SILK (2019 - Q1)

Good day, ladies and gentlemen, and welcome to Silk Road Medical's 2019 First Quarter Earnings Call. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to introduce your host for today's call, Ms. Lynn Lewis with Investor Relations. Ms. Lewis, you may begin. Lynn Lew

Thank you. Thank you all for participating in today's call. Joining me are Erica Rogers, Chief Executive Officer, and Lucas Buchanan, Chief Financial Officer. Earlier today Silk Road Medical released financial results for the quarter ended March 31, 2019. 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 the federal securities laws which 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 examination of operating trends and our future financial expectations, which includes expectations for hiring, physician training, growth in our organization and reimbursement, market opportunity and guidance for revenue and gross margin and operating expenses in 2019 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 24B for filing with the Securities and Exchange Commission on April 4, 2019 in connection with our initial public offering. This conference call contains time sensitive information and is accurate only as of the live broadcast today, May 8, 2019. 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'll turn the call over to Erica Rogers, CEO.

Thank you, Lynn. Good afternoon, everyone, and thank you for joining us. I am pleased to welcome you to Silk Road Medical's first earnings call to review our first quarter 2019 results. As many of you know, we completed our initial public offering in April raising approximately $109 million in net proceeds. I would like to express my sincere gratitude to all the investors who participated in the offering. At Silk Road we have one overarching theme, which is a relentless focus on successful patient outcomes, every patient every day. Everything we do at Silk Road is designed to further our goal to protect the brain. On this call and for the year we will focus on two key priorities important to our success. One is building the TCAR clinical evidence base, and two is US commercial execution. As this is our first call as a public company, I will also use the next few minutes to provide an overview of our business and then we will provide an update on our first quarter accomplishments. I'll then turn the call over to Lucas Buchanan, our Chief Financial Officer, to provide more detail on our financial results during the period and then we'll wrap up and open the call for questions. Silk Road Medical is a commercial stage medical device company dedicated to reducing the risk of stroke and its devastating impact. Stroke is one of the most catastrophic, debilitating and costly conditions worldwide. Carotid artery disease is one of the leading causes of stroke and it is the progression and buildup of plaque causing narrowing of the arteries in the front of the neck that supply blood flow directly to the brain. This plaque can break away from the arterial wall, travel towards the brain and cause a stroke. Patients are often asymptomatic until they're not, meaning the first symptom of carotid artery disease could be a major stroke. We believe the best way to avoid the morbidity and mortality of stroke is to prevent stroke in the first place. At Silk Road we have pioneered a new approach for the treatment of carotid artery disease called TransCarotid Artery Revascularization, or TCAR. TCAR relies on two novel concepts: minimally invasive direct carotid access in the neck, and high rate blood flow reversal during the procedure to protect the brain. Using our portfolio of products, TCAR has clinically demonstrated a reduction in the upfront morbidity and mortality profile when compared to current treatment alternatives and, importantly, also provides a reduction in long-term stroke risk. We are the first and only company to obtain FDA approvals, secure specific Medicare reimbursement coverage and commercialize products engineered and indicated for use in TCAR. With this approach we've established an entirely new minimally invasive endovascular category. We believe TCAR has the potential to become the standard of care in a multibillion-dollar market opportunity. Since we introduced TCAR in 2007, more than 10,000 procedures have been performed. But what is exciting is that we're just at the beginning of this journey. Based on the estimated 427,000 diagnoses of carotid artery disease in the United States in 2018, we estimate an annual US market opportunity of approximately $2.6 billion exists for our portfolio of TCAR products. We are currently focused on converting existing carotid revascularization procedures to the minimally invasive option of TCAR. There were approximately 168,000 carotid revascularization procedures performed in the US in 2018. These are predominately an invasive open surgery called carotid endarterectomy, or CEA, but also included 4,500 -- over 4,500 TCAR procedures. This translates to less than 3% penetration of treated patients with TCAR and approximately 1% of those diagnosed. Our opportunity is a classic conversion from open surgery to an endovascular minimally invasive procedure. We've seen this open to endo shift over the last 30-plus years and carotids represent the last endovascular frontier and, until now, have been one of the toughest challenges to solve with catheter-based technology due to the sensitivity of the brain. There is a lot of opportunity in front of us to penetrate this market. We aim to become the standard of care and treat the hundreds of thousands of patients at risk for stroke from carotid artery disease. Turning to our financial performance; revenue for the first quarter of 2019 was $12.8 million, up approximately 124% compared to the first quarter of 2018. For the full year we expect revenue to be in the range of $59 million to $61 million representing growth of 71% to 77% over full-year 2018 revenue. Looking ahead we expect growth will continue to come from increased TCAR adoption in the United States, driven by two key priorities: one, building the clinical evidence base; and two, US commercial execution. Paramount to our success is our relentless focus on patient outcomes. This focus pervades every decision we make and everything we do from product quality to physician training to sales education to clinical case support to commercial expansion and everything in between. In addition, Silk Road Medical has always been a company dedicated to building the clinical evidence around TCAR to support our efforts with patients, payers and providers. We are firmly rooted in the belief that physician confidence and adoption are driven by clinical evidence. The safety, effectiveness and clinical advantages of TCAR have been demonstrated in multiple clinical trials, post-market studies and registries that have evaluated the outcomes in more than 3,500 patients in the United States and Europe to date. We believe the results of our clinical studies provide evidence that TCAR offers significantly better reduction in stroke risk than transdermal carotid artery stenting, or CAS, and stroke risk on par with CEA while reducing complications associated with CEA including cranial nerve injury, pain, scarring, recovery time and extended length of stay in the hospital. TCAR allows physicians to present a minimally invasive alternative to patients without compromising the reduction in stroke risk they would expect in a CEA procedure. The evidence base for TCAR will continue to mount in large part driven by the TCAR Surveillance Project. The TCAR Surveillance Project was implemented in September of 2016 as an initiative of the Society of Vascular Surgery patient safety organization. It is an ongoing open-ended data collection effort that was designed to monitor the safety and effectiveness of TCAR in real-world use and contemporaneously compare TCAR to CEA. Overtime, it is expected that academic researchers will query the database and produce publications in peer reviewed journals, and physicians may present data at medical conferences regarding TCAR. We've already seen several presentations and papers regarding the TCAR Surveillance Project in 2018 and we have recently learned that a new abstract has been accepted for presentation by Dr. Mahmoud Malas during the plenary session of the Society of Vascular Surgeries Vascular Annual Meeting, or VAM, in National Harbor, Maryland on Thursday, June 13. I am also pleased to announce that we recently completed enrollment in ROADSTER 2, a post-market approval study to evaluate the outcomes in TCAR procedures using our ENROUTE stent in over 600 patients. An abstract has been submitted to the vascular annual meeting for review during the late breaking clinical trials section. We are firmly rooted in the belief that physician confidence and adoption are driven by clinical evidence and we will continue to build on the existing strong evidence base. Turning to our second key priority -- commercial execution is all about driving adoption of the TCAR procedure to generate initial and repeat orders of our products in the hospitals where TCAR is performed. The structure of the market is such that there is a concentrated base of physicians and hospitals performing carotid revascularization procedures. We estimate that approximately 2,750 physicians and 750 hospitals perform about 80% of the procedures. We believe this concentrated group of physicians has the appropriate skill set to learn and perform TCAR. So as a result, we don't have to change the referral pattern; we simply have to train physicians on TCAR and convert them from CEA. This starts with our flagship TEST Drive courses. TEST stands for TCAR education and simulation training and the TEST Drive courses are led by a highly regarded faculty of key opinion leaders allowing for significant peer-to-peer interaction and influence. These courses have been fully subscribed since inception and we conduct them on a regular basis. We believe these professional education initiatives are a key differentiator in driving successful outcomes during the learning curve of TCAR and establishing the confidence physicians need to adopt TCAR. Given the concentration of the procedure volume, we can leverage an efficient commercial coverage model. Over the last couple of years we have been methodically building a world-class commercial team as we've carefully rolled out TCAR. We ended 2018 with 25 active sales territories covering approximately 400 hospital accounts and 775 trained physicians. Each territory is supported by a team comprised of one area manager and one or more therapy development specialists. We ended 2018 with 27 area managers and 41 therapy development specialists and will continue to carefully and selectively build out this team in the years ahead. Area managers are responsible for developing territory business plans and, together with the therapy development specialists, they also support the training of proper use of our TCAR portfolio of products and provide clinically consultative support for patient selection, pre-procedure planning, procedure support and post-procedure care. We are incredibly proud of the world-class team we help build and we believe they are the only dedicated commercial team in the market focused exclusively on carotid artery disease. In the first quarter of 2019 we continued our commercial team, active territories and hospital accounts while continuing to run our TEST Drive courses. We achieved over 1,700 procedures in the period. In 2019 we plan to expand to roughly 35 territories and train approximately 500 new physicians while driving TCAR adoption towards a goal of exceeding 8,000 procedures for the year. In summary, we expect growth will continue to come from methodical commercial execution supported by the tailwinds of expanded clinical evidence and overarching focus on successful patient outcomes. With that I will now turn the call over to Lucas Buchanan, our Chief Financial Officer, and then will return with some closing comments.

Thank you, Erica. Revenue for the three months ended March 31, 2019 was $12.8 million, a 124% increase from $5.7 million in the same period of the prior year. Growth was driven by the growing adoption of TCAR across an expanding base of hospital accounts, trained physicians and active sales territories. Gross margin for the first quarter of 2019 was 74% as compared to 66% in the corresponding prior-year period. Gross margin improvement was driven by operational efficiencies as we spread fixed overhead costs across higher revenues. Total operating expenses for the first quarter of 2019 were $16.6 million, a 97% increase from $8.4 million in the first quarter of 2018. R&D expenses for the first quarter of 2019 were $2.7 million compared to $2.1 million in the first quarter of 2018. The increase was primarily attributable to an increase in personnel-related expenses as we continue to support product development and clinical study programs. Sales, general and administrative expenses for the first quarter of 2019 were $13.9 million compared to $6.3 million in the first quarter of 2018. The increase was primarily attributable to an increase of personnel-related expenses as we continue to expand our commercial team, as well as expenses related to building out our general and administrative infrastructure and support staff as we manage continued growth as a public company. Net loss from operations for the period was $24.2 million, or a loss of $20.12 per share, as compared to a net loss of $5.4 million, or a loss of $7.31 per share for the same period of the prior year. This metric for the first quarter of 2019 and 2018 included a $15.7 million noncash charge and $0.2 million noncash benefit respectively resulting from the re-measurement of the fair value of our convertible preferred stock warrant liability at each balance sheet date. We continue to record adjustments to the estimated fair value of the convertible preferred stock warrants until they were exercised in connection with our IPO in April 2019. We ended the first quarter of 2019 with $15.5 million of cash and cash equivalents. As Erica mentioned, we were pleased to complete our initial public offering in early April which generated net proceeds of approximately $109 million. Turning to our outlook for 2019, we expect full year 2019 revenue to be in the range of $59 million to $61 million representing growth of 71% to 77% over full-year 2018 revenue. After benefiting from a strong gross margin in the first quarter, we expect to increase spending in manufacturing and operational initiatives throughout the remainder of the year to support long-term capacity and efficiency goals. We are measuring our success and operational performance through several key metrics and initiatives, both near and long-term in nature. As Erica outlined earlier, we have set key objectives for 2019 to drive revenue growth. These include our objective to expand commercial coverage to roughly 35 territories, train an additional approximately 500 physicians, and achieve in excess of 8,000 procedures in 2019. With this in mind we do want to point out that the pace in which we execute commercial team expansion, new account activation and physician training, the key levers of our business, will always be dictated by our focus on patient outcomes and operational excellence. We believe this focus will put us on the best path towards our long-term goal of standard of care. We are constantly monitoring the cadence of our business as such. We look forward to providing commentary on our stated objectives and these levers as the year progresses. At this point I would like to turn the call back to Erica for closing comments.

Thank you, Lucas. Our vision for Silk Road Medical is big and we believe we are just at the beginning of this wide-open opportunity. Our mission is to be the global leader in the treatment of carotid artery disease through a relentless focus on patient outcomes. I am so grateful for the strong team we've assembled here at Silk Road. Our progress is truly a testament to their collaborative dedication and passion. And I feel very privileged to work alongside this team as we continue down a path of growth and innovation. We are also grateful to our newest investors who share our commitment to medical innovation and are providing the means for Silk Road Medical to carry on its mission to reduce the devastating burden of stroke. Before closing, I would like to take a moment to acknowledge that May is stroke awareness month. We are reminded of the countless patients and families whose lives have been forever changed by a devastating stroke. And this drives us to be part of the solution through technology and working with our physician and hospital partners to increase awareness. We look forward to updating you on our business. And with, that we will now open it up to questions. Operator?

[Operator Instructions] Our first question comes from Robbie Marcus with JPMorgan.

This is actually Christian [ph] on for Robbie. Good afternoon. Congrats on the first public quarter out of the gate. Obviously the growth speaks for itself, but can you give us any insight on the trends that you're seeing in the marketplace with respect to physician interest around TCAR? Have you seen any inflection in public perception as of late? Thanks.

Yes, in terms of perception in the marketplace, we continue to build on momentum and obviously as the footprint of the commercial business expands that momentum expands. Certainly we believe there will be some tailwinds on that momentum coming out of the June vascular annual meeting and that will certainly serve to increase the awareness as well around TCAR.

And then maybe just wanted to touch on a clinical question here. Do you have any updates around your discussions with the FDA related to standard risk indication? How should we as investors be thinking about the pathway forward for the opportunity for you guys?

Yes, sure. I can fully appreciate that question. I think first let me just point out again that the high surgical risk indicated and covered market is right immediate and in front of us, as you know. And that represents two-thirds of the patient population. So that is really the very large market opportunity that we're going after immediately. And we consider ourselves just at the beginning of penetration into that high surgical risk opportunity. That said, we understand the question around standard risk. We continue to look into that. And as soon as we have some definitive clarity around that we will certainly bring that to you.

And then last one from me, you gave some good color on how you're thinking about building out your sales territories and training physicians over the course of the year. It looks like SG&A continued to build pretty significantly this quarter. Can you give any quantitative color about how many new reps you added in the quarter and how many reps you expect to have to add in the year in order to get to that goal of 35 territories, 500 new physicians and 8,000 procedures on the year? Thank you.

Yes, Christian, this is Lucas. Thanks for the question. We do expect to continue to invest throughout the year in the sales and marketing line for sure both in the form of people and programs. The way we really look at the business is around physician training and physician productivity. As Erica mentioned, we run these TEST Drive courses on a regular basis and so we are kind of consistently expanding the denominator of trained physicians. And we've got a pretty significant commercial footprint that's busy doing that. And once those physicians are trained obviously there's a lot of time spent helping them through the learning curve and experience curve. And so, at any given point in time we have a decision to add a new territory or in some cases we add more support to an existing territory all in the pursuit of driving procedure volume. So it's not solely predicated on adding sales territories. So we have a very specific plan in place throughout the year, it is not necessarily linear. But we have and will deviate from that plan, as we have in the past, given specific regional dynamics where it may make sense to train more physicians in an existing territory or an existing hospital account. And in other parts of the country we may opportunistically add a sales territory either ahead of plan, or wait until we find the very best person. And so, the specificity around how when we add sales reps is less important to us as to the physician training cadence.

Our next question comes from Bob Hopkins with Bank of America.

Obviously you guys just went public, and so there's a little bit of new information here but not a tremendous amount. So I just have two quick ones. I was wondering, now that we have your first quarter results, could you just give us a sense for how much of the growth you're seeing at the company right now is coming from docs that were previously trained just doing more procedures than they've been doing previously versus adding new doctors? What does that look like here in the first quarter as compared to the last couple quarters? Just trying to get a sense of where the growth is coming from primarily.

Sure, happy to take that question. I will give you a little bit of background and then turn it over to Lucas. So, in terms of cases or procedures coming from existing physicians versus adding new physicians, it continues to be a mix of both. We continue to focus on moving physicians up their adoption curve. We know that experience early on in their hands is important to that adoption pace and as well the tailwinds of amassing additional clinical evidence. But certainly the procedural growth also comes from bringing new physicians on board and new hospitals on board. As you can imagine, once you have a hospital open, which of course requires all the typical medical device steps like going through the value analysis committee and other things. Once you are past those hurdles it certainly is efficient to work through not only an existing surgeon's procedural base but to train additional surgeons in that same hospital. So as Lucas sort of alluded to earlier, lots of different levers at getting at procedures. And this is the role and the job of the area manager to figure out which of those levers to pull.

Lucas, any -- I'm just…

Yes, I can add a little -- I can add a little to that.

[Indiscernible] driving more growth. Like is it changing? I know it's both, but I'm just curious if there is a trend worth calling out there. I'm trying to get a sense really for the same-store sales metric here, if you will.

Yes, so the first quarter was very reflective of our previous eight quarters. And overall if we look at our portfolio of trained physicians, we trained a lot more physicians in 2018 than we did in 2017. We trained a lot more physicians in the second half of 2018 than we did in the first half of 2018. So by and large our trained physician base is very early in their overall -- their weighted average adoption curve. And as we add to that denominator the ratio of business from new folks versus existing folks continues to get smaller and smaller and that trend continued in the first quarter. So most of our business is really getting quickly to repeat orders.

And the last question, I wanted to ask is on this topic of standard risk -- and I hear your point that when you're only doing the revenue base that you're doing relative to the size of the opportunity you have approval for, there's a lot of work to do and a huge opportunity there. But it's still interesting. And the only question I'd ask on standard risk, for either Erica or Lucas is, what is the first step in that process? What's the first thing that has to happen for the agencies to consider opening this up to standard risk?

Yes, I can appreciate that question, Bob. I think in terms of just looking at it from a pure regulatory standpoint, the stent itself is labeled for patients at risk for complications from carotid endarterectomy, or another way to say that is high surgical risk. So it's really the stent label that we're talking about. The neural protection system, which is the other flagship device in the procedure, is risk agnostic. So, on the stent side, that's really where it starts is conversations with the FDA to understand what specifically will be required. And of course, the best way to get a formal answer is to ask a formal question. And so, that's what we're in the process of formulating right now.

Our next question comes from Rick Wise with Stifel.

Let me start with a couple things. First of all, Erica, the ROADSTER 2 data that you indicated, congratulations on finishing enrollment. How do we think about the impact here? Is this something that's just -- in a broad sense just adds to the body of excellent evidence that you're accumulating? And so, it's not so much incremental as just part of the tide moving in the right direction here in terms of driving adoption. Or no, it's going to help answer some questions that linger and it could actually accelerate adoption growth training if the data -- assuming the data is what you would hope?

Well, first of all, Rick, thank you so much for joining us today. Really great to have you on the line. I really appreciate your question actually. We are excited about the completion of ROADSTER 2. This is obviously a major milestone for the Company -- not only because it fulfills a regulatory obligation at the FDA. But as you stated formerly in the first part of your remark there, Rick, is this is really about adding to the body of evidence. And this is a good body of evidence compared to ROADSTER 1 for example. In a multicenter study, and I think what is really special about ROADSTER 2 is that we were mandated to go to more new physicians and hospitals than existing users. So we really got a sense of what this procedure is like in the real world and when you put it in the hands of brand-new users. And that was really the question that we aimed to answer here. And so, I think what it will provide over time is some data mining beyond just the primary endpoint of course, but some data mining to look at these procedures over multiple physicians and multiple hospitals. So, we are very excited about it; it is a big milestone. Thank you.

I just want to clarify that the finished enrollment; the follow-up is ongoing. There's still monitoring and studying completion activities.

Thanks for keeping me honest there, Lucas. As you know, I did a survey trying to get a better sense of how physicians are thinking about TCAR and a couple things surprised me. I was just wondering how they played out the quarter. I was surprised at how quickly docs were ramping their procedures after training. And I'm sort of wondering whether that continued in the first quarter and how that's embedded in your thinking about guiding for the year. And second, I was surprised and interested to see -- not surprised really, but excited to see how the noncurrent TCAR docs -- how interested they are in getting trained and was wondering do you have the ability to meet the demand, frankly.

Sure, let me take those in reverse order. So the short answer is yes, we have the ability to meet the demand. And part of that is we put some fairly robust barriers to entry in front of a physician who puts their hand in the air and says they want to be trained. Because what we're really ultimately driving to do is have physicians build a TCAR program in their hospitals. We're not necessarily looking for the one-off case here and there, but a real dedication to a TCAR program. And so, that sort of leads to the answer to the first part of your question, which is in our TEST Drive training programs. We require that physicians not only are substantially through their value analysis committee and all of those boxes that have to be checked at the hospital level, but more importantly have already identified some patients in whom they believe TCAR would be appropriate. And we asked them to bring the de-identified H&P and images of those cases to the TEST Drive training program and those cases are reviewed in a group atmosphere where the pros and cons are debated among peer to peer. And so, that is part of why you see this accelerated adoption in physicians coming out of TEST Drive is because we have their commitment on the front end to build a TCAR program and a commitment to do cases upon returning. And one thing we know is that the faster we can get a surgeon up their first few cases coming out of TEST Drive the faster the overall adoption will be. So hopefully that answers your question.

Our next question comes from Joanne Wush [ph] with BMO Capital Markets.

Well, welcome to your first publicly traded conference call. Two questions. The first one is a little bit more maintenance. Gross margins of almost 74%, can you set the groundwork for what we should be looking at for this year? And how do you see those ramping overtime?

Thanks, Joanne, that's a very good question. We did have some unique attributes to the first quarter that led it to be slightly better than we expected. Some of that is related to commercial execution and all the things Erica talked about. But we've had some things that happened in the first quarter that won't necessarily persist throughout the remainder of the year. And as I alluded to in my prepared comments, there are some key investments that we want to make in manufacturing development to drive capacity and efficiency for the long-term that we think are important to the business. So, I would not expect the first quarter necessarily to be reflective of the remaining quarters.

Do want to set a goal for the year?

We are not giving guidance on that metric at this time, Joanne. It's early.

Okay, that's very fair. Just thought I would ask. I'd like to return then to the training concepts since that is such a big driver of revenue going forward. How do you think about how many programs you run each year and which geography they are going to be being opened up in? And how much flexibility do you have to say, oh, we have demand in -- I'll make it up -- Texas, let's go start something there?

Yes, so really interesting question. First of all, the TEST Drive program today is really centered out of Chicago. We conduct them in a beautiful surgery training center just outside Rosemont, right near the airport. And interestingly enough, in the same building as the Society of Vascular Surgery just by pure coincidence. So it's a centralized location, it's obviously easy for physicians to get in and out of Chicago. However, to your question, we have on occasion taken the training regionally when there are groups of physicians that need to be trained all at once or there is, to your point, a demand where the geography just doesn't work or the physician just really cannot get out to Chicago. But those are very much one-off situations and, as we've said before, our TEST Drive programs have been oversubscribed since inception. We also are doing another one of our fellowship TEST Drive programs dedicated solely to fellows and that is, I'm happy to say, also looking to be oversubscribed. So think the point is we will meet demand of the physicians who qualify to go to TEST Drive. And yes, we certainly can take the training to the physicians, but we try to minimize that.

Sounds terrific. Thank you so much.

Speakers, I'm showing no further questions in the queue at this time. I'd like to turn the call back to Ms. Erica Rogers for any closing remarks.

Well, thank you all very much for joining our first quarter 2019 results earnings call. Very much appreciate your time and attention and I hope you have a wonderful evening.

Ladies and gentlemen, thank you for participating in today's conference. This concludes the program. You may all disconnect and have a wonderful day.