Ra Medical Systems, Inc. (RMED) Q4 2018 Earnings Conference Call March 14, 2019 4:30 PM ET

Company Participants

Kevin McCabe - LHA Investor Relations
Dean Irwin - Chief Executive Officer, Chief Technology Officer and Chairman of the Board of Directors
Thomas Fogarty - Chief Commercial Officer
Andrew Jackson - Chief Financial Officer

Conference Call Participants

Andrew Stafford - Piper Jaffray
Bruce Nudell - SunTrust Robinson Humphrey, Inc.
Anthony Vendetti - Maxim Group, LLC

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the Ra Medical Systems Fourth Quarter Financial Results 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, March 14, 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' 2018 fourth quarter and full year 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, the company's Chief Commercial Officer. Due to a scheduling conflict, Mr. Fogarty will not be available for today's Q&A session.

Earlier today, Ra Medical issued a news release announcing financial results for the 2018 fourth quarter and full year. 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 March 14, 2019.

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 earnings new release that accompanies this call and the company's SEC filings, including Ra Medical's Annual Report on Form 10-K for the year ended December 31, 2018 to be filed with the SEC.

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 2018 fourth quarter and full year financial results. The release is also available on the company's website. The release includes the company's explanation for the 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 continue to be excited about our future and the significant market opportunity Ra Medical has with our DABRA laser system. We believe that DABRA is a better way to treat patients with lower extremity vascular disease.

Our system is a safe, versatile, easy to use and cost effective solution for treating patients with Peripheral Artery Disease or PAD. PAD affects about 17.5 million Americans. Estimates show the annual U.S. total addressable market for PAD is more than $1 billion and growing, even though only 20% to 30% of patients with the disease are being actively treated.

Left untreated, vascular blockage can increase the risk of heart attack, stroke, amputation or even death. In fact, about 180,000 amputations are performed each year in the United States as a result of PAD. Both our DABRA system for vascular indications and our Pharos system for dermatological indications are based on advanced excimer laser technology.

We began commercializing Pharos in 2004, and as of the end of 2018 we had shipped more than 1,000 systems worldwide. With our DABRA system, you may recall that in May of 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 of ablating a channel in occlusive peripheral vascular disease.

These procedures are typically referred to as atherectomy. Although the DABRA is not currently cleared by the FDA for that indication, nevertheless, we believe third-party health payors reimburse for photo ablation performed with the DABRA procedure if the physician determines the device and the procedure are medically appropriate for that particular patient.

Following FDA clearance, we commercially launched DABRA through an initial 12-month program, in which we temporarily placed the system in customer facilities and provided training and support for the procedure. Customers that decided to continue to use DABRA at the end of the launch period, sign commercial usage agreements with us that include specific terms of use and nominal maintenance fees.

We ended 2018 with 53 such agreements in place, including 19 signed during the fourth quarter. After a review of the commercial opportunity, we reached the decision to transition to the next phase, in promoting adoption of the DABRA system. With a new integrated commercial strategy aimed at building long-term relationships with our customer.

Tom Fogarty joined us in December in the newly created position, Chief Commercial Officer. He oversees all aspects of commercialization including sales and marketing of the DABRA and Pharos systems. As an executive, Tom has more than two decades of sales and marketing experience including significant product launch and commercialization experiences at Bioness and ev3.

Earlier in his career, he held sales and marketing positions at Medtronic, Baxter and Johnson & Johnson. Tom has a tremendous track-record of leading commercial programs at both early-stage companies and large corporations. He's experienced in building productive sales organizations and successfully commercializing vascular products.

Importantly, he's implementing a strategy that we believe will be instrumental in driving Ra Medical to the forefront of life-saving innovation for our DABRA system in the U.S. as well as international markets. This new strategy of longer-term customer adoption is a shift from our prior focus of initial evaluation sales.

During our steep ramp in the back half of 2018, we experienced certain issues that had an impact on our fourth quarter revenue and into 2019. In particular, the hiring and training of qualified sales personnel was dependent on the on-boarding of our CCO. And we also found that we needed a more robust training program for our newly hired sales personnel.

In addition, we experienced production limitations on our manufacturing process as we scaled up catheter production. We made changes in our production flow and we're now in the final stages of validating our manufacturing process. As of today, we're back, up and running in full production.

Also Tom led our first vascular national sales meeting in February. This meeting incorporated new training programs for both recently hired reps and continuing education for our longer-term sales personnel. We believe we've addressed those issues identified in 2018 and we will begin to see the positive impact on revenue beginning in the second quarter of 2019.

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

Thomas Fogarty

Thank you, Dean. And it's a pleasure to be speaking with all of you today. It has been an exciting time since joining the team at Ra Medical. From my years in commercial operations with a focus in the vascular field, I see the significant opportunity in commercializing the DABRA system.

Our new strategy encompasses an integrated approach that aligns all aspects of our commercial organization with a 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 fully integrated.

We have made upgrades and changes in our sales management team. And we have restructured our field organization in order to align with our key customer targets. We completed our first national vascular sales meeting in February with a revamped selling process that highlights our new value proposition. This process includes new hire and continuing education training programs. We are also expecting to continue a measured expansion of our commercial team with key hires in alignment with our long-term strategy over the next several quarters.

I believe we will start to see the positive impact of these changes reflected in revenue beginning in the second quarter of 2019. And I wish - I will turn the mike over to Dean.

Dean Irwin

Andrew, would you like to tell us a little bit about the financial results?

Andrew Jackson

Sounds good. Thanks, Dean. I'll review our financial results for the fourth quarter of 2018 followed by the full year. Revenue for the fourth quarter of 2018 was $2.0 million, and consisted of product sales of $1.2 million, and service and other revenue of $0.8 million. This compares with revenue of $1.9 million for the fourth quarter of 2017, which consisted of product sales of $1.2 million, and service and other revenue of $0.7 million.

Revenue from the vascular segment for the fourth quarter of 2018 was $0.6 million, an increase from $0.2 million for the prior year period. And revenue from the dermatology segment was $1.4 million compared with $1.7 million for the prior year period. Gross profit margin for the fourth quarter of 2018 was 40% up from 14% for the fourth quarter of 2017.

SG&A expenses for the fourth quarter of 2018 were $14.8 million compared with $3.0 million for the prior year period. SG&A expenses for the fourth quarter of 2018 and 2017 included $6.6 million and $1.1 million of stock-based compensation, respectively.

R&D expenses for the fourth quarter of 2018 were $1.2 million compared with $0.4 million for the prior year period. R&D expenses in the fourth quarter of 2018 and 2017 included $1.0 million and $0.1 million of stock-based compensation, respectively.

GAAP net loss attributable to common stockholders for the fourth quarter of 2018 was $14.9 million or $1.18 per share. This compares with a GAAP net loss of $3.1 million or $0.40 per share for the fourth quarter of 2017.

Adjusted EBITDA for the fourth quarter of 2018 was negative $7.0 million compared with adjusted EBITDA of negative $1.8 million for the prior year period. A reconciliation table of GAAP net loss to non-GAAP EBITDA is included in today's press release.

Turning to results for the year ended December 31, 2018, revenue was $6.3 million for the year, a 7% increase from $5.9 million for 2017. Product sales for 2018 were $3.2 million, up 3% from $3.1 million in 2017. And service and other revenue was $3.1 million, up 11% from $2.8 million for the prior year. Revenue from the vascular segment was $1.6 million in 2018, an increase of $0.3 million in 2017. Revenue from the dermatology segment was $4.7 million for 2018 compared with $5.6 million in 2017.

Gross profit margin for 2018 was 33%, an improvement from 29% for 2017. SG&A expenses were $30.4 million in 2018 compared with $14.9 million in 2017. SG&A expenses in 2018 and 2017 included $11.9 million and $8.7 million of stock-based compensation, respectively.

R&D expenses for 2018 were $2.8 million versus $4.5 million for 2017. R&D expenses for 2018 and 2017 included $2.0 million and $3.3 million of stock-based compensation, respectively.

GAAP net loss attributable to common stockholders for 2018 was $30.8 million or $3.34 per share compared with a net GAAP loss of $17.8 million or $2.35 per share for 2017. Adjusted EBITDA for 2018 was negative $15.8 million compared with adjusted EBITDA of negative $4.8 million for 2017.

We reported cash and cash equivalents as of December 31, 2018 of $64.3 million. You may recall that we completed our IPO on October 1, 2018 for net proceeds of $67.3 million. We used $18.5 million in cash to fund operating activities for 2018.

And finally as Dean mentioned, the implementation of the new commercial strategy and the slower pace of hiring sales representatives impacted of sales during the fourth quarter of 2018 and into the first quarter of 2019. While, we don't currently plan to provide revenue guidance on a quarterly basis going forward, we are making an exception for the first quarter due to the timing of our release of the fourth quarter results.

With our expectation for total revenue for the first quarter of 2019 in a range of $1.0 million to $1.4 million, which includes revenue from the vascular segment in the range of $0.3 million to $0.4 million, we believe we will begin to see the positive impact of our new commercial strategy beginning in the second quarter of this year.

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

Dean Irwin

Thanks, Andrew. A key component of gaining physician adoption for the DABRA system is building a body of compelling study evidence. We are delighted that a number of key opinion leaders in our space are presenting their findings. I want to share the results from two recent conference presentations. First, results from 111 lesions in 52 patients treated with the DABRA system showed 98% success rate for above and below the knee of PAD lesions.

These study results are particularly noteworthy, given the inclusion of the challenging patient group with Rutherford classifications between 4 and 6, a high presence of calcium and 93% median lesion stenosis.

A statistically significant difference was demonstrated in pre- and post-diameter stenosis and lesion success. Further, post-DABRA treatment showed statistically significant improvements in limb hemodynamic measures. These study results were presented at the prestigious LINC 2019 conference held in January in Germany by Dr. Ashok Kondur, Chair of the Cardiology Division at Garden City Hospital/MSU and Associate Program Director in the Interventional Cardiology Fellowship Program at DMC Harper University Hospital at Wayne State University. This is highly exciting performance reaffirmed a case report published in the January issue of Endovascular Today by Dr. Athar Ansari.

More recently at the JIM conference in 2019, held last month in Italy, Dr. Athar Ansari, Director of the California Heart & Vascular Clinic presented the data from 200-patient study using the DABRA system. His data showed a 94% success rate in ablating arterial blockages in 292 lesions.

Our DABRA will also be featured in upcoming podium presentations at the OEIS conference in Florida in April 2019. Given our novel photochemical technology, and research and development expertise, DABRA has opportunities to extend into additional indications.

We're pursuing FDA clearance specifically for the atherectomy indication. We have made a pre-submission that includes a new study design to allow the FDA to evaluate the DABRA atherectomy procedure. We expect to be in patient enrollment in the second quarter of 2019 with final results expected by the first quarter of 2020.

We also intend to pursue indications for in-stent restenosis and coronary artery disease. With coronary artery disease, we are working with the FDA to begin a pilot study in the next few quarters. Lastly, we intend to expand our product offerings in the endovascular space to provide our sales force with a more compelling value proposition to our customers.

In closing, I'm excited about the opportunity with our DABRA system and its advantages in a large and growing market. We are implementing a comprehensive commercial strategy aimed at growing revenue on a long-term sustainable basis. Our new commercial strategy is being led by proven leadership and we expect to begin seeing the benefits in the second quarter.

We are executing on a powerful mission of saving lives and limbs, and we're taking steps to secure our long-term success with a focus on building shareholder value.

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

Operator

[Operator Instructions]

Dean Irwin

While we're waiting for the first question, I'd like to mention that we'll be holding meetings at the ROTH Conference next Monday in Laguna Niguel, California. We look forward to seeing those of you attending.

Okay, operator, we are ready for the first question.

Question-and-Answer Session

Operator

And our first question is from the line of Matt O'Brien from Piper Jaffray.

Andrew Stafford

Hi, everyone. This is Drew on for Matt. Thank you for taking the questions. Specifically on the vascular side, can you provide any more details on some of the factors that led to the light number in the quarter? And then, maybe anything you've been seeing in the last couple of weeks since you've solved some of those issues that kind of give you confidence that you can continue to ramp that number throughout the year?

Dean Irwin

Yes. Thanks. And I appreciate your questions. So we did have some manufacturing issues as we scaled up and we have solved those and we are now back into full production. And our top accounts are performing at model. So we believe that each rep would be able to handle as few as four accounts producing up to $1 million a year in catheter sales. And that's at a rate of about 240 catheters per year per account.

We're very confident that that's holding true and that we'll be able to supply those customers now through the remainder of Q1 and through Q2.

Andrew Stafford

Okay. That's great. Can you kind of go into detail a little bit on the strategy change a little bit more? I mean, is that a change in how you're offering, pricing the products or offering the products specifically or is it more how you're approaching the customer, kind of how should we think about that into 2019 here?

Dean Irwin

Well, thanks. Bringing on our new CCO, Tom Fogarty has resulted in this shift from sales based upon evaluations to establishing longer-term relationships. And we're very excited about this shift in the strategy. Tom put this program together. As you know, he came on in late December. And he put this program together and introduced it to the sales force in February.

So we just completed that training along with the new ways to build that strong adoption with our customers. And we're seeing fantastic results, not only from patient testimonials, but also physician testimonials. We're really changing the way some of these patients are being treated with the DABRA system.

Andrew Stafford

Okay. Is that across both of your business lines, you're instituting that same sales strategy?

Dean Irwin

Our Pharos project is slightly different. The dermatological market is fairly different. And I know Tom is analyzing that now. We do expect to see an increase in Pharos sales this year, as we re-shift some resources towards that project. As you know in 2018, we took some of those resources and some of the focus away from Pharos as we were refining our DABRA sales.

Andrew Stafford

Okay, great. And then last one for me I guess is given some of the issues you've seen during the quarter, should we expect any disclosures related to internal controls, legal, et cetera, in the upcoming 10-K?

Andrew Jackson

No. We don't expect any additional disclosure controls coming out of the manufacturing issues other than just disclosing exactly what we just mentioned on this call.

Andrew Stafford

Okay. Thank you.

Operator

And our next question is from the line of Bruce Nudell from SunTrust.

Bruce Nudell

Good afternoon. Thank you. Pardon any background noise, I'm in a conference. So, Dean, I know that there were sales rep issues, manufacturing issues. But just given what you - the cadence of hiring you've got, now that you have full product availability, how should we expect expectations - how should we set expectations for revenue for the year? I think consensus is around $30 million for vascular, I'm sorry. Yeah.

Dean Irwin

Yeah, hi, Bruce. I'm going to turn this over to Andrew. As you know, we don't give guidance, but I'm going to let Andrew speak a little bit to that subject.

Andrew Jackson

That's exactly right, Dean. Thanks for the question, Bruce. So consistent with prior quarter, we are too early in our launch phase to really be able to accurately predict revenue at this stage and give guidance for the full year. We are just updating it for this quarter, but we do expect that on an ongoing basis that qualified reps will be doing $1 million a year, once they get four accounts under their belt.

Bruce Nudell

So, I guess, how many reps will have four accounts by the end of the year?

Andrew Jackson

So we finished Q4 2018 with 22 reps for the vascular segment. We plan to measurably add reps through the next couple of quarters and possibly into Q3. And we're not quite giving a number for the end of the year, but will be an increase from where we're at now.

Bruce Nudell

Okay. And, Dean, I guess, my only follow-up is have there been any unexpected either clinical or commercial frictions in territories where you're adequately staffed?

Dean Irwin

No. In fact, what we've seen is outstanding performance of the DABRA in a variety of different cases including retrograde, tough ISR cases, heavily classified lesions. In fact, the DABRA is exceeding our expectations clinically. As far as competition, as you know we're really not competing against other atherectomy devices. We are really changing the way the physicians are looking to go treat some of these vascular disease patients.

What we're finding is that the DABRA tends to track the true lumen, saving the physician time and having a better clinical outcome for the patient. It's that better clinical outcome that we're studying in our results trial, which is going to be a two-year follow-up study for these patients that have been treated with DABRA. We believe that we have a better way to treat these patients with longer lasting more durable results.

Bruce Nudell

Thanks so much.

Operator

[Operator Instructions] Our next question is from the line of Anthony Vendetti from Maxim.

Anthony Vendetti

Thanks, guys. Just in terms of maybe, Dean or Tom, in terms of the hiring pace, what should we expect? Is there a goal for the number of sales reps you're trying to hire per month? Or what is a reasonable expectation for 2019?

Dean Irwin

Hi, Anthony, thanks. So Tom is really put together a terrific package, looking at the quality of the rep as well as the rep's qualification. So we're paying a lot of attention to that. As you know, we study that very carefully in our soft launch and we believe that Tom is absolutely on the right track for hiring of quality reps that are capable of hitting the ground running with a reasonable ramp-up time.

So that being said, again, we have 22 reps at the end of the year. And I think that we'll be adding measurably, but again, with the focus on quality and not necessarily quantity. So we've established the qualifications for these reps and we're going to bring them on in a judicious but rapid pace.

Anthony Vendetti

Okay. And then in terms of the number of DABRA catheters sold in the quarter, do you have that number?

Andrew Jackson

Yeah. We don't give out the catheters sold. Someone could back into the ASP there, so we're just being consistent with prior quarter and not giving that number out.

Anthony Vendetti

Okay. And then lastly, Dean, atherectomy, you gave a little bit of information on that. Can you just go over the timeline, number of patients that you need to enroll for that? And then, when do you expect the readout for that?

Dean Irwin

Sure. So we actually have the pre-sub in with the FDA. I spoke with them last week. And I have the official call coming up on the 26. We expect less than 100 patients in order to establish the claim for atherectomy. We need to follow the patients for 180 days. So enroll these patients all and by enrollment, I mean, we actually treat the patients by, say, July. We'd be into January for the follow-up. Then a short time collecting and reporting the data to the FDA. And we believe from there it would be a quick decision as they're very familiar with us and this product. So we're looking at sometime Q1 of next year.

Now, that being said, we not had a single customer be denied a claim or have any response relative to any sort of clawbacks or refund. So our physicians are using the device, they're getting paid and we're having no issues there whatsoever.

Anthony Vendetti

Okay. So reimbursement hasn't been an issue, whether they're using it for atherectomy or PAD.

Dean Irwin

That's correct. It has not been an issue.

Anthony Vendetti

Okay. And then just the last question on the manufacturing/production issues in the fourth quarter 2018, was it the ramp up in that or was there an issue at the plant itself?

Dean Irwin

Yeah, as you know our product is simple, but the process is very complicated. And during the scale up of that process to meet demand we had production issues.

The issues were related to a very specific piece of equipment that we have now upgraded and we've completed the validation on that process. So again, we're back in production today.

Anthony Vendetti

And that, you said you're up and running on that. When did you officially come back up and running at full capacity?

Dean Irwin

It was very recently.

Anthony Vendetti

Okay. All right, excellent. I'll jump back in the queue. Thanks.

Operator

And at this time, I'm showing that we have no further audio questions. Mr. Irwin, I'd like to turn the call back to you.

Dean Irwin

Terrific. Well, thank you for your questions. I trust we've shared with you our excitement about our future prospects and our new comprehensive commercial strategy. We look forward to providing a progress update on our next call in May. In the meantime, have a great day. Thanks very much and we appreciate your support.

Andrew Jackson

Thank you.

Operator

Ladies and gentlemen, we thank you for joining us for the Ra Medical Systems fourth quarter financial results conference call. You may now disconnect.