities supporting future clearance of the ENROUTE NPS Plus. In Japan, we are actively investigating potential distribution partners while we work towards a reimbursement submission later this year, following the clearance of our ENROUTE neuroprotection system and ENROUTE stent last year. We are also working towards clearance of NPS Plus. While there are several steps ahead on our path to commercialization in these countries, we are well on our way to unlocking the $2.3 billion international market opportunity.
In summary, we are pleased to deliver strong growth in our business while our investments to diversify through product and geographic expansion begin to deliver.
I’ll now turn the call over to Lucas Buchanan, Chief Financial Officer and Chief Operating Officer.
Thank you, Erica. Revenue for the 3 months ended March 31, 2023, was $40.1 million, a 43% increase from $28.0 million in the same period of the prior year. Growth was driven primarily by increased TCAR adoption as evidenced by greater than 5% sequential quarterly growth in procedures and our sixth straight quarter of sequential growth in procedures per trained physician.
The number of TCAR procedures in the quarter was approximately 5,830, a 45% increase from the same period of the prior year. As our results suggest, despite continued strong performance on product level ASPs, revenue in the period divided by procedures in the period trended below historical average, which was a function of standard quarterly fluctuations as we have seen from time to time.
Our underlying procedure growth demonstrates ongoing strength in demand for TCAR. Gross margin for the first quarter of 2023 was 69%, similar to the first quarter of the prior year, but sequentially down due to unfavorable production variances associated with select components. We have resolved this specific issue, and beyond a modest expected impact to second quarter gross margins, we expect higher gross margins into the back half of the year.
Total operating expenses for the first quarter of 2023 were $44.5 million, a 26% increase from $35.4 million in the first quarter of 2022. R&D expenses for the first quarter of 2023 were $10.4 million compared to $8.1 million in the first quarter of 2022. The increase in R&D spending was driven primarily by growth in personnel, along with continued investments in new and ongoing programs.
Sales, general and administrative expenses for the first quarter of 2023 were $34.1 million compared to $27.3 million in the first quarter of 2022. The increase was largely driven by growth in personnel and increased stock-based compensation expense. As we look forward, we are leveraging our years of investment in commercial, manufacturing, R&D, and back-office infrastructure to drive durable top line growth and operating leverage.
Turning back to first quarter results. Net loss for the first quarter was $16.5 million or a loss of $0.43 per share as compared to a net loss of $16.7 million or a loss of $0.48 per share for the same period of the prior year. We ended the quarter with over $200 million in cash, cash equivalents and investments.
As a reminder, we completed a debt financing at favorable terms in 2022 with current available capacity at roughly $175 million. Together, our balance sheet and committed capital provide us with substantial financial flexibility and great optionality to support our business and growth initiatives looking forward.
Turning to our 2023 outlook. We continue to expect full year revenue to be in the range of $176 million to $184 million, reflecting growth of 27% to 33% over 2022 based on roughly 25,000 TCAR procedures at the midpoint of the range.
Our guidance reflects several variables, including the pace and progress of our commercial organization expansion, expanded market access for TCAR and a modest tailwind from the rollout of the ENFLATE balloon. As a reminder, we ended 2022 with a commercial presence in over 1,100 hospitals with almost 2,500 trained physicians served by 70 active sales territories. We cited on our last call that we believe we have achieved a critical mass for ongoing TCAR adoption, and we continue to expect incremental physician training and sales territory additions throughout the year and beyond.
In summary, we are proud of our leadership and resiliency. We look forward to continued progress on the path to establishing TCAR as the standard of care.
At this point, I will turn the call back to Erica for closing comments.
Thank you, Lucas. I’d like to close by inviting everyone to join us in just a few weeks on May 25 for a panel discussion between our Executive Medical Director, Dr.Dr.Sumaira Macdonald leading practitioners in the treatment of carotid artery disease. This will be the first in a series of educational events that we plan to host over the coming year to connect analysts and investors directly to the experts and open the dialogue around the benefits of TCAR amidst the broader treatment landscape, especially as we acknowledge stroke awareness month.
We hope our May 25 event sheds light into the current treatment landscape and how TCAR is uniquely positioned to deliver long-term value to patients and providers as we evolve the standard of care. We’re excited for the discussion, and we hope you’ll join us.
With that, I’ll open it up to Q&A. Operator?
[Operator Instructions] Our first question comes from the line of Robbie Marcus of JPMorgan.
Great. Wanted to start with first quarter trends. Lucas, you talked about normal quarterly fluctuations. The quarter came in below The Street. This is one of the first quarters guidance hadn’t been raised. So I was hoping you could dig into exactly what’s going on. Is there a stall in the standard risk indication? Is it less utilization? Is it some other seasonal trend that we aren’t aware of because I think most investors were expecting a number a bit higher than this. So I’d love to dive into the underlying trends here.
Sure, Robbie. Maybe I’ll give a quick answer, and then I’ll turn it back to Erica for kind of the bigger picture. The procedures in the quarter grew nicely, as we said, and the adoption trends were great. Where we were a little bit light was in revenue per procedure. That’s within the variation we’ve seen historically. But slightly less than we modeled, and we can talk about that further later, but I’ll turn it back to Erica for the broader dynamics quarter.
Robbie, thanks so much for being on. So look, we took the first quarter to catch up on some necessary sales organization architecture. And that’s really to prepare us for continued high growth. It’s normal course of business in a fast-growing med tech, but we accelerated our planned pace of creating new leadership positions, balancing some territory geographies, creating new territories, all in service of increasing physician touch points.
We know from our own data, when we do this, we see accelerated adoption. As a result of all of that, we saw some temporal distortions in revenue. And we’ve seen this before, as you alluded to, in our business with fluctuations in the timing of orders, and that was slightly exacerbated by our territory-balancing efforts. But I will say we’re really pleased with the quality of the people we’re attracting, the people we already have and the pace of adding these sales professionals and leaders and therefore, we’re confident in the guidance range.
Got it. And maybe to touch on the full year guidance range. Are you still thinking about the same revenues, which I think was about 20 — just under 25,000 procedures for the year and something about $7,200 in ASP per procedure for the year. Are there any changes to that? And does it have anything to do with the slowdown in first quarter of stocking from trained physicians?
Sure, Robbie. I’m happy to address that. So the nuance is we’re slightly more confident in total procedures for the year. So the roughly 25,000 on the last call was the under. Now it’s the over. So again, the procedure trends are good. To your point, of $7,200, the average last year was $7,100. So in our own expectations and modeling, we brought that down slightly. And just to do a little bit of math, if we take $180 million at the midpoint of our 2023 guidance and divide it by roughly where we came in, in 2022 on revenue per procedure at $7,100 rounded, that’s 25,400 procedures. If we came in at $7,200, that would get us towards the higher side of our range. And if we came in less than $7,100, the math is the math. So we’ve reduced our — we’ve increased our procedures. We’re at plan relative to our ASP discipline, and we’re slightly lowering our expectations on revenue per procedure to end up at the same point.
Our next question comes from Rick Wise of Stifel. Your line is now open.
Let me start off, and I just want to really make sure I’m understanding it. Your procedure numbers were basically exactly what we look for. Help me better understand the — if you could just give us a little more color on the why the dollars per procedure were less. I mean that doesn’t really have anything to do with the sales force expansion or the disruption. I understand that, that’s going to be helpful later in the year. But I just want to make sure I’m really understanding this point.
Yes. No, Rick, I’m so glad you asked that. Let me clarify that, which is when we add sales leadership, we generally are promoting from within. And so now we have a sales leader who’s leading and also managing that territory they left behind. When we talk about balancing territories, what we’re doing is splitting and moving people around. And so what that does in effect is leave some vacancies, leave some holes in territories.
And while our therapy development specialists are just terrific at covering cases and case planning in that aspect, they’re not the quota-carrying professionals. And so there’s a lag in sweeping back around to pick up the revenue or the order, if you will, from that case. And so that’s why we talk about temporal distortions as it relates to these expansions. And so overall, we’re feeling good and confident in the revenue guidance for the year.
No, I got that. That’s — I appreciate that. And maybe just to make sure I’m understanding. So does that suggest that maybe some of the revenue that might have been in the first quarter falls into the second quarter as a result? Or am I not thinking about it correctly? And maybe just as part of that, Lucas, I get to be the one who says, “Can you help us think through the cadence of the first to second, second to third, third to fourth.” You did say first quarter flattish, and I’m understanding it is sort of flattish. I was a shade more exuberant. But again, the procedures are right. So can you help us think through how to think sequentially in the distribution to get to the midpoint of your guidance range.
Sure, Rick. I think that’s a 2-part question. So the first was it — could it be somewhat of a timing issue? And the answer — the quick answer is yes. Again, we’ve seen this before. In Q4, we were at just over $7,200 revenue per procedure. In Q1, we were just shy of $6,900. That matches trends from the prior year. Obviously, it’s hard to make comparisons with different dynamics and the scale of our organization and the pandemic and things like that. And keep in mind, revenue per procedure is a derivative of units sold per procedure, that’s when we recognize revenue.
And the units sold in the quarter is a function of how many new hospitals we have, how many total hospitals we have, how many docs trained per hospital we have, how many territories we have, where we are at splitting territories? Is there a body? Is there a quota-carrying rep actually in the territory at the time? The par levels that the hospitals carry across our different product lines and SKUs, whether the hospitals are being affected by their own financial pressures or pandemic pressures, all of that makes that particular metric somewhat uncertain and which is why it has ranged between that kind of $6,900 and $7,300, $7,400 historically.
Again, what gives us confidence is strong pricing discipline, strong procedure growth and strong adoption curve metrics. And so as we look at the cadence of the rest of the year, as Erica mentioned, we were — last year, we wanted to get to 70 to 75 territories. We hit the low end of that range. So we had some catch-up to do. And we really not only focused on catching up, but really accelerating based on the talent we were seeing in the marketplace. And again, that creates some kind of first half disruption as you’re going through that change, but sets us up really well for the back half of the year beyond.
And so obviously, in the second half of the year, we will have more touch points per physician based on all of the training and hiring we’re doing right now. I would say the busiest people in the organization are the hiring managers and the sales organizations and their partners in HR while we continue to conduct the business of TCAR. And we’ll also get the benefit in the back half of — on the margin of the balloon revenue, right? Right now, we’re transitioning to that full market release, but there’s hospital contracting and getting first cases done. And so we’re really set up well for the second half of the year based on all of the activity in Q1 and Q2.
Yes, I’ll let somebody else ask if the second quarter will be sequentially flat or up.
Our next question comes from Adam Maeder of Piper Sandler.
Great. I guess I’ll take that question on Q2 and just ask, I showed Q2 revenue around $43.5 million for consensus. I think that implies 8% to 9% growth sequentially quarter-over-quarter versus your Q1 results. Any reaction to that figure? And then I have a follow-up or 2.
Yes. I think, again, the first quarter versus fourth quarter trend, obviously, is flattish. That matches prior year trends. What we’re seeing with the adoption curve, what we’re investing in with the commercial organization expansion and reiterating our guidance, all of that implies kind of a quarterly step-up in growth Q2 over Q1, Q3 over Q2, Q4 over Q3, with all of the other inputs we model and seasonality and things like that. I think that’s a reasonable expectation.
Okay. And then maybe we can turn to China. So congrats on the clearance there for the ENROUTE system. It sounds like you’re focusing on getting the stent across the regulatory goal line. Maybe just talk about pathway forward for that for the stent. Do you need to run a study? Can you use already available clinical data? And really the genesis of the question is, could we potentially see revenue from China or Japan later this year in 2023? Or is that more of a ’24 event? And then I have one follow-up.
Yes. Sure. Adam, I’ll take that one. Thanks for joining us. Yes, we’re really excited to see NPS clearance in China. And you’re right, we’re working on the stent. We haven’t given the specifics in part because we’re working with the Chinese regulatory authorities. So we haven’t given those specifics. What I can say is that the approval process is going well and as expected on ENROUTE stent. But as we’ve said in prior calls, I think it’s fair to say there will not be a revenue contribution from either China or Japan in 2023.
Okay. I appreciate the clarification there, Erica. And then just one last one. It’s around the CAS NCD reconsideration from CMS. Just wondering if there’s any update there and how you are thinking about potential likelihoods of outcomes and timing. And I saw that you submitted a common document to CMS. Just was hoping you could kind of walk us through the Cliffs Notes version of what that document says and your view on the NCD reopening.
Absolutely. So the NCD reconsideration is underway. We just passed the kind of open comment period. And so CMS, Medicare is off doing the work that they do and evaluating the body of clinical evidence that exists around TCAR, transfemoral CAS, carotid endarterectomy, optimal medical therapy, all of the above. And so as we said before, Adam, we couldn’t be more pleased with the body of evidence that exists around TCAR. And as you well know, CMS just leaned into kind of positively covering TCAR for standard surgical risk within the VQI TCAR Surveillance Project. And so we feel like we’re sitting in a really good place. The question that’s being asked is whether or not coverage should be expanded and some of the restrictions removed overall on transfemoral CAS and TCAR.
And so I think it’s safe to say CMS is going to do the work they do and review the evidence. As we alluded to in the prepared remarks, we continue to excel in outcomes over transfemoral CAS, both historically and in side-by-side comparisons from the VQI, large database comparisons.
So next step in the process, there will be a kind of June 12 — or sorry, July 12 draft decision memo and we’ll come back to you with what we think that means for us. But right now, we’re feeling confident. And as we’ve said, we see a range of positive outcomes for TCAR.
Our next question comes from Joanne Wuensch of Citi.
This is Anthony on for Joanne. The first, just going back to the commercial reorganization. Is the impact from this supposed to be contained to the first quarter? Or is this still ongoing? And then I just had one follow-up.
Yes. Anthony, thanks for joining us. I think reorganization might not be the choice of words I would use. We really refer to this as kind of balancing out territory geographies. And we’ve done this historically, and it’s a very commonplace in med tech. As the business grows, so does the sales organization to kind of meet and get ahead of that demand and getting ahead of driving adoption. So what we did here, Anthony, was accelerate the pace of our own plan and create a little more disruption and distortion in Q1 kind of taking more of the medicine upfront rather than spread out slowly over the year.
And in part, we were responding to the amazing talent that is coming our way and taking advantage of that talent being available or wanting to be available now and seeking out Silk Road. So there’s more to do here, but I’d say that in Q1, we made some real significant progress, and I couldn’t be more excited about the folks who are in training and their TCAR training right now.
Got it. That’s helpful. And then my second one, Lucas, is there any way you could quantify — I know you said modest impact to gross margin in the second quarter, just if you can maybe put any numbers around that. Just trying to understand what the ramp looks like in the back half of the year.
Sure. Well, gross margin came in at 69%, as I referenced. Q4 of last year was just shy of 73%. So that gives you — kind of that range gives you a sense of the impact because we had strong price discipline. And each quarter, we have higher unit volume against a relatively fixed overhead at this point with 2 main manufacturing facilities. And so we took some period expense related to some issues that we needed to solve. That’s mostly a Q1 impact. It will partially impact Q2 as well, and then we’ll get back to normal barring any other specific issues.
Our next question comes from Neil Chatterji of B. Riley.
Just curious — I know you said that the procedure growth was healthy in first quarter. Just curious if you could maybe just give us an update on kind of the operating environment in the first quarter and as we kind of move to the early second quarter, any impact from staffing or COVID or any other factors on volumes?
Yes. Neil, I’m glad that you asked that question. Embedded in the kind of reiterating our guidance range is the fact that we’re seeing hospital inpatient — U.S. inpatient hospital business kind of normalize. There are, as you’ve heard from others, some pockets still here and there of labor shortages. But by and large, I think patients are back to the business of getting screened and seeing their physicians and physicians are back to doing procedures in hospitals. So it feels like a more normalized operating environment, which is one of the assumptions in our guidance.
Great. Maybe just on ENFLATE. You touched on starting to get some feedback there from the full launch. Just curious, any more color with those kind of initial sites? And then just remind us if you’re still expecting a positive impact on the revenue per procedure.
Sure. I’ll take part of that, Neil. Yes, the feedback has been very positive, just as we expected. The balloon was really to solve kind of some ergonomic challenges and some ease-of-use procedural benefits, improving the safety margin of that particular step in the procedure. That was the purpose of developing the ENFLATE balloon, and all of that is turning out to be true. So the feedback is quite positive. We’re in the early days of the full market release, which really happened in Q2. And so we’re still working through hospital pricing, hospital contracting, that sort of thing. I’ll let Lucas take the back half of your question.
Yes. Yes. In terms of the revenue per procedure, given that it’s a new product, it’s our fifth product, as we spoke about on the last call, we do expect that to be a tailwind over time to revenue per procedure against the headwind of some of the slightly lower units per procedure of all the other products for all the reasons I listed in a prior question. So there’s a net effect there.
We’ve taken a step back. We’ve always said that kind of the revenue per procedure would ultimately come closer to kind of our actual product level ASP, assuming kind of 1 unit each in a TCAR procedure as we get to this critical mass and there’s fewer and fewer kind of new accounts and new stocking orders, and it’s really utilization-driven revenue. And we show that in our investor deck we’re very focused on managing the business that way. We want all of our revenue to come from reorders and growing utilization.
And again, we’ve seen peaks and valleys in the revenue per procedure for timing and other factors. But we’re getting closer to a normalized metric on that front going forward. But small changes up or down have big impacts for a very focused business.
I would now like to turn it back to Erica Rogers, Chief Executive Officer, for closing remarks.
Thank you very much for joining us.
Thank you for your participation in today’s conference. This does conclude the program. You may now disconnect.