Ra Medical Systems, Inc. (RMED) Q1 2019 Earnings Conference Call May 13, 2019 4:30 PM ET

Company Participants

Kevin McCabe – LHA Investor Relations
Dean Irwin – Chief Executive Officer
Tom Fogarty – Chief Commercial Officer
Andrew Jackson – Chief Financial Officer

Conference Call Participants

Matthew O’Brien – Piper Jaffray
Bruce Nudell – SunTrust
Craig Bijou – Cantor Fitzgerald
Anthony Vendetti – Maxim Group

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the Ra Medical Systems First Quarter 2019 Conference Call. At this time, all participants are in a listen-only mode. Following management’s prepared remarks, we will hold a question-and-answer session. [Operator Instructions] As a reminder, this call is being recorded today, May 13, 2019.

I’d now like to turn the call over Kevin McCabe. Please go ahead.

Kevin McCabe

This is Kevin McCabe with LHA. Thank you for participating in today’s call to discuss the Ra Medical Systems’ Q1 financial results and the Company’s business progress. Joining me from Ra Medical are Dean Irwin, Chief Executive Officer; Andrew Jackson, Chief Financial Officer; and Tom Fogarty, Chief Commercial Officer.

Earlier today, Ra Medical issued a news release announcing financial results for the first quarter 2019. If you have not received this news release or you would like to be added to the Company’s e-mail distribution list, please contact LHA in Los Angeles at 310-691-7100 and speak with Kasha Chen. The news release is also available on the Investor Relations section of Ra Medical’s website.

During this call, management will be making a number of forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. To the extent that statements made by management are not descriptions of historical facts regarding Ra Medical, they are forward-looking statements reflecting the current beliefs and expectations of management as of May 13, 2019, including financial, sales, marketing, and clinical trial expectations.

You should not place undue reliance on these forward-looking statements, because they involve known and unknown risks, uncertainties and other factors that are in some cases beyond the Company’s control and could materially affect actual results. For details about these risks, please see the company’s SEC filings, including Ra Medical’s Annual Report on Form 10-K for the year ended December 31, 2018 filed with the SEC on March 15, 2019 and quarterly report on Form 10-Q for the period ended March 31, 2019 to be filed with the SEC shortly.

Ra Medical expressly disclaims any intent or obligation to update forward-looking statements except as required by law. In addition, during the course of this call, there may be reference to certain non-GAAP financial measures that are not prepared in accordance with U.S. Generally Accepted Accounting Principles and may be different from non-GAAP financial measures used by other companies.

Investors are encouraged to review Ra Medical’s press release issued earlier today announcing its first quarter financial results, which includes an explanation of the company’s use of non-GAAP measures and the reconciliation to GAAP measures.

Now, I’d like to turn the call over to Dean Irwin. Dean?

Dean Irwin

Thanks, Kevin. Good afternoon, everyone, and thank you for joining us. I’m pleased to report that we commenced our new commercial strategy designed to drive our DABRA excimer laser system to the forefront of vascular disease treatments. Since the beginning of the year, we have shifted our commercial focus towards developing long-term customer relationships.

As anticipated, the transition negatively impacted first quarter results. That said, revenues for the quarter were slightly above our guidance for both our vascular and dermatology segments. And we believe we will see a greater impact on revenues in the second half of the year. Tom Fogarty will discuss the teams work in a few minutes. As an update on DABRA usage agreements, we signed 16 new agreements during the quarter with a total of 69 agreements in place as of March 31, 2019 at varying volumes of purchases.

I’m also pleased to report that in March, we completed the validation of our upgraded manufacturing process. The limitations we experienced related to the scale up in catheter production impacted the number of evaluation cases we performed during the fourth quarter and into the first quarter. I want to emphasize again the significant opportunity attainable with our DABRA system and its potential to change the paradigm of vascular treatments. DABRA has advantages in delivering a safe, versatile, easy to use in economical solutions to treat patients with peripheral artery disease or PAD.

PAD effects about 17.5 million Americans with a total annual U.S. addressable market of more than $1 billion in growing. Even though, only 20% to 30% of patients with PAD are being treated. If left untreated, vascular blockage can increase the risk of heart attack, stroke, amputation, or even death. In fact, about 200,000 amputations are performed each year in the U.S. as a result of PAD.

DABRA photochemically dissolves plaque with minimal vascular trauma. DABRA can cross chronic total occlusions and remove a broad range of blockage types from soft thrombus to hard calcium. We believe that endovascular treatments using DABRA’s photoablative action maybe more durable than treatments using other devices because of the reduced mechanical thermal and barometric trauma.

As previously announced, we’re conducting a two-year registry to measure the long-term patency results using DABRA and in fact, we treated the first patient in the registry last week. With our DABRA system, you may recall that in May, 2017, we received FDA 510(k) clearance for crossing chronic total occlusions in patients with symptomatic infrainguinal lower extremity vascular disease with an intended use for ablating a channel in occlusive peripheral vascular disease.

Last week, we submitted an IDE to the FDA for expansion of the label to specifically include atherectomy and we receive the acknowledgement that the FDA received the submission last Friday. We expect to enroll up to 100 patients at up to 10 clinical sites with a six-month follow-up for each patient. Given the timing of our IDE filing, we are on track to enroll and treat the first trial subjects in the third quarter of this year. We expect to have their trial results in the first quarter of 2020.

Protection of our intellectual property has been and remains a priority. And I’m pleased to report that last month we were issued another U.S. patent related to our catheters and received a notice of allowance on another patent relating to Arteriovenous Fistula Shunts. And finally, like the DABRA system for vascular indications, our Pharos system for dermatological indications is based on the same advanced excimer laser technology. We began commercializing Pharos in 2004 and as at the end of the first quarter of 2019, we had shipped more than 1,000 systems worldwide.

I will now turn the call over to our Chief Commercial Officer, Tom Fogarty. Tom?

Tom Fogarty

Thank you, Dean. And it’s a pleasure to be speaking with all of you today. We’re making headway in our transitioning our commercial organization with a focus on developing long-term customer relationships. The DABRA was initially launched to a trial program in which the system was placed in customers’ facilities with RA Medical personnel providing training and support for the procedure. When the trial period came to an end, customer’s deciding to continue with the DABRA, sign commercial usage agreements that included specific terms of use and nominal maintenance fees.

Following the trial program, we’re review the commercial opportunity and made the decision to transition to the next phase, in promoting adoption of the DABRA system. That being a new integrated commercial strategy aimed at building long-term relationships with our customers. I joined Ra Medical in December of 2018 and initiate a comprehensive review that included reevaluating the requirements of our sales reps, identifying key territories and began measurably hiring qualified sales personnel.

We also instituted a more robust training program for our new reps and continuing education for our longer tenured reps. Our new strategy encompasses an integrated approach that aligns all aspects of our commercial organization with the goal of building strong long-term relationships with our customers. This strategic shift is being made to establish a commercial ecosystem in which sales reps, clinical specialists, marketing and technical support are all fully integrated.

We held our first national sales meeting in February at which we incorporated our new training programs. On March 31, 2019, we had a total of 20 vascular sales reps compared with 22 on December 31, 2018. We are continuing to evaluate the current structure and hierarchy and planning measured expansion of our commercial team with key hires in alignment with our long-term strategy over the next several quarters. I believe it will start to see the positive impact of these changes reflected in revenue beginning in the second half of 2019.

Now, I’ll turn the call over to Andrew to discuss our financial results. Andrew?

Andrew Jackson

Thanks, Tom. I’ll review our Q1 2019 financial results. Revenue for the first quarter of 2019 was $1.7 million, consisting of product sales of $894,000 and service and other revenue of $854,000. This compares with revenues of $1 million for the first quarter of 2018, consisting of product sales of $235,000 and service and other revenue of $734,000.

Revenue for the first quarter of 2019 from the vascular segment was $0.5 million, an increased from $0.1 million for the prior year period. Revenue for the first quarter of 2019 for the dermatology segment was $1.3 million, an increase from $0.9 million for the prior year period.

Total cost of revenues for the first quarter of 2019 were $1.9 million compared to $0.7 million for the prior year period. SG&A expenses for the first quarter of 2019 were $13.2 million, which included $6.3 million in stock-based compensation compared with $2.6 million, which included $0.4 million in stock-based compensation for the prior year period.

R&D expenses for the first quarter of 2019 were $1.5 million, which included $0.9 million in stock-based compensation compared to $0.3 million, which included $0.1 million in stock-based compensation for the prior year period.

GAAP net loss attributable to common stockholders for the first quarter of 2019 was $14.7 million or $1.16 per share. This compares with a GAAP net loss of $2.7 million or $0.34 per share for the first quarter of 2018. Adjusted EBITDA for the first quarter of 2019 was negative $6.8 million, which compares with negative $2.1 million for the prior year period.

The reconciliation of GAAP to non-GAAP EBITDA is included in today’s press release. We reported cash and cash equivalents are $55.1 million as of March 31, 2019. We used $8.9 million in cash to fund operating activities in the first quarter of 2019.

With that, I’d like to turn the call back over to Dean.

Dean Irwin

Thanks, Andrew. We continue to build a body of evidence supporting the effectiveness and safety of the DABRA excimer laser system. In the first quarter, there were two study results presented, one from Dr. Athar Ansari, Director of the California Heart & Vascular Clinic demonstrating a 94% success rate in treating peripheral artery disease patients with DABRA. And one from Dr. Ashok Kondur, Chair, Division of Cardiology, Garden City Hospital, Michigan State University, demonstrating a 98% success rate.

Our DABRA system will be featured in a number of upcoming conferences, included the Society for Cardiovascular Angiography and Intervention or SCAI, May 20 through 22 in Las Vegas. New Cardiovascular Horizons May 29 through 31 in New Orleans. The C3 Conference in June 23 through 26 at Orlando and the Amputation Prevention Symposium or AMP, August 14 through 17 in Chicago.

In addition to our atherectomy study, we will be pursuing the use of DABRA as a tool for the treatment of vascular blockages associated with coronary artery disease. With coronary artery disease, we’re working with the FDA to begin a pilot study in the next few quarters. And lastly, we intend to expand our product offerings in the end of vascular space to provide our sales force with a more compelling value proposition to our customers.

In closing, I’m excited about the opportunity for DABRA and its advantages in a large and growing market. We are reporting progress with a comprehensive commercial strategy aimed at growing revenue on a long-term sustainable basis and expect to begin seeing the benefits of this transition in the second half of this year.

We believe we are executing on our mission of empowering physicians to save lives and limbs and we are taking steps to help secure our long-term success with a focus on building shareholder value.

With these comments, I would like to open up the call for questions. Operator?

Question-and-Answer Session

Operator

[Operator Instructions]

Dean Irwin

While we’re waiting for our first question, I’d like to mention that we will be attending the Jefferies Global Healthcare Conference on June 4 in New York and presenting at the LD Micro Invitational on June 5 in Los Angeles. If you’d like to meet with us during either of these conferences, please contact LHA at 310-691-7100. Operator, we’re ready for the first question.

Operator

Your first question comes from Matthew O’Brien with Piper Jaffray. Your line is open.

Matthew O’Brien

Afternoon, and thanks for taking the question. Just for starters, maybe Tom or Dean, just talk a little bit about the progress that you saw throughout the quarter from a sales perspective in terms of adding those 16 new agreements, maybe stabilizing some of your existing customers and order patterns, et cetera. Again, as we move throughout the quarter, did you see a meaningful uptake in March that really starts to make you feel better about Q2?

Tom Fogarty

Yes. Hi, Matt. Thanks for the questions. With our manufacturing limitations resolved, we’re really looking at restarting some of the evaluation accounts that that installed out in the fourth quarter and early in the first quarter. So yes, we’re very excited about restarting these accounts and begin to providing them with high quality product.

Matthew O’Brien

Okay. And then if you think about the trialing I think Tom mentioned, just as you were – the 16 accounts that you saw, can you just give us a sense for how many people were trialing during Q1 and how many you ended up closing kind of like your closure rate, if you will?

Tom Fogarty

What I can tell you about that is that the accounts are very excited, including those accounts that had installed during the fourth quarter and the first quarter of Q1. In fact, I got off the phone with a physician just last week who is very excited to restart his evaluation process. So to answer your question, I don’t think that we have many, if any, at all, that are unwilling to continue trying and going through their evaluation process. So now with the manufacturing limitations behind us, we’re really eager to continue that process and drive the revenues forward.

Matthew O’Brien

Got it. And then as we think about the surgeon that you’re speaking with or that you did close in terms of the new agreements, can you just give us some kind of color as far as the level or the volume that some of these clinicians tend to do on an annual basis and what are you seeing so far as far as utilization of the technology? Is that limited more the crossing type cases or is it being used a little bit more broadly than that?

Tom Fogarty

Well, our target market are not only vascular surgeons, but also interventional cardiologists and interventional radiologists. It’s really quite a mix, almost balanced out equally here in the United States. Many of these labs are new and are just getting started with their customer base. Many of them do hundreds and hundreds if not even close to a thousand legs a year.

So that being said, the demographic of our customer is very tremendously from mild users have just a few hundred legs a year, all the way up to a facility that’s treating a 1,000 patients or more. So it’s very difficult to comment on the volume of each individual site. That being said, we’re very confident with an average of between 6 and 12 sites, sales rapid raw medical can attain that million dollar territory per year. So that gives you a little bit of color on how we believe the site average rounds out.

Matthew O’Brien

Okay. And then just two more for me. No real guidance here on the Q2 or for the full year. And I think on the last call, you had said Q2 was going to be an important quarter for you guys. So are you saying now that, it’s more of a backup kind of back half really story at this point that we have our expectations for Q2 vascular revenue should be pretty modest.

Tom Fogarty

Well, again, we’re not going to give guidance and we are working through these new evaluations now than manufacturing limitations have been resolved. So I think we’re going to wait and see how the balance of Q2 rounds out. Obviously, we’re feeling very strong about Q3, but we really don’t want to give guidance just yet as we’re starting to gain some traction on these evaluation accounts.

Matthew O’Brien

Okay. And then one for Andrew, just the negative gross margin in the quarter. Was there a onetime hit that you saw from the changes that you’re making on the manufacturing process that affected that metrics specifically and how do we think about that metric going forward?

Andrew Jackson

Yes, that’s exactly right, Matt. So our dermatology gross margin was 40%, which is very consistent with the prior quarters. So it really came from the scale of issues we experienced in the vascular segments and that was kind of a one-off.

Matthew O’Brien

And do you think that metric will start to improve here in Q2 and really turned the quarter?

Andrew Jackson

I do. I think we’ve got a pretty much everything out in Q1. They may have been a little trail into Q2. The Q2 will definitely be trending on.

Matthew O’Brien

Very helpful. Thanks so much.

Operator

Your next question comes from Bruce Nudell with SunTrust. Your line is open.

Bruce Nudell

Hi, thanks for taking the question. Andrew, what’s the likely cash burn for the year?

Andrew Jackson

The Q4, we – I’m sorry, in Q1, it was $8.9 million for operations. We’re really not giving guidance for cash burn, just like we’re not giving guidance for revenue at this stage of the company.

Bruce Nudell

Okay. And I guess on a commercial side, what’s been the response to the product? And are there any notable frictions that you’re encountering in the marketplace?

Andrew Jackson

I think a commercialization question like that, I’ll turn over to Tom.

Tom Fogarty

Yes. Bruce, can you clarify that question for me? I’m not sure, make sure I understood that.

Bruce Nudell

Yes. I guess what our customers saying about your product compared to other products? How are they feeling about the price differential? Or – and/or are there any frictions where there has not to even try to revise?

Tom Fogarty

Yes, good question. We haven’t had any push back on the trial. What we’re doing, which has been helping is that we’ve got this emergence of this clinical data, that’s learning a level of clinical validation for us. So I think the two studies, the number of individual case reports that we’re getting, I think the customers are really embracing the product and I’m actually more excited about it now.

But I’ve been here for a few months and it was before because I’ve had the opportunity to see it in the marketplace. So I don’t think we have any pushback at all on the product itself. Every product has got its own nuances and we’re going through that learning curve, I think in a much more measured way moving forward. So I’m very bullish moving forward, Bruce.

Bruce Nudell

And I guess Tom, just another outtake from the press release was that you’re honing in on where are you putting reps and probably which accounts you’re going after. Could you shed any insight into that?

Tom Fogarty

Yes. I think generally, we – you’ve heard the phrase a mile wide and an inch deep, so we’re now shifting to 10 feet wide in a mile deep. So we’ve actually gone ahead and done a much better job of focusing on, I think the appropriate targets for us. And then we realign a number of territories that are closer to where the business is. And I can’t speak to what happened in the past and I’ll moving forward though our folks are in the right spot.

Bruce Nudell

Thanks so much.

Tom Fogarty

Thanks, Bruce.

Operator

Your next question comes from Craig Bijou with Cantor Fitzgerald. Your line is open.

Craig Bijou

Good afternoon, guys. Thanks for taking the questions. Maybe start with a follow-up on the sales organization. So I don’t know Tom or Dean, just kind of want to get a sense, there are – it sounds like, there are still some moving pieces, you’re still trying to get some things in place. So just from a base sales force perspective, just kind of wanted to get the timing of, when you kind of – you’ll have that base in place. And then kind of going beyond that, any expectations for sales reps at the end of 2019, and I know you’ve talked about clinical specialists. So any, any color on, how many you have today and what you can have or what do you would like have by the end of 2019.

Dean Irwin

Sure. Today, we’re at 20 reps, so, or at least at the end of the quarter, we were at 20 reps and we’re aligning the rep spoke geographically, as well as with their core competencies. Again, we’re not necessarily selling a tool for photo ablation. We’re really treating legs and that’s a shift in how our reps are portraying the product and becoming partners with these clinicians and these outpatient based labs. So that being said, I think that, throughout the year we’re going to continue to add these reps in the right geographies, going to the right accounts. And I think we’ll be somewhere in the neighborhood of 30 reps by the end of the year.

Craig Bijou

And, Dean, any color on the clinical specialist size, because I know that was a bit of a shift in strategy and to drive better utilization of the DABRA once delivered.

Dean Irwin

Tom and I just got off a call with all of our clinical specialists and it was a very, very positive call. Clinical specialist talked about how they’re being helpful in the labs, working with the physicians on expanding the utilization of the DABRA catheter. So we’re in more cases, every cath lab day. So again, we haven’t quite rounded out the exact ratio of clinical specialists to a sales reps, but Tom as honing in very rapidly on that number now.

Craig Bijou

Great. And maybe just one or another follow-up on the sales force. Just wanted to get your thoughts on the environment – the hiring environment for the reps that, obviously you guys are looking for quality reps and expect to increase the number. So just want to get a sense for what you’re seeing out there when – there are some other companies that are focusing on a similar area.

Dean Irwin

There are. But that being said, there’s also been a great deal of consolidation over the past few years in our industry. So talented people are available. Tom, do you want to add a little bit more to that?

Tom Fogarty

Yes, thank you, Dean. So, I think that the environment is competitive for all earlier stage companies, but I think we have a very compelling value proposition for people that we’re recruiting and we’re also changing our profile. So as we move our overall commercial strategy forward, we’ve also made a little bit of a shift in terms of our profile. And we really haven’t had too much issue and attracting that kind of challenge. So at this point, we’ve got focused recruiters, we’re doing a lot of networking and so far the resumes, that I’ve been looking at some of the new folks who are bringing on board, I’ve been pretty pleased with them. And I’m actually – that’s part of the reason why I’m so bullish moving forward is where we’re putting, as they say, good to great. We’re putting the right people in the right spot.

Craig Bijou

Great. And one last one, Dean on the coronary or the potential coronary study, just any color there on, how big that would have to be and what you, I guess, overall timing of when you will. I know you said over the next couple of quarters, but when you might finalize, what that study looks like and then potentially the timing or follow-up on that.

Dean Irwin

Well, yes. So, obviously, I’m very excited about the prospects for treating coronary vessels, and so our – many of our physicians. I had a great conversation with the FDA, coronary group and cardiovascular group just the other day. And they feel that we have a lot of opportunity there to streamline that study. That being said, we’re probably going to start with a pilot study. That is a small number of patients, perhaps between five and 20 to prove out the feasibility of our DABRA catheter for treating coronary blockages and coronary instent restenosis.

Then we’ll take it from there and move onto a larger study to a pivotal trial to support the 510(k) or PMA as it may be indication for use. So I – although I do expect to have a first inhuman sometime within the next, three quarters or so, I think that the indication itself in the marketplace might be 2020 or 2021.

Craig Bijou

Great, thanks for taking the questions.

Operator

Your next question comes from Anthony Vendetti with Maxim Group. Your line is open.

Anthony Vendetti

Yes, thanks. One of my questions on the study was answered. So Dean, so once the pilot study is done, either be a PMA or 510(k), and so the pilot study, you’re looking for results first quarter 2020, and then if there’s a 510(k) that process plays out, you’re looking at commercialization 2021, is that correct?

Dean Irwin

Yes, that’s right. We think we can get the pilot study done pretty quickly. Obviously, the FDA is now interested in us performing that pilot study here in the U.S. although we do have a European and another OUS option. So we have our options open, we’re going to choose the most timely of those options. And the FDA is working very well with that said at this point in time.

That being said, we do believe that there is a 510(k) option and the FDA has informed us of that. So things could move along quite quickly. And of course, 180 day follow up with at least a 100 patient cohort. So you can do the math from there and that would put it into 2021. Yes.

Anthony Vendetti

Got it. And then just a little bit more on the margin. So Andrew, I don’t know if you want to answer this, but so I know there were some charges and some issues that you had to deal with in the vascular division this quarter, you said they’re largely resolved, maybe some trickle forward into 2Q. But as that business normalizes, what could the vascular gross margin reach by, let’s say, fourth quarter – third or fourth quarter?

Andrew Jackson

Over 50%.

Anthony Vendetti

Okay, okay. All right, great. All right, guys. Thanks.

Operator

There are no further questions. I’ll turn it back to Dean Irwin for closing remarks.

Dean Irwin

Thank you very much for your questions. We’re excited about the progress we’ve made with our new comprehensive commercial strategy. We look forward to providing a progress update on our Q2 quarterly call in August. In the meantime, have a great day. Thanks very much.

Operator

This concludes today’s conference call. You may now disconnect.