ClearPoint Neuro (NASDAQ:CLPT) Q2 2020 Earnings Call

0:00 Greetings, and welcome to ClearPoint Neuro's second quarter and six-month 2020 Financial Results Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. Comments made on this call may include statements. These forward-looking statements may include, without limitation, statements related to anticipated industry trends, the company's plans, prospects, and strategies, both preliminary and projected, and management's expectations, beliefs, estimates, or projections regarding future results of operations.

0:55 Actual results or trends could differ materially. The company undertakes no obligation to revise forward-looking statements for new information or future events. For more information, please refer to the company's annual report on Form 10-K for the year ended December 31, 2019, and the company's quarterly report on Form 10-Q for the quarter ended March 31, 2020, both of which have been filed with the Securities and Exchange Commission, and the company's quarterly report on Form 10-Q for the quarter ended June 30, 2020, which the company intends to file with the Securities and Exchange Commission on or before August 14, 2020. All the company's filings may be obtained from the SEC or the company's website at www.clearpointneuro.com.

1:47 I would now like to turn the call over to Joe Burnett, Chief Executive Officer. Please go ahead, sir. Thank you, Brock, and thank you to everyone listening on today's call. The second quarter of 2020 brought about new personal and professional challenges to the entire world, and we here at ClearPoint Neuro were no exception. Our priorities during the second quarter for the company and for our team and culture were threefold. Number one, to make sure that every patient that needed treatment felt supported by the availability of ClearPoint products and our team members. We wanted to ensure that surgeries performed during COVID restrictions gave the patients the best possible chance of success. 2. While cases decreased in the quarter, we wanted to ensure our development projects and investments in our talented team continue to move forward so that our strategy is intact and so that we exit the crisis in a stronger position than when the pandemic started.

2:45 3. To protect our employees from layoffs or furloughs so that they can be a pillar of strength for friends and family who have all been impacted by the health or financial impact of the crisis. I can tell you now today that we accomplished all three of these goals In parallel to achieving these three cultural goals, we believe our financial performance indicates that we made the most of the situation, and we were encouraged by the speed in which elective case procedures bounced back in June to about 85% of the pre-COVID run rate. This combined with our diversification into biologics and drug delivery enabled us to still have a successful quarter from a financial standpoint and deliver $2.5 million in top-line revenues. I will have Hal Hurwitz, our CFO, take you through some of the detail, and then I will provide an update on our four-pillar growth strategy and expectations moving forward.

3:38 Hal? Thanks, Joe. Total revenues were $2.5 million for the three months ended June 30, 2020, and $2.6 million for the three months ended June 30, 2019, which represents a decrease of $129,000, or 5%. Drilling down on these revenue numbers, one can see the effects of the COVID-19 pandemic that Joe described in his opening remarks. Functional neurosurgery revenue, which consists of disposable product commercial sales related to cases using our ClearPoint system, decreased 38% to $1 million for the three months ended June 30, 2020, from $1.7 million for the same period in 2019.

4:25 This decrease was due to the effects of the COVID-19 pandemic in which substantially all elective surgical procedures, historically representing approximately 80% of our ClearPoint system case volume, were postponed or canceled in April 2020 and resumed modestly compared to pre-pandemic levels in May and June 2020. Biologics and drug delivery revenues, which include sales of disposable products and services related to customer-sponsored clinical trials, utilizing the ClearPoint system increased 183% to $1.2 million for the three months ended June 30, 2020 from $413,000 for the same period in 2019. This increase was due primarily to an increase in biologic and drug delivery service revenues attributable to the establishment of relationships with biologic and drug delivery companies that included period-based retainers for clinical services in support of such companies' respective clinical trials.

5:28 Also contributing to the increase in biologics and drug delivery revenues was an increase in related product revenues. Capital equipment revenue consisting of sales of ClearPoint reusable hardware and software and services related thereto decreased 51% to $240,000 for the three months ended June 30, 2020 from $485,000 for the same period in 2019. While revenues from this product line historically have varied from quarter to quarter, we believe that many hospitals have postponed capital equipment evaluations and acquisition activities during the pandemic, resulting in this decrease. Gross margin for the three months ended June 30, 2020 was 74% as compared to 60% for the same period in 2019.

6:21 This increase in gross margin was due primarily to a shift in the mix of revenues by line of business that resulted in service revenues, which bear higher gross margins in comparison to other product lines, representing a greater contribution to total sales. Turning to operating expenses, total operating expenses for the three months ended June 30, 2020 were $3.3 million, a 15% increase from operating expenses of $2.9 million for the same period in 2019. Breaking down the components of operating expenses, research and development costs were $822,000 for the three months ended June 30, 2020, compared to $698,000 for the same period in 2019, an increase of 18%.

7:11 The increase was due primarily to increases in headcount and related personnel costs. Sales and marketing expenses were $1.1 million for each of the three months ended June 30, 2020 and 2019. Travel and entertainment expenses decreased during the three months ended June 30, 2020 as compared to the same period in 2019, resulting primarily from reduced activity due to the COVID-19 pandemic. Also decreasing was incentive compensation resulting from the reduced product sales I previously discussed. These decreases were offset by an increase in personnel costs resulting primarily from headcount increases in our clinical and marketing teams.

7:57 General and administrative expenses were $1.4 million for the three months ended June 30, 2020, compared to $1 million for the same period in 2019, an increase of 33%. This increase was due primarily to increases in share-based compensation, professional fees, and a reduction of the allocation of shared departmental resources to production due to the reduced manufacturing activity as an effect of the COVID-19 pandemic. Net interest expense for the three months ended June 30, 2020 was $197,000 compared with $259,000 for the same period in 2019. This decrease was primarily due to a decrease in the amortization of the discount associated with secured notes that were repaid and retired in the first quarter of 2020 and to the repayment and retirement in June 2019 of other secured notes. This decrease was partially offset by the interest expense associated with the secured notes issued in January 2020.

9:05 Cash used in operations for the three months ended June 30, 2020 was $1.7 million. and our cash balance at June 30, 2020 was $16 million. I will now turn the call back to Joe. Thanks, Hal. As I hope you can see, we believe we have a strong quarter of performance, certainly compared to how things looked back in April of this year. However, we are cognizant that new challenges lie ahead as a direct result of the continuing COVID-19 pandemic, and we will continue to focus on patient support and pipeline execution in the months ahead. Starting with our first pillar of growth in functional neurosurgery, we continue to see that case volume has not yet returned to pre-COVID levels, and we do not expect a full return in the foreseeable future for the following reasons.

9:56 Number one, the virus continues to spread to many regional hospitals, which remain at risk to again suspend elective procedures for some duration of time. We currently have a handful of hospitals that have in fact reduced procedure volume in preparation of protecting ventilators and hospital beds in the event of a case influx. While we do not expect a drastic change in practices, as we had seen from March to May of this year, we do expect continued openings and closings. Number two, patients have to maneuver a series of testing before becoming candidates for surgery with our products. While in the past month, we have enjoyed an increase in surgical procedures, We need to remember that in March through May of this year, many patients were not able to see their neurologist during that time to do the proper testing and preparation of a surgery. Those meetings are again taking place, but we do expect a lull in cases as the patients destined for surgery continue to undergo the appropriate preliminary study.

10:58 And finally, our case volume continues to be centered in around 60 active clinical sites in the United States today. Should one of these centers or one of our high-volume users be impacted directly by COVID, it can in fact slow down the return to these pre-COVID levels. We must also remember that the patient plays an important role in the decision to move forward with the surgery as well. And as many of our patients are being treated for high-risk categories like Parkinson's disease, it is not uncommon that a patient may change their mind on their surgery the day before or even the day of. As Hal mentioned in his comments, while capital acquisition has not completely stopped, there has been a significant pause placed on new site evaluations and purchases.

11:44 We did not initiate any new sites for installation in the quarter. However, we do maintain a pipeline of more than 20 potential additional placements. Our team has done a great job making progress remotely. However, we expect there to be at least a few months before additional placements begin and our sales team can pass through meaningful hurdles Our development efforts have not stopped, however, and we have made meaningful progress during this time on our next-generation navigation platform and other ancillary products. We look forward to offering continued updates on these programs in the very near future. For our second pillar, biologics and drug delivery, we continue to expand the number and depth of our partnerships in the gene therapy and stem cell space.

12:31 While many preclinical and bench testing labs had to shut down for a period of time, shipments to these labs have resumed, supporting preclinical efforts of our more than 20 active relationships. We also saw a pause in recruitment and enrollment for a number of pivotal studies. However, those cases seem to have started scheduling again. We have continued our training and talent investment in this space and have identified more than five potential development projects currently underway. to cement our role as a leading device partner for these exciting biologics companies. For our third pillar, therapy projects, we have continued to make progress with our laser partners CLS and IGT in Sweden and France, respectively. The COVID interruption, however, did impact our ability to progress through some key preclinical milestones based on lab and testing availability.

13:24 We now believe that we will perform our first human cases using our complete laser solution Some time in the second half of 2021. As for our fourth pillar, achieving global scale, we have continued to support appropriate regulatory filings in countries requiring CE mark. The current travel ban from the United States to Europe has again slowed our ability to train and install systems in the quarter at some of these new centers. We do believe, however, that we will have active clinical sites installed in Europe in the first half of 2021. Further, you can see from the 74% gross margin in the quarter that our disposable and service businesses continue to gain profitability, highlighting the validity of our razor razor blade model. While we do not expect every quarter to have this level of margin, as so little capital has been sold, we do continue to feel we can gain economies of scale with increased throughput and less travel for local clinical specialists as they are hired.

14:24 With that, I would like to open up the call for any questions. Thank you. At this time, we'll be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment, please, while we pull for questions. Our first question today is from Sally Yankes of Brookline Capital Markets. Please proceed with your question. Hi, Joe and Harold. Thanks. Thanks for joining the call.

15:10 Just wondering, when do you think there's going to be a resumption or bounce back in the elective surgery procedures? I mean, probably, I mean, fourth quarter next year. Do you have any indication of when you think things might resume there? Yes, Sally, that's a very important question, and I tried to give a little bit of color to that in my prepared statement. I think the reality is that we have, in fact, seen a bounce back. I think if you look at the monthly results of our case volume, we did 11 cases in April, we did 44 in May, and then we did 71 in June. So you can see the trend is certainly in the right direction. Thank you so much for joining us.

16:22 So if you are thinking about which hospitals you're going to send COVID patients to versus which hospitals you're going to protect because they do some of the most sophisticated, difficult surgeries, in most cases our equipment is in some of those larger academic centers, which do continue to treat some very sick patients. I imagine it just varies regionally. It looks like it, you know, the areas where there's, you know, Thank you for joining us. and now we're talking about kind of 10 to 15% of our hospitals.

17:19 So we're definitely moving in the right direction, but we need to recognize that, you know, this pandemic is still not under control. So we need to make sure we're conservative in our planning. The next question is from Andrew De Silva of B Reilly FBR. Please proceed with your question. Hey, thank you very much, and I'm glad to share. It sounds healthy. Just a couple quick ones from me. Can you just give a little bit of color on how things are progressing with the two days? And then also, as it relates to just practices that don't have access necessarily internally to MRIs, are you seeing – Additional efficiencies coming in there where they're able to more readily access MRIs and utilize ClearPoint for the procedures?

18:22 Yeah, sure. Again, I'll answer the first question initially here, and thanks for the question, Andrew. Our progress on two-a-days is certainly continuing to gain steam. In fact, I believe we have 16 hospitals right now that have successfully scheduled and performed Two procedures in the same MRI suite in the same day. And again, one of the most crucial parts of that is not the fact that it can be done, but it can reliably and predictably be done. The last thing you want to do is schedule two patients for surgery, bring them in, get them emotionally prepared to go through a challenging neurosurgery, an important one, but a challenging one nonetheless, and then have that first procedure that was only supposed to last for three hours take six hours.

19:09 Thank you for joining us. Some of our hospitals, like pediatric hospitals, there just isn't that much demand for these types of procedures. They're fewer and farther between. But there's no reason for a situation where a hospital has access to a significant funnel of Parkinson's patients, for example, or essential tremor patients, where they can't reliably do two procedures a day using our platform and our training methods.

19:55 That's kind of bucket number one. Bucket number two is that access to MRI continues to improve as well. I would estimate at least 20-30% of all new MRI systems that go in with a focus on neuro are in fact those interoperative MRIs in the hospitals that we work with. And again, once an interoperative MRI, it's technically an MRI suite that's designed for surgery. What that means in most cases is the surgical team in fact makes the decision on scheduling, not the radiology team. and that takes down one significant barrier of MRI access being that the surgical team does not need to negotiate for that time.

20:41 It's actually reversed where they do surgeries when the patient needs it and then they backfill their own scanner with diagnostic scans when the time is appropriate. So those two trends are certainly still moving in the right direction. Okay, that's a great color. Thank you very much. I was actually just a little bit curious, and this doesn't need to be specifically about this particular quarter, but just as the cadence goes, Medtronic, for example, has their own MRI-guided laser ablation platform that is capable of being used without ClearPoint Neuro's platform. But I know that it does often get utilized with it.

21:28 Have you seen a trend where more and more of those kinds of systems are being utilized alongside your platform despite the ability to not be utilized, not to have to be utilized with it? Yeah, I would say that our... You know, the laser ablation market is an interesting one because it's one that we were sort of there from the start. You know, if you think about deep brain stimulation, those procedures have been helping patients for more than 20 years, and our technology was not available from the beginning. With neuro laser ablation, you know, we had the advantage of being there from the start. So we feel like we are actually growing with the market, if anything, maybe growing a little faster than those initial placements.

22:13 I would say our current penetration is about 30% to 35%. of all laser ablation procedures use ClearPoint. And the key reason why that was an attractive adjacent market for us and one that we felt we had a credible path to market leadership is because even if the laser ablation catheter is placed in the operating room and does not use MRI guidance for the placement itself, before you can turn the laser on, Thank you for joining us. We continue to believe that that's the best option for patients, and that's why we felt it was appropriate for us to build a pathway to have access to our own laser system where we can own the entire procedure from the beginning to the end.

23:31 Right, and that makes a lot of sense, and that also aligns with some of the challenge checks we ran, so that's good to hear. And just a couple more quick ones from me. As it relates to The whole working remotely situation created by the pandemic. From a sales and marketing standpoint and the essential employee protocols at the hospitals, how has your ability to get in front of decision makers been? I understand that capital equipment purchasing is down, but have you been able to at least adequately talk to who would eventually be able to make those decisions at your target facilities? Yes, I think we have, and I think hospitals, you know, in dealing with the crisis and dealing with uncertainty of capital budgets have still made their key decision makers accessible, albeit it's via Microsoft and Zoom meetings, and it's certainly not in person.

24:32 So, you know, as I tried to mention in some of my remarks, we have absolutely been able to, you know, Forgive the football analogy here, but move the ball down the field and kind of move the chains. However, there are still a couple substantial milestones that have to be crossed before anything could actually lead to a new capital purchase. And arguably the most important one is a successful evaluation. So our typical process is we work through the committees at the hospital. We determine pricing both for capital and disposables. Thank you for joining us. because hospitals are still running through kind of pent-up demand for some of their other procedures, and the thought of bringing a new technology in for evaluation with some of these uncertainties just hasn't quite been the priority. They're still trying to get through their existing technology and pipeline of patients.

25:56 But to that point, like I mentioned, there's at least 20 additional sites that are somewhere in that capital acquisition process that we have been making progress. And as soon as we get the green light, we've got inventory ready to install and begin these evaluations once again. The one additional caveat I would mention, because I think you asked an important question as well, is that I don't know that everything returns to normal anytime soon, if not ever. I think access to hospitals is something that is going to become much more important value-driven as far as which employees of different companies are allowed in that hospital. And that's one thing I'm really proud of our team is that over the past four or five years, we've demonstrated our professionalism.

26:42 We've demonstrated the value that our clinical team adds to each and every case. And we have not had a single hospital that has come to us and said that we are not essential personnel in that fashion. So we feel that absolutely our channel and our support network is going to continue to have access to these hospitals. even where in some situations where more traditional sales personnel have not been able to do that. Useful caller. Great to hear as well. And, you know, last question for me. Within healthcare more broadly, we're just seeing a lot of clinical trials adding additional sites as companies just try to hit earlier announced enrollment timeline expectations.

27:30 Are you seeing that with any of your drug delivery partners right now? We absolutely are. Yeah, I think that's a very ongoing conversation and it's a very, very delicate balance that we all have to make between expanding too quickly and then also ensuring that every single patient is treated in a consistent fashion. and in the right way. You know, the more sites you have, the less control you kind of have. And I think if anything that has made our model in the biologics and drug delivery space even more attractive to some of our partners because number one, you know, we've demonstrated the ability to get a new site up and running quickly and we can get a new site up and running quickly partially because we don't just train them and then move on. We have someone present for every one of those procedures. So it's a constant evolving process Thank you so much for joining us.

28:56 They don't have to hire their own clinical team, but rather they can hire our team as an extension of their own clinical group, and we can not only perform the infusion, but we can help execute the randomization and the protocol itself. So if anything, I think it's putting one of our services in even more demand than it was before because we can help some of these companies to expand quickly at high quality and be able to catch up to some of those milestones and delays that the COVID situation has caused. Interesting dynamics. Great. Hey, thank you very much for taking the time, and best of luck going forward. Okay. Thanks, Andrew. As a reminder, if you would like to ask a question, please press star 1 on your telephone keypad.

29:55 There are no additional questions at this time. I would like to turn the call back to Joe Burnett for closing remarks. Well, thank you again from the entire ClearPoint team for staying by our side. With your help, we can continue to give patients with debilitating neurological diseases like Parkinson's disease, tumor, and epilepsy the comfort that they can count on us to receive these truly life-changing procedures. Thank you very much and have a good evening. This concludes today's conference you may disconnect your lines at this time. Thank you for your participation.